The American party system has changed four times, and three of the changes were linked to money and banking. Moreover, three of the changes were linked to the issue of decentralization and states' rights. The current tremors surrounding monetary policy and the Federal Reserve Bank coincide with increasing questioning of why the Democrats and Republicans have failed to question the subsidization of investment and commercial banks and the recent Federal Reserve Bank inflation of the monetary base. One key difference between the current crisis in the American party system and past crises is the absence of a competent press or media. These were central to political debate in America until the 1930s. However, the transition from passive to active electronic media has reinvented, downsized and in a sense traditionalized the press from the centralized mainstream media that was prevalent in the 1950s to websites and blogs that are reminiscent of early newspapers.
The changes in the American party system were as follows. First, the establishment of the Federalist and Democratic Republican parties in response to Alexander Hamilton's advocacy of the First Bank and federal subsidies to manufacturing. Second, the split between the National Republicans and the Democratic Republicans, which became the split between the Whigs and the Democrats in 1836 specifically in response to Andrew Jackson's removal of federal assets from the Second Bank and his veto of the Second Bank. Note that decentralization played a role both in the Federalist-Democratic division in the 1790s and the Whig-Democratic division of 1836. Both the Federalists and the Whigs were elitist centralizers and the Democrats were decentralizers, pale copiers of the earlier anti-Federalists.
The third party formation was of course in the 1850s, the formation of the Republican Party, the centralizing party that inherited Whig elitism but reformulated its ideology to combine (a) surface advocacy of laissez faire, in imitation of Jackson with (b) the traditional Whig advocacy of centralization. The Civil War was fought not over banking but slavery. It was here that the centralization issue came to the fore.
The fourth party formation occurred in 1896, when William Jennings Bryan reinvented the Democratic Party as the party of inflation and free silver. Many of the subsequent centralizing ideas of Franklin D. Roosevelt were included in Bryan's philosophy. In 1896 the debate between centralizers and decentralizers died. Although the southern Democrats continued to advocate decentralization, the majority of the two major parties became committed to reform on a centralized basis.
This transformation was reinforced in the 1930s, when Roosevelt accelerated the Democrats' insistence on centralization.
Of the four changes, only the establishment of the Republican Party did not involve banking. However, the Republicans' insistence on intensification of centralization, not only concerning the Union but also the National Banking Act, led to establishment of the Federal Reserve Bank five decades later.
The development of American politics, then, has been toward centralization. But in management, business, economics and political theory, centralization was increasingly shown to be an inferior solution during the past eight decades.
One of the pivotal moments in American politics was Andrew Jackson's formulation of the Democratic Party. Until then, parties barely existed in America. Jackson identified the special interest of privilege linked to paper money and held that the formation of an organized party of common Americans was necessary to forestall privilege and banking interests. He was not certain that the average American was capable of withstanding the onslaught of paper money advocacy and privilege associated with central banking. The power of Jackson's vision was great, and the powerful party organization of the nineteenth century and the public's commitment to sound money permitted survival of the Jacksonian system for nearly eight decades.
However, the ideas of Fabian socialism, Bismarck's social democracy and Progressivism provided American elites with new ammunition that the Jacksonian model could not contemplate. These included the use of pretense of supporting the common man in the name of elite privilege as a tool to wrest control of banking and money in favor of economic elites. This was accomplished in the context of modest reform in areas such as workers' compensation and then in the 1930s minimum wages and social security, all with dubious value to the average American.
Nor was Jacksonian democracy itself free of special interest characteristics. There have been wrinkles and overlap in all of the American party formulations. The Jacksonian Democrats were cruel racists. Jackson oversaw the Trail of Tears march and the insistent American racism traces its resonance to Jacksonian Democracy. Jacksonian Democracy itself was a form of special interest formulation, of the common white male identifying himself as superior to blacks and native Americans.
As Louis Hartz correctly points out, the brilliance of the Whigs was the use of the Lockean imagery in the interest of mercantilist philosophy. This has been the artifice of the Republicans since the Civil War. But all of American party ideologies have been self-contradictory, and the Republican is as well. Jackson claimed to be a democrat, yet he forestalled South Carolinian nullification. He claim to be for states' rights, yet he created rigid national party organization.
Today, the Republicans claim to be for free markets yet institute socialism. Much like the Democratic Republicans in 1836, the Republicans are at the breaking point.
