In the first posting in this series we tried to make it clear that a common currency — any currency, in fact, as well as money in all its forms — must be based solidly on the foundation of private property in the means of production if it is to be financially sound . . . and honest. As we have discovered, if the money supply is also to be economically and politically sound (and honest), direct ownership of the means of production must be broadly distributed throughout society.
If widespread ownership of the means of production — whether labor or capital — is not a determinant characteristic of an economy, there is no just and effective means to distribute income equitably throughout society. Consequently, in the short term the State will be forced to intrude more and more in the economy to maintain political stability. In the long term, of course, the inroads the State will be forced to make on private property will eventually lead to economic disorder and, finally, to the collapse of the political order.
The current economic downturn is a graphic illustration and proof of these basic principles. The solution is to develop a realistic program of economic recovery that will end with widespread ownership of the means of production. Only in this way can the foundation be laid for the implementation of a sound currency that can then be extended throughout the world without increasing the power of the State over individuals, families, and institutions.
Depression the Only Result
This is not the place to make the case that economic downturns have increased in severity as ownership of the means of production has become increasingly concentrated, and ordinary people have lost control over their own lives. We state it here as an established fact, and leave the discussion and proof for future writings.
The effect of concentrated ownership of the means of production is nowhere more evident than in the increasing demands that the State take responsibility for everyone's individual good as well as the common good. Since the first "Great Depression" that followed the Panic of 1893, more and more people have insisted that the government do something. Nevertheless, despite the spectacle of Coxey's Army, the more persuasive populism of the New Deal, or the latest stimulus or bailout, government programs have proven increasingly ineffectual, even counterproductive of the desired results.
In spite of that, while the pundits and powers-that-be have been announcing the end of the recession on a regular basis, no one in a position of authority seems to be aware that the basic problems are not only not being solved, they are getting worse. A recent Wall Street Journal article observed that cash levels in U.S. companies were at their highest levels in the past half century. Despite the positive sound of "high cash balances," this is not a good thing.
A business with "excess" cash on hand exhibits a high degree of inefficiency — or fear, which leads to inefficiency. As Aristotle and Aquinas observed, the proper use of money is to be spent, i.e., "consumed." A company that has more cash on hand than it absolutely needs to meet its projected transactions demand is using its resources inefficiently. That cash should either be invested in productive capital or paid out to the shareholders.
Thus, large cash balances in U.S. businesses tell us two things. 1) Businesses are not financing new or replacement capital, and 2) businesses are not paying out dividends that can be used to stimulate consumer demand and thus increase the demand for new capital. Retaining cash in a business is a self-defeating strategy, if not suicidal. In an ironic twist, if businesses hold on to cash out of a conservative impulse to maintain the value of their asset holdings, the State ensures that the asset holdings become worth less by inducing inflation to stimulate effective demand — eventually (carried to its logical extreme) worthless.
With businesses holding on to cash instead of spending it into circulation in the form of new capital investment or distribution of dividends, the only recourse within the current Keynesian framework is for the State to redistribute purchasing power and create effective demand by inflating the currency. This was what the Populists demanded in the 1890s with the cry of "Free Silver," was accomplished in the 1930s with massive increases in the federal debt and official devaluation of the dollar, and is now greasing the skids as the country slides rapidly into bankruptcy.
Misunderstanding Finance
The basic problem here is the assumption that new capital formation can only be financed out of existing accumulations of savings. As Dr. Harold G. Moulton demonstrated in 1935, however, that assumption is utterly false. If businesses paid out their "excess" cash over and above their projected need for working capital as dividends to their shareholders, and financed new and replacement capital formation by discounting bills of exchange drawn on the present value of the projected future stream of income to be realized from the sale of marketable goods and services produced by the capital financed (as Moulton recommended), the economy would receive a tremendous boost in the form of an increase in effective demand.
As Kelso and Adler proposed, to ensure that the dividends would not be reinvested and to make certain that effective demand is kept up, all new capital financed by the extension of bank credit must be broadly and directly owned. This will increase effective demand in two ways: 1) Existing shareholders will not be able to reinvest their dividends simply because the new capital is financed with credit; they won't be able to do anything with their capital income except spend it on consumption. 2) New and future shareholders will necessarily spend their dividends first on debt service to retire the loans that financed the new capital (an increase in effective demand for capital goods, as Moulton pointed out, which is a type of consumption, although from the seller's perspective, not the buyer's) and, once the acquisition loans are repaid, use the dividends for (more) consumption income.
Thus, the necessary kick-start to the economy can be provided immediately by paying out accumulated cash in the form of dividends. To maintain the necessary level of effective demand, all new capital formation should be financed using "pure credit" without the use of existing accumulations of savings. The increased demand for capital goods will create jobs and increase consumption income. Further, ownership of the new capital must be spread out among people who will spend the income on consumption instead of reinvesting in new capital once the initial acquisition loan is repaid — a "triple threat" for additional sources of production-backed consumption income instead of government inflation-induced redistribution.
Modern Corporate Finance
The issue, then, is not ownership of the means of production, whether labor or capital, but concentrated ownership of the means of production. Is concentrated ownership of the means of production as necessary as the major schools of economics would have us believe? Obviously not, as we have already seen.
The problem is that many people in power believe implicitly in the disproved dogma that existing accumulations of savings are absolutely necessary in order to finance new capital formation. This requires a class of people (the fewer, the better) who cannot consume all of their income, and necessarily reinvest the excess in additional capital.
Concentrated ownership of the means of production throws a monkey wrench into Say's Law of Markets. Concentrated ownership distorts the "production equals income" equation by diverting income that should be expended on consumption into reinvestment. Paradoxically, as Moulton pointed out in The Formation of Capital, purchase of capital goods is consumption from the point of view of the supplier, but investment from the point of view of the buyer. The problem is that under the false assumption that only existing accumulations of savings can be used to finance capital formation, the income that should be used in aggregate to purchase the production generated by the new capital is instead used to finance the new capital. Aggregate effective demand is thereby decreased, rendering the new capital investment less feasible.
The irony is that existing accumulations are not used directly to finance new capital investment. The fact is that retained earnings (the most common form of savings today) are income that has already been reinvested. Existing accumulations of savings are, instead, typically used as collateral to insure the money creators that they will be repaid. The potential demand for consumption goods is transformed into realized demand for capital goods — after the existing accumulations of savings have in most cases already been reinvested in businesses by retaining earnings.
The end result is that a single dollar "saved" by failing to pay out dividends has two effects. One, effective consumption demand is reduced by the dividends that are not paid. Two, the capitalist not only enjoys the increased wealth resulting from retaining earnings and reinvesting income into the business, but can use those same savings in the form of retained earnings as collateral for additional capital formation.
Thus, as effective consumption demand is reduced by one dollar, reinvestment and new investment increase by at least two dollars. This concentrates ownership of the means of production at an accelerating rate, diverting ever greater amounts of consumption income directly into reinvestment by retaining earnings, and indirectly by using retained earnings — equal to existing investment in excess of the original capitalization of the firm — as collateral for yet more capital formation.
Relative Decline in the Value of Labor
When discussing the relative value of labor and capital as inputs to production we are, of course, looking at "labor" and "capital" purely as factors of production. We are not taking into account the infinite value of a single human being as a human being, but separating the person from what the person owns, whether labor or capital, purely for the purposes of analysis.
As technology advances, capital rather than labor takes over as the predominant factor of production. Again, this says nothing about the purpose of production that, as Adam Smith pointed out in the opening pages of The Wealth of Nations, is consumption — not reinvestment. Not surprisingly, Smith was a pioneer in setting forth the principles of the real bills doctrine and Say's Law of Markets, which led eventually to the realization that, by backing money with the present value of existing or future marketable goods and services instead of accumulations of existing wealth, humanity could be freed from dependency on past savings.
The profits generated by capital go by natural right of private property to the owner of capital, just as the profits generated by labor go by natural right of private property to the owner of labor. With labor decreasing in value relative to capital, however, labor's income decreases. When that is the case, as Charles Morrison argued in An Essay on the Relations Between Labour and Capital (1854), workers must become owners, or see the share of income that goes to labor fall to below what is needed to maintain people in a manner befitting the demands of human dignity. The problem is how workers without savings or adequate income can become owners of the means of production when existing political, tax, and financial policies assume as a given that new capital formation can only be financed out of existing accumulations of savings.
A Sound Program of Broadened Ownership
The answer is Capital Homesteading. Widespread direct ownership of the means of production can be achieved virtually overnight by implementing Capital Homesteading. Businesses will find it profitable to pay out dividends by making dividends tax deductible at the corporate level, while providing each citizen with a credit allocation would broaden ownership of the new capital. Inflation would be avoided because, contrary to the Keynesian assumption, no money is created until and unless a financially feasible capital project is located and presented for financing. Deflation is avoided by creating money as needed, not artificially holding back economic growth by imposing politically motivated quotas or requirements. The question that might occur to many people, however, is whether direct ownership of the means of production can truly be as important as all that. The answer is, "Absolutely."
This is because the chief principle for a global common currency, or any currency, common or otherwise, for that matter, is to link all money creation to the present value of existing and future marketable goods and services in an economy in which the means of producing those goods and services is broadly owned. Unless all money creation is tied directly to the present value of existing and future marketable goods and services through a broadly distributed private property right, and all State power derives only from people who secure their personal sovereignty by means of an adequate private property stake in the means of production, the State — and the money creators who finance the State — become all-powerful, and can accurately be described as a "despotic economic dictatorship." (Quadragesimo Anno, loc cit.)
A self-evident corollary to the necessity of linking all money creation directly to the present value of existing and future marketable goods and services via the institution of private property is to restrict the involvement of the State, especially in the economy. If anything is to be learned from the various accounts of common currencies related in this series, it is that once the State manages to seize control of the machinery of money creation, personal sovereignty and individual human dignity soon drop by the wayside.
This is not to say that the State does not have the responsibility of setting standards and enforcing contracts when disagreements arise. Setting and regulating the value of the currency and ensuring that all issuers of monetary instruments adhere materially to the terms of the contract is not the same as carrying out the task of creating money, any more than when the State declares that any other unit of measure is the official standard.
Setting the value of the dollar, and defining the dollar as the official currency in no way prevents private individuals from making any just bargain they want, on any terms they want. If the parties to a contract wish to settle the debt with paper dollars, bars of gold, or a few head of cattle, the State — Keynes's declaration to the contrary — has no business interfering, as long as the matter of the contract is not illegal.
If, however, the State begins manipulating the currency to achieve an end, regardless how worthy that end might seem in the short run, the country (and, in our day, the world) in effect surrenders private property, personal sovereignty, and individual human dignity to total State control. Destruction of private property through manipulation of money and credit is less obvious (and thus more insidious) than other forms of socialism, but the end is the same. Private property is almost always the first natural right to be taken away, but it is never the last. Liberty — freedom of association — follows hard on the heels of the abolition of private property, while life itself is under continual assault these days by the "economic dictatorship."
System Design
Obviously a common currency is a good thing. Unfortunately, when discussing a common currency, it seems that everything is tossed on the table except the all-important design of the financial structures by means of which a just money and credit system is implemented and maintained. Far more time is spent on political issues that should have been settled long since, or even on the specific design of the coin and currency.
Design considerations of the currency are, of course, important, especially as they can make or break the effort. All we have to do is recall the lack of success with the U.S. Twenty Cent Piece and the Susan B. Anthony Dollar. We cannot, however, ignore the design of the system. Like any other good thing, the system must be carefully structured so as not to raise barriers against full participation in the economic common good by everyone. The system must not be used for the advantage of an individual, a group, or nation over others. This is a significant danger when recognizing the potential abuses that result from concentrated economic power — and economic power is concentrated most effectively by controlling the means of creating money and credit.
The real issue lies in how money and credit are created, and the control that is exercised over the process. The original idea behind creating money and extending credit was that people and businesses in the community had productive potential. There was land, labor, natural resources, technology, and the demand for goods and services. Unfortunately, there was frequently not enough gold or silver coin available to finance development.
