Avi Gilbert
At this point in our 236 year history, the United States is faced with making a choice between bankruptcy or depression. The problem is that the "choice" may ultimately not be much of a choice at all.
Our Founding Fathers' Perspective
"They say paper money has improved the country. . . not one syllable of this is truth; it is errors from beginning to end. It was CREDIT which did these things and that credit has failed. . . All emissions of paper for government purposes is not making of money, but making use of credit to run into debt by."
One might initially surmise that these sentiments were penned by a Ron Paul supporter. However, it was Thomas Paine who penned these words in 1786. In fact, he went so far as to consider it an act of treason when a government incurs excessive debt "because it operates to take away a man's share of civil and natural freedom, and to render property insecure."
In fact, many of our Founding Fathers maintained a similar perspective, which was contrary to the sentiments of Alexander Hamilton, the United States' first Secretary of the Treasury.
However, since Hamilton was George Washington's closest political ally, Hamilton's view carried the day. This led to the establishment of a national bank, and Hamilton has, therefore, been considered the father of our national debt. But, what many do not point out is that it is this same Alexander Hamilton who also unsuccessfully fought for the United States to appoint and empower a King to run its newly created government. Unfortunately, those that struck down this idea did not have the foresight to see the flaws in Hamilton's fiscal perspective.
Thomas Jefferson felt quite strongly that our government should never incur debt with repayment terms beyond nineteen years, and that it must be paid off fully within that time frame. From his perspective, one generation did not have the right to cause a succeeding generation to be bound by its indebtedness.
In an letter dated June 24, 1813 written by Jefferson, who vigorously opposed Hamilton's views, Jefferson made it quite clear that excessive debt would lead to "oppression, bankruptcy, and it's inevitable consequence, revolution." Jefferson continued that "the unlimited emission of bank paper has banished [Great Britain's] specie, and is now, by a depreciation acknowledged by her own statesmen, carrying her rapidly to bankruptcy, as it did France, as it did us, and will do us again."
As we are now several centuries removed from Hamilton's experiment, we are left with Jefferson's prescience resounding in our minds and coffers.
The History of the Federal Reserve
The United States has a fractional reserve banking system. This means that a bank does not maintain a dollar of currency, or greenback, for every dollar represented by deposits at its bank. When you deposit one hundred dollars into your bank, the bank may retain five dollars of that in its vault, and the remaining ninety-five dollars is loaned out in the regular course of its business operations.
If there is some event that may cause the depositors of that bank to demand their money, it would potentially cause that bank to call in loans, sell investment holdings, or withdraw its own deposits that are held in other banks. This puts pressure on the other banks and financial markets, which may be forced to do likewise. This cycle reverberates through the financial system and can bring the entire banking system to its knees.
This is exactly what happened to the banking industry in 1907, in what became known as the 1907 Bankers' Panic. This panic spread throughout the country, and caused many state and local banks to file for bankruptcy.
In 1913, with the enactment of the Federal Reserve Act, the Federal Reserve was created as a response to the 1907 panic. The Fed was given the power to inject more cash into banks in order to avoid another 1907 panic.
As the Great Depression was just around the corner, the Fed would have its first real test. In 1931, Great Britain came off the gold standard. At the time, there were significant gold withdrawals from the United States. The Fed then acted to prevent a further drain of gold reserves by raising its discount rate charged to member banks, which supposedly halted the gold drain. However, not long after the Fed's action, there was a run on banks across the country and over 10% of all banks suspended their operations.
Even though the Fed increased its currency infusions into the banking system during this period of time, the banking industry spiraled into a vicious cycle, which resulted in the Banking Holiday of 1933, during which every bank in the United States was ordered closed by government decree to prevent further runs on banks and resulting bank failures.
However, by this point in time, nearly one-third of all banks in the country had gone out of business....Finish reading @Source