Wednesday, February 4, 2009
Tuesday, February 3, 2009
President Andrew Jackson's Message to the Federal Reserve Bank, Today's Congress and President Obama
"It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth can not be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society--the farmers, mechanics, and laborers--who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government. There are no necessary evils in government. Its evils exist only in its abuses. If it would confine itself to equal protection, and as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor, it would be an unqualified blessing. In the act before me there seems to be a wide and unnecessary departure from these just principles.
"Nor is our Government to be maintained or our Union preserved by invasions of rights and powers of the several States. In thus attempting to make our General Government strong we make it weak. Its true strength consists in leaving individuals and States as much as possible to themselves--in making itself felt, not in its power, but in its beneficence; not in its control, but in its protection; not in binding the States more closely to the center, but leaving each to move unobstructed in its proper orbit.
"Experience should teach us wisdom Most of the difficulties our Government now encounters and most of the dangers which impend over our Union have sprung from an abandonment of the legitimate objects of government by our national legislation, and the adoption of such principles as are embodied in this act. Many of our rich men have not been content with equal protection and equal benefits, but have brought us to make them richer by act of Congress. By attempting to gratify their desires, we have in the results of our legislation arrayed section against section, interest against interest, and man against man, in a fearful commotion which threatens to shake the foundations of our Union. It is time to pause in our career to review our principles, and if possible revive that devoted patriotism and spirit of compromise which distinguished the sages of Revolution and the fathers of our Union. If we can not do at once, in justice to interests vested under improvident legislation, make our Government what it ought to be, we can at least take a stand against all new grants of monopolies and exclusive privileges, against any prostitution of our Government to the advancement of the few at the expense of the many, and in favor of compromise and gradual reform in our code of laws and system of political economy."
---President Andrew Jackson
Bank Veto, July 10, 1832
Upon President Andrew Jackson's veto of the Charter of the Second Bank of the United States, the predecessor of the Federal Reserve Bank.
"Nor is our Government to be maintained or our Union preserved by invasions of rights and powers of the several States. In thus attempting to make our General Government strong we make it weak. Its true strength consists in leaving individuals and States as much as possible to themselves--in making itself felt, not in its power, but in its beneficence; not in its control, but in its protection; not in binding the States more closely to the center, but leaving each to move unobstructed in its proper orbit.
"Experience should teach us wisdom Most of the difficulties our Government now encounters and most of the dangers which impend over our Union have sprung from an abandonment of the legitimate objects of government by our national legislation, and the adoption of such principles as are embodied in this act. Many of our rich men have not been content with equal protection and equal benefits, but have brought us to make them richer by act of Congress. By attempting to gratify their desires, we have in the results of our legislation arrayed section against section, interest against interest, and man against man, in a fearful commotion which threatens to shake the foundations of our Union. It is time to pause in our career to review our principles, and if possible revive that devoted patriotism and spirit of compromise which distinguished the sages of Revolution and the fathers of our Union. If we can not do at once, in justice to interests vested under improvident legislation, make our Government what it ought to be, we can at least take a stand against all new grants of monopolies and exclusive privileges, against any prostitution of our Government to the advancement of the few at the expense of the many, and in favor of compromise and gradual reform in our code of laws and system of political economy."
---President Andrew Jackson
Bank Veto, July 10, 1832
Upon President Andrew Jackson's veto of the Charter of the Second Bank of the United States, the predecessor of the Federal Reserve Bank.
If You Are a Boomer, You Can Retire—Here’s How
The 202 million Americans born between 1940 and 1994 look forward to retirement, but to retire they will need financial stability. The assets required for retirement amount to roughly $540,000 for a middle-class professional who wishes to retire at age 67 on $70,000 per year including social security benefits. Unfortunately, though, 401-k, pension plans, annuities and other financial arrangements fail to protect retirees from a trio of financial risks—inflation, stock market volatility and deflation. These risks reduce Americans’ prospects for a comfortable retirement.
The steps that the Federal Reserve Bank has taken recently to eliminate deflation and depression may prove to weaken the dollar and cause inflation. In the 1970s, stagflation, the combination of unemployment and inflation, saw inflation rates of 13.3% in 1979 and 12.5% in 1980. That could happen again—and worse.
