We’ve been on a Federal Reserve kick lately, and we demonstrated last week that the central bank is really not needed. Click here to read. Today, let’s dive in a little further and show one of the things that led to the creation of the Federal Reserve.

Understanding what enabled the Federal Reserve to be created is essential to understanding the history of our economic policy. Luckily the Fed has only been around for 102 years so it’s easy to see what it has done or has not done. Central banks are a bad idea, and the founders of America understood this, because they understood that the states should give power to the national government. Things began changing in haste for America around the time Andrew Jackson became president. His first vice president, John C. Calhoun of South Carolina, was a staunch advocate for states having the power to tax and send revenue to the federal government. Jackson believed in preserving the Union at all costs. This rudimentary disagreement led Calhoun to resign as vice president and run for and be elected to the senate. He became one of Jackson’s nemeses from then on.

Calhoun warned that the North’s thirst for revenue from Southern states would be problematic. Remember, due to the North having a larger population it controlled Congress. “The North has adopted a system of revenue and disbursements, in which an undue proportion of the burden of taxation has been imposed upon the South, and an undue proportion of its proceeds appropriated to the North. …the South, as the great exporting portion of the Union, has in reality paid vastly more than her due proportion of the revenue,” Calhoun stated in his argument for the nullification of unfair laws.

Calhoun died eleven years before the Civil War began, and his death left a void that was not filled. Secession debate continued, and Abraham Lincoln continued to rail against states having more power than the national government. His eloquent speeches rival those of Barack Obama, but they were ripe for divisiveness, much like Obama’s speech about stripping Constitutional rights from people who have not committed crimes.

An example of Lincoln’s oratorical gift: “We are not enemies, but friends. We must not be enemies. Though passion may have strained, it must not break our bonds of affection. The mystic chords of memory, stretching from every battlefield and patriot grave to every living heart and hearth-stone all over this broad land, will yet swell the chorus of the Union when again touched, as surely they will be, by the better angels of our nature.” You see, the South viewed its peaceful secession from the North similar to the colonies seeking independence from England, but Lincoln would not have it that way. The Battle of Fort Sumter was where Lincoln unleashed his fury for the South refusing to collect tariffs. This rebellion began the bloodiest war in American history. 

In the book The War Between the States: America’s Uncivil War, the author quotes Charles Adams’ book When in the Course of Human Events and states, “The total approximate revenues were $107.5 million [for the nation]. These were the amounts charged at Federal ports for the ‘privilege’ of importing products into the U.S. The South, with a far smaller population and economy, but much more dependent on imported products than the North, paid $90 million (83%) of this total, the North only $17.5 (17%).

“Correspondingly, out of a national total of $261 million in exports in 1860, Southern exports counted for $214 million and Northern $47 million. These exports were typically subject to retaliatory force in tariffs at their point of destination with the South shouldering an identical 83-17% burden of the load.

“In addition, $13 million in fishing bounties were paid to New Englanders, 83% of that, too, originating from Southern coffers. Finally, in a time before Federal Anti-Trust Laws, Northern shipping held a monopoly on business from Southern ports. The South paid these merchants $36 million more.

“Growing North Congressional dominance drove the tariff higher and higher. Lincoln spearheaded its increase to nearly 40% by the outbreak of war, and nearly 50% by the end of the war.”

The oppressive taxation infuriated Southerners and drove them to take drastic measures to secede from the Union. Of course, we know that the South was not victorious in winning her independence from oppressive regulation, and we understand today that the Federal or national government is stronger than it ever has been.

After the Civil War things were never the same. Top-down government has been the modus operandi ever since, and our Constitution has been at odds with our powerful national government. Forty-eight years after the Civil War, the strong national bank called the Federal Reserve came along, and our monetary policy never looked the same again. The dollar began a long slow slog to fiat status, and inflation has caused our money to be confiscated without most even realizing it. It allowed our Federal government more totalitarian control.

What are we saying?

The Federal Reserve has been able to create boom and bust cycles, and in 2008 America’s economy should have been allowed to go as low as it would. The Fed stepped in and said there would be “rioting in the streets” if they did not intervene. This has only delayed the inevitable crash, and our money is being passively confiscated through inflation and deflation. Inflation in goods we need like food and clothing, and deflation in commodity prices. The latter indicates production levels are down. Furthermore, this would not have been possible if our Constitution had been adhered to and states gave power to the Federal government. Since the Civil War this has not been the case.

Economist Henry Hazlitt wrote the following about the Federal Reserve: “The money rate [interest rates] can, indeed, be kept artificially low only by continuous new injections [Quantitative Easing] of currency of bank credit in place of real savings. This can create the illusion of more capital just as the addition of water can create the illusion of more milk.”

More money has been injected into the system to give the illusion that we have more prosperity. That’s why the stock market continues to rise. The day of reckoning is coming, and how you have prepared will matter the most.