British efforts to develop India economically in the nineteenth century, for example, were seriously hampered by the fact that the currency was the silver Rupee. Massive amounts of silver were imported each year, sometimes more than total world production. (Helfferich, op. cit., 134.) This caused a shortage everywhere else, particularly in Europe with its traditionally silver-based currency. Simply purchasing the material for the currency represented a substantial economic drain. The very activity carried out to spur economic development thus acted as a brake on it, a phenomenon that modern central bankers have yet to acknowledge.
Without an adequate supply of sound currency, productive projects remain ideas. Then someone discovered that productive potential could be turned into money through the extension of "pure credit." That is, someone realized that instead of using credit and creating money based on existing accumulations of savings achieved by cutting consumption, credit could (and, in fact, invariably is) based on the present value of existing and future marketable goods and services. Having a definable present value, this can be turned into "money" and used to finance the formation of the very capital used to generate the future savings needed to repay the loan.
To replace existing accumulations of savings as collateral (which, as we have observed, is what past savings are generally used for, not direct capital investment), the risk premium typically charged on all loans except those made to the presumably "risk free" government can be used as an actual premium on capital credit insurance and reinsurance policies.
Reform of the Banking System
At least one more thing is needed to ensure that the State — whether local, regional, national, or even global — does not manage to seize control of money and credit and put or maintain itself as an economic dictatorship. The commercial and central banks of the world must be independent of the State, or, if the central bank is construed as a "fourth branch of government," that the executive, judicial, and legislative branches do not have any means of taking it over and subverting it to their own purposes.
Taking the United States Federal Reserve System as an exemplar, there are certain measures that could be implemented almost immediately to restore the independence of the Federal Reserve. One, restrict the Fed to rediscounting qualified private sector paper of member banks supplemented with limited open market operations involving private sector paper issued by businesses and non-member banks. Two, make the prohibition against monetizing government deficits more than a dead letter by forbidding the Federal Reserve to deal in either primary or secondary government issues. Three, institute a 100% reserve requirement by rediscounting all qualified loans for industrial, commercial, and agricultural purposes at the regional Federal Reserve banks.
Existing savings can be used to make loans to government and consumers, or for speculative investment. Any "new money" created by the extension of bank credit and discounting of bills of exchange must be restricted to properly vetted and financially feasible loans made for commercial purposes. These measures would go a long way toward restoring some sanity to the financial system, but one thing more is needed: a program to encourage widespread direct ownership of the means of production. One possibility is outlined in the two books co-authored by Louis O. Kelso and Mortimer J. Adler, The Capitalist Manifesto (1958) and The New Capitalists (1961). The subtitle of the latter is revealing, and illustrative of the incoherent mess into which a dogmatic faith in Keynesian economics has trapped the global economy: "A Proposal to Free Economic Growth from the Slavery of Savings."
Instituted in a way that conforms to the original intent of central banking, and adding a program of expanded capital ownership so as to ensure the broadest possible participation in the economy and economic and political empowerment of everyone, common currencies can be of great benefit to everyone. Even a global common currency, hedged about with such safeguards as independence from government and widespread direct ownership of the means of production, would be of great benefit to humanity.
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Showing posts with label Common Cause. Show all posts
Showing posts with label Common Cause. Show all posts
Monday, July 19, 2010
Thursday, July 15, 2010
Common Cause, Part XVII: Principles for Common Currencies
Clearly the problems associated with implementing and maintaining a common currency, especially at the global level, are not something that can easily be resolved. Furthermore, the stakes are extremely high. How we understand and implement these institutions can make them either extraordinarily beneficial to the advancement of humanity and of individuals . . . or the deadliest and most evil tyranny ever established.
Restructuring the Social Order
The first step is to "clean up" the existing system. It makes no sense to dismantle a bad system if all we end up with is something worse. Any reform must start at the most basic level. For a currency, this is at the level of the individuals who transact business, incur debts, and who, by doing so, create money. All transactions involve money, although the form of the money can vary widely. The vast amount of money even within a currency union is far from common currency. Money often circulates between two individuals or a very limited group in the form of bills of exchange. A personal IOU, even a handshake, has the substance, if not the usual form, of a bill of exchange.
Given the fact that the bulk of the money supply never goes near a bank or receives the official sanction of the State, the Just Third Way requires a "strong juridical order" as an absolute necessity within a system that recognizes and protects personal sovereignty and individual human dignity. The institutional and cultural environment within which people carry on the business of life, what the Germans call Volkswirtschaft, must be such that the essential principles of justice are understood, established, and maintained within acceptable parameters.
When a culture or civilization takes the wrong principles for granted, any reform — especially a reform imposed by the State or some other authority (recall our earlier discussion of internal v. external controls) — will necessarily be ineffective, even counterproductive of the desired end. Virtuous acts (and justice is a virtue) become virtually impossible. (Vide Albert Venn Dicey, Lectures on the Relation Between Law and Public Opinion in England During the Nineteenth Century, 1905.) As Ferree explained,
With its emphasis on having the State "create" effective demand by manipulating the currency, Keynesian economics attempts to impose results. Just as John Jones necessarily failed by attempting to impose results individually, however, the State inevitably throws society into complete chaos. As an individual, Jones' failure affects at most only him, his dependents, and a few other people. As the guardian of the common good, however — the common good being that vast network of institutions within which we as individuals and as members of society engage in Volkswirtschaft (the business of living) — the State's failure affects everyone and everything in society, sometimes fatally.
The Right Approach
In social terms, Jones as an individual can afford to fail — or, at least, society can afford his failure (his wife and his children might have a different view of the subject). Still, Jones's failure will not drag the entire social order down with it. The State does not have that luxury. The State's efforts to guide the restructuring of the social order must therefore be based on sound principles to begin with and — paradoxically — not be directed at imposing desired results or a preferred condition of society. Rather, the State's job is more difficult and at the same time more subtle: to provide a safe and coherent environment within which people, both as individuals and as members of groups, can work to gain the ends they desire and prefer.
That is, people must be free to associate and organize to achieve whatever they (not some State bureaucrat or ivory tower academic) want and have determined for themselves what they need, as long as it is in conformity with the essential precepts of the natural moral law. The first step in this process of reforming the social order to conform to the natural law — the most basic of which is, "good is to be done and evil avoided" — is to establish a clear set of parameters. We can call these the Four Pillars of an Economically Just Society:
The Role of the State
By "a limited role for the State" we do not mean that there is no role for government. Rather, because it has a monopoly on the instruments of coercion, the State must carefully refrain from trying to impose desired results. It is irrelevant how good some people or even a majority might believe those results to be, if they come into conflict with anyone's natural rights. The State's role must therefore be limited to policing abuses when they occur, enforcing contracts when some dispute arises, and, in general, providing a "level playing field" on which citizens are free to pursue their private interests as long as those interests do not come into material conflict with the natural moral law or the demands of the common good.
There are certain circumstances under which the State can and should take a greater role. These, however, are exceptions to the general rule that the role of the State must be limited economically and, in many respects, politically. (Vide Alexis de Tocqueville, "The Principle of Sovereignty of the People of America," Democracy in America, I.iv.) In an emergency, such as war or famine, even (to a limited extent) times of economic disruption — especially those caused by adherence of those in power to the discredited principles of Keynesian economics — a redistribution of existing wealth may be necessary as an expedient.
To conform to the precepts of the natural law, this redistribution should be made through the tax system. The wealth should first be taken from those with a "superabundance," and then from those with a great surplus, and so on, down the line. At no point should anyone be taxed on what he or she needs to maintain him- or herself or his or her dependents in a manner befitting the demands of human dignity and consistent with his or her station in life. Logically, this can be done most easily and justly by setting the total exemption and deduction level for everyone at the same amount. Total income exempted from taxation would necessarily be sufficient to provide for normal living expenses. Everything above that would be taxed at the same rate, thereby “naturally” taking more from those with a “superabundance,” and progressively less from those with a mere abundance, then a surplus, and so on. Thus, everyone with the means to pay the extra tax would pay according to his or her means, with no one bearing a greater proportional burden.
Under the “principle of double effect,” widespread emergency has been used to rationalize a progressive tax system. The reasoning is that, because taxation itself is not “objectively evil,” taxing unjustly is permitted (although hardly recommended!) as an expedient. This is because the “intended good” of having sufficient revenue to meet the emergency outweighs the “unintended evil” of treating some people unfairly — temporarily. To implement a progressive tax or any other form of redistribution as a normal thing, however, is to “justify injustice.” Justifying injustice is an oxymoron. Progressive taxation also relies on creating a continuing state of emergency, and the creation of a class permanently dependent on the State. Absent any better line of reasoning than has yet come to light, there is no justification for any tax other than a single rate above what is needed to meet common domestic needs adequately.
At no time should the currency be manipulated in any way, whether to ease the presumed pains of emergency redistribution, the costs of war, to achieve "full employment," equality of economic condition, or anything else. Inflation is a "hidden tax" on people with money holdings, while deflation is similarly a charge on debtors. When induced artificially by the State via manipulation of the currency, both inflation and deflation are profoundly unjust, and strike at the very foundation of the social order. Both inflation and deflation undermine the natural right of private property by vesting control over what is private wealth in the hands of the State. "Property," as Louis Kelso pointed out, "in everyday life, is the right of control." (Louis O. Kelso, "Karl Marx: The Almost Capitalist," American Bar Association Journal, March 1957.)
Money Manipulation and Social Order
By manipulating — controlling — money and credit, by considering money somehow a special creation of the State and only the State, the State is vested with effective title of everything in the economy. Money and credit are the chief means by which property rights are conveyed. By separating money creation from the present value of existing and future marketable goods and services, and claiming the right to determine in what manner property can be conveyed, to whom, and on what terms, the State effectively claims ownership of everything. (Hobbes, loc. cit.) Private property as an institution is effectively abolished.
The outward forms of private ownership may remain unchanged for some time under a program of State control of money and credit, but they become an empty shell. The substance or essence of property — control — has been taken away. By controlling money and credit, the "despotic economic dictatorship" can decide who is permitted to live and in what manner. "No one can breathe against their will." The Servile State becomes established in all its awe-inspiring stupidity. (Vide, Hilaire Belloc, The Servile State, 1912.)
Once we truly understand that the individual, not the State, is sovereign, however, all of this changes. We realize that, far from being a special creation of the State, as "chartalism" and the various monetary theories based on or related to chartalism assume, (Vide Knapp, op. cit.) the case is far different. The State creates nothing, including money. Rather, the State's monetary role is a very restricted one. That is, the State has the responsibility to set the standard and the value of the currency, and — when necessary — police abuses when conflicts arise as to whether the parties in a transaction are adhering to the terms of the contract.
The State's role is thus to define and regulate — not create — what constitutes the common currency. Further, the State lacks the power to declare that only its common currency can be used to carry out transactions. A common currency is established as a social good to facilitate transactions, not to impose State control of the economy. Despite Keynes's assertion that the State has the power to change reality by "re-editing the dictionary" (A Treatise on Money, loc. cit.) the essential definition of money remains: anything that can be used in settlement of a debt.
The Slavery of Savings — Again
Unfortunately, trapped by the assumption that only existing accumulations of savings can be used to finance capital formation, many people assume that the State must take control of the money supply. Otherwise, the people who currently control existing accumulations of wealth — past savings — will keep humanity enslaved forever. Many economists and policymakers assume that the only way to break this monopoly of wealth, this "despotic economic dictatorship" (Quadragesimo Anno, loc. cit.), is to have the State create all money, either through the central bank engaging in open market operations in government securities, or simply by printing money (or — the same thing — creating demand deposits) and spending it into circulation.
It is beyond the scope of this series to show that both techniques are substantially the same. We hope to present our argument later when we look at "interest-free" money in a future series. Suffice it to say, then, that many otherwise intelligent people assume as a given that humanity is trapped between two extremes. The one is capitalism, in which a private elite controls the means of acquiring and possessing private property through its monopoly on existing accumulations of savings. The other is socialism, in which the State controls the means of acquiring and possessing private property through its presumed monopoly on money creation.
Not to belabor the point, but when we understand that money is anything that can be used in settlement of a debt, we realize the falsity of the premises behind both capitalism and socialism. It is outside the purview of the State allow or maintain the barriers that inhibit or prevent ordinary people from accessing money and credit in order to acquire and possess private property in the means of production as in capitalism. Similarly, it is beyond the State's competence to take control over money and credit to impose desired results, as in socialism.
