Fiat Money of the Past, Part 4

This entry is part 19 of 31 in the series 2011B

Fiat Money in the American Colonies

If someone wanted to create a control group to experiment with differing forms of alternative money it would be difficult to put together a better set of ingredients than existed in the colonial times of the American continent. Their situation was a little like the group in the parable who didn’t have the gold. They had to improvise.

We must remember that England, France and other nations were not investing in America out of the spirit of good will – just to help them advance into prosperity and freedom. Just the opposite is true. They didn’t give a hoot about the comfort the colonists may or may not have had. Instead, they were in it for the money – the profit.

The dominant mother country, England, did everything in its power to insure the maximum amount of gold and silver that found its way into the colonies was shipped back home. Essential goods and taxes had to be paid in coin yet the flow was one way, for English laws prohibited sending coins to America and even discouraged colonies from trading with each other. England wanted all available commodity wealth for herself with as little as possible going to the colonies. Most of the gold and silver money that found its way to the colonies came from pirates or trade with the Spanish West Indies. Other coins came from the Netherlands, the German States, France and other foreign countries. In turn, many of these coins went back to England.

This illustrates one of the weaknesses of gold and silver money. Their quantity can be manipulated so those gaining the favor of the bankers and powers-that-be have all the advantages whereas a lesser power such as the colonies have a monetary famine.

Fortunately, the colonies did not just roll over and play dead, or America as we know it may have never been. Their independent spirit shined forth in their creation of numerous alternative and fiat currencies that allowed them to prosper and continue their growth.

They tried using various non-metallic commodities as money but people wanted to pay with the least desirable available and this caused problems. They tried monetizing tobacco but the different quantities available from the various harvests created inflation and deflation. In 1639 when a bumper crop threatened severe inflation they decided to burn half the crop. What a waste!

Something else had to be done or it seemed the colonies would turn into a poor man’s slave camp whose only purpose was to serve the crown.

One of the not so well known experiments with non metallic money were bills of exchange where farmers or manufacturers could use bills drawn up for the promised sale of products and use these like cash in trading or purchasing.

Another item used as money were “shop notes,” also called “notes of hand.” When a merchant sold some something on credit he drew up one of these notes and often traded it to someone else for other items he needed just as if it were money.

Massachusetts was the first to come up with the fiat paper money solution in 1690. They printed paper bills from copper plates, which were called bills of credit. These were promissory notes based on no present commodity, but a future delivery and supported by the full faith and credit of the government. This allowed the colonists to buy supplies and pay labor so agriculture and production could move forward.

Within ten years other colonies saw the new prosperity in Massachusetts through this fiat currency and a number of variations appeared in Rhode Island, Connecticut and New Hampshire.

The Massachusetts money was at first issued in moderate amounts (starting with 7,000 pounds) and the money held its value well for 20 years. Then they got a little greedy and dramatically increased their issue until it reached 420,000 pounds. On top of this counterfeiters jumped in and added a significant amount of false currency. Inflation crept in but, even so, the economy hummed along much better than it did before the fiat currency.

In 1723 Pennsylvania (followed by Delaware, New York and New Jersey) successfully created another type of money, seemingly out of thin air that was more stable and successful. The State created money by the shear power of fiat and loaned it out to citizens at 5% interest. These were more secure than bills of credit as they were loaned against collateral, which was usually the plentiful supply of land available. They were also issued more responsibly so the money supply was not excessive. The issuance of this new money not dependent on any precious metal but only upon the fiat of the government and the resources and labor of the people.

Instead of the interest going to private banking it went to finance the government. From 1723 to 1750 Pennsylvania citizens had to pay no taxes as all government expenses were financed by the interest paid by citizens. This money system worked very well and little or no inflation occurred.

It wasn’t long before the authorities back in England sensed a problem. The injection of new money caused the colonies to trade more with each other and to cease relying on or even seeking gold and silver coin. England felt their trade and flow of new cash was threatened by the new money and also upset at the inflation in Massachusetts. In response King George II in 1751 issued a ban on creating any new colonial paper money.

This made things more difficult but fortunately they were still able to use money in circulation and the governors were lax in enforcing the ban so some new money was still added to circulation. Several years later Franklin was forced to make a trip to England to petition Parliament to lift the ban. When he got there he saw that the economic situation of the common people in the mother country was dire.

The situation in the colonies was much different as related by Congressman Charles G. Binderup in a radio address in 1941.

He first quoted Franklin

“There was abundance in the Colonies, and peace was reigning on every border. It was difficult, and even impossible, to find a happier and more prosperous nation on all the surface of the globe. Comfort was prevailing in every home. The people, in general, kept the highest moral standards, and education was widely spread.”

