The Hazards of Money Printing: The Financial Panic of 1819 and Thomas Jefferson's Warning
Thomas Jefferson once warned of the dangers of a "deluge of paper money," a phrase that aptly describes the current situation with the Federal Reserve and the U.S. government. The consequences of this reckless monetary policy are felt every time we visit the grocery store or gas station, as our money's value continues to depreciate.
Despite claims from central bankers and politicians that they are combating inflation, the reality is that inflation is a deliberate policy. The political class is systematically eroding the value of your money. This is not a recent phenomenon. Since the early days of the Republic, government officials have been devaluing our money for their benefit. Unfortunately, many people are unaware of this and attribute price inflation to corporate greed, price hikes by Putin, or other factors.
Jefferson warned that the harmful effects of this flood of paper money would not be mitigated until citizens comprehensively understood its causes and consequences. A look back at the first American boom-bust crisis in the early 19th century can provide valuable insights into our current situation. During this period, Jefferson's dire warnings about unregulated fiat, paper money were proven true.
The First American Boom-Bust Crisis
In a 1814 letter to Thomas Cooper, Jefferson wrote, "Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper as we were formerly by the old Continental paper." Just a year later, a depression swept across the United States, triggered by a financial panic. This economic downturn, which lasted until 1821, is widely considered the first boom-bust period in U.S. history. Jefferson's prediction was spot on.
The root of the depression was a familiar problem - excessive money printing. The economic downturn followed the War of 1812, which officially ended with the signing of the Treaty of Ghent on February 18, 1815. After the war, banknotes began to depreciate rapidly due to the dramatic increase in the amount of paper in circulation.
The First Bank of the United States' charter expired in 1811 and was not renewed. The Second Bank of the United States (SBUS) wasn't established until 1816, leading to a proliferation of state-chartered banks. To fund the war, the federal government relied on these state-chartered banks, which issued large quantities of paper money banknotes far exceeding the amount of gold to back them.
This led to a drain of gold from these banks. To keep the money flowing, the U.S. government agreed to a suspension of specie payments from state banks, a situation that persisted even after the war ended. This allowed banks to make loans with little to no regard for gold reserves to back them, a recipe for disaster.
The Financial Panic of 1819
Jefferson was acutely aware of this, as he made clear in his letter to Cooper. "I am an enemy to all banks discounting bills or notes for anything but coin. But our whole country is so fascinated with this Jack lantern wealth, that they will not stop short of its total and fatal explosion," he wrote.
On March 23, 1815, the U.S. entered a period of financial panic, followed by several years of mild depression, culminating in a severe economic downturn known as the Panic of 1819. While financial conditions in Europe in the wake of the Napoleonic wars exacerbated the panic, it was fundamentally a domestic problem caused by money printing.
Rapid expansion of the money supply, as happened during the war years, leads to numerous malinvestments in the economy. Credit expansion fueled land speculation in the West, which likely would not have occurred in a more stable monetary environment. Historian George Dangerfield argued that the entire postwar American economy was "based on a land boom."
Since the U.S. Treasury accepted payments for land in the form of state-issued banknotes, state-chartered banks helped fund this land boom. However, most of them lacked sufficient specie to back their paper. After opening for business in 1817, the Second Bank of the United States (SBUS) further expanded money and credit.
The SBUS had 18 branches, which were supposed to operate under the oversight of the main bank in Philadelphia. However, oversight was lax. The SBUS was also supposed to regulate state banks, but this oversight was similarly lax.
Western branches of the national bank got caught up in the land boom mania and began issuing SBUS banknotes at a dizzying pace. Dangerfield noted in his book The Awakening of American Nationalism that SBUS banks tried to restock their insufficient gold reserves by redeeming their notes for hard money at eastern and northern SBUS branches.
The result was a "deluge of bank paper" without sufficient gold backing, as Jefferson described it. According to economist Murray Rothbard, by 1818, the Second Bank of the United States had demand liabilities exceeding $22.4 million, with a specie fund of just $2.4 million - a 10:1 ratio. A 5:1 ratio was considered sustainable.
That year, the SBUS attempted to address the problem by curtailing loans by its western branches. When state banks began presenting their banknotes for redemption at the Second Bank of the United States, it refused to provide gold specie from its reserves. There was simply too much paper and not enough gold. The state banks did the only thing they could do; they began foreclosing on heavily mortgaged farms and business properties.
