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Capitalism, Democracy, and the Hundred Years’ War Over the American Dollar

By H.W. Brands

New York, W.W. Norton & Company, 2006
ISBN: 978-0-393-33050-2 pbk
239 pages

Bob Corbett
March 2015

In the introduction H.W. Brands argues that the central struggle in the early U.S. was a clash between Capitalism and Democracy. Many leaders wanted and admired both, but the struggle was the interface. On Brands’ view one of the most essential battles in this struggle was over the nature of the monetary system that would be the rule of the land. It was these “money men” who, on Brands’ view, shaped the essential nature of the later U.S. “In every generation a few bold spirits stood out, grappling with the question on which the fate of the American political economy hung. They were geniuses and rascals, statesmen and speculators, patriots and profiteers. They were the Money Men.”

It’s important to note this does not mean the “rich” vs the “poor.” That’s a different issue. Rather this is a book about the monetary system the U.S. would have and how that impacted the nature of both capitalists’ interests and the democratizing nature of the U.S. system.

Below I try to capture a bit of the essence of each chapter.

The Aristocracy of Capital: Pp. 15 – 55

Alexander Hamilton was from St. Croix in the Caribbean. As a very young man he wrote a powerful article about the 1772 hurricane that swept the island and people were moved. Some wealthy men, seeing his promise, sent him to the U.S. for education at King’s College. (Columbia).

Hamilton was soon involved in U.S. politics. He favored a boycott on British commerce; however at the same time others, especially George Washington, chose to wage war against Britain.

A significant portion of the colonial disagreement with Britain centered in the money supply. England supported a system in which gold and to a lesser extent, silver, was the measure of wealth and exchange, and taxes were payable in British coin. To a lesser extend Spanish coin and even American Indian “wampum” were also used, but paper money was highly frowned upon. England wanted to control the colonial world by these taxes in coin.

Hamilton saw the primary problem was that the individual states each controlled its own taxation. He argued strongly for a nation in which the federal government, not the states, primarily controlled taxation.

“That power which holds the purse strings absolutely, must rule.”

He wanted Congress to have “. . . complete sovereignty in all that relates to war, peace, trade, finance and to the management of foreign affairs.”

He argued for the establishment of a national bank to control currency and taxation. He was at the forefront of the movement which did eventually create a national president and Congress with significant major powers over individual states in the key areas which Hamilton supported.

The 85 individual issues of the “Federalist Papers” hammered home the new system and its values. Most of them were written by Hamilton.

The anti-Federalists were worried that a national government with too much power seemed like a retreat to the British model which they feared.

Eventually Hamilton’s view prevailed, but adding the Bill of Rights and getting Washington to reluctantly agree to the presidency were necessary. Washington then named Hamilton the first treasury secretary. He had until 1790 to lay out a long-term plan.

Hamilton strongly favored the federal government debt arguing that such a debt gave strong incentive to wealthy investors to support the state. He trusted the market. Where the investor’s interest lay, with the debt holders, so would their positive interest, he argued.

James Madison let the opposition to Hamilton’s plan on 2 major grounds:

  1. Since the value of the outstanding bonds would be 100% of face, this favored speculators who had purchased them, instead of patriots who originally purchased them.
  2. The assumption of state debts and bonds gave benefit to profligate states which hadn’t carefully managed their debt.

Hamilton worried about Congress controlling money via taxes and monetary policy. He thus adopted Adam Smith’s view of an independent National Bank which would “. . . receive taxes, disburse appropriations, managed the national debt, and issue notes that would serve as money.”

After a difficult battle the U.S. Nation bank came into existence.

The Bank War Pp. 57 – 95

The country was split. Hamilton led the capitalists and supporters of the bank. Jefferson led the democrats who were opposed to it, fearing a return to British-style politics. Jefferson’s party was called the Republicans and wanted to limit federal power.

When the French Revolution broke out the Federalists, led by Hamilton, leaned toward England. The Republicans favored France, especially because of France’s help in the American Revolutionary War.

In this midst of this battle on July 11, 1804 Aaron Burr and Hamilton fought a dual and Hamilton died the next day.

The Republicans under the presidency of James Madison allowed the National Bank to close. However, with clouds of war showing in 1812, things changed. The war went badly, but did demonstrate even to the Republicans the necessity of the National Bank. By 1816 the second Bank of the U.S. was chartered.

Nicholas Biddle of Philadelphia was a Federalist and was appointed as one of the directors in 1819. At the same time the U.S. suffered its first real financial panic. A financial crisis was tied to the land prices in all the areas west to the Mississippi River and it caused a great panic. John Marshall’s Supreme Court stood with the constitutionality of the National Bank.

In January 1823 at age 37 Nicholas Biddle became president of the Bank of the U.S. He worked to keep the bank as much out of politics as possible.

Andrew Jackson became president in 1829 and pledged not to “renew” the bank in 1836 when its charter expired.

In relation to this particular issue author H.W. Brands makes the statement below which just delighted me to no end. Fewer generalizations about political discourse can be truer than this one.

“Few questions in American politics are decided on their merits alone, and the Bank questions was not one of these.”

Biddle applied early in 1832 for renewal. Popular Daniel Webster presented the bill to the Senate. Missouri’s Thomas Hart Benton attacked the bank. In the ensuring battle of several years the bank finally collapsed.

The Bonds of Union Pp. 97 – 131

First the steamboat and then the railways changed the nature of the U.S. economy and were major factors in the growth of the nation.

