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Henningsen: A State Bank

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This isn’t the first time Vermonters have considered establishing a state bank. In the late 1780’s they were caught in a national depression stemming from the closing of the British West Indies to American trade and the resulting loss of British specie – that’s a technical term for hard cash, as opposed to paper notes.

Forced to purchase British goods in specie, American merchants demanded that they too be paid in coin. That was tough in rural areas like Vermont, where economic exchange occurred mostly in farm produce or paper notes. Like indebted farmers in Massachusetts, who rose in Shays’s Rebellion in 1786, cash-strapped Vermonters stormed courthouses in Windsor and Rutland, threatening to close courts and prevent enforcement of debt collection and foreclosure.

In early 1787, to head off a possible repeat of the Shays affair here, Governor Thomas Chittenden proposed creating a state bank to extend mortgages to farmers and issue paper scrip as legal tender to pay debts. Vermont’s legislature called for a public referendum, leading to a spirited debate over how much issuing scrip would actually solve the problem and how much it would contribute to massive inflation and ruin everyone. It didn’t escape public notice that Chittenden himself, deeply behind on property tax payments, would profit enormously from discharging his debts in paper notes. Ultimately, voters turned down the proposal by a four-to-one margin.

Although the details of the 1780’s affair and those leading to today’s proposals for a public bank differ, the broad picture is strikingly similar. One state bank advocate argues that it simply isn’t fair for Vermont to give its money to large banks, which collect interest on the deposits, and then have to borrow from Wall Street to finance state projects. This reflects a deep and steady current in American history – a resentment of bigness, of outside control, of the feeling that others are making an unfair profit. It’s not an accident that the stock villain of old-time stage and screen melodrama was the frock-coated, heavily-mustachioed banker, perpetually threatening to foreclose on the family farm. (It happened to my own great-grandparents.) Eventually Snidely Whiplash became Gordon Gekko with his ode to greed in Wall Street – as well as today’s hedge fund barons – and they all evoke the same hostility.

What strikes me is that, so often, such anger results in cries for government action: whether it be in today’s call for a Vermont state bank or in the agitation of those late 19th century Populists whose demands for fairness in banking led ultimately to creation of the Federal Reserve. At a time when trust in government is apparently at an all-time low, it’s comforting to see that, when the chips are really down, many people believe that only government can solve the problem.