The Free Market
By "free market" we do not mean a market in which "anything goes." Instead, we mean a market to which everyone has free and full access, and in which each person can participate fully insofar as it is consistent with his or her capacities and abilities. In today's society, the principle of the free market is violated most often by the assumptions underpinning both capitalism and socialism — both of which are rooted in the mistaken belief that the only source of financing for new capital formation is existing accumulations of savings: the slavery of savings.
The slavery of savings supports capitalism by declaring that because existing accumulations of savings are the only source of financing, economic growth and development absolutely require a class of persons who cannot consume all they produce, and necessarily reinvest the excess. The richer and smaller this class becomes, the more wealth becomes concentrated, the less proportionately is consumed and more saved and reinvested, and thus the faster economic growth and development can take place.
Socialism differs from capitalism only in this: that the single artificial person of the State replaces the class of natural private persons. This (at least according to Keynes) renders the process of saving and reinvestment in new capital formation most efficient and results in the maximum number of jobs created. As Keynes declared,
An important step in reforming capitalism is to make the allegedly "free market" truly free. This can be done most effectively by removing barriers (chiefly the dogmatic belief that only existing accumulations of savings can be used to finance new capital formation) to full and free participation in the market. The astute reader, noting that limited participation in the market, primarily limited ownership of the means of production, is the defining characteristic of capitalism may rightly observe that a capitalism reformed in this way is no longer capitalism. He or she would be absolutely correct. Neither would it be socialism, but a just, third way that transcends the mistakes and errors of the past embedded in the two failed systems.
The Restoration of Property
To be sound as well as just, all money must be linked directly to the present value of existing and future marketable goods and services in the community. Private property provides the link to sound and just money, as well as for virtually the whole of the common good. As Benjamin Watkins Leigh observed, "Power and Property can be separated for a time by force or fraud — but divorced, never. For as soon as the pang of separation is felt . . . Property will purchase Power, or Power will take over Property."
To be truly a common currency, then, the rights of property must be secure, or there is no true or sound basis for the money supply; money creation becomes a means not of facilitating legitimate transfers of property rights, but of carrying out theft on a massive scale. There must be no limitations imposed on the exercise of property except to prevent harm to the owner, other individuals and groups in society, and the common good as a whole.
Widespread Ownership of Capital
One thing more is needed for a common currency or any other currency to be sound and just. Money is a derivative of the present value of existing and future marketable goods and services. Ownership of the means of production must, therefore, be widespread, or there is no legitimate basis for the great mass of people to participate in economic life.
Before the industrial revolution, the two predominant factors — means — of production were land and human labor. Land retains its place, of course, but with the advent of industrialization, the other predominant factor of production shifted from human labor to capital. Bound by the slavery of past savings, this shift has left those with only their labor to sell without apparent recourse except socialism.
This presents us with a problem. To broaden ownership of the means of production and lay the foundation for the implementation of a global common currency, it seems necessary to engage in the paradox of destroying or abolishing private property in the means of production for some (the rich) for the benefit of others: the poor. In the next and final posting in this series, however, we will see that there is a way out of this dilemma — one that has the potential to achieve the goals of socialism, but without violating the principles of capitalism.
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Restructuring the Social Order
The first step is to "clean up" the existing system. It makes no sense to dismantle a bad system if all we end up with is something worse. Any reform must start at the most basic level. For a currency, this is at the level of the individuals who transact business, incur debts, and who, by doing so, create money. All transactions involve money, although the form of the money can vary widely. The vast amount of money even within a currency union is far from common currency. Money often circulates between two individuals or a very limited group in the form of bills of exchange. A personal IOU, even a handshake, has the substance, if not the usual form, of a bill of exchange.
Given the fact that the bulk of the money supply never goes near a bank or receives the official sanction of the State, the Just Third Way requires a "strong juridical order" as an absolute necessity within a system that recognizes and protects personal sovereignty and individual human dignity. The institutional and cultural environment within which people carry on the business of life, what the Germans call Volkswirtschaft, must be such that the essential principles of justice are understood, established, and maintained within acceptable parameters.
When a culture or civilization takes the wrong principles for granted, any reform — especially a reform imposed by the State or some other authority (recall our earlier discussion of internal v. external controls) — will necessarily be ineffective, even counterproductive of the desired end. Virtuous acts (and justice is a virtue) become virtually impossible. (Vide Albert Venn Dicey, Lectures on the Relation Between Law and Public Opinion in England During the Nineteenth Century, 1905.) As Ferree explained,
Suppose for instance, that John Jones' and Bill Smith's society have a long tradition of not paying debts. As a result . . . everybody is suspicious of everybody else, and no one will let out money or goods. . . .It's not too great a stretch — or any stretch at all, for that matter — to see in John Jones's efforts to impose honesty on the group externally an analog of efforts by the modern Nation State to impose desired results by fiat, especially in the financial services industry. The inevitable result of individual efforts is poverty and ruin, while the State's labors end in financial chaos and economic depression. Based on the false assumptions of Keynesian economics, today's financial system is almost custom-designed to fail and to disrupt the social order at the most basic level.
Suppose that John Jones notices this condition, and sees what the cause of it is: the whole group is not honest. He sets out, then, to change the group — to reorganize it into an honest community.
The question is: What can John Jones do as an individual? He might, for instance, decide to give the community "a good example" of honesty. That is, he might lend out all his money to others, thus showing that he trusts them, and undertake always to pay his debts exactly on time. It sounds good; but, remembering that what is wrong with that community is that everyone considers it normal to be dishonest, we might readily calculate the chances that John Jones' heroic honesty and trust would have of reforming the community. When he starts handing out his money freely, it is rather obvious that most of his neighbors will try to grab off as much of it as they can while the grabbing is good. When he is finally reduced to poverty, it is unlikely that his example will attract many followers. (Ferree, op. cit., 44-45.)
With its emphasis on having the State "create" effective demand by manipulating the currency, Keynesian economics attempts to impose results. Just as John Jones necessarily failed by attempting to impose results individually, however, the State inevitably throws society into complete chaos. As an individual, Jones' failure affects at most only him, his dependents, and a few other people. As the guardian of the common good, however — the common good being that vast network of institutions within which we as individuals and as members of society engage in Volkswirtschaft (the business of living) — the State's failure affects everyone and everything in society, sometimes fatally.
The Right Approach
In social terms, Jones as an individual can afford to fail — or, at least, society can afford his failure (his wife and his children might have a different view of the subject). Still, Jones's failure will not drag the entire social order down with it. The State does not have that luxury. The State's efforts to guide the restructuring of the social order must therefore be based on sound principles to begin with and — paradoxically — not be directed at imposing desired results or a preferred condition of society. Rather, the State's job is more difficult and at the same time more subtle: to provide a safe and coherent environment within which people, both as individuals and as members of groups, can work to gain the ends they desire and prefer.
That is, people must be free to associate and organize to achieve whatever they (not some State bureaucrat or ivory tower academic) want and have determined for themselves what they need, as long as it is in conformity with the essential precepts of the natural moral law. The first step in this process of reforming the social order to conform to the natural law — the most basic of which is, "good is to be done and evil avoided" — is to establish a clear set of parameters. We can call these the Four Pillars of an Economically Just Society:
• A limited economic role for the State,We've gone over these pillars in some depth in previous writings, but we need to apply them to the specific case of reforming the social order to the point where a common currency ceases to be a threat, and becomes a benefit to all humanity.
• Free and open markets as the best means for determining just wages, just prices, and just profits,
• Restoration of the rights of private property, particularly in corporate equity, and (the "fatal omission" from virtually all modern economic systems)
• Widespread direct ownership of the means of production.
The Role of the State
By "a limited role for the State" we do not mean that there is no role for government. Rather, because it has a monopoly on the instruments of coercion, the State must carefully refrain from trying to impose desired results. It is irrelevant how good some people or even a majority might believe those results to be, if they come into conflict with anyone's natural rights. The State's role must therefore be limited to policing abuses when they occur, enforcing contracts when some dispute arises, and, in general, providing a "level playing field" on which citizens are free to pursue their private interests as long as those interests do not come into material conflict with the natural moral law or the demands of the common good.
There are certain circumstances under which the State can and should take a greater role. These, however, are exceptions to the general rule that the role of the State must be limited economically and, in many respects, politically. (Vide Alexis de Tocqueville, "The Principle of Sovereignty of the People of America," Democracy in America, I.iv.) In an emergency, such as war or famine, even (to a limited extent) times of economic disruption — especially those caused by adherence of those in power to the discredited principles of Keynesian economics — a redistribution of existing wealth may be necessary as an expedient.
To conform to the precepts of the natural law, this redistribution should be made through the tax system. The wealth should first be taken from those with a "superabundance," and then from those with a great surplus, and so on, down the line. At no point should anyone be taxed on what he or she needs to maintain him- or herself or his or her dependents in a manner befitting the demands of human dignity and consistent with his or her station in life. Logically, this can be done most easily and justly by setting the total exemption and deduction level for everyone at the same amount. Total income exempted from taxation would necessarily be sufficient to provide for normal living expenses. Everything above that would be taxed at the same rate, thereby “naturally” taking more from those with a “superabundance,” and progressively less from those with a mere abundance, then a surplus, and so on. Thus, everyone with the means to pay the extra tax would pay according to his or her means, with no one bearing a greater proportional burden.
Under the “principle of double effect,” widespread emergency has been used to rationalize a progressive tax system. The reasoning is that, because taxation itself is not “objectively evil,” taxing unjustly is permitted (although hardly recommended!) as an expedient. This is because the “intended good” of having sufficient revenue to meet the emergency outweighs the “unintended evil” of treating some people unfairly — temporarily. To implement a progressive tax or any other form of redistribution as a normal thing, however, is to “justify injustice.” Justifying injustice is an oxymoron. Progressive taxation also relies on creating a continuing state of emergency, and the creation of a class permanently dependent on the State. Absent any better line of reasoning than has yet come to light, there is no justification for any tax other than a single rate above what is needed to meet common domestic needs adequately.
At no time should the currency be manipulated in any way, whether to ease the presumed pains of emergency redistribution, the costs of war, to achieve "full employment," equality of economic condition, or anything else. Inflation is a "hidden tax" on people with money holdings, while deflation is similarly a charge on debtors. When induced artificially by the State via manipulation of the currency, both inflation and deflation are profoundly unjust, and strike at the very foundation of the social order. Both inflation and deflation undermine the natural right of private property by vesting control over what is private wealth in the hands of the State. "Property," as Louis Kelso pointed out, "in everyday life, is the right of control." (Louis O. Kelso, "Karl Marx: The Almost Capitalist," American Bar Association Journal, March 1957.)
Money Manipulation and Social Order
By manipulating — controlling — money and credit, by considering money somehow a special creation of the State and only the State, the State is vested with effective title of everything in the economy. Money and credit are the chief means by which property rights are conveyed. By separating money creation from the present value of existing and future marketable goods and services, and claiming the right to determine in what manner property can be conveyed, to whom, and on what terms, the State effectively claims ownership of everything. (Hobbes, loc. cit.) Private property as an institution is effectively abolished.
The outward forms of private ownership may remain unchanged for some time under a program of State control of money and credit, but they become an empty shell. The substance or essence of property — control — has been taken away. By controlling money and credit, the "despotic economic dictatorship" can decide who is permitted to live and in what manner. "No one can breathe against their will." The Servile State becomes established in all its awe-inspiring stupidity. (Vide, Hilaire Belloc, The Servile State, 1912.)
Once we truly understand that the individual, not the State, is sovereign, however, all of this changes. We realize that, far from being a special creation of the State, as "chartalism" and the various monetary theories based on or related to chartalism assume, (Vide Knapp, op. cit.) the case is far different. The State creates nothing, including money. Rather, the State's monetary role is a very restricted one. That is, the State has the responsibility to set the standard and the value of the currency, and — when necessary — police abuses when conflicts arise as to whether the parties in a transaction are adhering to the terms of the contract.
