Jefferson in 1802 talks about 2008

A good friend of mine sent me this quote by Thomas Jefferson.

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

Monetary control is a matter of public legislation, that is the #1 lesson we must relearn from the 08 fiasco. Money creation is never to be left entirely to the invisible hand.


Roy Russo said…
Jefferson died a broke land owner, after borrowing his entire life via bank loans (land-rich, money-poor). It's fitting that he'd have a negative view of private banks.

The funny thing about this quote (and his being close to a Libertarian) is that he had no problems owning slaves, yet warns the people about becoming slaves to banks.
Anonymous said…
Jefferson died broke, not from borrowing from banks all his life, but because he spent his entire post-presidential life giving away his fortune to charities and the needy. In order to fund those donations he plegded the value of his property (the Monticello plantation and mansion) against advanced funds from various persons and banks so that he wouldn't need to sell the land until after he died.

He was, after all, a very clever man. Numerous inventions, self taught in multiple languages, author of the various famous documents you may have heard of, president of the USA, etc...
Marcf said…
Those were the days when president of the USA went with "very clever man".
Army No Va said…
Franklin was another, perhaps wiser than any of our presidents. He was asked after the signing of the Constitution - "What kind of Government do we have?". He replied, "A republic, if you can keep it...".

We started down the slippery slope of empire in the Civil War (it amazes me to hear of the complaints about Bush violating the constitution when he was a piker compared to Lincoln!).

But the biggest move away from a republic was the Income Tax Amendment and the Fed Reserve creation. These were what Jefferson was warning us about!
David Richmond said…

Claims that the quote is "at least partly spurious", and notes that the words "'inflation' and 'deflation' did not come into use until 1864 and 1920"
Arthur B. said…
"Monetary control is a matter of public legislation, that is the #1 lesson we must relearn from the 08 fiasco. Money creation is never to be left entirely to the invisible hand."

You have it backward. Right now monetary control is not the result of the invisible hand, it is done GOSPLAN style by the federal reserve, controlled bv government.

In the USSR, the government set the price of steel, in the US the fed sets the price of the short term interest rate.

The banking system benefits from this system because money creation puts money in their pocket. They will push for lower interest rate in order to expand the money supply.

How can we understand Jefferson's quote? In the absence of the banking regulation, with a
government enforced monopoly on money
the banks would print like crazy. The economy would disappear, Zimbabwe style in a week.

In a freed market, competition between currency acts against inflationary forces, as people prefer to hold a stable currency.

There are a few variants of this.

For Hayek, fiat currencies are privatized and kept in check by competition. Note that one of Peter Thiel's goal with Paypal was to achieve this ideal for political reasons. There is a risk that the market leader abuses from this position and start inflation. This is what happened with the dollar under Clinton, when the rest of the world kept accepting them. It provided a lot of real wealth to America, as China exchanged real goods for paper, but the dollar is now at risk of losing its status as a world reserve currency, which would dramatically lower it's value. I would argue that a privatized emitter of dollar would care more about the long term stability of the dollar. Right now the FED cares about keeping the government solvent. Bernanke said in clear words that the FED would be buying treasury securities, which is equivalent to printing money and handing it to the government.

For other hard money proponents, bank should operate on a 100% reserve status, using a commodity money, generally gold and no fractional reserve lending should happen. Little inflation would come from finding new mines, overall the monetary size would very slowly increase and prices would keep falling.

Last but not least, the free banking suggests a commodity money and a system of fractional reserve lending built on top. Banks engaging in reckless lending would see the value of their banknotes fall and would be suggest to run on the banks by competitors. Overall a market equilibrium would favor banks with high capital ratios. There would be a slight inflation of money.

This was the close to being the system in Scotland and the US for short periods of time. Government has always meddled with money.


If you're interested in money and banking, I'd love to discuss it more in details with you. I work as a quantitative analyst in finance, money & banking is my hobby. I'm X2002.
Marcf said…

I have been trying to get to the bottom of money creation and unless I am missing something very obvious, debt creation was not regulated at the i-bank level. Fractional reserve banking was only regulated for deposit banks. Does the FED truly control the amount of money in the system? Regulated banks cannot increase lending beyond a multiplier of deposits, but ibanks? they were feeding the hedge funds... where do you work? if you ever come to madrid let me know :)
Arthur B. said…
Investment banks operate differently from fraction reserve banks. In FRB, the customer's deposit is an implicit callable loan. The bank has to rely on the average time the customers leave the deposit idle.

Investment banks are less weaselly, they rely on short term commercial paper to finance long term debt. The short term credit need to be rolled continuously, if they can't they become bankrupt.

When a deposit bank lends money, the loaner can still spend his money. When you place your money on a money market account, you know it is lent.

Without checks on deposit banks, they can lend all of their deposits, which will be placed on bank account, then lent again, and again, etc. If they can "only" lend 10%, it can only multiply the money by (1+0.9+0.81..) = 10.

Investment banks on the other hand need to tap into the commercial paper market to finance anything. They are constrained by the supply of short term loans. If they consume to much, the short term interest rate will rise above the fed fund target rate.

This will attract banks who will use their deposit to finance the investment banks. Ultimately, the check placed on banks affect the capacity of investment banks to finance themselves. Money trickles from the federal reserve, to the banks, to the investment banks, to the hedge funds etc.

The FED controls this with the short term interest rate. When the short term borrowing starts, the interest rate rise, and the FOMC keeps it down by lending money on the repo market (against treasuries usually, against baseball cards today).

By the way, the FED is now insuring commercial paper and it's even considering buying 10 year treasuries. This is equivalent to printing money and handing it to the investment banks, or what's left of them, and the government. Pretty bad.

I work in a small hedge fund. No plans to visit Madrid soon but if you're in New York, let me know :)
Marcf said…
Tres interesting.

Any book you suggest I read to get up to speed on all the various theories of money?
Arthur B. said…
I can suggest "The mystery of banking". There's a free book here.

It's a good read, but remain skeptic. I personally disagree with key parts of it :)
Anonymous said…
You'd feel safer if the government controlled money creation?

They already do, of course, but how amazingly naive to think politicians are going to defend the value of your earnings better than the individual owners.

They inflate by design, you realize...
Anonymous said…
^^ nice blog!! ^@^

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