Regarding the Tea People, who are anti-taxes and anti-spending but have not articulated any viable plan for running the government both successfully and consistently with their desires, I was thinking about another occasion in American history when economic decisions were made based on less-than well-considered principles. What came to mind, and it was a long time ago, but hang with me on this, was Andrew Jackson’s “war” on the Bank of the United States. A president went on a crusade against the institution that was essentially functioning as his federal reserve. He won but the country lost, with both long and short-term consequences.

This is a difficult story to tell concisely, because controversies about a central bank went back to day one, and they sidetrack into things like hard vs. soft money, trade deficits, tariffs, the cotton economy, and about a million other things, culminating in the role of corporations and capitalism itself in a democracy (which we’re still trying to figure out). Let’s enter as late as possible and keep things as general as we can without sacrificing the point:

After the government found it had all kinds of trouble financing the war of 1812, Congress chartered the Bank of the United States (the second time they had tried this) and authorized it for a term of 20 years. The bank was privately held, but it received in deposit all the dough the federal government had and executed all of the government’s financial transactions. This sounds pretty basic, but the controversial part of it was that the Bank (hereafter “BUS”) was uncontrolled. The government owned one-fifth of its stock but exercised no control. It was a private, profit-making company that, in exchange for an annual payment of $1.5 million, got to take all the taxpayer money in the country and use it to make more money through loans, investment, commercial banking, and so on. And not unlike corporations today with their campaign donations, when the BUS sensed that a congressman or a newspaper editor or someone else was going to encroach on its prerogatives, it would make a friendly loan or two to the people in question. This seemed undemocratic on any number of levels, and some saw it as a conspiracy on the part of the federal government to make a select class of people rich at the expense of everyone else.

Whatever one thought of the Bank, there was no argument that it was immensely powerful. As the biggest bank it in the country, it lent money to the state banks and if it didn’t like the way they did things it could curtail those loans, contracting credit. Similarly, it could take the paper money it had acquired from the state banks (there was no US paper money, just coins; individual banks issued their own paper) and present them for redemption in gold, which would also serve to draw down the funds available for those banks to lend.

In other words, the BUS could control credit on a national basis. This was a good thing as long as the BUS behaved responsibly which, by the time Jackson came around, it mostly did. The other good thing about the BUS was that because the BUS had verifiable deposits, its paper money was actually worth what it said it was worth. With every bank in the country issuing paper and there being nothing in the way of regulation, a holder of paper had no idea what was backing it. You could have, say, a $10 bill in your hands and wouldn’t know if it was worth $10, $5, or nothing.

President Jackson hated banks. I don’t think he totally understood banks in the same way that Thomas Jefferson didn’t quite get them either. As planters (like Jefferson, Jackson owned a plantation worked by slaves), both saw banks mainly as parasitical entities. The slavers, with their constant thirst for credit, were slaves to the bankers. Irony’s a bitch. Jackson made a point of saying he didn’t hate the BUS more than he hated all banks, but the BUS was a particular sore spot because the government had succeeded in outsourcing the entire economy. The BUS, Jackson wrote, “is in itself a Government.”

Fast-forward (and how): trying to force Jackson’s hand, the BUS applied to Congress for re-authorization five years early. The measure passed. Jackson vetoed it. There was no override. Now the bank was wounded, but he hadn’t killed it as it still had time to try to find some other way of staying alive. Jackson had to deliver a mortal blow. The problem was that in his and his administration’s haste to wreck the BUS, they hadn’t quite figured out how to replace it. In fact, they never did.

Nonetheless, Jackson’s next move was to withdraw the government’s funds from the BUS. This was blatantly illegal–the BUS law said the money had to stay there unless the BUS had been officially certified as unsafe by the Secretary of the Treasury–and Jackson had to fire two Treasury Secretaries before he got someone to pull the funds, the ubiquitous knave Roger B. Taney. Under different political circumstances, the move might have gotten Jackson impeached. It did get him censured by the Senate and Taney rejected by the Senate. Still, it was done. The funds were out and were randomly deposited in politically friendly state banks, or “pet banks” as they came to be called. Simultaneously, the BUS, needing to replace capital, started calling in all its loans. This caused a recession, which rather proved Jackson’s point. The state banks, now flush with gold, started printing up money and making loans, fueling a bubble economy. This corrected the BUS’s abuses, but put the economy as a whole on a dangerous footing.

The story goes on. Trying to restrain the bubble, Jackson issued an executive order that said the government would only accept payment for land in gold or silver (the government was doing a lot of land business just then because it had freed up a great deal of it, having just evicted all the Native Americans still living in the East–a depressing story for another time). Between this action and the death of the BUS, which had issued the only reliable paper money in the country, the value of paper crashed, which meant crazy inflation and an upward spiral in prices… Flashing forward again: in 1837 everything crashed, and the country endured a very severe six-year depression, with mass failures of banks, the collapse of the cotton trade, and several states defaulting on their debts.

Jackson wasn’t completely wrong about the BUS, just as the Tea People aren’t completely wrong about some of the things they’re exercised about. The point is that policies, however they are motivated, have consequences. This is particularly true of economic policies, where disturbing one domino can send all the rest crashing. Jackson knocked over a couple and the country suffered very badly. The Tea People need to have a more nuanced view of government than is suggested by carrying Hitler signs. It would be so very easy for them to get what they want but for everyone else to lose what they have.

This entry was posted on Saturday, April 17th, 2010 at 5:24 pm and is filed under The Political Mindscape. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.