The State's role is thus to define and regulate — not create — what constitutes the common currency. Further, the State lacks the power to declare that only its common currency can be used to carry out transactions. A common currency is established as a social good to facilitate transactions, not to impose State control of the economy. Despite Keynes's assertion that the State has the power to change reality by "re-editing the dictionary" (A Treatise on Money, loc. cit.) the essential definition of money remains: anything that can be used in settlement of a debt.
The Slavery of Savings — Again
Unfortunately, trapped by the assumption that only existing accumulations of savings can be used to finance capital formation, many people assume that the State must take control of the money supply. Otherwise, the people who currently control existing accumulations of wealth — past savings — will keep humanity enslaved forever. Many economists and policymakers assume that the only way to break this monopoly of wealth, this "despotic economic dictatorship" (Quadragesimo Anno, loc. cit.), is to have the State create all money, either through the central bank engaging in open market operations in government securities, or simply by printing money (or — the same thing — creating demand deposits) and spending it into circulation.
It is beyond the scope of this series to show that both techniques are substantially the same. We hope to present our argument later when we look at "interest-free" money in a future series. Suffice it to say, then, that many otherwise intelligent people assume as a given that humanity is trapped between two extremes. The one is capitalism, in which a private elite controls the means of acquiring and possessing private property through its monopoly on existing accumulations of savings. The other is socialism, in which the State controls the means of acquiring and possessing private property through its presumed monopoly on money creation.
Not to belabor the point, but when we understand that money is anything that can be used in settlement of a debt, we realize the falsity of the premises behind both capitalism and socialism. It is outside the purview of the State allow or maintain the barriers that inhibit or prevent ordinary people from accessing money and credit in order to acquire and possess private property in the means of production as in capitalism. Similarly, it is beyond the State's competence to take control over money and credit to impose desired results, as in socialism.
The Free Market
By "free market" we do not mean a market in which "anything goes." Instead, we mean a market to which everyone has free and full access, and in which each person can participate fully insofar as it is consistent with his or her capacities and abilities. In today's society, the principle of the free market is violated most often by the assumptions underpinning both capitalism and socialism — both of which are rooted in the mistaken belief that the only source of financing for new capital formation is existing accumulations of savings: the slavery of savings.
The slavery of savings supports capitalism by declaring that because existing accumulations of savings are the only source of financing, economic growth and development absolutely require a class of persons who cannot consume all they produce, and necessarily reinvest the excess. The richer and smaller this class becomes, the more wealth becomes concentrated, the less proportionately is consumed and more saved and reinvested, and thus the faster economic growth and development can take place.
Socialism differs from capitalism only in this: that the single artificial person of the State replaces the class of natural private persons. This (at least according to Keynes) renders the process of saving and reinvestment in new capital formation most efficient and results in the maximum number of jobs created. As Keynes declared,
I conceive . . . that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community. It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. Moreover, the necessary measures of socialisation can be introduced gradually and without a break in the general traditions of society. (General Theory, op. cit., V.24.iii.)That is, as long as the State controls the means of production and determines what "owners" are entitled to receive, actual "ownership" — legal title — is a meaningless formality. Private property is effectively abolished. Keynes's proposal, of course, is simply an expansion to all productive assets of Henry George's proposal for landed property. To understand this, we need to realize that "interest" is the return on capital other than land (it comes from "ownership interest") — that which Keynes referred in the above quote as the "rate of reward," while "rent" is the return on land. As George explained,
What I, therefore, propose, as the simple yet sovereign remedy, which will raise wages, increase the earnings of capital, extirpate pauperism, abolish poverty, give remunerative employment to whoever wishes it, afford free scope to human powers, lessen crime, elevate morals, and taste, and intelligence, purify government and carry civilization to yet nobler heights, is — to appropriate rent by taxation.Capitalism's only saving grace — and its only difference from socialism — is that it preserves (albeit in truncated form) the natural right to be an owner. In general, capitalism limits this to an elite few, but at least the germ remains. From that tiny seed it is still possible to reform the system. With socialism, and its abolition of virtually the whole of the natural law, any restructuring of the system cannot be a mere "reform," however far-reaching. A complete dismantling and reconstruction is in order. The fact is that socialism "is based . . . on a theory of human society peculiar to itself," (Quadragesimo Anno, op. cit., § 120) and cannot be reconciled with the fundamental precepts that necessarily underpin human society: the natural moral law.
In this way the State may become the universal landlord without calling herself so, and without assuming a single new function. In form, the ownership of land would remain just as now. No owner of land need be dispossessed, and no restriction need be placed upon the amount of land any one could hold. For, rent being taken by the State in taxes, land, no matter in whose name it stood, or in what parcels it was held, would be really common property, and every member of the community would participate in the advantages of its ownership. (Henry George, Progress and Poverty. New York: The Robert Schalkenbach Foundation, 1992, 405-406.
An important step in reforming capitalism is to make the allegedly "free market" truly free. This can be done most effectively by removing barriers (chiefly the dogmatic belief that only existing accumulations of savings can be used to finance new capital formation) to full and free participation in the market. The astute reader, noting that limited participation in the market, primarily limited ownership of the means of production, is the defining characteristic of capitalism may rightly observe that a capitalism reformed in this way is no longer capitalism. He or she would be absolutely correct. Neither would it be socialism, but a just, third way that transcends the mistakes and errors of the past embedded in the two failed systems.
The Restoration of Property
To be sound as well as just, all money must be linked directly to the present value of existing and future marketable goods and services in the community. Private property provides the link to sound and just money, as well as for virtually the whole of the common good. As Benjamin Watkins Leigh observed, "Power and Property can be separated for a time by force or fraud — but divorced, never. For as soon as the pang of separation is felt . . . Property will purchase Power, or Power will take over Property."
To be truly a common currency, then, the rights of property must be secure, or there is no true or sound basis for the money supply; money creation becomes a means not of facilitating legitimate transfers of property rights, but of carrying out theft on a massive scale. There must be no limitations imposed on the exercise of property except to prevent harm to the owner, other individuals and groups in society, and the common good as a whole.
Widespread Ownership of Capital
One thing more is needed for a common currency or any other currency to be sound and just. Money is a derivative of the present value of existing and future marketable goods and services. Ownership of the means of production must, therefore, be widespread, or there is no legitimate basis for the great mass of people to participate in economic life.
Before the industrial revolution, the two predominant factors — means — of production were land and human labor. Land retains its place, of course, but with the advent of industrialization, the other predominant factor of production shifted from human labor to capital. Bound by the slavery of past savings, this shift has left those with only their labor to sell without apparent recourse except socialism.
This presents us with a problem. To broaden ownership of the means of production and lay the foundation for the implementation of a global common currency, it seems necessary to engage in the paradox of destroying or abolishing private property in the means of production for some (the rich) for the benefit of others: the poor. In the next and final posting in this series, however, we will see that there is a way out of this dilemma — one that has the potential to achieve the goals of socialism, but without violating the principles of capitalism.
#30#
Wednesday, July 14, 2010
Common Cause, Part XVI: The Federal Reserve
In a pattern that has become depressingly familiar in the 20th and 21st centuries, the "Panic of 1890" revealed structural weaknesses in the global financial system. No sooner had the world recovered from the relatively minor shock of 1890, however, than the "Panic of 1893" ensued. This precipitated what would be known until the 1930s as "the Great Depression." Nowadays, of course, we avoid the terms "panic" and "depression." We prefer "downturn" and "recession," but the effect is the same. In principatu commutando saepius, nil praeter domini nomen mutant pauperes — "In changing rulers, the poor usually change nothing but the name of their master." (C. Iulius Phaedrus, I.15.i)
The Panic of 1893
Not too many people today even know about the Panic of 1893. It was, nevertheless, a turning point in American financial history. As Harold Moulton explained, "The Panic of 1893 precipitated a genuine agitation for the improvement of our banking system, but before any legislation on the subject could be passed, there occurred the political campaign of 1896, the issue of which was once more the silver question." (Harold G. Moulton, Financial Organization of the Economic System. New York: McGraw-Hill Book Company, 1938, 343.)
The "silver question" refers to the late 19th century Populist demand for "free silver." Free silver was the push to inflate the currency by minting as much cheap silver as necessary to bring the U.S. currency back to its wartime value. During the Civil War, Treasury Secretary Salmon P. Chase's policy of financing the Union war effort with debt had led to massive inflation. Naturally enough, it also caused the virtual disappearance of gold, silver, and even copper coinage from circulation. To restore the credit of the United States, the National Bank system, established in 1863 (amended in 1864), and the Coinage Act of 1873 were intended to deflate the currency and restore the pre-war parity.
Efforts to restore the value of the U.S. currency and secure the national credit were, all things considered, successful — but at a high cost. During the war, farmers had borrowed "cheap," that is, inflated currency. This now had to be paid back with "dear" or deflated currency. With the decline in prices due to both the tremendous increase in production and the deflation of the currency, a farmer had to produce (for example) 100 bushels of wheat at 50 cents instead of 50 bushels at $1.00.
The figures are grossly oversimplified, of course. It does, however, demonstrate the dilemma in which the farmers found themselves. In the burst of Populist sympathy that resulted from the Panic of 1893, the Coinage Act of 1873 came to be seen as a criminal conspiracy. This was because the effect of the Act was to destroy the ability of the farmers to repay their debts on the same terms on which the debts had been incurred. It was then — twenty years after the passage of the Act — that it entered agrarian and conspiracy lore and legend as the "Crime of '73." (Walter T. K. Nugent, The Money Question During Reconstruction. New York: W. W. Norton & Company, Inc., 1967, 65.)
According to Moulton, however, the real question was not to what degree the government should be manipulating the currency, but whether it should be manipulating it at all. Both camps, the Republicans and conservative Democrats who pushed for a sound currency by linking it to gold and maintaining the value by constricting the money supply, and the Populists, who demanded inflation by linking the currency to a bimetallic standard of both gold and cheap silver, were locked into the mindset of the British Currency School. That is, they believed that "money" consists of gold and silver coin, and paper certificates issued by the State. Demand deposits — checking accounts — and certain time deposits were added later. This gave us the standard M1 and M2 definitions of money currently used by the Federal Reserve.
Completely ignored in all of this was the fact that money consists of far more than mere coin, currency, demand deposits, and small value savings accounts. Money, in fact, is anything that can be used in settlement of a debt. Currency, whatever form it takes, is merely a symbol, a derivative of money, just as money itself is a symbol, a derivative of the present value of existing and future marketable goods and services in the economy.
Banks can create sound money at need, without inflation or deflation, as long as the new money is directly backed by the present value of existing and future marketable goods and services in which the issuer has a private property stake. Consistent with Say's Law of Markets, there is never any excuse, in an economy characterized by widespread direct ownership of the means of production and with a well-regulated and functional banking and financial system, for there to be either an inadequate or excess supply of money.
The Slavery of Savings
Unfortunately, trapped in the paradigm dictated by the British Currency School (and which subsequently shackled Keynesian economics), the monetary commission appointed in 1897 looked only at currency, and not at the banking system. The subsequent bill that resulted from the investigations — the Currency Act of 1900 — did not address the main issue. As Moulton remarked, "In the main, . . . this act was concerned primarily with the money question. On the banking side all that was attempted was a stimulation of the growth of national, as compared with state, banks by decreasing the capital requirements and by permitting the issue of notes up to the full value of the government bonds held as security." (Ibid.)
The most common complaint during the depression that followed the Panic of 1893 was that there wasn't enough money in circulation to keep the economy running. As one authority described the situation,
There was no central bank to provide accommodation either for the commercial banks or for the private sector as a whole. When an individual bank lacked the capacity to discount bills of exchange, there was nowhere to go, no "lender of last resort" for industry, commerce, and agriculture. The best that could be done within the framework dictated by the Currency School was to increase the amount of government debt that could be used to back the currency. This helped create the illusion that inflation is the remedy for an economic downturn.
The Panic of 1907
No sooner had the country recovered from the depression that followed the Panic of 1893 than the stage was set for the next financial shakeup. As Moulton pointed out, the basic problem remained unsolved: the banking system was grossly inadequate to serve the needs of an advanced economy. To make matters worse, virtually all financial power had become concentrated in the hands of a very few people. Effectively, the financial center of the country was New York City, just as it is today. Where people had focused on preventing the concentration of financial power in government hands by preventing the establishment of a central bank, power had concentrated in private hands. This set the stage for a series of events that culminated in the "Panic of 1907."