When Benjamin Franklin went over to England to represent the interests of the Colonies, he saw a completely different situation: the working population of this country was gnawed by hunger and poverty. “The streets are covered with beggars and tramps,” he wrote. He asked his English friends how England, with all its wealth, could have so much poverty among its working classes.

His friends replied that England was a prey to a terrible condition: it had too many workers! The rich said they were already overburdened with taxes, and could not pay more to relieve the needs and poverty of this mass of workers. Several rich Englishmen of that time actually believed, along with Mathus, that wars and plague were necessary to rid the country from man-power surpluses.

Franklin’s friends then asked him how the American Colonies managed to collect enough money to support their poor houses, and how they could overcome this plague of pauperism. Franklin replied:

“We have no poor houses in the Colonies; and if we had some, there would be nobody to put in them, since there is, in the Colonies, not a single unemployed person, neither beggars nor tramps.”

His friends could not believe their ears, and even less understand this fact, since when the English poor houses and jails became too cluttered, England shipped these poor wretches and down-and-outs, like cattle, and discharged, on the quays of the Colonies, those who had survived the poverty, dirtiness and privations of the journey. At that time, England was throwing into jail those who could not pay their debts. They therefore asked Franklin how he could explain the remarkable prosperity of the New England Colonies. Franklin replied:

“That is simple. In the Colonies, we issue our own paper money. It is called ‘Colonial Scrip.’ We issue it in proper proportion to make the goods and pass easily from the producers to the consumers. In this manner, creating ourselves our own paper money, we control its purchasing power and we have no interest to pay to no one.”

The information came to the knowledge of the English Bankers, and held their attention. They immediately took the necessary steps to have the British Parliament to pass a law that prohibited the Colonies from using their scrip money, and then ordered them to use only the gold and silver money that was provided in sufficient quantity by the English bankers. Then began in America the plague of debt-money, which has never since brought so many curses to the American people.

The first law was passed in 1751, and then completed by a more restrictive law in 1763. Franklin reported that one year after the implementation of this prohibition on Colonial money, the streets of the Colonies were filled with unemployment and beggars, just like in England, because there was not enough money to pay for the goods and work. The circulating medium of exchange had been reduced by half.

Franklin added that this was the original cause of the American Revolution – and not the tax on tea nor the Stamp Act, as it has been taught again and again in history books. The financiers always manage to have removed from school books all that can throw light on their own schemes, and damage the glow that protects their power.

Franklin, who was one of the chief architects of the American independence, wrote it clearly:

“The Colonies would gladly have borne the little tax on tea and other matters had it not been the poverty caused by the bad influence of the English bankers on the Parliament, which has caused in the Colonies hatred of England and the Revolutionary War.”

(Author’s note: This exact quote cannot be verified though Franklin did express this thought in different wording.)

This point of view of Franklin was confirmed by great statesmen of his era: John Adams, Jefferson, and several others. A remarkable English historian, John Twells, wrote, speaking of the money of the Colonies, the Colonial Scrip:

“It was the monetary system under which America’s Colonies flourished to such an extent that Edmund Burke was able to write about them: ‘Nothing in the history of the world resembles their progress. It was a sound and beneficial system, and its effects led to the happiness of the people.’”

John Twells adds:

“In a bad hour, the British Parliament took away from America its representative money, forbade any further issue of bills of credit, these bills ceasing to be legal tender, and ordered that all taxes should be paid in coins. Consider now the consequences: this restriction of the medium of exchange paralyzed all the industrial energies of the people. Ruin took place in these once flourishing Colonies; most rigorous distress visited every family and every business, discontent became desperation, and reached a point, to use the words of Dr. Johnson, when human nature rises up and assets its rights.”

Another writer, Peter Cooper, expresses himself along the same lines. After having said how Franklin had explained to the London Parliament the cause of the prosperity of the Colonies, he wrote:

“After Franklin gave explanations on the true cause of the prosperity of the Colonies, the Parliament exacted laws forbidding the use of this money in the payment of taxes. This decision brought so many drawbacks and so much poverty to the people that it was the main cause of the Revolution. The suppression of the Colonial money was a much more important reason for the general uprising than the Tea and Stamp Act.”

The next step in fiat money came though the Continental Congress on May 10, 1775 in creating the first fiat money for the nation – the Continental Currency. Money historian
Alexander Del Mar sees this as a major ingredient of the revolution

“…the creation and circulation of bills of credit by revolutionary assemblies…coming as they did upon the heels of the strenuous efforts made by the Crown to suppress paper money in America … constituted acts of defiance so contemptuous and insulting to the Crown that forgiveness was thereafter impossible . . . There was but one course for the crown to pursue and that was to suppress and punish these acts of rebellion. There was but one course for the colonies; to stand by their monetary system. Thus the Bills of Credit of this era, which ignorance and prejudice have attempted to belittle into the mere instruments of a reckless financial policy were really the standards of the Revolution. They were more than this: they were the Revolution itself!”
History of Money in America; Alexander Del Mar 1895, Page 96

They started with $2 million and reached a total of $200 million. In addition to this coined and colonial money continued to circulate.

