“There is a right way and a wrong way, always choose the right way.” Abraham Sabrin (1914-2001)
The following is the second part of an expanded version of a presentation I gave on June 27th at the independent living campus where we live in Naples, FL. We moved to Naples from Fort Myers, where we moved to in June 2021 after we had lived in New Jersey since 1977.
The conflicting visions of Alexander Hamilton and Thomas Jefferson played themselves out in the first half of the 19th century… and as we shall see, continue up to the present.
The political and financial elites wanted to centralize banking with the establishment of the First and Second Banks of the United States. These banks were the forerunners of our Federal Reserve, which was created in December 1913 when President Wilson signed the Federal Reserve Act. These early experiments in central banking ended when President Jackson vetoed the rechartering of the Second Bank. The details of the history of these two banks are available in Murray Rothbard’s The Mystery of Banking.
Banking back then and continues until today is fundamentally flawed. Banks operate under what is called fractional reserve banking. Banks take in deposits which are supposedly available on demand and use those funds to make long term loans. Thus, there is a “time” mismatch between the liabilities of a bank and its assets. And when depositors lose confidence in the solvency of a bank, they demand to withdraw their gold and/or silver, which were kept in reserve to back up the bank’s deposits, a bank run ensues. Gold and silver being money, while bank deposits are money substitutes.
A bank panic reveals the shakiness of fractional reserve banking. This is a major reason bankers want a central bank to bail them out when the bank overextends its lending.
In the final scene of the 1946 movie It’s a Wonderful Life, a run occurs when depositors line up to withdraw their money. George Bailey, the head of the Bailey Building and Loan, informs the depositors their money has been loaned out so their neighbors could buy a house in town, and therefore not all the depositors’ money is available to be withdrawn. The flaw in fractional reserve banking—in this case an S&L—is obvious.
Central banks have an enormous power—the ability to create money, which the Second Bank used to help fund the War of 1812. The “boom” caused by the Second Bank’s money printing ended in the panic of 1819—America’s first great depression. My financial history students learned about the events surrounding the panic when we reviewed The Panic of 1819. Some historians and economists have called the book the definitive history of the period.
Additional notable panics occurred in 1837, 1873 and 1893. In the panic of 1893, the last Jeffersonian president, Grover Cleveland, when presented with an unemployment bill to ease the hardship of workers laid off during the severe economic downturn, vetoed the bill with a message reflecting his limited government view, “Though the people support the government, the government should not support the people.” Today government unemployment insurance is as American as apple pie. No politician has called for abolishing unemployment insurance, which creates an incentive to remain unemployed instead of seeking a new job as soon as possible.
Another contentious issue that drove a wedge between the North and South in the early decades of the republic was the tariff—the primary revenue stream for the federal government. The South, being an importer of goods, while the North being the primary manufacturing hub of the country, was upset with the high tariffs imposed on their imports. When the Morrill tariff bill was signed into law in March 1861, two days before Lincoln was inaugurated, which raised tariffs to the highest level in American history, the Southern states decided to secede from the Union, asserting its right to leave just as it voluntarily entered the Union in the last century.
There is substantial evidence provided by both economists and historians that the tariff was the primary cause of the misnamed Civil War. The Confederacy did not want to take over the federal government. A better term for the conflict should be the War for Southern Independence.
A tariff set the stage for the American Civil War. The quarrel between the North and the South was a fiscal quarrel, not a war over slavery. The tariff of 1828 was called the tariff of abomination. Nullification was a strong argument to void unconstitutional federal laws.
The South paid the vast majority of the taxes. Fort Sumter was essentially a useless fort, but it did serve to collect taxes. Secession was the cause of the Civil War, but taxation was the most significant factor. Taxes have been the core of most rebellions throughout history. Attempts to secede have always been very tough. Sadly, some Southerners did make slavery an argument for secession. Lincoln did not believe in the self-determination of people.
In short, Lincoln’s objective was to preserve the Union because the Southern economy was a “cash cow” for the federal government. Yes, slavery was ended with the Emancipation Proclamation, which only freed slaves in the Southern states. Slavery could not be the cause of the War for Southern Independence because it was issued in 1863, two years after the war began. If slavery were the cause of the Civil War and Lincoln was the “great emancipator,” why didn’t he issue the Proclamation as soon as he was inaugurated in 1861?
Lincoln also wielded enormous power during the conflict suspending habeas corpus and shutting down newspapers that disagreed with his policies. The federal government expanded its size and scope with an income tax, printing “greenbacks,” and vast new oversight over international trade.
Because of the War for Southern Independence the stage was set for future big government policies that were implemented incrementally until we get to the 20th century. The transformation of America toward a more Hamilton model of government was well underway.
My latest piece on the economy was published in Fortune, https://fortune.com/2023/03/27/recession-2023-layoffs-tech-finance-unemployment-outlook-fed-rates-murray-sabrin/ This is an update of my 2021 forecast, https://fortune.com/2021/12/09/next-recession-heres-everything-bubble-markets-2021-2022-covid-murray-sabrin/
Murray Sabrin, PhD, is emeritus professor of finance, Ramapo College of New Jersey. Dr. Sabrin is considered a “public intellectual” for writing about the economy in scholarly and popular publications. His new book, The Finance of Health Care: Wellness and Innovative Approaches to Employee Medical Insurance (Business Expert Press, Oct. 24, 2022), and his other BEP publication, Navigating the Boom/Bust Cycle: An Entrepreneur’s Survival Guide (October 2021), provides decision makers with tools needed to help manage their businesses during the business cycle. Sabrin's autobiography, From Immigrant to Public Intellectual: An American Story, was published in November, 2022