By mid-19th century markets were national and no longer only local. America had an industrial revolution which changed the nation.

The world’s economy shifted in the 2nd half of the 19th century to a gold standard. More gold came out of California in the 1/4thof that century than the previous 300 years in the whole world!

The issue of slavery in the new western states arose and in 1850 the Missouri Compromise split the nation and the struggle for and against slavery was engaged and dominated. The 1860 election of Abraham Lincoln led much of the south to leave the Union. The Civil War began.

The nature of wealth and its value began to change. Simon Chase became secretary of the U.S. treasury, and given the desperate situation he was in he was able to:

  1. Introduce the first U.S. income tax
  2. Allowed U.S. banks to pay in paper, not actual gold, for certificates.

This did devalue the currency and at the end of the war the cost of living was 75% higher than before.

Very important to the Union effort in the war and for the development of a system of national banks was Jay Cooke. He worked with his brother Salmon Cooke and Secretary of the Treasury Henry D. Chase to raise money for the war by selling bonds.

At first they sold primarily to bankers and large companies, but they were generally skeptical of war bonds. Jay Cooke devised a plan to sell them to ordinary people, not primarily to banks. This worked spectacularly and he became very important to the war effort. By the spring of 1863

“. . . Jay Cooke may have become the person most vital to the Union war effort, after Lincoln.”

The Cooke brothers, working closely with Secretary of Treasury Chase were extremely influential in having Congress pass a bill reestablishing national banks. Lincoln signed this law on Feb. 25, 1863.

Eventually Cooke and Chase fell out, and the next short-term secretary, William Fessenden also did not work well with Cooke. However, Hugh McCulloch replaced Fessenden and he fully restored Cooke to his position of power and control over U.S. government bonds.

One Confederate leader said after the war:

“The Yankees did not whip us in the field. We were whipped in the Treasury Department.”

The Great Gold Conspiracy: Pp. 131 – 158.

H.W. Brands points out that after the war it could be seen that capitalism, neither Jeffersonianism nor Hamiltonianism were relevant.

“. . . the capitalists won control of the national government. The capitalist created a national currency, a national tax code, a national banking system, and a national system of credit . . . (and) commenced construction of a nationally funded railway to the Pacific.”

New York replaced Philadelphia as the “center” of power and activity in the U.S. Railroads dramatically changed markets and business and Jay Gould emerged as the cleverest analyst of the market.

Gould, along with Daniel Drew and Jim Fisk, decided to bet heavily on the Erie railroad as the lead toward the future. They outwitted Cornelius Vanderbilt for control of the Erie.

Eventually Jay Gould engineered a market manipulation in the gold market making him a fortune but costing his partner Fisk along the way.

The Transit of Jupiter: Pp. 159 – 197

John Pierpont Morgan was an important banker in a family of bankers. He opened his own bank in 1861. He loaned heavily to railroads, but demanded that some of his own people would be on the railroad boards of directors in order to protect the Morgan interest. In this process he learned the railroad business inside and out.

In 1879 the U.S. went back on the gold standard. A depression followed in 1893 and many suffered.

“Coin” came onto the scene in 1894 opening his “school” on money. His central argument was that the American money system had to be rooted in both gold and silver, not gold alone.

Coin, however, was fictional, though many did not realize this. He was created by William Harvey of Virginia. Brands sees this episode of monetary history as yet another clash between the forces of capitalism (the gold folks) and those who also wanted silver in the mix (the Democrats). William Harvey wrote “In the struggle of might against right the former has generally triumphed.” He was referring to the gold standard folks who were the party of “might.”

A gold panic soon followed and by early 1896 nearly all U.S. gold reserves were gone. Pierpont Morgan met with a reluctant President Cleveland and convinced him that an utter economic collapse was at hand. Cleveland followed Morgan’s recommendation to issue special bonds to Morgan and friends for 100 million in gold.

The deal did save the treasury, but it was very unpopular. Soon William Jennings Bryan became the Democratic nominee for president mainly on his stand on the money issue. He wanted a dual silver and gold system.

The Republicans won, but non-political issues were mainly responsible for stability. More gold was discovered in Alaska and Africa and better means of abstracting of gold increased the world supply. Further, the business cycle improved independent of the money issue.

However, McKinley was assassinated and Theodore Roosevelt became president. Roosevelt took on Morgan’s money project and brought it down but didn’t attack other Morgan business interest, only what he thought was wrong and dishonest.

Yet by 1907 another financial panic occurred, and the lines were clearly drawn by 1912. Wealthy capitalists effectively controlled the capital of the U.S.

Epilogue: The Money Answer: Pp. 199 - 206

Shortly after the crisis of 1912 J.P. Morgan died and an era effectively ended. Congress began to push hard for a new “national” bank to control the money supply.

“The Federal Reserve Act of 1913 created a hybrid system combining important elements of both capitalism and democracy. The twelve Federal Reserve banks were privately capitalized but answered to a board appointed by the White House. Gold remained the basis of the money supply, but the Federal Reserve Board, by manipulating interest rates and the reserve requirements of member banks, could strongly influence bank lending and thereby provide the ‘elastic currency’ the drafters of the legislation agreed the country required.”

The huge amounts of money loaned to Europe during and after WWI eventually put too much pressure on the new system and the Great Depression followed.

With the U.S. off the gold system and a federal banking system in place, Brands believes that the “money” problem is now safely solved for the United States.

I learned a great deal from this work and thought it was well worth the read. I would recommend it to anyone interested at all in the history of the “nature” of money in the

Bob Corbett


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