Monday, June 10, 2013

Private Sector Money, I: Antebellum Bucks


Last week we got a (nother) question about money creation.  Given the fact that the more money the government seems to be printing up the less we have, this is a question on everyone’s lips — or, at least, in everyone’s pocketbook.  As our correspondent said,

“A bite or three for thought. Could it be possible for an organization of extremely profitable high tech multinationals to come together to create an internal system of money amongst themselves that separates them from the expense of participating in the existing international banking/governmental systems?  Could profits by any other name be positioned to escape both the transactional and tax costs of the existing system?  Certainly, government in this country is demonstrating a sweeping long term inability to adapt to changes and some people may well be justified in thinking the existing form of state/corporate governing has become a dinosaur looking for a place to go extinct.  As always, for informational purposes only.  Your thoughts are requested.”

Our response was that it is not only possible for private individuals and businesses to create their own money, they have been doing it for thousands of years.  It was only recently (in historical terms), in fact, that government managed to take over so much of the economy.  It did this by capturing the issue of what is essential counterfeit money backed only by the faith that people have in the government’s credit and ability to collect taxes: “bills of credit.”  Before that, since the dawn of civilization, virtually the whole of the money supply consisted of various forms of mortgages and bills of exchange offered and accepted by private individuals and businesses.

As government has grown and taken over more of people’s lives, the percentage of the money supply backed by government debt has grown in proportion.  To take just the case in the United States, in the 1830s, when Alexis de Tocqueville noted that in America the government hardly seemed to rule at all, Congressman George Tucker of Virginia estimated that 99% (at least) of the money supply consisted of these merchants and bankers acceptances, not coin or government debt-backed banknotes.  In fact, the government obeyed the constitutional prohibition against emitting bills of credit, so that the national debt was kept at a minimum, without pressure to emit more debt when “more money” was needed by the private sector — no “quantitative easing” or “stimulus.”

This permitted Andrew Jackson actually to pay off the national debt in full.  He then screwed up by forcing the shutdown of the institution that had made it possible for him to pay off the debt (by providing adequate “accommodation” for the private sector), the Second Bank of the United States, as the result of a personal quarrel with the president, Nathanial Biddle.  Jackson then issued the “Specie Circular” of 1836 (and left it for Van Buren to enforce), and sent the country into a depression for lack of money, “Hard Times.” (I am of the personal opinion that Jackson did this to take revenge on the land speculators who were responsible, in his eyes, for the removal of the Cherokee and the “Trail of Tears,” but it backfired and took revenge against the whole country.)

During the American Civil War the Union largely financed its war effort with debt rather than taxes.  The problem was twofold.  One, taxes are always more or less unpopular.  During the initial stages of the Civil War, however, public support was strong.  The general feeling among the financial and political communities was that the public would have patriotically supported increased taxes to put down “the rebellion.”

Two, Salmon P. Chase, Abraham Lincoln’s Secretary of the Treasury, wanted to be president.  If he was seen as the man who raised taxes, he thought people wouldn’t vote for him.  Chase was also an adherent of the “currency school” of economics and finance.  He thought that government debt was proper backing for the currency.  Consequently he flooded the country with debt-backed “Greenbacks” (“United States Notes”), and kicked off inflation.

Later, Chase realized that he had to tax, anyway.  By then the damage had been done, however.  If inflation was bad, however, deflation was, in many respects, worse.

#30#

No comments: