"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks to the people!"
Wise words indeed, succinctly stating the problems of leaving the printing of legal tender in the hands of a single authority, such as an organized banking cartel. But the solution he poses, which is a democratically controlled money supply, has problems too.
He states banks gain power and property through inflating the currency, and then deflating it—in other words lending inflated (lesser value) currency out then having deflated (greater value) currency paid back to them. We've certainly seen the inflated part of the equation, and I anticipate soon we will see deflation, and Thomas Jefferson's warning bearing out in reality. In housing we see significant deflation already, and a new wave of foreclusures and further price drops will be here soon. Paper money and credit cycles are an old game.
But paper money in the hands of the people would quickly devalue through inflation when everybody starts voting themselves pay raises and forgiveness of their debt. Whereas banking controlled money supply will have inflation followed by deflation through which the banks profit from the amplitudes of currency fluctuation both high and low—a democratically controlled money supply will see rampant inflation, moving to hyperinflation probably, and no looking back.
Back when paper money was backed by gold or other precious metals, there were episodes of inflation and deflation, but small compared to what we see today. So, many who favor stable currency support reversion to a gold standard, where natural limitations on the amount of gold keep inflationary and deflationary forces in check. I think a gold standard is sensible and support it, but the compromise of power that would entail to people who currently hold power, I don't see that as a practical solution.
Now, the Federal Reserve Bank is governed by a mix of appointees from both private banks and the President (and approved by the Senate), so there is some democratic influence. By numbers, government appointees have a slight majority over bank appointees, but in practice, the Fed tends to side with banking interests. Possibly a checks and balances system from a separate review committee, with government appointees of two year terms rather than 14 (as currently exists for Federal Reserve positions), might be able to put the brakes on uncontrolled Federal Reserve policy.
I don't know, since I doubt any democratically driven body would ever want to stop inflation; when banks and the Fed want to start the inflation party, no governmental body is going to stop them. But, once that happens, it would be only banks and wealthy interests motivated to reel things back with deflation, creating some semblance of balance over time. Those who hold wealth, particularly bonds, would not want much inflation, and one can only guess where the power lies. We see now that Congress and the President remain opposed to any deflationary correction, so I'm not sure that thowing more democratic control into the system will make much of a difference.
The solution is--if the gold standard is inviable--a more distrustful social attitude toward credit, such that fewer people get caught up in the inflation/deflation traps the banks seem to set every few decades.