The Ghost of Thomas Jefferson

By John Steele Gordon

Thomas Jefferson was born one of the richest men in the American colonies. At the age of 14, he inherited 5,000 acres and 52 slaves from his father. Later, he and his wife, Martha, inherited 11,000 acres and 135 slaves from his father-in-law, John Wayles. But as one of the largest planters in the country, he had an aristocratic disdain for those who engaged in commerce—especially banking—a business that makes money from money, rather than from what Jefferson rather ironically regarded as “honest toil.”

American banking began only in 1784, as before independence Great Britain had forbidden banks in the colonies. Alexander Hamilton, the first secretary of the treasury, established the Bank of the United States, modeled on the Bank of England, to act as the central bank and provide discipline to the emerging American banking system.

With the founding of the BUS, which had been chartered over Jefferson’s furious opposition, a bull market in bank stocks developed on Wall Street. When the bubble collapsed, a delighted Jefferson calculated that it had caused losses of $5 million—about what he thought all the real estate in Manhattan was worth.

The American banking system flourished under the BUS, but Jeffersonians in Congress managed to deny it a new charter in 1811. Without a central bank, it proved very difficult for the federal government to borrow when war with Britain broke out the next year.

In 1816 President James Madison, who had opposed the first Bank of the United States, supported a second bank, now recognizing how important a central bank was to a healthy banking system and to facilitate federal borrowing. But the Second Bank of the United States never had the power to discipline commercial banks that the first one had had. Andrew Jackson, a thoroughgoing Jeffersonian when it came to money and banking, vetoed the renewal of its charter. For the next 77 years, the United States would be the only major country without a central bank. The price was numerous bank failures and a boom-and-bust economy.

In the panic of 1907, the federal government had to turn to J. P. Morgan to prevent a wave of bank failures and it was realized that a central bank was a necessity in a modern economy.

In 1913 the Federal Reserve came into existence. But the ghost of Thomas Jefferson and his hatred of large, powerful banks still lived. Instead of one central bank, there were 12, spread across the country. The governors of these banks at the time tended to be political appointees with little or no banking experience.

Benjamin Strong, head of the paramount Federal Reserve Bank of New York, was an exception, having been president of Bankers Trust. He soon became the de facto head of the entire Fed system with the other Fed governors following his lead. Thus, when Strong died in 1928, the Fed became essentially leaderless and stood by after the stock market crash the following year. It kept interest rates high when they should have been slashed and the money supply shrank by one-third, greatly deepening the depression. Thousands of banks failed over the next three and a half years and the banking system nearly collapsed.

The Fed was reorganized in 1934, with power moving from the regional banks—now headed by presidents, not governors, which is the true title of power in central banking—to the Board of Governors in Washington.

After untold financial disasters, Thomas Jefferson’s ghost was finally banished from American banking.


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