This past year, according to the Federal Reserve Bank, M1, currency and demand deposits, increased at a seasonally adjusted rate of 37.6% in the three months from August to November 2008. M2, which includes savings deposits, increased 13.9%. In comparison, in the five years that preceded the 1979-80 inflation, from November 1973to December 1978, M1 increased about 37%. In other words, since last summer the Fed has increased the money supply by an amount equivalent to the amount it increased the money supply during several years preceding the 1979-1980 inflation. More ominously, according to the St. Louis Fed, the monetary base grew from $873.8 billion on September 10 to $1,671 billion on December 17, an increase of better than 90%. These fluctuations suggest inflation risk.
Moreover, the recent panic in the financial markets reminds us that 40 or 50 percent fluctuations in stock market prices are to be expected over any twenty year period. No matter what, retirees face the risk of stock market declines.
Those facing retirement also face a third risk: fluctuating commodity and house prices. For instance, oil has descended from $145 to $37 and now back to the $40s per barrel over the past few months. Someone who purchased a year’s worth of heating oil last July suffered losses. Dollar depreciation, stock price depreciation and commodity price depreciation all threaten retirees, but of the three, the least threatening risk is depreciating commodity and house prices. Many retirees would benefit from deflation because deflation would stretch their consumption budgets. But the federal government has made prevention of deflation a key objective. Monetary policy is at loggerheads with retirement policy. Yet, none of the interest groups associated with retirees has emphasized this crucial issue.
Potential retirees thus face three risks. First, they face the risk of inflation, which would significantly erode the value of dollars that they hold and so devalue traditional annuity, savings and money market accounts. Second, they face the risk of stock market fluctuation. Third, they face the risk of price depreciation in commodities and real estate.
Dollar-Based Retirement
Much has been written about retirement in financial terms. Many experts argue that an annuity that replaces 60 to 80 percent of final average income is necessary to retire. In private industry, the old fashioned defined benefit pension plan used to accrue benefits of one to two percent of final average salary per year of service. That would mean that an employee with 35 years of service would get about 50% of pay, often partially reduced for primary social security benefits upon normal retirement age. When social security was added to the pension the result was about 70% of pay. With respect to today’s more popular 401(k) plans, an employee who earns $100,000 and aims to retire at 67 with 70% of pay including social security would need roughly $540,000. But what if the $540,000 is eroded to $400,000, $300,000 or less in real dollar terms over a 2-3 year period? In the late 1970s there were accounts of retirees forced to sell their homes or eat pet food in order to make ends meet because of governmentally-induced inflation.
Commodity-Based Retirement
It is time to rethink dollar-based retirement. Retirees need to pay for a stream of goods and services whose dollar value fluctuates. The most important risk that they face is diminution of the stream of goods and services, not their fluctuating dollar value. A steady dollar income in an inflationary environment poses a greater risk to retirees’ well being than a stream of commodities that meets retirees’ needs in a deflationary environment, even if the dollar value of the commodities is declining.
Retirees need to consider the commodity value of retirement income rather than its dollar value. That is, retirees need to compute their budgets, translate the budgets into commodity equivalents, and then annuitize a stream of commodity consumption into a flow of forward commodity futures contracts. Then, they need to fund the stream. Today, this can be conveniently done with exchange traded funds. Excess assets over and above the required commodity stream could be invested in traditional financial instruments, CD’s, precious metals or other hedges.
The reason this is necessary is the Federal Reserve Bank’s risky, potentially inflationary monetary policy.
In 2003, the average white retiree’s budget was $26,341. Social security, which is indexed for inflation, covered roughly half of this amount. The average retiree spent 15 to 17% of this budget on food, eight to 13% on utilities, 17% on transportation, 2.6% on gasoline 30-35% on rent, and 9-10% on healthcare.* Were inflation to escalate, the average retiree would face risk over and above social security. Commodity contracts could insure this risk.
But if a retiree earns twice the average wage, or about $80,000, and wants to retire at age 67 with an annuity of $56,000, then at today’s low interest rates he needs a pool of goods and services (net of social security) of at least $360,000 upon retirement. At a median October home price of $218,000, home ownership would account for 60% of this fund unless house prices continue to fall. If the retiree wishes to avoid a reverse mortgage or borrowing to fund his retirement (which would create yet an additional risk), he would need the full $360,000.