Continental Currency has received a lot of bad press because of the massive inflation associated with it but we need to take a breath and reflect with reason and see that there would have been no way to fight, let alone win the war without it. There just was not enough gold and silver coin available to the government to fight the most powerful kingdom on the planet.

$200 million was a lot in those days and this amount would have caused inflation but it was not enough to cause the bottom to fall out by the end of the war. Two other events were responsible.

First is that the colonial states began printing their own scrip in massive amounts. At the beginning of the war there was about $3.8 million in colonial scrip and at the end there was $209 million – more than the total amount of the continental currency. Congress realized this additional scrip would be a problem and asked the states to discontinue printing, but they mostly ignored this request.

Secondly, they faced and even greater threat from British counterfeiting. Benjamin Franklin wrote of this time:

“The artists they employed performed so well that immense quantities of these counterfeits which issued from the British government in New York, were circulated among the inhabitants of all the states, before the fraud was detected. This operated significantly in depreciating the whole mass.”
Kenneth Scot, Counterfeiting in Colonial America (Philadelphia: University of Pennsylvania Press, 2000), 259–60

They shipped special presses from England for this specific purpose and distributed massive amounts of bogus, but high quality currency for some time before the colonists caught on to the sabotage. Throughout the war the British distributed this a much as possible, sometimes by the wagonload.

It is a mystery as to exactly how many counterfeit bills wound up in circulation. For some reason the British government to this day has never revealed any data on it. Judging by the stories and the amount of inflation that occurred Thomas Jefferson concluded there must have been as much counterfeit as there were authorized continentals.

If not for the vast inflow of bills not authorized by Congress the Continental would not have failed.

There is another reason for the great inflation. During wartime, especially a war of survival, resources and labor are directed away from production that brings wealth to society and is directed toward war materials that create no wealth but only serve to defeat the enemy and afterwards become mostly useless or destroyed in the war itself. Most of the labor during such a war produces no wealth. A fiat currency is backed up by the wealth of a nation and if the wealth is diminished inflation will occur no matter what.

At the beginning of the war the was only $9.2 million worth of coins in all the colonies and only a tiny amount was in the hands of congress to fight a war – a war that required much more money than they had if they were to win. Despite having an inflationary $400 million added to circulation in addition to the $200 million continentals this fiat scrip saved the day and paid our soldiers to fight and financed the war for six years. A final loan from France then saved the day and allowed us to continue the final six months until victory was obtained.

We owe the foundation of our nation and the victory over the crown to the Continental. There’s no way we could have won the war with a handful of gold and silver coins.

It would be interesting to see how the results would have been different if $200 million worth of continentals would have been circulated as the main currency in a time of peace with no counterfeiting and competing bills from the colonies. Instead of $600 million spent mostly on war we would have had $200 million on production, transportation, manufacturing, farming etc. If the Continental had the advantage of being backed by lots of new wealth the results would have been much different.

Nothing destroys a money system or economy like a war of survival. After any such a war there is rebuilding with a restructured money system and progress toward prosperity begins anew.

This happened to the United States, which was on the fiat system with some coins. After the Revolutionary War they rebuilt and prospered. It also happened after World War I when all nations were on the gold standard. Here the economies of the world were devastated despite reliance on gold, but they rebuilt and prospered.

Fortunately there is no war, no disaster or human screw up so bad that it cannot be surmounted by the best that is in us.

Sources:

Web of Debt by Ellen H. Brown, 2008

The Secret World of Money by Andrew M. Gause, 1996

The Lost Science of Money By Stephen Zarlenga

Money Masters Video. Transcript at: http://www.no-debts.com/anti-federalist/files/moneymasters.txt

History of Money in America; Alexander Del Mar 1899

Kenneth Scot, Counterfeiting in Colonial America (Philadelphia: University of Pennsylvania Press, 2000)

Greenback, Jason Goodwin, 2003

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Copyright 2011 by J J Dewey

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Democracy

This entry is part 22 of 62 in the series 2010

Posted Aug 8, 2010

Larry W:
Also, many of your quotes are wrong. JJ will be correcting you on
this, I’ve seen him do it before.

JJ
Looks like you’re a prophet. Here goes.

Blayne:
Might want to review what the founders had to say about democracy. there is a reason why it is not mentioned in the constitution. The founders deplored it.

JJ
Not so fast. First let us look at your quotes from Thomas Jefferson

First quote: “A democracy is nothing more than mob rule, where 51% of the people may take away the rights of the other 49%.”

JJ
This is a fabricated quote, evidently made up by someone who didn’t like what Jefferson really had to say about Democracy.

