The Fateful Financing of the War of 1812

On pages 198-199 of The Mystery of Banking by Murray N. Rothbard, we read:

“The U.S. government encouraged an enormous expansion in the number of banks and in bank notes and deposits to purchase the growing war debt. These new and recklessly inflationary banks in the Middle Atlantic, Southern, and Western states, printed enormous quantities of new notes to purchase government bonds. The federal government then used these notes to purchase arms and manufactured goods in New England….

By August 1814, it became clear that the banks of the nation apart from New England could not pay [in specie], that they were insolvent. Rather than allow the banks of the nation to fail, the governments, state and federal, decided in August 1814 to allow the banks to continue in business while refusing to redeem their obligations in specie. In other words, the banks were allowed to refuse to pay their solemn contractual obligations….

This general suspension was not only highly inflationary at the time; it set a precedent for all financial crises from then on. Whether the U.S. had a central bank or not, the banks were assured that if they inflated together and then got in trouble, government would bail them out.”

This quote is cited from pages 337-338 of The Creature from Jekyll Island, A Second Look at the Federal Reserve by G. Edward Griffin.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: