Thomas Jefferson’s chilling warnings about unchecked fiat, paper money proved prophetic as the U.S. plunged into its first boom-bust economic crisis in the early 19th century. 

In an 1814 letter to Thomas Cooper, Jefferson wrote, “Every thing 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 one year later, a depression gripped the United States kicked off by financial panic. This economic downturn lasted until 1821 and is widely viewed as the first boom-bust period in U.S. history. 

And it was exactly what Jefferson predicted. 

The depression was rooted in an all-too-familiar problem – excessive money printing.

The economic downturn came on the heels of the War of 1812, which officially ended with the signing of the Treaty of Ghent on Feb. 18, 1815. After the war, banknotes began to rapidly depreciate due to the exponential increase in the amount of paper in circulation. 

The First Bank of the United States charter ended in 1811 and was not renewed. The Second Bank of the United States (SBUS) wasn’t created until 1816. This led to a proliferation of state-chartered banks.

As economist Murray Rothbard explained in his book, The Panic of 1819, to fund the war, the federal government turned to these state-chartered banks, and they issued large numbers of paper money banknotes far exceeding the amount of gold to back them. 

This caused gold to drain from these banks. To keep the money flowing, the U.S. government agreed to a suspension of specie payments from state banks and the situation persisted after the war ended. This allowed banks to make loans with little to no regard for gold reserves to bank them.

It was a formula for disaster.

Jefferson understood this all too well, making his views clear in his letter to Cooper. 

“I am an enemy to all banks discounting bills or notes for any thing but coin. but our whole country is so fascinated with this Jack lanthern wealth, that they will not stop short of its total and fatal explosion”

On March 23, 1815, the U.S. entered a period of financial panic. It was followed by several years of mild depression culminating in a sharp economic downturn known as the Panic of 1819.

The panic was exacerbated by financial conditions in Europe in the wake of the Napoleonic wars, but it was fundamentally a domestic problem caused by money printing.

Whenever the money supply rapidly expands, as it did during the war years, it creates all kinds of malinvestments in the economy. The expansion of credit fueled land speculation in the West, that likely would not have happened in a more sound 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 bank notes, state-chartered banks helped fund this land boom. The problem was most of them lacked sufficient specie to back their paper. 

After it opened for business in 1817, the Second Bank of the United States (SBUS) jumped right in to further expand money and credit.

The SBUS had 18 branches. They were supposed to operate with oversight by the main bank in Philadelphia, but the oversight was lax. Meanwhile, the SBUS was supposed to regulate state banks. This oversight was also lax. 

Meanwhile, western branches of the national bank got caught up in the land boom mania and began issuing SBUS banknotes at a dizzying pace. In his book The Awakening of American Nationalism, Dangerfield noted 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, as Jefferson called it, “a deluge of bank paper” without sufficient gold backing.

According to Rothbard, by 1818, the Second Bank of the United States had demand liabilities exceeding $22.4 million. Its specie fund stood at a mere $2.4 million – a 10:1 ratio. A 5:1 ratio was considered sustainable. 

That year, the SBUS tried to rein in 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 spiking unemployment. 

It was just what Jefferson predicted. 

In an 1819 letter to John Adams, Jefferson lamented that the situation would never change or even 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.”

Jefferson went on to pinpoint the root of the problem with paper money, “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 penned by Adams discussing Chapter 6 of the 1817 Treatise on Political Economy by Destutt de Tracy. Adams cited a passage calling the printing of paper money 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.

“A theft of greater magnitude & still more ruinous is the making of paper. It is greater because in this money there is absolutely no real value. It is more ruinous because by its gradual depreciation during all the time of its existence it produces the effect which would be produced by an infinity of successive deteriorations of the coin.”

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 an hundred & fifty years.” [emphasis added]

How much worse are things today?

We can accurately predict another economic meltdown in the future because, after more than 200 years, the problem of paper money remains. The people still have not become radically instructed as to the cause and consequences of the boom-bust cycle that’s fueled by printing massive amounts of paper (and today, electronic) money.

The government continues to print it at a dizzying pace. Just consider that the Federal Reserve created nearly $9 trillion out of thin air since the 2008 financial crisis. 

Economic principles don’t change with the times. In 1788, Jefferson wrote, “Paper is poverty … it is only the ghost of money, and not money itself.

It’s still true today.

In other words, Jefferson called it.

His foresight underscores the enduring danger of paper money and government excess, echoing through history’s economic crises.

Mike Maharrey

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