Michael Hudson : US anniversary talk

How US slave interests stifled US monetary and banking policy until 1913^[1]

The role of slave states in shaping the U.S. Constitution goes far beyond slavery itself. I want to discuss the distinctively American effect of this states-rights policy for banking and financial policy.

The main aim of the slave states was to block federal power – via the rule of the democratic majority – to take measures to limit or end slavery, and to prevent its westward expansion. From the very beginning, the southern slave states insisted on the national government relinquishing as much power to the states as possible – and to give them the power to block federal actions binding on the entire United States.

This anti-federal policy set the Southern states at odds with the North and West. The fear that the northern population would increase and become more urban, electing candidates for Congress, the Senate and the Presidency whose policies would be adverse to that of the slave states.

The result was an opposition to tariff protection, internal improvements, and a national bank and related commercial banking to provide credit for industrial investment and employment. That was the program of Henry Clay and the Whigs. To the South, it threatened to increase the population of northern states, which threatened to back abolitionist policies.

The Southern slave states advocated limiting money and credit to gold and silver coinage precisely to impose financial austerity. The aim was to starve the economy of credit by blocking federal tax and tariff collection from being circulated back into the economy to provide a basis for bank credit.

The South viewed bank credit as financing industrial investment and urban employment. That threatened to raise the price of grain that plantation owners had to pay to feed their slaves. The aim was to make their cotton and other plantation exports less expensive and hence more competitive in foreign markets.

The first fight over monetary policy erupted in 1791 when the nation’s first Secretary of the Treasury, Alexander Hamilton (1789-1795) proposed to establish a government mint and created the First Bank of the United States in Philadelphia. The First Bank was not a central bank and did not hold the Treasury’s reserves, but was merely a national bank permitted to establish branches across state lines. But the anti-Federalist president Thomas Jefferson (1801-1809) and his fellow Virginian slave-owning successor James Madison (fourth U.S. president, 1809-1817) urged that monetary functions should be left to the states.

Virginia’s Democratic senator John Taylor (in office at various times from 1792 to 1824) warned that “if Congress could incorporate a bank, it might emancipate a slave.” Advocates of states’ rights feared federal authority for its potential to support the abolition of slavery.

A more concrete concern was that a thriving national banking system would benefit the industrializing urban north. This was at odds with the South’s plantation economy based largely on supplying cotton to Britain’s textile mills, as I’ve just indicated. The South wanted to keep the price of grain low to feed its slaves to produce cotton and tobacco. Providing more credit and tariff protection to northern industry would increase the urban industrial population, and hence its demand for grain, raising its price for plantation owners to feed their slaves. Southern politicians therefore opposed northern industrial development and sought to restrict money to bullion as much as possible to prevent food prices from rising.

Under the Democratic Party’s “Solid South,” the federal government followed a hard-money bullion-based policy from the 1820s up to the eve of World War I. It was based on commodity money in the form of silver and gold coinage. This was deflationary, in contrast to the paper bank money that Britain and other European economies were creating to finance their industrial takeoff.

That need for banks to keep high bullion reserves was a deliberate aim of public policy after the presidency of Andrew Jackson (1829-1837). To pay off the new debt from the War of 1812, the government ran surpluses for all but two of the next twenty years. That enabled the entire national debt to be paid off by 1835 under Jackson.

These federal surpluses were largely derived from customs duties, which had to be paid in bullion. That drained coinage out of the economy and its banking system. The Treasury was cash-rich at the economy’s expense. Banks had to maintain high levels of coinage as reserves to meet the frequent spikes in demand to convert their notes and deposits into bullion, above all to pay for moving and selling the crops in autumn. That focus on bullion coinage limited the degree to which paper credit could be created without risk of a run on the banks.

The Whig party of northern industrialists and free labor, led by Henry Clay, wanted the Treasury to recycle its budget surpluses into the economy by depositing its bullion in the banking system. That would have made government surpluses the foundation of bank reserves. But popular resentment toward banks enabled Southern politicians to mobilize opposition to this, imposing deflationary monetary policy.

Jackson refused to renew the charter of the Second Bank of the United States in 1836, and removed the Treasury’s deposits from banks in which it had held its deposits. Removing these deposits limited the ability of banks to create a safe superstructure of credit and paper debt-money to finance northern industry.

“The avowed object of the [Jackson-Democratic] administration and its advisers,” asserted Calvin Colton in his Public Economy for the United States, “was to suppress the paper medium of the country, and introduce a metallic currency; and the independent or sub-treasury was to be the means of accomplishing the end, although, as shown by Mr. Clay, it must necessarily fail, and itself establish a paper medium of a most dangerous tendency.”

A similar monetary deflation occurred after the Civil War, which the northern states financed by printing greenbacks. After the war, creditor interests – and the South – again insisted on redeeming this paper currency in bullion. That led to a steady deflation that persisted into the 1890s, when William Jennings Bryan, the Democratic Party candidate for the presidency in 1896, described agriculture and industry as being crucified on a cross of gold. The Republican protectionist tariffs created budget surpluses that had to be paid in coinage, draining bullion from the economy. while requiring banks to redeem their paper currency in coinage, limiting their ability to create a superstructure of bank credit.

When the United States convened its National Monetary Commission after the crash of 1907 to review banking practices throughout the world, its volume on the history of the U.S. Treasury written by David Kinley, described how, “Under the terms of the law establishing the independent treasury, the Government was expected to keep its own money and have no connection with the banking institutions of the country” and hence the economy’s currency needs. This “independence” meant that the Treasury’s fiscal surpluses from tariff duties and land sales drained coinage from the economy and its banks, as I’ve mentioned.

Finally, in 1913, the Federal Reserve was created and made “independent” from what was the government’s own deflationary hard-money policy. The Federal Reserve used this independence to support the commercial bank members, who were its stockholders.

On June 29, 2026, the Supreme Court gave President Donald Trump the power to fire administration appointees across the board, except for the Federal Reserve – in order to ensure its policy independence. Instead of discriminating against the banking system as had been the case prior to 1913 and blocking its money and credit creation, the Federal Reserve has acted as the banking system’s defender. Its increasingly reckless credit creation is capped by the post-2009 Zero Interest Rate Policy (ZIRP) and today’s IT bubble This turnabout was initiated by a counter-reaction to the government’s own hard-money limitations on credit prior to 1913.

1. Paper presented at The US Revolution/Counterrevolution @250 webinar, Intermational Manifesto Group, July 5, 2026. ↑