After winning the Revolutionary War in 1783, the United States enacted the Federal Constitution in 1787 and established a federal government. Thirteen states that were former British colonies participated in the federation. The federal government was filled with war heroes. The new nation achieved rapid growth in a short period of time, and political conflicts arising from economic interests solidified into political parties. In the northern region, where commerce and industry were developed, the Federalist Party (now the Republican Party) was formed, centered around George Washington, Alexander Hamilton, and John Adams, while in the southern region, where agriculture was developed, the Republican Party (now the Democratic Party) was formed, centered around Thomas Jefferson and James Madison. At that time, the United States did not have the form of a strong federal state as it does today, and it was taking the form of a national federation in which the federal state and local states shared sovereignty, like the European Union (EU). The Federalists wanted to create a strong federal state with developed commerce and industry, while the Republicans wanted to remain a loose national federation based on agriculture. But two practical problems were pulling America’s leash: a shortage of currency and massive war debt. At the time, the gold standard was in place, so precious metals (gold and silver) were used as currency. At the time, precious metals were not produced in the United States, so the only way to secure precious metals was to focus on exports. It was a similar situation to the 1970s and 1980s when Korea was desperate to secure paper gold (dollars) by exporting shoes and seafood.
'Bank of America' and the Constitutional Debate
In 1791, Federalist Alexander Hamilton decided to create the Bank of the United States to overcome the national crisis. Even today, the banking system in the United States is divided into the National Bank and the State Bank. The National Bank is a bank established under federal law and can operate throughout the United States, while the State Bank is a bank established under state law and can operate only within the state. Today, the Federal Reserve System (Fed) describes the Bank of the United States as its own root, but in fact, the Bank of the United States is nothing more than a commercial bank established under federal law. In Korea, it is equivalent to the Industrial Bank or the Export-Import Bank. Under the gold standard, monetary policy is not necessary because of the automatic adjustment function of gold. The automatic adjustment function of gold means that the export and import of goods immediately affects the amount of money (gold reserves) and prices of a country. Hamilton believed that the Bank of the United States would help increase the authority and influence of the federal government, effectively manage trade and commerce, repay government debt, and strengthen national defense. However, Hamilton's idea was attacked by Republicans such as Jefferson and Madison. They believed that since the U.S. Constitution did not explicitly allow the establishment of a national bank, establishing a bank by federal law would infringe upon the powers of the states, and that the U.S. bank would benefit only a small group (capitalists) at the expense of the majority of the people (farmers), making it unconstitutional. However, Hamilton persuaded the majority of the Congress and the president (George Washington), and the Bank of the United States was established. Some states that were nervous about this began to establish state banks. State banks issued bank notes, and other states that lacked specie used these bank notes as currency. This sparked competition among states to establish state banks. A bank note refers to a gold deposit certificate. In English, 'note', 'check', and 'bill' mean deposit certificate, check, and promissory note, respectively. In the colonial era, if you took a bank note to the Bank of Joseon, you would receive gold in return, but today, if you take a bank note to the Bank of Korea, you would only receive paper (bank note) in return. Why is that? Today, U.S. Treasury bonds (2-10 year maturities) are called “treasury notes.” Why is that? Hints have already been given.
Killing the small banks
The Bank of the United States was the source of federal credit and the only chartered interstate bank (a bank operating nationwide), but it did not act as a central bank. It did not conduct monetary policy, did not regulate private banks, and did not act as a lender of last resort. It could only issue money (banknotes) backed by capital, not fiat money. While the paper money printed by the Bank of Korea today is fiat money backed only by paper, the paper money issued by the Bank of the United States at that time was real money backed by capital (gold). In 1811, when the charter period (20 years) of the Bank of the United States was expiring, the fourth president of the United States, Madison, wanted to renew the charter of the Bank of the United States. Although Madison was a republican, he was concerned about the military tensions with Britain that were occurring in the western Appalachians. Although President Madison emphasized reality instead of ideology, the bill to renew the Bank of the United States was defeated by a single vote in the Federal Congress. This is because state banks opposed the renewal of the US bank's patent. When state bank notes were deposited in US banks, the US banks would not rotate the notes but would present them directly to the state bank to withdraw gold. If gold was withdrawn from state banks, the state bank's ability to issue bank notes would be limited and it would be unable to maintain an appropriate level of reserves. In this way, US banks would deplete the liquidity of their competitors and force out banks they did not like. At that time, it was an idyllic time when three or four gangsters could rob a rural bank, so there were no fair trade laws to regulate abuse of power by dominant players in the market. According to rumors, in the 1990s, a major domestic conglomerate bought up a large quantity of short-term bills issued by a certain financial institution in the market and presented them for payment at once, causing the financial institution to go bankrupt.
War and Peace
In the aftermath of the Napoleonic Wars, the War of 1812 broke out between the United States and Britain. The United States had difficulty raising funds for the war, and there was a debate over the revival of the National Bank. However, the National Bank was revived only after the War of 1812. The Federalist Party opposed the war from the beginning, and Americans felt humiliated. After the war, the Federalist Party collapsed, and almost all politicians joined the Republican Party. Even those who had not read Jean-Jacques Rousseau predicted the demise of party politics. However, soon after, political divisions arose over greed and justification. The biggest issue was the reestablishment of the Bank of the United States. In 1815, Secretary of State James Monroe told President Madison that if the Bank of the United States was established, the commercial sector of the states would come under federal control, which would naturally strengthen the Union. Political support for the monetary and financial system brought about postwar economic growth and a land boom, and combined the interests of eastern capitalists and western and southern landowners.
But the fundamental reason for the revival of American banking was that the American economy had changed from a simple "agricultural economy" to an "industrial economy" in which finance and industry were interdependent. Vast territories in the West had been opened up for white settlers, and steam power and bank credit (loans) had become powerful drivers of economic growth. Revisionists within the Republican Party believed that federal intervention was necessary to continue expansion.
In 1816, the Republican Party split, and the Revisionists, led by Carl Houn and Henry Clay, passed a bill to establish the Second Bank of the United States. This bank was to be granted special privileges. It could open branches anywhere in the country and had a monopoly on conducting banking business on a national level. The federal government would buy one-fifth of the bank's stock and appoint one-fifth of its directors. The federal government would deposit all federal funds in the Bank of the United States, which would issue its own banknotes and purchase federal bonds. All seemed peaceful. But there was more to it than meets the eye.
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