The $360,000 would need to be allocated as something like $56,000 for food (agricultural futures), $56,000 for energy (energy futures), about $50,000 in materials for home repair and new car costs (materials futures), with the remaining amount in cash, precious metals or other hedges against deflation and inflation to purchase a range of other items. It would be easy to develop more refined budgets that could be annuitized with forward commodities futures using exchange traded funds.
Retirees should not have to fear deprivation. However, for millions of Baby Boomers, the Federal Reserve Bank is creating that very risk. In order to sidestep the financial system’s uncertainties, Boomers need to stop thinking in dollar terms and start thinking in consumption terms. They need to re-conceptualize their retirement planning in terms of a commodity rather than a dollar stream. There is no reason why insurance companies and pension funds cannot furnish such arrangements.
Theoretically, money provides a store of value as well as a unit of account and medium of exchange. Our monetary system’s inability to do so deserves re-consideration. In 1913, when the Federal Reserve Bank was founded, life expectancy was only 52 years for males and females combined and planning for retirement was not an important issue for the average American. To this day retirement planning is not one of the Federal Reserve Bank's priorities. Americans continue to hope for retirement, but recent events suggest that Fed policy and the monetary system may encumber rather than facilitate their goals. Today’s economic theories were developed at a point in time when erosion of fixed incomes affected the wealthy and helped debtors. Today, inflation primarily harms the middle class and poor elderly.
*Pierre Bahtzi, “Retirement Expenditures for Whites, Blacks and Persons of Hispanic Origin. Monthly Labor Review, June 2003, pp. 20-22.
The steps that the Federal Reserve Bank has taken recently to eliminate deflation and depression may prove to weaken the dollar and cause inflation. In the 1970s, stagflation, the combination of unemployment and inflation, saw inflation rates of 13.3% in 1979 and 12.5% in 1980. That could happen again—and worse.
This past year, according to the Federal Reserve Bank, M1, currency and demand deposits, increased at a seasonally adjusted rate of 37.6% in the three months from August to November 2008. M2, which includes savings deposits, increased 13.9%. In comparison, in the five years that preceded the 1979-80 inflation, from November 1973to December 1978, M1 increased about 37%. In other words, since last summer the Fed has increased the money supply by an amount equivalent to the amount it increased the money supply during several years preceding the 1979-1980 inflation. More ominously, according to the St. Louis Fed, the monetary base grew from $873.8 billion on September 10 to $1,671 billion on December 17, an increase of better than 90%. These fluctuations suggest inflation risk.
Moreover, the recent panic in the financial markets reminds us that 40 or 50 percent fluctuations in stock market prices are to be expected over any twenty year period. No matter what, retirees face the risk of stock market declines.
Those facing retirement also face a third risk: fluctuating commodity and house prices. For instance, oil has descended from $145 to $37 and now back to the $40s per barrel over the past few months. Someone who purchased a year’s worth of heating oil last July suffered losses. Dollar depreciation, stock price depreciation and commodity price depreciation all threaten retirees, but of the three, the least threatening risk is depreciating commodity and house prices. Many retirees would benefit from deflation because deflation would stretch their consumption budgets. But the federal government has made prevention of deflation a key objective. Monetary policy is at loggerheads with retirement policy. Yet, none of the interest groups associated with retirees has emphasized this crucial issue.
Potential retirees thus face three risks. First, they face the risk of inflation, which would significantly erode the value of dollars that they hold and so devalue traditional annuity, savings and money market accounts. Second, they face the risk of stock market fluctuation. Third, they face the risk of price depreciation in commodities and real estate.
Dollar-Based Retirement
Much has been written about retirement in financial terms. Many experts argue that an annuity that replaces 60 to 80 percent of final average income is necessary to retire. In private industry, the old fashioned defined benefit pension plan used to accrue benefits of one to two percent of final average salary per year of service. That would mean that an employee with 35 years of service would get about 50% of pay, often partially reduced for primary social security benefits upon normal retirement age. When social security was added to the pension the result was about 70% of pay. With respect to today’s more popular 401(k) plans, an employee who earns $100,000 and aims to retire at 67 with 70% of pay including social security would need roughly $540,000. But what if the $540,000 is eroded to $400,000, $300,000 or less in real dollar terms over a 2-3 year period? In the late 1970s there were accounts of retirees forced to sell their homes or eat pet food in order to make ends meet because of governmentally-induced inflation.