Financier J. P. Morgan certainly did not intend to drive the United States and most of Europe into a major depression. All he wanted to do was carry out business as usual, and squash a competitor like a bug in the grand tradition of laissez faire capitalism. It was unfortunate for Morgan and the rest of the world that his business-as-usual triggered events that rapidly spiraled out of control.
In 1907, the president of the Knickerbocker Bank and Trust, the third largest bank in New York, got his bank into a great deal of trouble by speculating in copper shares. At that time, regulations permitted commercial banks to own and deal in securities other than their own equity shares or government bonds. It wasn't until after 1929 that commercial banking and investment banking were separated. This was reversed with the repeal of Glass-Steagall, leading directly to the current economic malaise.
Because of the attempt to manipulate copper, the Knickerbocker was in desperate need of cash to prevent a run on the bank. A run would almost certainly result in the failure of the institution, and the loss of everything by creditors and depositors. The president of the Knickerbocker applied to J. Pierpont Morgan for emergency funds to keep his bank open. Seizing the opportunity to rid himself of a competitor, Morgan refused. The resulting run on the Knickerbocker spread like wildfire, causing a financial panic throughout New York, then the nation and, finally, Europe.
Congress Acts
A Congressional investigating committee determined that Morgan's stranglehold on the control of money and credit was the single most important factor in causing the Panic of 1907. For this and other reasons, not the least of which was the need for such an institution, Congress decided to make a fourth attempt to establish a central bank for the United States. There were, however, two serious problems that had to be addressed before any successful attempt could be made.
The first of these was the paradoxical concept of breaking up a private monopoly over the control of money and credit by establishing a government monopoly over the same thing. If a standard central banking system were established, the only change would be concentration of power in governmental, rather than private hands.
The other problem was the strong suspicion and distrust in America of banks of any kind, but especially central banks. This distrust had already brought down three attempts to create a central bank for the United States — the Bank of North America, the Bank of the United States, and the Second Bank of the United States. The word "bank" itself would probably be enough to guarantee failure. (Interestingly, the Bank of North America, after a convoluted series of mergers, is still in existence today, owned by Wells Fargo & Co., and doing business as Wachovia.)
The unique solution to these problems was, in retrospect, the only one possible under the circumstances. Instead of establishing a "Central Bank of the United States," Congress installed a "Federal Reserve System," a description rather than a name. In an astounding move, the national currency consisting of gold coin, subsidiary silver, bronze and copper-nickel tokens, gold and silver certificates, and treasury notes of various types was put officially into a secondary or supplementary role in the economy.
This had, of course, always been the case, as Henry Thornton demonstrated in 1802 in his book, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. Nor did the United States lag behind. According to Congressman George Tucker, the amount of gold and silver coin that circulated in the United States during the 1830s — inadequate by any standard — was dwarfed by the number and amount of bills of exchange that circulated, constituting possibly as much as 95% of the money supply. The unusual thing about the Federal Reserve Act was that, in sharp contrast to the British Bank Charter Act of 1844 and the United States National Bank Act of 1864, it acknowledged the reality that "money" consists of more than gold, silver, and State-authorized certificates.
The New Currency
Paradoxically, the primary currency of the United States was not to be a national currency at all, but the product of a currency union embracing twelve independent districts. Each would have its own, separate currency which would pass at par in all the other districts as well as being legal tender everywhere. The Federal Reserve Act established not one, but twelve central banks for the United States, each independent, and each the final authority and recourse in monetary and credit matters within its own district.
Through the process of rediscounting, twelve separate currencies would be provided that would expand and contract to meet the needs of industry, commerce, and agriculture in a specific region. This would avoid the twin pitfalls of inflation and deflation, and maintain parity among the twelve districts as well as the national currency by pegging it to the official price of gold at a little over $20 per ounce. The currency would be backed with the present value of existing and future marketable goods and services in the economy, and supplemented with gold and silver coin and certificates.
One very important provision of the Federal Reserve Act of 1913, and one technically still in full force today, was the absolute prohibition against any Federal Reserve Bank purchasing primary government securities, that is, government bonds and notes issued by the United States Treasury and sold directly to the ultimate holder. This was to prevent the government from "monetizing" its deficits by printing money through the central bank.
In order to regulate commercial bank reserve requirements and retire the old National Bank Notes, however, the Federal Reserve had to be permitted to buy and sell secondary government securities that served as the backing for the National Bank Notes. Government securities were the only asset, aside from cash, that a commercial bank could hold as reserves to back their note issues. "Secondary" securities are debt or equity instruments that have already been sold once, and are now up for sale by a holder in due course who is not the issuer.
The new Federal Reserve Notes were emitted through the rediscount mechanism in 1914 and 1915 in denominations of 5, 10, 20, 50 and 100 dollars. These were the old "horse blanket" notes, used until the reforms of 1928 decreased the size of the paper currency. The designs would be familiar to anyone today. The usual currency for ordinary people was still gold and silver coin, particularly since the lowest denomination Federal Reserve Note, five dollars, represented almost a week's pay for an average worker. Coin was supplemented with gold and silver certificates and other notes issued by the Treasury, but the most important currency for commerce was now the Federal Reserve Note. The Half Eagle, the $5 gold piece, continued to be the large denomination workhorse of the system, with the Half Dollar the primary currency for most silver transactions.
The Federal Reserve also began purchasing the outstanding government debt held by the National Banks on the open market. This was to replace the National Bank Notes backed by government debt held by the National Banks, with Federal Reserve Bank Notes backed by government debt held by the Federal Reserve. In appearance the Federal Reserve Bank Notes were indistinguishable from ordinary Federal Reserve Notes. The only difference was that Federal Reserve Notes were backed by qualified short-term loan paper representing the present value of existing and future marketable goods and services, while the Federal Reserve Bank Notes were backed by government debt taken over from the National Banks.
The idea was first to replace all National Bank Notes in circulation with Federal Reserve Bank Notes. The process was relatively straightforward. The Federal Reserve System would take over the government debt held by the National Banks to back their note issues, retiring the National Bank Notes and substituting Federal Reserve Bank Notes. The Federal Reserve would then phase out government debt as the backing for the currency by replacing government debt with rediscounted qualified loan paper representing private sector industrial, commercial, and agricultural assets.
The Hijacking of the Federal Reserve
All of the controversy surrounding the establishment of the Federal Reserve System, however, was to no avail. The carefully worked out design of the system lasted only a few years, never really getting the chance to operate as intended. The common currency of the twelve Federal Reserve districts was transformed into a de facto national currency. What happened was World War I.
The Federal Reserve was established in 1913, a short time before Archduke Francis Ferdinand, the heir-apparent to the throne of Austria-Hungary, was assassinated in Sarajevo. When the United States entered the war, the government was faced with the problem of financing the war effort. Taxes are, of course, perennially unpopular, and no professional politician will levy them except as a last resort. The only other recourse was debt financing. This created problems.
After saturating the market with the first Liberty Loan drive, liquidity in the system was used up. The only way to raise more money outside of raising taxes was for commercial banks and brokers to sell their Liberty Bonds to the Federal Reserve. Misusing the program that had been developed to retire the National Bank Notes (although with the most patriotic of motives), the Federal Reserve then created the money to purchase the bonds from these secondary holders in due course. The secondary holders in due course then turned around and bought more Liberty Bonds from the government.
The result was that a way had been found to monetize government deficits without violating the letter of the law. As Harold Moulton noted, however, "Responsibility for the large use of bonds as a means of financing the war cannot . . . be placed primarily at the doors of the Federal Reserve system, the Treasury rather than the Federal Reserve officials being responsible for the methods of war finance." (Harold G. Moulton, Financial Organization and the Economic System. New York: McGraw-Hill Book Company, Inc., 1938, 392.)
With the New Deal and the effective loss of autonomy of the regional Federal Reserves, the concentration of power in the Board of Governors, the discontinuance of rediscounting for the private sector and the formal institution of the Open Market Committee, the federal government assumed near-total control of the financial system. (Ibid., 407-417.) The formal establishment of the Open Market Committee in the 1930s, in fact, institutionalized the operation of the Federal Reserve as a backup for government spending — the lender of first resort for the State, rather than of last resort for the private sector. The United States common currency experiment, while an exemplary model of the way a central banking system can be designed for a currency union without any one region, state, or nation dominating the situation, had been forced into objective failure by politicians intent on misusing the central bank's control over money and credit. As Moulton commented,
As a result, control over money and credit is more concentrated today than it was in 1907, and the United States currency union effectively no longer exists. Even lip service is no longer paid to the ideal established in 1913: the new Federal Reserve Notes "hide" the specific bank of issue in a very obscure manner. They appear to be liabilities of the system as a whole, not of a specific region. The notes are clearly not the product of a currency union, but a national currency. Instead of regional "elastic" currencies to meet the private sector development and liquidity needs of different regions of the country, the United States has a single currency managed for political ends of the central government.
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The Panic of 1893
Not too many people today even know about the Panic of 1893. It was, nevertheless, a turning point in American financial history. As Harold Moulton explained, "The Panic of 1893 precipitated a genuine agitation for the improvement of our banking system, but before any legislation on the subject could be passed, there occurred the political campaign of 1896, the issue of which was once more the silver question." (Harold G. Moulton, Financial Organization of the Economic System. New York: McGraw-Hill Book Company, 1938, 343.)
The "silver question" refers to the late 19th century Populist demand for "free silver." Free silver was the push to inflate the currency by minting as much cheap silver as necessary to bring the U.S. currency back to its wartime value. During the Civil War, Treasury Secretary Salmon P. Chase's policy of financing the Union war effort with debt had led to massive inflation. Naturally enough, it also caused the virtual disappearance of gold, silver, and even copper coinage from circulation. To restore the credit of the United States, the National Bank system, established in 1863 (amended in 1864), and the Coinage Act of 1873 were intended to deflate the currency and restore the pre-war parity.
Efforts to restore the value of the U.S. currency and secure the national credit were, all things considered, successful — but at a high cost. During the war, farmers had borrowed "cheap," that is, inflated currency. This now had to be paid back with "dear" or deflated currency. With the decline in prices due to both the tremendous increase in production and the deflation of the currency, a farmer had to produce (for example) 100 bushels of wheat at 50 cents instead of 50 bushels at $1.00.
The figures are grossly oversimplified, of course. It does, however, demonstrate the dilemma in which the farmers found themselves. In the burst of Populist sympathy that resulted from the Panic of 1893, the Coinage Act of 1873 came to be seen as a criminal conspiracy. This was because the effect of the Act was to destroy the ability of the farmers to repay their debts on the same terms on which the debts had been incurred. It was then — twenty years after the passage of the Act — that it entered agrarian and conspiracy lore and legend as the "Crime of '73." (Walter T. K. Nugent, The Money Question During Reconstruction. New York: W. W. Norton & Company, Inc., 1967, 65.)
According to Moulton, however, the real question was not to what degree the government should be manipulating the currency, but whether it should be manipulating it at all. Both camps, the Republicans and conservative Democrats who pushed for a sound currency by linking it to gold and maintaining the value by constricting the money supply, and the Populists, who demanded inflation by linking the currency to a bimetallic standard of both gold and cheap silver, were locked into the mindset of the British Currency School. That is, they believed that "money" consists of gold and silver coin, and paper certificates issued by the State. Demand deposits — checking accounts — and certain time deposits were added later. This gave us the standard M1 and M2 definitions of money currently used by the Federal Reserve.
Completely ignored in all of this was the fact that money consists of far more than mere coin, currency, demand deposits, and small value savings accounts. Money, in fact, is anything that can be used in settlement of a debt. Currency, whatever form it takes, is merely a symbol, a derivative of money, just as money itself is a symbol, a derivative of the present value of existing and future marketable goods and services in the economy.
Banks can create sound money at need, without inflation or deflation, as long as the new money is directly backed by the present value of existing and future marketable goods and services in which the issuer has a private property stake. Consistent with Say's Law of Markets, there is never any excuse, in an economy characterized by widespread direct ownership of the means of production and with a well-regulated and functional banking and financial system, for there to be either an inadequate or excess supply of money.
