The Panic of 1837 - How Sound Money Failed the People of the United States - Stablecoins and the Crypto World Explained

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BOOM is still on holiday. This week, BOOM presents an editorial from two years ago, dated 7th May 2023. The lessons to learn from that article are timeless and BOOM often sends it to readers who ask for some extra tuition on the subject of money. The subjects dealt with include —

1. THE PANIC OF 1837 — HOW SOUND MONEY POLICY FAILED TO PROTECT THE PEOPLE OF THE UNITED STATES

2. MOST GOVERNMENTS DON’T UNDERSTAND MONEY

3. KILLING THE CENTRAL BANK OF THE UNITED STATES

4. THE FREE BANKING ERA — 1836 - 1862 — NO CENTRAL BANK

5. MASSIVE BANK FAILURES

6. THE ARRIVAL OF LENIN AND THE USSR — ONLY ONE BANK

7. STABLE COINS AND THE CRYPTO WORLD EXPLAINED

8. NEW STABLECOIN BILL IN US CONGRESS ATTEMPTS TO REGULATE STABLECOINS

As you read, please remember that this article was published by BOOM over 2 years ago. However, BOOM is confident that all readers will benefit from a review of these important subjects.

A CEILING IN THE PALAZZO TE — MANTOVA — POWER AND MONEY?

THE PANIC OF 1837 — HOW SOUND MONEY POLICY FAILED TO PROTECT THE PEOPLE OF THE UNITED STATES

It is fashionable to rage against central bankers and even commercial bankers with some people vehemently accusing them of creating most if not all of societies ills. It is time to re-consider a world of so-called “sound’ money, backed by gold and when there was no central bank. That world occurred in the 19^th century in the United States.

If you hate banks and bankers …… or if you are a true believer in the wisdom of governments …. or a true believer in the concept of "hard" (or "sound") money, you should take a good hard look at The Panic of 1837 in the United States. An examination of the events leading up to the Panic and the events that occurred afterwards are worthy of your time.

MOST GOVERNMENTS DON’T UNDERSTAND MONEY

All of human history reveals that most Governments don't understand money. And the idea that the concept of "soundness" can be used to somehow tame money creation is magical thinking in action. All forms of money are contracts of credit, based upon trust and enforced by social agreement. Human beings will always find ways to innovate in regard to contracts of credit. That is what the history of money tells us. Let's look back to 1837.

KILLING THE CENTRAL BANK OF THE UNITED STATES

It all started when the US President, Andrew Jackson, in his wisdom, effectively killed off the central bank which was then called the BUS -- the Second Bank of the United States. That process started in 1833 but was not completed until 1836.

The end of the central bank triggered a huge real estate boom as State based commercial banks issued credit money loans in large volumes to eager borrowers to purchase land. Is this sounding familiar?

THE SPECIE CIRCULAR EXECUTIVE ORDER — HARD, SOUND MONEY

The Government became concerned. So they issued the so-called "Specie Circular", an executive order issued by President Andrew Jackson on July 11th 1836. He ordered that payments for the purchase of public lands be made exclusively in gold or silver. Jackson was a "hard" money man who was always suspicious of banks creating credit money loans without the "sound" backing of gold and silver. The idea of the "Specie Circular" was to squash "excessive" land speculation and the "excessive" growth of the credit money supply (bank loans).

Jackson directed the Treasury Department and banks to only accept specie (Gold or Silver) as payment for government-owned land after Aug. 15, 1836. However, settlers and residents of the state in which they purchased land were permitted to use "paper" money (bank credit) until December 15th on lots up to 320 acres.

After that date, the Specie Circular effectively strangled the use of paper money. This caused a huge collapse of real estate prices. Buyers simply could not find sufficient gold or silver to settle purchases so they stopped buying. The banks had no option but to reduce credit creation dramatically and many banks then subsequently failed (as you would expect) due to loan defaults.

THE SUBSEQUENT PANIC

The Panic of 1837 started in April, one month after Martin Von Buren became President. It was an absolute economic disaster. By May 21, 1838, a joint resolution of Congress repealed the Specie Circular. The experiment with "sound" money was decisively over.

THE FREE BANKING ERA — 1836 - 1862 — NO CENTRAL BANK

Interestingly, a central bank was not established after that debacle. During the period from 1836 - 1862, there were only State banks with no Federal Bank. This period is called the Free Banking Era. Bank notes had to be issued with gold or silver backing but loan books of credit money were allowed. More chaos ensued.