Check this out:
Click Here

Let us look at your second Jefferson quote:
“The democracy will cease to exist when you take away from those who are willing to work and give to those who would not.”

Again this is a fabricated quote.
Click Here

It seems to be a true statement though that says nothing negative about democracy itself.

Here are a few of many examples of what Jefferson really thought about democracy.

“The fundamental principle of [a common government of associated States] is that the will of the majority is to prevail.” Thomas
Jefferson to William Eustis, 1809.

“I subscribe to the principle, that the will of the majority honestly expressed should give law.” Thomas Jefferson: The Anas, 1793.

“Where the law of the majority ceases to be acknowledged, there government ends; the law of the strongest takes its place, and life and property are his who can take them.” Thomas Jefferson to Annapolis Citizens, 1809.

“[Bear] always in mind that a nation ceases to be republican only when the will of the majority ceases to be the law.” Thomas Jefferson: Reply to the Citizens of Adams County, Pa., 1808.

“Absolute acquiescence in the decision of the majority, the vital principle of republics, from which is no appeal but to force, the vital principle and immediate parent of despotism, ” Thomas
Jefferson: 1st Inaugural, 1801.

There are more in my book The Lost Key of the Buddha

Now let us look at the rest of the quotes.
Benjamin Franklin: When the people find that they can vote themselves money, that will herald the end of the republic.

JJ
This is also most probably a false quote and the closest thing to it was originated by Alexander Fraser Tytler, a contemporary with Franklin. No one seems to find this quote being attributed to Franklin before 1988
More information here

That said, let us see if this applies to democracy in our age. It doesn’t, but it does apply to our Republic for this is happening in the here and now before our eyes. We have a small minority having power to vote themselves money and benefits and this, not the majority, is causing our financial ruin. The majority of the people are very concerned over this abuse.

Benjamin Franklin:
“Democracy is two wolves and a lamb voting on what to have for lunch. Liberty is a well-armed lamb contesting the vote.”

Another false quote. There is no record of Franklin saying this.
Click Here

There are a lot of flaws in this quote that Franklin would have seen. For example what we have now is a dozen wolves voting what to have for dinner with none of the lambs being able to vote at all. Since lambs outnumber wolves then a democracy would wind up protecting the lambs.

I’ll assume the rest of these quotes are accurate, as I do not have time to check each one. So far it looks like anti democracy people just make up quotes to fit their need.

Alexander Hamilton, Federalist Papers: We are a Republican Government, Real liberty is never found in despotism or in the extremes of democracy…it has been observed that a pure democracy if it were practicable would be the most perfect government. Experience has proved that no position is more false than this. The ancient democracies in which the people themselves deliberated never possessed one good feature of government. Their very character was tyranny; their figure deformity.

JJ
Hamilton is dead wrong on this. Where has there ever been a democracy that was a tyranny? Never. Mainly because there has never been a democracy in the history of the world. The closest thing to one was Athens, but even this was a representative government with each potential voter representing at least a dozen people who could not vote.

Even so Athens created the greatest example of freedom and enlightenment the world had seen up to that time. Nearby Sparta was a dictatorship and very little light came from there compared to the more democratic Athens.

John Adams: “Democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide.”

JJ
Adams didn’t know what he was talking about. There has never been a democracy.

James Madison: “Democracies have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security or the rights of property; and have in general been as short in their lives as they have been violent in their death.”

JJ
Yeah, right and the opposite of democracy like North Korea, Cuba and the old Soviet Union are really compatible with personal security and property rights.

John Quincy Adams: The experience of all former ages had shown that of all human governments, democracy was the most unstable, fluctuating and short-lived.

JJ
The same could be said of freedom. Wherever freedom surfaced in our world history it only lasted for a short while because all the powers of the beast fought against it. The one great example of a group seeking freedom during the Roman Empire was led by Spartacus. It was short lived and failed. Did this make it wrong?

No. never.

The human spirit will pursue freedom and true workable democracy until they are achieved.

James Madison: Democracy was the right of the people to choose their own tyrant.

JJ
Tyranny is always a possibility in any system, however without the right of the people to vote they will have a tyrant by default. The more democratic the government the less likely is tyranny for what people will vote to elect or re-elect a known tyrant?

John Adams: That the desires of the majority of the people are often for injustice and inhumanity against the minority, is demonstrated by every page of the history of the world.

JJ
And where is there a great injustice that the majority of the people of the United States desire?

I can’t think of any.

I can, however think of many that minorities desire. Here are a few.

Murder, rape, racism, slavery, dictatorship, more stimulus, forced socialism and communism, no free speech, no guns and lots of others.

I’ll pick the will of the majority any time over the present will that the minority in our government is attempting to force upon us.
Copyright 2010 by J J Dewey