Commodity-Based Retirement
It is time to rethink dollar-based retirement. Retirees need to pay for a stream of goods and services whose dollar value fluctuates. The most important risk that they face is diminution of the stream of goods and services, not their fluctuating dollar value. A steady dollar income in an inflationary environment poses a greater risk to retirees’ well being than a stream of commodities that meets retirees’ needs in a deflationary environment, even if the dollar value of the commodities is declining.
Retirees need to consider the commodity value of retirement income rather than its dollar value. That is, retirees need to compute their budgets, translate the budgets into commodity equivalents, and then annuitize a stream of commodity consumption into a flow of forward commodity futures contracts. Then, they need to fund the stream. Today, this can be conveniently done with exchange traded funds. Excess assets over and above the required commodity stream could be invested in traditional financial instruments, CD’s, precious metals or other hedges.
The reason this is necessary is the Federal Reserve Bank’s risky, potentially inflationary monetary policy.
In 2003, the average white retiree’s budget was $26,341. Social security, which is indexed for inflation, covered roughly half of this amount. The average retiree spent 15 to 17% of this budget on food, eight to 13% on utilities, 17% on transportation, 2.6% on gasoline 30-35% on rent, and 9-10% on healthcare.* Were inflation to escalate, the average retiree would face risk over and above social security. Commodity contracts could insure this risk.
But if a retiree earns twice the average wage, or about $80,000, and wants to retire at age 67 with an annuity of $56,000, then at today’s low interest rates he needs a pool of goods and services (net of social security) of at least $360,000 upon retirement. At a median October home price of $218,000, home ownership would account for 60% of this fund unless house prices continue to fall. If the retiree wishes to avoid a reverse mortgage or borrowing to fund his retirement (which would create yet an additional risk), he would need the full $360,000.
The $360,000 would need to be allocated as something like $56,000 for food (agricultural futures), $56,000 for energy (energy futures), about $50,000 in materials for home repair and new car costs (materials futures), with the remaining amount in cash, precious metals or other hedges against deflation and inflation to purchase a range of other items. It would be easy to develop more refined budgets that could be annuitized with forward commodities futures using exchange traded funds.
Retirees should not have to fear deprivation. However, for millions of Baby Boomers, the Federal Reserve Bank is creating that very risk. In order to sidestep the financial system’s uncertainties, Boomers need to stop thinking in dollar terms and start thinking in consumption terms. They need to re-conceptualize their retirement planning in terms of a commodity rather than a dollar stream. There is no reason why insurance companies and pension funds cannot furnish such arrangements.
Theoretically, money provides a store of value as well as a unit of account and medium of exchange. Our monetary system’s inability to do so deserves re-consideration. In 1913, when the Federal Reserve Bank was founded, life expectancy was only 52 years for males and females combined and planning for retirement was not an important issue for the average American. To this day retirement planning is not one of the Federal Reserve Bank's priorities. Americans continue to hope for retirement, but recent events suggest that Fed policy and the monetary system may encumber rather than facilitate their goals. Today’s economic theories were developed at a point in time when erosion of fixed incomes affected the wealthy and helped debtors. Today, inflation primarily harms the middle class and poor elderly.
*Pierre Bahtzi, “Retirement Expenditures for Whites, Blacks and Persons of Hispanic Origin. Monthly Labor Review, June 2003, pp. 20-22.
Henry Clay and the Panic of 1819
Henry Clay was the founder of the Whig Party and Abraham Lincoln's mentor. The Whig Party was antecedent to today's Republican Party. Born in Virginia, his family moved to Kentucky when he was 14 in 1791. Clay became a lawyer and was a Democratic Republican, that is, a follower of Jefferson. Although the Democratic Republicans opposed the Federalists' plan to support business at the federal level, some Democratic Republicans favored government support for manufacturing and banking at the state level:
"Though Republicans generally rejected federal assistance to economic development, they debated whether state governments should establish or subsidize banks, transportation companies, or other corporations. Henry Clay's first major effort in the Kentucky state legislature was to come to the defense of just such a corporation, the embattled Kentucky Insurance Company."*
The Kentucky Insurance Company was given a monopoly to insure all Mississippi River cargoes in the state of Kentucky but it was also given the power to make loans and issue notes, i.e., paper money. Many Kentuckians opposed this proposal. However, Henry Clay, who had been elected to the state legislature in 1803 favored paper money because, according to Watson**:
"men like Clay were convinced that the availability of credit for new investments and a plentiful currency that could expand in volume with the needs of local business were absolutely essential for regional prosperity. When an effort began in 1804 to repeal the company's banking privileges, Clay leaped to its defense."