The Slavery of Savings
Unfortunately, trapped in the paradigm dictated by the British Currency School (and which subsequently shackled Keynesian economics), the monetary commission appointed in 1897 looked only at currency, and not at the banking system. The subsequent bill that resulted from the investigations — the Currency Act of 1900 — did not address the main issue. As Moulton remarked, "In the main, . . . this act was concerned primarily with the money question. On the banking side all that was attempted was a stimulation of the growth of national, as compared with state, banks by decreasing the capital requirements and by permitting the issue of notes up to the full value of the government bonds held as security." (Ibid.)
The most common complaint during the depression that followed the Panic of 1893 was that there wasn't enough money in circulation to keep the economy running. As one authority described the situation,
A currency famine followed. The hoarding of money drove silver and paper as well as gold to a premium at New York on and after July 30, 1893. Money brokers advertised offers to purchase currency payable by certified check. Bank depositors in need of money bought currency from the brokers at a higher premium. The currency famine continued until early September, with premiums varying from day to day. (Gerald T. White, The United States and the Problem of Recovery after 1893. University, Alabama: The University of Alabama Press, 1982, 3.)All of this was, of course, unnecessary. Had merchants and manufacturers been able to draw bills and discount them at commercial banks, there would have been no problem. Unfortunately, the amount of currency that the National Banks could issue was limited not by the amount of qualified paper presented for discounting, but by the banks' reserve requirement and the amount of government bonds they held as backing for the currency.
There was no central bank to provide accommodation either for the commercial banks or for the private sector as a whole. When an individual bank lacked the capacity to discount bills of exchange, there was nowhere to go, no "lender of last resort" for industry, commerce, and agriculture. The best that could be done within the framework dictated by the Currency School was to increase the amount of government debt that could be used to back the currency. This helped create the illusion that inflation is the remedy for an economic downturn.
The Panic of 1907
No sooner had the country recovered from the depression that followed the Panic of 1893 than the stage was set for the next financial shakeup. As Moulton pointed out, the basic problem remained unsolved: the banking system was grossly inadequate to serve the needs of an advanced economy. To make matters worse, virtually all financial power had become concentrated in the hands of a very few people. Effectively, the financial center of the country was New York City, just as it is today. Where people had focused on preventing the concentration of financial power in government hands by preventing the establishment of a central bank, power had concentrated in private hands. This set the stage for a series of events that culminated in the "Panic of 1907."
Financier J. P. Morgan certainly did not intend to drive the United States and most of Europe into a major depression. All he wanted to do was carry out business as usual, and squash a competitor like a bug in the grand tradition of laissez faire capitalism. It was unfortunate for Morgan and the rest of the world that his business-as-usual triggered events that rapidly spiraled out of control.
In 1907, the president of the Knickerbocker Bank and Trust, the third largest bank in New York, got his bank into a great deal of trouble by speculating in copper shares. At that time, regulations permitted commercial banks to own and deal in securities other than their own equity shares or government bonds. It wasn't until after 1929 that commercial banking and investment banking were separated. This was reversed with the repeal of Glass-Steagall, leading directly to the current economic malaise.
Because of the attempt to manipulate copper, the Knickerbocker was in desperate need of cash to prevent a run on the bank. A run would almost certainly result in the failure of the institution, and the loss of everything by creditors and depositors. The president of the Knickerbocker applied to J. Pierpont Morgan for emergency funds to keep his bank open. Seizing the opportunity to rid himself of a competitor, Morgan refused. The resulting run on the Knickerbocker spread like wildfire, causing a financial panic throughout New York, then the nation and, finally, Europe.
Congress Acts
A Congressional investigating committee determined that Morgan's stranglehold on the control of money and credit was the single most important factor in causing the Panic of 1907. For this and other reasons, not the least of which was the need for such an institution, Congress decided to make a fourth attempt to establish a central bank for the United States. There were, however, two serious problems that had to be addressed before any successful attempt could be made.
The first of these was the paradoxical concept of breaking up a private monopoly over the control of money and credit by establishing a government monopoly over the same thing. If a standard central banking system were established, the only change would be concentration of power in governmental, rather than private hands.
The other problem was the strong suspicion and distrust in America of banks of any kind, but especially central banks. This distrust had already brought down three attempts to create a central bank for the United States — the Bank of North America, the Bank of the United States, and the Second Bank of the United States. The word "bank" itself would probably be enough to guarantee failure. (Interestingly, the Bank of North America, after a convoluted series of mergers, is still in existence today, owned by Wells Fargo & Co., and doing business as Wachovia.)
The unique solution to these problems was, in retrospect, the only one possible under the circumstances. Instead of establishing a "Central Bank of the United States," Congress installed a "Federal Reserve System," a description rather than a name. In an astounding move, the national currency consisting of gold coin, subsidiary silver, bronze and copper-nickel tokens, gold and silver certificates, and treasury notes of various types was put officially into a secondary or supplementary role in the economy.
This had, of course, always been the case, as Henry Thornton demonstrated in 1802 in his book, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. Nor did the United States lag behind. According to Congressman George Tucker, the amount of gold and silver coin that circulated in the United States during the 1830s — inadequate by any standard — was dwarfed by the number and amount of bills of exchange that circulated, constituting possibly as much as 95% of the money supply. The unusual thing about the Federal Reserve Act was that, in sharp contrast to the British Bank Charter Act of 1844 and the United States National Bank Act of 1864, it acknowledged the reality that "money" consists of more than gold, silver, and State-authorized certificates.
The New Currency
Paradoxically, the primary currency of the United States was not to be a national currency at all, but the product of a currency union embracing twelve independent districts. Each would have its own, separate currency which would pass at par in all the other districts as well as being legal tender everywhere. The Federal Reserve Act established not one, but twelve central banks for the United States, each independent, and each the final authority and recourse in monetary and credit matters within its own district.
Through the process of rediscounting, twelve separate currencies would be provided that would expand and contract to meet the needs of industry, commerce, and agriculture in a specific region. This would avoid the twin pitfalls of inflation and deflation, and maintain parity among the twelve districts as well as the national currency by pegging it to the official price of gold at a little over $20 per ounce. The currency would be backed with the present value of existing and future marketable goods and services in the economy, and supplemented with gold and silver coin and certificates.
One very important provision of the Federal Reserve Act of 1913, and one technically still in full force today, was the absolute prohibition against any Federal Reserve Bank purchasing primary government securities, that is, government bonds and notes issued by the United States Treasury and sold directly to the ultimate holder. This was to prevent the government from "monetizing" its deficits by printing money through the central bank.
In order to regulate commercial bank reserve requirements and retire the old National Bank Notes, however, the Federal Reserve had to be permitted to buy and sell secondary government securities that served as the backing for the National Bank Notes. Government securities were the only asset, aside from cash, that a commercial bank could hold as reserves to back their note issues. "Secondary" securities are debt or equity instruments that have already been sold once, and are now up for sale by a holder in due course who is not the issuer.
The new Federal Reserve Notes were emitted through the rediscount mechanism in 1914 and 1915 in denominations of 5, 10, 20, 50 and 100 dollars. These were the old "horse blanket" notes, used until the reforms of 1928 decreased the size of the paper currency. The designs would be familiar to anyone today. The usual currency for ordinary people was still gold and silver coin, particularly since the lowest denomination Federal Reserve Note, five dollars, represented almost a week's pay for an average worker. Coin was supplemented with gold and silver certificates and other notes issued by the Treasury, but the most important currency for commerce was now the Federal Reserve Note. The Half Eagle, the $5 gold piece, continued to be the large denomination workhorse of the system, with the Half Dollar the primary currency for most silver transactions.
The Federal Reserve also began purchasing the outstanding government debt held by the National Banks on the open market. This was to replace the National Bank Notes backed by government debt held by the National Banks, with Federal Reserve Bank Notes backed by government debt held by the Federal Reserve. In appearance the Federal Reserve Bank Notes were indistinguishable from ordinary Federal Reserve Notes. The only difference was that Federal Reserve Notes were backed by qualified short-term loan paper representing the present value of existing and future marketable goods and services, while the Federal Reserve Bank Notes were backed by government debt taken over from the National Banks.
The idea was first to replace all National Bank Notes in circulation with Federal Reserve Bank Notes. The process was relatively straightforward. The Federal Reserve System would take over the government debt held by the National Banks to back their note issues, retiring the National Bank Notes and substituting Federal Reserve Bank Notes. The Federal Reserve would then phase out government debt as the backing for the currency by replacing government debt with rediscounted qualified loan paper representing private sector industrial, commercial, and agricultural assets.
The Hijacking of the Federal Reserve
All of the controversy surrounding the establishment of the Federal Reserve System, however, was to no avail. The carefully worked out design of the system lasted only a few years, never really getting the chance to operate as intended. The common currency of the twelve Federal Reserve districts was transformed into a de facto national currency. What happened was World War I.
The Federal Reserve was established in 1913, a short time before Archduke Francis Ferdinand, the heir-apparent to the throne of Austria-Hungary, was assassinated in Sarajevo. When the United States entered the war, the government was faced with the problem of financing the war effort. Taxes are, of course, perennially unpopular, and no professional politician will levy them except as a last resort. The only other recourse was debt financing. This created problems.
After saturating the market with the first Liberty Loan drive, liquidity in the system was used up. The only way to raise more money outside of raising taxes was for commercial banks and brokers to sell their Liberty Bonds to the Federal Reserve. Misusing the program that had been developed to retire the National Bank Notes (although with the most patriotic of motives), the Federal Reserve then created the money to purchase the bonds from these secondary holders in due course. The secondary holders in due course then turned around and bought more Liberty Bonds from the government.
The result was that a way had been found to monetize government deficits without violating the letter of the law. As Harold Moulton noted, however, "Responsibility for the large use of bonds as a means of financing the war cannot . . . be placed primarily at the doors of the Federal Reserve system, the Treasury rather than the Federal Reserve officials being responsible for the methods of war finance." (Harold G. Moulton, Financial Organization and the Economic System. New York: McGraw-Hill Book Company, Inc., 1938, 392.)
With the New Deal and the effective loss of autonomy of the regional Federal Reserves, the concentration of power in the Board of Governors, the discontinuance of rediscounting for the private sector and the formal institution of the Open Market Committee, the federal government assumed near-total control of the financial system. (Ibid., 407-417.) The formal establishment of the Open Market Committee in the 1930s, in fact, institutionalized the operation of the Federal Reserve as a backup for government spending — the lender of first resort for the State, rather than of last resort for the private sector. The United States common currency experiment, while an exemplary model of the way a central banking system can be designed for a currency union without any one region, state, or nation dominating the situation, had been forced into objective failure by politicians intent on misusing the central bank's control over money and credit. As Moulton commented,
In concluding this discussion of the Federal Reserve system attention should be called to a point of view embodied in the new legislation, which marks a profound departure from the conception that had prevailed during the long period from the Civil War to 1933. As a result of the experience of the early nineteenth century in connection with the First and Second national banks and in the light of banking history in other countries, the opinion had crystallized that an efficient monetary and banking system, responsive to the requirements of business, necessitated detachment from political control. This conviction was responsible for the Independent Treasury system; for the segregation of the monetary from the fiscal functions of the Government in the Currency Act of 1900; for vesting in the National Banking system the power to issue notes; and for the democratic organization of the Federal Reserve system and the independent political position accorded the members of the governing board. While the Secretary of the Treasury was ex officio a member of the Board, the view prevailed that the Treasury should not be permitted to dominate Reserve policies in the interests of government fiscal requirements. (Harold G. Moulton, Financial Organization of the Economic System. New York: McGraw-Hill Book Company, 1938, 416-417.)It is no wonder Moulton declared that, "This shift is a reflection of the philosophy that not only is it a proper function of the Government to assume control over the entire credit system, but that only the Government can be depended upon to exercise such control in the interest of public welfare as a whole." (Ibid., 417.)
As a result, control over money and credit is more concentrated today than it was in 1907, and the United States currency union effectively no longer exists. Even lip service is no longer paid to the ideal established in 1913: the new Federal Reserve Notes "hide" the specific bank of issue in a very obscure manner. They appear to be liabilities of the system as a whole, not of a specific region. The notes are clearly not the product of a currency union, but a national currency. Instead of regional "elastic" currencies to meet the private sector development and liquidity needs of different regions of the country, the United States has a single currency managed for political ends of the central government.