This led to widespread bankruptcies, bank failures, a collapse in real estate prices, and soaring unemployment. It was exactly what Jefferson had predicted.
The Root of the Problem
In a 1819 letter to John Adams, Jefferson lamented that the situation would not change or improve until people understood the root cause of the economic malaise - paper money. "The evils of this deluge of paper money are not to be removed until our citizens are generally and radically instructed in their cause & consequences," he wrote.
Jefferson identified the crux of the problem with paper money as the "want of a stable, common measure of value, that now in use being less fixed than the beads & wampum of the Indian."
Jefferson was responding to a letter from Adams discussing Chapter 6 of the 1817 Treatise on Political Economy by Destutt de Tracy. Adams quoted a passage in which Tracy described the printing of paper money as more ruinous and a greater theft than empires of old shaving off a little gold from their coins and passing them off as full-weight. In other words, Tracy called it stealing.
Adams put it in even harsher terms, writing to Jefferson: "That is to say an infinity of successive felonious larcenies. If this is true as I believe it is we Americans are the most thievish people that ever existed, we have been stealing from each other for a hundred & fifty years."
The Situation Today
Today, the problem of paper money persists, and we can predict another economic meltdown in the future. The public still has not become radically instructed about the cause and consequences of the boom-bust cycle fueled by printing massive amounts of paper (and now, electronic) money.
The government continues to print money at an alarming rate. The Federal Reserve has created nearly $9 trillion out of thin air since the 2008 financial crisis through quantitative easing alone, on top of the expansion of money and credit due to over a decade of artificially low interest rates.
Economic principles do not change with the times. In 1788, Jefferson wrote, "Paper is poverty ... it is only the ghost of money, and not money itself." This is still true today. Jefferson's foresight highlights the enduring danger of paper money and government excess, a warning that echoes through the economic crises of history.
The Tenth Amendment Center contributed to this report.
Bottom Line
The warnings of Thomas Jefferson about the dangers of unregulated fiat, paper money, and the resulting boom-bust cycles are as relevant today as they were in the early 19th century. The unchecked printing of money by governments and central banks leads to inflation, economic instability, and ultimately financial crises. While the specifics may change, the underlying economic principles remain the same. What are your thoughts on this topic? Share this article with your friends and continue the discussion. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.
The Hazards of Money Printing: The Financial Panic of 1819 and Thomas Jefferson's Warning
Thomas Jefferson once warned of the dangers of a "deluge of paper money," a phrase that aptly describes the current situation with the Federal Reserve and the U.S. government. The consequences of this reckless monetary policy are felt every time we visit the grocery store or gas station, as our money's value continues to depreciate.
Despite claims from central bankers and politicians that they are combating inflation, the reality is that inflation is a deliberate policy. The political class is systematically eroding the value of your money. This is not a recent phenomenon. Since the early days of the Republic, government officials have been devaluing our money for their benefit. Unfortunately, many people are unaware of this and attribute price inflation to corporate greed, price hikes by Putin, or other factors.
Jefferson warned that the harmful effects of this flood of paper money would not be mitigated until citizens comprehensively understood its causes and consequences. A look back at the first American boom-bust crisis in the early 19th century can provide valuable insights into our current situation. During this period, Jefferson's dire warnings about unregulated fiat, paper money were proven true.
The First American Boom-Bust Crisis
In a 1814 letter to Thomas Cooper, Jefferson wrote, "Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper as we were formerly by the old Continental paper." Just a year later, a depression swept across the United States, triggered by a financial panic. This economic downturn, which lasted until 1821, is widely considered the first boom-bust period in U.S. history. Jefferson's prediction was spot on.
The root of the depression was a familiar problem - excessive money printing. The economic downturn followed the War of 1812, which officially ended with the signing of the Treaty of Ghent on February 18, 1815. After the war, banknotes began to depreciate rapidly due to the dramatic increase in the amount of paper in circulation.
The First Bank of the United States' charter expired in 1811 and was not renewed. The Second Bank of the United States (SBUS) wasn't established until 1816, leading to a proliferation of state-chartered banks. To fund the war, the federal government relied on these state-chartered banks, which issued large quantities of paper money banknotes far exceeding the amount of gold to back them.
This led to a drain of gold from these banks. To keep the money flowing, the U.S. government agreed to a suspension of specie payments from state banks, a situation that persisted even after the war ended. This allowed banks to make loans with little to no regard for gold reserves to back them, a recipe for disaster.