The opponents of the Kentucky Insurance Company won a Pyrrhic victory in that the monopoly of paper money issuance was withdrawn from the Kentucky Insurance Company but it was granted to several other banks. Paper money issuance proceeded handsomely in Kentucky.
Clay was elected to the House of Representatives in 1811. He was an advocate of aggressive military action against the British in 1812 and a mild opponent of slavery (he himself owned slaves). Participating with John Quincy Adams in the peace negotiation with the British in Ghent in 1814, Clay returned to Congress at a time when the Federalist Party gasped its final breath due to its opposition to the War of 1812. Watson notes that***:
"the lessons of the war had persuaded many leading Republicans that some of the Federalists' favorite measures had merit after all, including a national bank, a protective tariff and federal aid to internal improvements. The new policies appealed strongly to Henry Clay, and the congressman from Kentucky was in the forefront of efforts to adopt them."
The First Bank of the United States's charter had expired in 1811, but the War of 1812 motivated support for a Second Bank. The war also increased support for federal subsidies to manufacturing because many felt that military strategy required manufactures. Difficulties in transporting troops and men led to support among future Whigs for road building. John C. Calhoun, later the advocate of state veto power and state's rights (over slavery), argued that improved transportation would make the Republic smaller and so overcome Montesquieu's and others' concern that republics in large areas cannot survive. "Let us then...bind the Republic together with a perfect system of roads and canals."+ However, many Americans were++:
"worried about the corrupting power of monopolies and feared that the creation of a new class of moneyed capitalists based on paper wealth would undermine the moral and political fiber of the republic."
After the War of 1812 American trade with Europe grew rapidly, in part because of a famine in Europe+++:
"Inexperienced in the fluctuations of an unregulated market economy, government officials and officers of the newly chartered Second Bank of the United States cooperated merrily in feeding the boom, often profiting from banking and land speculation on their personal accounts.
"The party ended abruptly, however, when the BUS had to collect enough specie to make the final payment on the Louisiana Purchase.++++ Loans were suddenly called in, and the Bank demanded specie in exchange for its holdings of state bank notes. Suddenly deprived of credit, numerous urban businesses collapsed and discharged their employees. Thousand of borrowers could not pay their loans and lost homes, farms and businesses to the sheriff's auction. Coincidentally, a bumper crop in Europe cut demand for American foodstuffs and drove farm prices even lower. From a heyday of prosperity and expansion, the American economy was plunged into the rigors of high unemployment, widespread bankruptcy and the suspension of specie payments by banks.
"The panic struck in 1819, and parts of the economy continued to be affected throughout the first half of the 1820s. Fortunately, most Americans still lived on subsistence farms that provided food for their tables, regardless of the level of commodity prices or the prospects for waged labor...Banks demanded strict repayment of their loans but refused to honor their own obligations to pay specie...At the center of everything, the Bank of the United States was the strictest creditor of all, seeking to pay its own debts by pressing state banks and private customers with equal severity. Among the many lawyers who did a handsome business suing delinquent borrowers and foreclosing lands for the BUS, Henry Clay was one of the most active, with a heavy case load all over Kentucky and Ohio."
*Harry L. Watson. Andrew Jackson versus Henry Clay: Democracy and Development in Antebellum America. Boston: Bedford St. Martin's, 1998. p. 46.
**Ibid., p. 48.
***Ibid., p. 52
+John C. Calhoun, "Speech on Internal Improvements", February 4, 1817, in Robert L. Meriwether, ed., The Papers of John C. Calhoun, vol 1, 1807-1817, 23 vols, p. 401.
++Ibid., p. 55
+++Ibid., p. 56
++++Note that this government policy of Jefferson's precipitated the panic, as did the excessive paper money issuance which would not have been possible without government legalization and support of fractional reserve banking and banking monopolies.