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Tuesday, July 13, 2010
Common Cause, Part XV: The United States Currency Union
As the world's most common reserve currency, the United States Dollar currently functions as a quasi-common currency of the world. Before World War I, the British pound held this place. Before the middle of the nineteenth century, the "Piece of Eight" had the number one spot. The "fall" of these currencies was not caused by the pressures of maintaining a world position, nor was the displacement of the Spanish dollar or the British sovereign the cause of their subsequent or simultaneous devaluation. Their respective declines were the result of factors intrinsic to attempting to misuse currencies as something other than a sound and stable medium of exchange and store of value.
These are attempts familiar to every collector of world coins. Any collector can chronicle the decline of a specific currency as the government responsible for maintaining and regulating its value misused its powers to meet short-term political goals. These factors are evident even in the numismatic history of the United States.
States' Rights
One of the most jealously protected rights of the United States under the Articles of Confederation was that of regulating and emitting coin and currency. This was a particular bone of contention during the early years of the United States as a result of the Continental Currency debacle. The states were, for good reason, reluctant to give up their right to regulate their domestic currency to a central government. Who, after all, knew what sort of irresponsible actions a central government might take?
Often grouped under the heading, "Colonial Coppers," state issues should appropriately be treated the same as, e.g., their German analog before Bismarck forced unification on his terms. That is, they are independent currencies by states joined in a very loose political union. As one authority put it,
Official Issues
New Hampshire was first to consider coinage after independence, but little came of the project. Only a very rare "pattern" copper penny was produced, bearing a pine tree on one side and a harp on the other. New York, possibly the most commercially oriented of the former colonies, never minted any coins . . . officially. The Empire State relied on existing coinage and the product of private mints operating without official sanction. There is, of course, the famed 1787 "Brasher Doubloon," or $16.00 gold piece, made privately by a jeweler Ephraim Brasher — pronounced "BRAYzher," as the coin guides hasten to add. The "Nova Eborac" (slightly distorted Latin for "New York") coppers were manufactured by Thomas Machin in a factory near Newburgh, which also produced massive quantities of counterfeit British halfpence.
Only Massachusetts, Connecticut, New Jersey and Vermont issued coins on a regular basis. Most state currency was the detested paper. Massachusetts had both unofficial and authorized issues. All of the unofficial coppers are believed to be unique, while the authorized issues are — for state issues — reasonably priced and relatively easy to obtain.
Issues by the state of Connecticut may be the most common coins struck between the adoption of the Articles of Confederation and the ratification of the Constitution. Possibly to pass easier in circulation, there is a vague resemblance to the British regal halfpence — and, of course, to the ubiquitous counterfeits.
New Jersey — "Nova Caesarea" — issued coins in some quantity, making it easier for modern students and collectors to study an undeservedly obscure period in American financial history. These are nowhere near as plentiful as the issues of Connecticut, but they are still relatively easy to obtain. All have the same basic design, a horse's head over a plow on the obverse (the "front" of the coin), and a shield on the reverse.
Vermont coppers fall into two general categories: those that look vaguely like imitation British halfpence, and those that are clearly new types. The new types have a skyline of hills and a sunrise over a plow, and an "all-seeing eye" with rays and stars on the reverse.
The first official coins issued by the central government under the Articles of Confederation were the "Fugio Cents," so-called from the motto — suggested by Dr. Benjamin Franklin — "Fugio, Mind Your Business," i.e., "I (Time) Fly, (Therefore) Mind Your Business." As described in the enabling legislation of July 6, 1787,
Just as in England, there were a tremendous number of private tokens manufactured in various places and put into service. As in many periods of history, a dearth of official coinage forced private merchants and individuals to try and fill the need. The token issues of Ireland, Scotland and England are often a more fruitful area of study than official issues if we're trying to understand what was really going on at the time, especially economically.
Similarly, during the 1830s in the United States, as well as the Civil War and the Great Depression a great number of private issues were emitted to try and meet the need for circulating media when the government failed to supply sufficient coinage. While this is a fascinating area of study, it is peripheral to the concept of a common currency, which is our primary concern. Suffice it to say that some of the most interesting post-colonial coinages fall into the category of privately issued coins or "tokens." This is an area often overlooked, falling into the cracks between the colonial period and the ratification of the Constitution.
Nevertheless, the variety of issues offers endless opportunities, although we will not get into it in this series of postings. Many of these were manufactured in England or Ireland. A quick survey reveals the "North American Token," the "Bar 'Copper'," the "Auctoris Plebis Token," the "Mott Token," the "Standish Barry Threepence," the "Albany Church Token," the "Kentucky Token," the "Franklin Press," the "Talbot, Allum & Lee Cents," the "Myddelton Token," the "Copper Company of Upper Canada," the "Castorland Medal," the "New York Theatre Token," the "New Spain" token (struck for Texas, at the time under Spain), the "North West Company Token," and an incredible number of tokens celebrating George Washington.
The difficulty and confusion caused by having thirteen different currencies greatly inhibited economic development in the new country. Clearly something had to be done. When the new Constitution of 1789 was drafted, therefore, the central government was delegated the power of setting standards and regulating the value of a common currency. Individual states were deprived of the mint right. Whether or not private coinage was legal under the Constitution was a point continuously debated until local coin and currency were made explicitly illegal under the National Bank Act of 1863 and subsequent coinage act of 1864.
While the new Federal government took control over the coinage, paper money was another matter. Because of the Continental Currency disaster, the central government avoided paper money altogether. A number of states, however, made a few cautionary issues. Alabama, Florida (as a territory), Minnesota, Missouri and North Carolina issued paper notes to the Federal standard prior to the American Civil War. Texas also issued dollar-denominated paper currency until the 1840s, but as an independent republic. State chartered banks of issue, many of them financially shaky, issued large quantities of notes. These were frequently referred to as "shinplasters," indicating their presumed worthlessness, a characteristic by that time considered endemic to all paper money. Combined with a strong suspicion of central authority and concentrated power of any kind, the lack of sound paper money and credit prevented an adequate and properly regulated US currency.
A National Bank
As early as 1779 Alexander Hamilton had begun pushing for the establishment of a national bank on the model of the Bank of England — at least as the Bank of England operated prior to the suspension of convertibility in 1797 and Sir Robert Peel's Bank Charter Act of 1844. A national bank was necessary to ensure that all paper currency passed at par, regardless who issued it, and to have a lender of last resort for the private sector when ordinary commercial banks ran short of reserves and needed to rediscount their loans. Hamilton wrote to Robert Morris and proposed the formation of such an institution. (Edward S. Kaplan, The Bank of the United States and the American Economy. Westport, Connecticut: Greenwood Press, 1999, 7.) Hamilton never intended that any national bank should in any way finance government borrowing. He had observed first hand the problems associated with financing the Revolution with debt, and wanted none of it.
Morris organized the Bank of North America in 1781, and received the approval of Congress to serve as a national bank. Until 1784 the bank served to help stabilize the finances of the United States — but unfortunately this was largely by extending credit to the new government. Morris ensured that this was never to excess, but it established a precedent that subsequent generations would take for granted. Congress did not renew the charter as a national bank, but the Commonwealth of Pennsylvania issued the institution a charter as a state bank, and the bank continues to this day, having merged with the East Pennsylvania Banking and Trust Company in 1929. (Kaplan, op. cit., 13.)
The First Bank of the United States, organized by Alexander Hamilton in 1791, a year before the inauguration of the Federal mint in Philadelphia, was doomed from the start. Intended primarily as a depository for Federal funds and a means of facilitating public transactions by discounting and rediscounting bills of exchange, as well as to organize the financial system of the United States (of which the establishment of the mint in 1792 was a first step), the bank met only with distrust and suspicion. It was, after all, a national bank, and that meant national (federal) control and centralized power. The charter was not renewed when it came up in 1811.
The Bank of the United States represented centralized power over a particularly sensitive area. Control over money and credit could, and often does, determine who becomes prosperous, and who stays poor. Any central bank is instituted to give control over money and credit to someone. The only question, depending on how the institution is structured, is to whom that power is given.
Andrew Jackson's War on the Bank
The Second Bank of the United States, established in 1816, fared no better. There was a desperate need for a central bank or similar institution, if only to regularize government transactions and the payment system, to say nothing of providing adequate commercial credit and serving as a lender of last resort for the development of the new western territories. Still, suspicion of centralized financial power again brought down the bank. Almost the only popular thing Andrew Jackson accomplished as president was to shut down the Bank when the charter came up for renewal in 1836. This was, of course, after removing Federal funds and re-depositing them in other institutions run by his friends and supporters.
A nation-wide depression brought about by inadequate circulating media and the constriction of trade, "Hard Times," resulted from Jackson's emasculation and subsequent shut down of the bank. His subsequent issuance of the notorious "Specie Circular" that prohibited the federal government from accepting payment of taxes, duties, and land sales in any form other than gold or silver coin provided the trigger.
This resulted in the famous "Hard Times Tokens." These were privately issued copper cents and half cents (or reasonable facsimiles thereof) pressed into service to supply the demand for small change. Since the 1830s were possibly one of the most politically active eras in the history of the United States, most tokens carry a political theme, usually anti-Jackson. A representative sampling is available to any collector, and a United States coin collection is not considered complete unless it contains at least a few examples.
While Old Hickory might have thought he was solving the problem of the national bank by abolishing it, the battle continued to rage. Economists, financiers and statesmen knew that something was wrong, but an acceptable solution seemed out of reach. Dozens, if not hundreds, of books and pamphlets, to say nothing of uncounted journal and newspaper articles, poured from the presses from the 1830s through the 1850s. Henry C. Carey, the first American economist to command an international reputation, caused a great deal of consternation and acrimonious debate with the publication of his 1838 book, The Credit System in France, Great Britain and the United States, in which he advocated a laissez faire "free banking" system on the Scottish model, but with no national or central bank, and complete freedom from government regulation — conveniently forgetting that some government regulation is necessary if only to set common standards.
The public, meanwhile, limped along with inadequate Federal coinage, paper currency from state-chartered banks of issue, and foreign coins. The output of the mint during the 1830s was so small that some authorities estimate that there was less than one United States coin of any denomination in circulation per capita. Industrial and infrastructural development in the United States was financed by private bank credit, backed by foreign investment, mostly from Great Britain, instead of by a domestic central bank. In essence, the United States was using the private investors of Great Britain as a central bank.
Because the few sound banks largely controlled credit, the industrial and infrastructural wealth of western development was concentrated in very few hands. Only Abraham Lincoln's 1862 Homestead Act addressed the problem of concentrated ownership, and then only in agriculture. Since the Homestead Act was based on existing assets, it did not require a central bank to provide a uniform and sound credit currency.
The National Bank Act of 1864
The American Civil War amply demonstrated the inadequacy of the financial system, both North and South. There was a complete breakdown of the currency in the South, even before the outcome of the struggle became obvious. The North suffered heavy inflation, shortages, and the disappearance of coinage in compliance with Gresham's Law, the economic principle that "bad money drives out good." Both sides financed the war with issues of paper backed only by government debt, with the dearth of small change being made up by private token issues, postage stamps, and fractional currency.
Disaster was only averted in the North because its industrial base and foreign trade were largely untouched. Confederate and state currency in the South was worthless before the end of the war. There was no industrial base to back up the flood of issues. In addition, the North shipped large quantities of counterfeits into the Confederacy to break its back economically as well as militarily. A source of particular outrage in the South was the fact that, late in the war, Northern counterfeits were accepted when authentic Confederate currency was refused. The counterfeits were better executed and printed on higher quality paper than the South had at its disposal.
Treasury Secretary Salmon P. Chase pushed through a National Bank Act in 1863, modeled on Sir Robert Peel's Bank Charter Act of 1844. This turned out to be badly flawed, and a new act was passed in 1864. The real problem, however, was not addressed. Paper currency was mandated as backed by government debt, not the present value of existing inventories or of industrial, commercial, or agricultural assets.