MASSIVE BANK FAILURES

During the free banking era, state banks had an average life span of just 5 years. About half of the banks failed for the usual reason of loan defaults. But some failed because they had inadequate gold and silver with which to honour note redemptions. As a result some banks innovated and began to offer central banking services to other banks. Nonetheless, bank failures continued in huge numbers.

THE NATIONAL BANKING ACT — BANK SUPERVISION WITH NO CENTRAL BANK — A UNIFORM NATIONAL CURRRENCY

In 1863, the National Banking Act was passed, creating a system of Federal banks. And the office of Comptroller of the Currency was created to supervise those banks. A uniform national currency was also created. A huge bout of CPI inflation followed immediately with inflation hitting 24.6 % in 1864. By 1870, there were 1,638 national banks and only 325 state banks.

BANKING MISTRUST GENERATED 30 YEARS OF DEFLATION — BANKING PANICS OCCURRED in 1873, 1884, 1893, 1896, 1901, 1907

Inevitably, with no Central Bank to provide overnight support, liquidity mis-matches occurred and banks lost faith in each other. Mistrust ruled. Outright deflation hit and stayed for dinner (and beyond) from 1866 right through to 1897. Per capita GDP in the US rose very, very slowly from $ 4,700 to $ 7,200 over thirty long years. Much economic hardship was manifest. As sure as night follows day, bank runs occurred when depositors panicked about the security of their deposits. There were Banking Panics in 1873, 1884, 1893, 1896, 1901, 1907. Many, many banks failed, people lost their savings and deflationary real estate crashes occurred. This is what life is like without a central bank and with cash currency backed by Gold. In other words, in such a situation, credit money -- created via commercial bank loans -- rules the roost with no effective controls.

THE EARLY 19TH CENTURY WAS NO BETTER

But what about the early years of the 19th century? Surely it was a golden era of "sound" money? Gold rushes in the early part of the 19th century triggered mass migrations as people desperately tried to dig money out of the ground.

During the early years of the 19th century, there were banking crises in 1819, 1825, 1837, 1847 and 1857.

THE 19TH CENTURY YEARS WERE DESPERATE TIMES INDEED

Almost the entire 19th century in the US were desperate times indeed. It was slowly becoming obvious that a central bank was needed to provide stability to a banking sector in which inter-bank trust was badly damaged.

The concept of "sound" money (backed by Gold) failed to protect the people in the 19th century.

The fact is that humans need supervision in regard to money. Banks need to be supervised strictly and have access to overnight capital reserves. A central bank must maintain inter-bank trust and must stop excessive credit creation. Easy to say -- not so easy to do.

THE ARRIVAL OF LENIN AND THE USSR — ONLY ONE BANK

The problem is that human beings run elected governments and central banks. They also run commercial banks.

One nation attempted to rid itself of such beasts. It was called the USSR – the Union of Soviet Socialist Republics where there were no elections, no commercial banks and where a lone, all powerful central bank controlled the supply of money. That institution was appointed by a group of unelected tyrants in the Central Committee, unanswerable to the majority of the people. The experiment lasted 70 years. It ended when productivity eventually collapsed in a heap because nobody bothered to do any work, waiting for all their goods and services to be delivered by a benevolent central government. Utopia achieved.

TRUST IN MONEY AND BANKS IS ESSENTIAL

Our governments, our central banks and our commercial banks are all potentially flawed institutions because they contain human beings. Trust in our national money systems and in our national currencies is critical to keep our social system from implosion. The alternative is economic and social chaos. Beware of anyone who attempts to destroy that trust.

STABLE COINS AND THE CRYPTO WORLD EXPLAINED

Stablecoins are Crypto tokens (digital commodities) that mimic real national currencies. They are the bridges between the Crypto world and the real world. They enable (not always but most often) the holders of Cryptos to move their funds in the Crypto world back into the fiat currency world. Thus, they are an important service. The sponsors/promoters of Stablecoins claim that they are fully backed by sufficient stocks of legitimate national currency held in safe depository institutions. However, this has always been doubted and recently there was serious doubt about one major Stablecoin in particular. That serious doubt triggered concerns for the stability of some financial institutions based in the USA.

US DOLLAR PROXIES

Why the USA? The reason is self evident. The currency which is mimicked the most by Stablecoins is the US Dollar. This makes all Cryptos, in effect, potential US Dollar proxies. In other words, the Crypto world is a US Dollar Proxy world. It supports and promotes the US Dollar Empire. If you create a Crypto and people pay you for it, then the conventional currency used (most often) for such a transaction is the US Dollar. Thus, the Crypto world increases demand for US Dollars globally.