"Though Republicans generally rejected federal assistance to economic development, they debated whether state governments should establish or subsidize banks, transportation companies, or other corporations. Henry Clay's first major effort in the Kentucky state legislature was to come to the defense of just such a corporation, the embattled Kentucky Insurance Company."*
The Kentucky Insurance Company was given a monopoly to insure all Mississippi River cargoes in the state of Kentucky but it was also given the power to make loans and issue notes, i.e., paper money. Many Kentuckians opposed this proposal. However, Henry Clay, who had been elected to the state legislature in 1803 favored paper money because, according to Watson**:
"men like Clay were convinced that the availability of credit for new investments and a plentiful currency that could expand in volume with the needs of local business were absolutely essential for regional prosperity. When an effort began in 1804 to repeal the company's banking privileges, Clay leaped to its defense."
The opponents of the Kentucky Insurance Company won a Pyrrhic victory in that the monopoly of paper money issuance was withdrawn from the Kentucky Insurance Company but it was granted to several other banks. Paper money issuance proceeded handsomely in Kentucky.
Clay was elected to the House of Representatives in 1811. He was an advocate of aggressive military action against the British in 1812 and a mild opponent of slavery (he himself owned slaves). Participating with John Quincy Adams in the peace negotiation with the British in Ghent in 1814, Clay returned to Congress at a time when the Federalist Party gasped its final breath due to its opposition to the War of 1812. Watson notes that***:
"the lessons of the war had persuaded many leading Republicans that some of the Federalists' favorite measures had merit after all, including a national bank, a protective tariff and federal aid to internal improvements. The new policies appealed strongly to Henry Clay, and the congressman from Kentucky was in the forefront of efforts to adopt them."
The First Bank of the United States's charter had expired in 1811, but the War of 1812 motivated support for a Second Bank. The war also increased support for federal subsidies to manufacturing because many felt that military strategy required manufactures. Difficulties in transporting troops and men led to support among future Whigs for road building. John C. Calhoun, later the advocate of state veto power and state's rights (over slavery), argued that improved transportation would make the Republic smaller and so overcome Montesquieu's and others' concern that republics in large areas cannot survive. "Let us then...bind the Republic together with a perfect system of roads and canals."+ However, many Americans were++:
"worried about the corrupting power of monopolies and feared that the creation of a new class of moneyed capitalists based on paper wealth would undermine the moral and political fiber of the republic."
After the War of 1812 American trade with Europe grew rapidly, in part because of a famine in Europe+++:
"Inexperienced in the fluctuations of an unregulated market economy, government officials and officers of the newly chartered Second Bank of the United States cooperated merrily in feeding the boom, often profiting from banking and land speculation on their personal accounts.
"The party ended abruptly, however, when the BUS had to collect enough specie to make the final payment on the Louisiana Purchase.++++ Loans were suddenly called in, and the Bank demanded specie in exchange for its holdings of state bank notes. Suddenly deprived of credit, numerous urban businesses collapsed and discharged their employees. Thousand of borrowers could not pay their loans and lost homes, farms and businesses to the sheriff's auction. Coincidentally, a bumper crop in Europe cut demand for American foodstuffs and drove farm prices even lower. From a heyday of prosperity and expansion, the American economy was plunged into the rigors of high unemployment, widespread bankruptcy and the suspension of specie payments by banks.
"The panic struck in 1819, and parts of the economy continued to be affected throughout the first half of the 1820s. Fortunately, most Americans still lived on subsistence farms that provided food for their tables, regardless of the level of commodity prices or the prospects for waged labor...Banks demanded strict repayment of their loans but refused to honor their own obligations to pay specie...At the center of everything, the Bank of the United States was the strictest creditor of all, seeking to pay its own debts by pressing state banks and private customers with equal severity. Among the many lawyers who did a handsome business suing delinquent borrowers and foreclosing lands for the BUS, Henry Clay was one of the most active, with a heavy case load all over Kentucky and Ohio."
*Harry L. Watson. Andrew Jackson versus Henry Clay: Democracy and Development in Antebellum America. Boston: Bedford St. Martin's, 1998. p. 46.
**Ibid., p. 48.
***Ibid., p. 52
+John C. Calhoun, "Speech on Internal Improvements", February 4, 1817, in Robert L. Meriwether, ed., The Papers of John C. Calhoun, vol 1, 1807-1817, 23 vols, p. 401.
++Ibid., p. 55
+++Ibid., p. 56
++++Note that this government policy of Jefferson's precipitated the panic, as did the excessive paper money issuance which would not have been possible without government legalization and support of fractional reserve banking and banking monopolies.
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