By Peter Stone

Compiled by: Block unicorn

There are a total of 4 central banks in the U.S., 3 of which have closed, and 1 is still operational. The last central bank we closed was the Second Bank of the United States by Andrew Jackson in 1836, which gives us a roadmap to ending the Federal Reserve.

Second Bank of the United States

The Second Bank was established in 1816. Like all central banks, its purpose was to finance government debt at the expense of issuing counterfeit money.

Buying government debt is standard practice for central banks: it’s the bribe they pay governments for a license to forge currency. They use that counterfeit money to buy government bonds at low interest rates, allowing governments to deficit spend cheaply.

Governments would typically pass legal tender laws requiring ordinary people to use these counterfeit notes, or the whole system would collapse: the government would be left with a pile of worthless paper that it couldn’t spend.

Besides profits for central bank sponsors, floods of fake money are popular with politicians because they induce short-term economic booms: fake money boosts real savings and makes borrowing cheap.

Cheap loans sparked an artificial boom, a frenzy of hiring, building and investment. It was like crack cocaine for politicians, who took credit for a boom in organizational flames that burned brightly but was short-lived.

But it will eventually end in a recession or depression. At this point, governments will scapegoat the markets—those mysterious “animal spirits” of Keynesian “collective hallucinations.” Or they will pin the blame on an external crisis, such as a war, or a financial collapse caused by an overextended boom, which was caused by the recession itself.

So, here’s the central bank package: empowering counterfeiters to provide governments with cheap money, and a short-lived boom that preferably ends after the election.

The second Bank of America is established

Now back to 1816, the money printing during the War of 1812 caused regional banks to refuse to redeem their paper money for gold, which was the banking version of a default.

Remember, back then, one dollar actually represented gold - about 1/20 of an ounce. So refusing to redeem it in kind (gold and silver coins) was tantamount to bankruptcy. Like a pawn shop refusing to return your guitar.

The banks wanted a bailout, and the central bank—the Second Bank of the United States—was their tool.

Created by Congress, the Second Bank would hold the federal government's deposits and process its payments--so it would act as a normal bank for the federal government. More importantly, the Second Bank would help market government debt.

In return, the Second Bank was allowed to print paper money and make loans, just like legal reserve banks do today: they pretended to have a million dollars, then drew up an IOU for a borrower in exchange for a promise to pay a million dollars plus interest. That IOU—the paper money—was legal tender, thanks to legal tender laws, and it was illegal to refuse to accept it.

Unlike today’s Federal Reserve, the Second Bank did not set interest rates. However, currency counterfeiting kept interest rates down, leading to a brief but violent boom that ended in the Panic of 1819, one of the worst recessions in U.S. history.

By the way, Murray Rothbard wrote an entire book about this crash—in fact, it was his doctoral dissertation.

Public antipathy towards banks

The public blamed the Second Bank for the crash of 1819. But a printing press could buy a lot of friends, so the bank still had support in Congress.

As a result, the bank caused panics one after another, including in 1822 and 1825, every three years.

These events sparked public outrage and led the fiery populist Jackson to make bank abolition a focus of his campaign.

Jackson was the Donald Trump of his time — despised by the establishment, and he resented the establishment. He was a former war hero, and he despised the elites. In fact, Donald Trump has a bust of Jackson prominently displayed in the Oval Office.

Jackson personally hated paper money, as he had nearly gone bankrupt accepting paper money that became worthless. He believed that only gold and silver were real money. In addition, Jackson was sympathetic to states' rights and believed that the federal bank trampled on the rights of states.

Jackson abolishes the Second Bank

Jackson was elected in 1828, but the bank's charter did not expire until 1836, and he began preparations to withdraw federal deposits from the Second Bank.

The Second Bank fought back by halting lending by state banks, hoping to provoke a bank collapse—a "panic" that would be blamed on Jackson.

However, the move backfired, and the public became even more dissatisfied with the Second Bank, seeing it as a plutocratic manipulator, which it was.

Faced with this outrage, the House of Representatives failed to renew the Second Bank’s charter in 1834, closing it.

What happened next? Jackson stepped up land sales and, for the first and only time in U.S. history, paid off the federal debt.

Initially, these sales were conducted with paper money, which was continuously issued by state banks, which took over the printing of money from the Second Bank. This sparked a land speculation boom, and Jackson countered with the Gold and Silver Order of 1836, requiring land purchases to be paid in gold or silver.

This finally put an end to the inflationary banks: the end of cheap money bankrupted nearly half of all banks in the United States—about 400 in total.

The vast majority were newly formed “wildcat” state banks, formed to profit from the land mania. But even the major New York banks stopped honoring gold and silver, effectively declaring bankruptcy.

From the Second National Bank to the Federal Reserve

Now the United States has all the ingredients for a return to a healthy currency. The Second National Bank has been closed, speculative banks have been cleared out, and the national debt has even been paid off.

If the government did nothing at that point, the surviving conservative bankers would replace the speculators and we would have a sound banking system, a sound dollar, and an end to the boom-bust cycle of inflation and depression.

Unfortunately, by that time, Andrew Jackson had left office. The political friends in the administration came back, and President Van Buren allowed the banks to operate without redemption of gold and silver, which amounted to a bailout of the banks, similar to the bank bailouts of the 1800s.

This continued for another 40 years, with one boom-bust cycle after another. Usually, the railroads played the role of a bubble of extravagance, but Lincoln caused the real hyperinflation.

The hard money advocates had one victory during this period, returning the country to the gold standard in 1879, ushering in the greatest golden age in American and world history. By the way, my article on that golden age is here.

However, this golden age only lasted until 1907, when a group of banks attempted to manipulate the copper market but failed, triggering one of the nation’s largest bank crashes. This crash was almost single-handedly saved by the largest oligarch in the United States, Morgan.

The bailout cost Morgan a lot of money, so he and other bankers immediately institutionalized the bailout mechanism and passed the cost on to the public. Eventually, the Second National Bank was resurrected, now Orwellian-named the "Federal Reserve." The name was carefully chosen to evoke the safety and trust of the banking rescue mechanism, in effect resurrecting the dirty bank rescue machine.

Thus, the Federal Reserve, the Creature of Jackal Island (the author compares it to a creature to emphasize its impact on the U.S. financial system and the context in which it emerged), was born.

in conclusion

To me, the most important lesson from the second bank is that we can absolutely end the Fed. It has happened three times and will probably happen again.

But the key is to educate ordinary people - the voters - about what the Fed actually does, and what all central banks do.

Help them understand that inflation, recessions, and even bank collapses are not caused by so-called "animal spirits." They are not greedy workers or even failures of the private sector of the market that require the wise hand of government to intervene. They are the product of the Federal Reserve, its vocation, and its reason for existing.