This process grows the stock of Eurodollars. Eurodollars are US Dollars outside of the US and outside of the control of the US regulatory authorities. Paradoxically, the US Dollar Empire is built on such Dollars because those Eurodollars can be increased in volume by parties other than the US government, in particular, by offshore tax haven banks. It is actually more correct to call the US Dollar Empire, the Eurodollar Empire.

Many Crypto promoters think that Crypto represents some sort of “revolution” in money. They play on this theme as a means to attract investors. However, nothing could be further from the truth. Cryptos are an invention of US intelligence organizations, created as an alternative means of boosting the volume of Eurodollars that exist globally. The first Crypto was Bitcoin and its release in January 2009 was based upon a paper released by the NSA (US National Security Agency) way back in 1996 titled “How to Make a Mint: The Cryptography of Electronic Cash”.

NAKAMOTO SATOSHI = CENTRAL INTELLIGENCE

Some will say “No – Bitcoin was created by Satoshi Nakamoto (!)”. But "Nakamoto", 中本 or ナカモト, is a common family name in Japan, roughly meaning "middle-origin" or CENTRAL. And “Satoshi”, サトシ , means INTELLIGENCE or wisdom. Central Intelligence. Think about it.

A Central Intelligence operation to expand Eurodollar volumes makes sense, especially if its founder is a mysterious, unknown and unidentified Japanese man called “Satoshi Nakamoto”.

NEW STABLECOIN BILL IN US CONGRESS ATTEMPTS TO REGULATE STABLECOINS

Let’s return to the subject of Stablecoins. A new 73-page draft bill was published on Saturday April 15th 2023 by the US House Financial Services Committee proposing that the Federal Reserve’s Board of Governors be given oversight of non-bank entities and digital asset firms inside the US involved in the issuance of Stablecoins.

The discussion draft was titled “A bill to provide requirements for payment stablecoin issuers, research on a digital dollar, and for other purposes”. It describes a series of proposed rules on the issuance of dollar-pegged digital assets as well as establishing requirements for interoperability, reporting and enforcement. A two-year moratorium on the creation and issuance of algorithmic Stablecoins is part of the proposal. There is also a request for the US Treasury to study the feasibility and working impact of a digital dollar central bank digital currency (CBDC) -- (whatever that means). Penalties are proposed for firms and platforms that issue Stablecoins without regulatory approval. They include prison time of up to five years, as well as a $1 million fine.

BOOM thinks that this Bill will simply drive Stablecoin issuance offshore into other national jurisdictions – out of the reach of US regulators and US depository institutions. Perhaps that is its true, unrevealed purpose because driving the Crypto world away from US shores will have the effect of reducing any negative impact it may have upon US financial institutions. In other words, they can have their cake and eat it. And such algorithmic Stablecoins could still be denominated in US Dollars (or any other real national currency) without the pesky requirement of establishing any deposits inside the US of domestic US Dollars to “back” them. A relationship with a non US global bank or payment system would suffice to effect settlements.

As part of the draft Bill’s proposed requirements, Stablecoin issuers must “publish the monthly composition of the issuer’s reserve portfolio on the website of the issuer, in a format established, jointly, by the federal payment Stablecoin regulators.” But if a non US based Stablecoin issuer wishes to ignore such a regulation, then BOOM cannot see why that cannot take place.

The draft Bill envisages that acceptable backing for Stablecoins will include US currency, central bank reserve deposits, Treasury bills with a maturity of 90 days or less, as well as certain repurchase agreements backed by Treasury bills with the same maturity period. This is essentially a codification of the model that Stablecoins such as USDC, USDT and BUSD already follow.

The legislation also requires that redemption requests, which are when Stablecoin holders trade in their tokens for the national currency backing it, must be executed in a time frame no “longer than one day after the redemption request.” All well and good, as long as the transaction occurs inside the United States. And if it occurs outside the US, then the legislation simply does not apply.

The proposed draft Bill will protect US based banking and depository institutions. However, it may simply transfer those risks to another national jurisdiction – or a whole group of jurisdictions. And such may trigger innovation which could create a Multipolar Crypto world of Proxy Currencies and isolate use of the US Dollar inside the United States in the long term. That could effectively be the end of the US Dollar Empire which is built on the primacy of external dollars in international trade and capital settlements. It would also be the end of the Bretton Woods world so carefully constructed in New Hampshire in July 1944, well before the end of World War 2.

As Winston Churchill once said “You can always count on the Americans to do the right thing, after they have exhausted all other possibilities.”

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