U.S. Needs Strong Central Bank on Hamiltonian Model

As the country's first secretary of Treasury, Alexander Hamilton pointed out: "Credit, public and private, is of the greatest consequence, the invigorating principle, an entire thing. Every part has the nicest sympathy with every other part. Wound one limb and the whole tree shrinks and decays."

Hamilton was arguing for a strong national bank, independent of direct Treasury or congressional control, with private citizens exercising majority control and government playing a minority role. The institution would be the nation's central bank and would also carry out regulatory functions.

The original bank proved to be a great success until its 20-year charter, under attack by antifederalists and populists led by Madison and Jefferson, failed to be renewed.

200 Years Later

Today's Federal Reserve System, established in 1913, is the historical descendant of Hamilton's original Bank of the United States.

The Fed is also the foundation on which to erect the unitary central banking and national reserve system that's needed to solve the country's banking problems. I'm confident Hamilton would agree.

"Banking is not a mere matter of private property," Hamilton said, "but a political machine of the greatest importance to the state."

And in keeping with the doctrine of the separation of powers as embodied in the Constitution, of which Hamilton was among the original framers, banking should be kept separate as far as practical from the direct influence of both the legislative and executive branches.

A Jerry-Built Structure

The long list of major issues addressed by the remedial banking proposals now the subject of noisy, often irresponsible debate inside the Beltway is itself a strong argument for replacing the present jerry-built U.S. banking and bank regulatory structure.

This sprawling system -- a dozen federal and myriad state regulatory agencies, about 12,500 banks, 40,000 entities in all with banklike powers to receive, lend, borrow, and create money -- would be better replaced with a single semi-independent federal agency to deal with all central banking and regulatory issues.

Accountability, responsibility, and authority would be focused in a single agency. Present fragmentation of functions in separate agencies results in bureaucratic ineffectiveness, confusion, high costs, complexity, turf tending, finger pointing, and buck passing.

One Central Bank

What is needed is a single preeminent federal central banking, reserve, and regulatory agency. And transferred into it would be all present federal banking regulatory agencies.

State regulatory action with respect to federally regulated banks would be preempted. State regulation would remain for intrastate banks and community banks. Members of the agency would be chosen or approved subject to action of both federal branches, much as members of the Fed are chosen now.

The new agency would be built on the foundations of the Federal Reserve System.

The Treasury's proposal to merge the Office of Thrift Supervision with the Office of the Comptroller of the Currency is a short but exemplary step in the right direction.

The next step would place both under the Fed. Merging their examination forces with those of the Fed and the Federal Deposit Insurance Corp. and other regulatory agencies under the Fed would permit streamlining of central bank policy and regulation.

As larger banks increased in size and complexity, the number of smaller banks would diminish. The country would move toward a national banking system of eight or a dozen truly national banks, capable of matching the universal banks of other major countries, plus twice that number of superregional banks and many local community-type banks.

Self-anointed populists and most large banks would no doubt rise in opposition to the idea of a single federal banking agency with a broad array of new powers and responsibilities.

But on deeper reflection, many might come around to favor the benefits of a single, level playing field for all. Another attraction would be the significant cost savings to be derived from such a streamlined system.

A single Federal banking agency based on the Hamiltonian model would be a wise and historic prescription for U.S. banking's malaise and the credit ratings of long-term U.S. Treasury bonds.

Under the shadow of a $3 trillion national debt, the Federal Reserve System must carry out the monetary policy and central banking responsibilities of the United States with no help from any other agency, Congress, or the executive branch.

Fed's Limited Powers

Yet its direct influence extends only to a small sector of the decaying banking system. Only through this portion of the system can it exercise control to create money, pump up the money supply, stimulate or stem inflation, raise or lower the trade imbalance, save American jobs, and support or let fall the exchange value of the dollar.

Strenuous attempts by the Fed to jump-start the economy out of the current recession have succeeded in lowering short-term interest rates, but with little effect on longer-term rates.

The recession appears to be still with us. The Federal Reserve is more and more perceived as a very small tail attempting to wag a very large economic dog.

Leading bankers have voiced fears that the U.S. banking industry is dying. Leading legislators argue that banks are not needed, because other kinds of financial entities can handle all bank functions.

Shrinking Capital Base

This is nonsense. But bank depositors continue to close out their CDs and interest-bearing accounts and to switch their funds to money market and bond mutual funds. At the same time, the capital of the banking system continues to shrink, and legislators berate the banks for prolonging the recession by curtailing lending.

A Fed with powers extended to the dimensions of Hamilton's conception of the Bank of the United States would be a more credible and effective protector of the banking system.

The wounded American banking industry itself is too big to fail -- or be allowed to shrink, decay, and die.

When Alexander Hamilton took office in 1789 as the first secretary of the Treasury, the United States was an economic banana republic, a financial basket case similar to present-day Argentina.

Decade-old debts of hundreds of millions of dollars from the Revolutionary War remained in default. Public and private debts could be paid only by barter, or in gold or silver specie, and there was very little of that. Inflation soared. With no credit standing, the government could not sell bonds.

A Long-Ago Turnaround

But perceptions can quickly change. When Hamilton left office in 1795, the United States had as high a credit rating as that of any country in Europe. U.S. bonds, issued at 4 1/2% and 5% interest, were selling at 10% over par.

Hamilton said, "A national debt can be a national blessing, if properly funded."

A perception is growing worldwide that the crazy-quilt disorder of the U.S. banking system is unmanageable, that the United States' problems of public credit have not been soundly addressed and never will be, and that the nation's debts will never be properly funded.

Strengthening the Federal Reserve System along Hamiltonian lines so that the U.S. banking system becomes more nearly congruent with the banking systems of other major developed countries of the world would change such perceptions.

Mr. Hendrickson, an attorney, is chairman of the Hamiltonian Institute, New York. He wrote "The Future of Money" and "The Cashless Society" and is a biographer of Alexander Hamilton.

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