The Financial Panic of 1819
Jefferson was acutely aware of this, as he made clear in his letter to Cooper. "I am an enemy to all banks discounting bills or notes for anything but coin. But our whole country is so fascinated with this Jack lantern wealth, that they will not stop short of its total and fatal explosion," he wrote.
On March 23, 1815, the U.S. entered a period of financial panic, followed by several years of mild depression, culminating in a severe economic downturn known as the Panic of 1819. While financial conditions in Europe in the wake of the Napoleonic wars exacerbated the panic, it was fundamentally a domestic problem caused by money printing.
Rapid expansion of the money supply, as happened during the war years, leads to numerous malinvestments in the economy. Credit expansion fueled land speculation in the West, which likely would not have occurred in a more stable monetary environment. Historian George Dangerfield argued that the entire postwar American economy was "based on a land boom."
Since the U.S. Treasury accepted payments for land in the form of state-issued banknotes, state-chartered banks helped fund this land boom. However, most of them lacked sufficient specie to back their paper. After opening for business in 1817, the Second Bank of the United States (SBUS) further expanded money and credit.
The SBUS had 18 branches, which were supposed to operate under the oversight of the main bank in Philadelphia. However, oversight was lax. The SBUS was also supposed to regulate state banks, but this oversight was similarly lax.
Western branches of the national bank got caught up in the land boom mania and began issuing SBUS banknotes at a dizzying pace. Dangerfield noted in his book The Awakening of American Nationalism that SBUS banks tried to restock their insufficient gold reserves by redeeming their notes for hard money at eastern and northern SBUS branches.
The result was a "deluge of bank paper" without sufficient gold backing, as Jefferson described it. According to economist Murray Rothbard, by 1818, the Second Bank of the United States had demand liabilities exceeding $22.4 million, with a specie fund of just $2.4 million - a 10:1 ratio. A 5:1 ratio was considered sustainable.
That year, the SBUS attempted to address the problem by curtailing loans by its western branches. When state banks began presenting their banknotes for redemption at the Second Bank of the United States, it refused to provide gold specie from its reserves. There was simply too much paper and not enough gold. The state banks did the only thing they could do; they began foreclosing on heavily mortgaged farms and business properties.
This led to widespread bankruptcies, bank failures, a collapse in real estate prices, and soaring unemployment. It was exactly what Jefferson had predicted.
The Root of the Problem
In a 1819 letter to John Adams, Jefferson lamented that the situation would not change or improve until people understood the root cause of the economic malaise - paper money. "The evils of this deluge of paper money are not to be removed until our citizens are generally and radically instructed in their cause & consequences," he wrote.
Jefferson identified the crux of the problem with paper money as the "want of a stable, common measure of value, that now in use being less fixed than the beads & wampum of the Indian."
Jefferson was responding to a letter from Adams discussing Chapter 6 of the 1817 Treatise on Political Economy by Destutt de Tracy. Adams quoted a passage in which Tracy described the printing of paper money as more ruinous and a greater theft than empires of old shaving off a little gold from their coins and passing them off as full-weight. In other words, Tracy called it stealing.
Adams put it in even harsher terms, writing to Jefferson: "That is to say an infinity of successive felonious larcenies. If this is true as I believe it is we Americans are the most thievish people that ever existed, we have been stealing from each other for a hundred & fifty years."
The Situation Today
Today, the problem of paper money persists, and we can predict another economic meltdown in the future. The public still has not become radically instructed about the cause and consequences of the boom-bust cycle fueled by printing massive amounts of paper (and now, electronic) money.
The government continues to print money at an alarming rate. The Federal Reserve has created nearly $9 trillion out of thin air since the 2008 financial crisis through quantitative easing alone, on top of the expansion of money and credit due to over a decade of artificially low interest rates.
Economic principles do not change with the times. In 1788, Jefferson wrote, "Paper is poverty ... it is only the ghost of money, and not money itself." This is still true today. Jefferson's foresight highlights the enduring danger of paper money and government excess, a warning that echoes through the economic crises of history.
The Tenth Amendment Center contributed to this report.
Bottom Line
The warnings of Thomas Jefferson about the dangers of unregulated fiat, paper money, and the resulting boom-bust cycles are as relevant today as they were in the early 19th century. The unchecked printing of money by governments and central banks leads to inflation, economic instability, and ultimately financial crises. While the specifics may change, the underlying economic principles remain the same. What are your thoughts on this topic? Share this article with your friends and continue the discussion. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.