"The Crime of '73"
The monetary reform of 1873, while attempting to satisfy all concerns and put national finances on a sound basis, pleased no one. Twenty years after its passage, during the Great Depression that followed the Panic of 1893, populist legend grew up that the "Crime of '73" was the result of payoffs from "International Bankers" in London. For their part, financial interests in the East were certain that Congress had surrendered to Populist concerns. They accused the politicians of selling out the credit of the United States to satisfy the demands of agrarian levelers and anarchists.
One good result of the reform of 1873 was that the United States had an adequate supply of sound circulating media for the first time in its history. To prevent the practice of "Wildcat Banking," all banks of issue had, since 1864, been required to meet stringent reserve requirements, and all had to be properly chartered by the federal government. True, the reserves had to be in the form of federal securities — debt — but as long as the American economy remained sound, there couldn't be too many problems . . . could there? In any event, the mints finally managed to meet the demand for coin, and sufficient credit was available domestically to finance internal development.
The weights of American subsidiary silver were changed to conform to the metric standards that had been effective in France before the Latin Monetary Union of 1865. The arrows that had been placed at the date on the Seated Liberty coins in 1854 to indicate a reduced weight, now reappeared in 1873 and 1874 to indicate increased weight. The Dime, for example, was now 2-1/2 grams of .900 fine silver. This was the same as the pre-1865 French Demi (Half) Franc.
The 20 Cent piece, introduced in 1875, matched the specifications of the pre-1865 Franc. Only the Dollar, the official legal tender coin, retained its original weight under the coinage act of April 2, 1792. This was 412-1/2 grains of silver (.7736 of a Troy ounce), although the original fineness had been increased from .8924 to .900. The US. Dollar was thus heavier than the Latin standard of .7324 ounces for the primary legal tender coin of the Union, although presumably equal in value.
Conforming U.S. coinage to metric weights was the first move in an abortive attempt to conform the United States to an international standard. Eventually the weight of the Dollar would have been reduced to match the standard legal tender coin of the Latin Monetary Union. The fineness of the subsidiary coinage (Dime through Half Dollar; the coinage act of 1873 abolished the silver Trime — three cent piece — and Half Dime) would have been reduced to .835 in order to reduce 20¢ US to the 19.3¢ of the Franc, Lira, Peseta, and so on.
A few years later, in 1879, patterns were developed for an international-standard 4 Dollar gold piece, the Stella. This coin would have fit into the bimetallic standard of the Latin Union. In 1873, however, the Latin Monetary Union effectively abandoned the bimetallic standard. This was a result of the French reparations due to Prussia and the increasing flood of silver on world markets.
Complications arising from having a domestic arrangement of an effective gold standard within an official bimetallic standard while attempting to reconcile the system with an international currency changing from a bimetallic standard to the gold standard proved too much to handle. When combined with a policy of avoiding foreign entanglements — and what could be more entangling than an international currency union — any effective attempt to have the United States meet international currency standards had to be abandoned. The domestic currency, however, was finally put on a sound basis.
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These are attempts familiar to every collector of world coins. Any collector can chronicle the decline of a specific currency as the government responsible for maintaining and regulating its value misused its powers to meet short-term political goals. These factors are evident even in the numismatic history of the United States.
States' Rights
One of the most jealously protected rights of the United States under the Articles of Confederation was that of regulating and emitting coin and currency. This was a particular bone of contention during the early years of the United States as a result of the Continental Currency debacle. The states were, for good reason, reluctant to give up their right to regulate their domestic currency to a central government. Who, after all, knew what sort of irresponsible actions a central government might take?
Often grouped under the heading, "Colonial Coppers," state issues should appropriately be treated the same as, e.g., their German analog before Bismarck forced unification on his terms. That is, they are independent currencies by states joined in a very loose political union. As one authority put it,
It will be seen that the currency of the early colonies was by no means uniform, and each colony acted on its own in the use of whatever currency it could secure or manufacture. At times exchange tables were used, and a traveler from Massachusetts to Carolina found it necessary to exchange his money on arrival at destination, as a traveler does now with his American money when visiting foreign countries. The first guide book published in New York, in the late seventeenth century, contains an elaborate and interesting exchange table of money from the different colonies. These varying exchange values were true also of foreign money. Hence, a pound sterling was worth six Spanish dollars in New York and North Carolina, seven and one half in the middle colonies (except New York), and four and one quarter in South Carolina and Georgia. (Joseph Coffin, The Complete Book of Coin Collecting. New York: Coward, McCann & Geoghegan, Inc., 1979, 40-41.)A number of "speculative issues, tokens, and patterns" were prepared beginning almost immediately after independence. The "Continental Dollar," believed to have been struck in Philadelphia, is dated 1776. Tokens called "Nova Constellatio Coppers" seem to have been a quasi-private venture by Gouverneur Morris, who was Assistant Financier of the Confederation. These appear to have been manufactured in Birmingham, UK, and were struck in fairly large quantities. Some unusual "Immune Columbia" coins exist that may have been manufactured in Birmingham and intended for New York, but nothing is known of their origin for certain. There are also some "Confederatio Coppers" from (maybe) the same factory and (possibly) intended as patterns for a national currency.
Official Issues
New Hampshire was first to consider coinage after independence, but little came of the project. Only a very rare "pattern" copper penny was produced, bearing a pine tree on one side and a harp on the other. New York, possibly the most commercially oriented of the former colonies, never minted any coins . . . officially. The Empire State relied on existing coinage and the product of private mints operating without official sanction. There is, of course, the famed 1787 "Brasher Doubloon," or $16.00 gold piece, made privately by a jeweler Ephraim Brasher — pronounced "BRAYzher," as the coin guides hasten to add. The "Nova Eborac" (slightly distorted Latin for "New York") coppers were manufactured by Thomas Machin in a factory near Newburgh, which also produced massive quantities of counterfeit British halfpence.
Only Massachusetts, Connecticut, New Jersey and Vermont issued coins on a regular basis. Most state currency was the detested paper. Massachusetts had both unofficial and authorized issues. All of the unofficial coppers are believed to be unique, while the authorized issues are — for state issues — reasonably priced and relatively easy to obtain.
Issues by the state of Connecticut may be the most common coins struck between the adoption of the Articles of Confederation and the ratification of the Constitution. Possibly to pass easier in circulation, there is a vague resemblance to the British regal halfpence — and, of course, to the ubiquitous counterfeits.
New Jersey — "Nova Caesarea" — issued coins in some quantity, making it easier for modern students and collectors to study an undeservedly obscure period in American financial history. These are nowhere near as plentiful as the issues of Connecticut, but they are still relatively easy to obtain. All have the same basic design, a horse's head over a plow on the obverse (the "front" of the coin), and a shield on the reverse.
Vermont coppers fall into two general categories: those that look vaguely like imitation British halfpence, and those that are clearly new types. The new types have a skyline of hills and a sunrise over a plow, and an "all-seeing eye" with rays and stars on the reverse.
The first official coins issued by the central government under the Articles of Confederation were the "Fugio Cents," so-called from the motto — suggested by Dr. Benjamin Franklin — "Fugio, Mind Your Business," i.e., "I (Time) Fly, (Therefore) Mind Your Business." As described in the enabling legislation of July 6, 1787,
Resolved, that the board of treasury direct the contractor for the copper coinage to stamp on one side of each piece the following device, viz: thirteen circles linked together, a small circle in the middle, with the words "United States around it; and in the centre, the words "We are one"; on the other side of the same piece the following device, viz: a dial with hours expressed on the face of it, a meridian sun above on one side of which is the word "Fugio" and on the other the year in figures "1787", below the dial, the words "Mind Your Business." (R. S. Yeoman, A Guidebook of United States Coins, 41st Edition, 1988. Racine, Wisconsin: Western Publishing Company, 1987, 56.)Private Tokens and Unofficial Issues
Just as in England, there were a tremendous number of private tokens manufactured in various places and put into service. As in many periods of history, a dearth of official coinage forced private merchants and individuals to try and fill the need. The token issues of Ireland, Scotland and England are often a more fruitful area of study than official issues if we're trying to understand what was really going on at the time, especially economically.
Similarly, during the 1830s in the United States, as well as the Civil War and the Great Depression a great number of private issues were emitted to try and meet the need for circulating media when the government failed to supply sufficient coinage. While this is a fascinating area of study, it is peripheral to the concept of a common currency, which is our primary concern. Suffice it to say that some of the most interesting post-colonial coinages fall into the category of privately issued coins or "tokens." This is an area often overlooked, falling into the cracks between the colonial period and the ratification of the Constitution.
Nevertheless, the variety of issues offers endless opportunities, although we will not get into it in this series of postings. Many of these were manufactured in England or Ireland. A quick survey reveals the "North American Token," the "Bar 'Copper'," the "Auctoris Plebis Token," the "Mott Token," the "Standish Barry Threepence," the "Albany Church Token," the "Kentucky Token," the "Franklin Press," the "Talbot, Allum & Lee Cents," the "Myddelton Token," the "Copper Company of Upper Canada," the "Castorland Medal," the "New York Theatre Token," the "New Spain" token (struck for Texas, at the time under Spain), the "North West Company Token," and an incredible number of tokens celebrating George Washington.
The difficulty and confusion caused by having thirteen different currencies greatly inhibited economic development in the new country. Clearly something had to be done. When the new Constitution of 1789 was drafted, therefore, the central government was delegated the power of setting standards and regulating the value of a common currency. Individual states were deprived of the mint right. Whether or not private coinage was legal under the Constitution was a point continuously debated until local coin and currency were made explicitly illegal under the National Bank Act of 1863 and subsequent coinage act of 1864.
While the new Federal government took control over the coinage, paper money was another matter. Because of the Continental Currency disaster, the central government avoided paper money altogether. A number of states, however, made a few cautionary issues. Alabama, Florida (as a territory), Minnesota, Missouri and North Carolina issued paper notes to the Federal standard prior to the American Civil War. Texas also issued dollar-denominated paper currency until the 1840s, but as an independent republic. State chartered banks of issue, many of them financially shaky, issued large quantities of notes. These were frequently referred to as "shinplasters," indicating their presumed worthlessness, a characteristic by that time considered endemic to all paper money. Combined with a strong suspicion of central authority and concentrated power of any kind, the lack of sound paper money and credit prevented an adequate and properly regulated US currency.
A National Bank
As early as 1779 Alexander Hamilton had begun pushing for the establishment of a national bank on the model of the Bank of England — at least as the Bank of England operated prior to the suspension of convertibility in 1797 and Sir Robert Peel's Bank Charter Act of 1844. A national bank was necessary to ensure that all paper currency passed at par, regardless who issued it, and to have a lender of last resort for the private sector when ordinary commercial banks ran short of reserves and needed to rediscount their loans. Hamilton wrote to Robert Morris and proposed the formation of such an institution. (Edward S. Kaplan, The Bank of the United States and the American Economy. Westport, Connecticut: Greenwood Press, 1999, 7.) Hamilton never intended that any national bank should in any way finance government borrowing. He had observed first hand the problems associated with financing the Revolution with debt, and wanted none of it.
Morris organized the Bank of North America in 1781, and received the approval of Congress to serve as a national bank. Until 1784 the bank served to help stabilize the finances of the United States — but unfortunately this was largely by extending credit to the new government. Morris ensured that this was never to excess, but it established a precedent that subsequent generations would take for granted. Congress did not renew the charter as a national bank, but the Commonwealth of Pennsylvania issued the institution a charter as a state bank, and the bank continues to this day, having merged with the East Pennsylvania Banking and Trust Company in 1929. (Kaplan, op. cit., 13.)
The First Bank of the United States, organized by Alexander Hamilton in 1791, a year before the inauguration of the Federal mint in Philadelphia, was doomed from the start. Intended primarily as a depository for Federal funds and a means of facilitating public transactions by discounting and rediscounting bills of exchange, as well as to organize the financial system of the United States (of which the establishment of the mint in 1792 was a first step), the bank met only with distrust and suspicion. It was, after all, a national bank, and that meant national (federal) control and centralized power. The charter was not renewed when it came up in 1811.
The Bank of the United States represented centralized power over a particularly sensitive area. Control over money and credit could, and often does, determine who becomes prosperous, and who stays poor. Any central bank is instituted to give control over money and credit to someone. The only question, depending on how the institution is structured, is to whom that power is given.
Andrew Jackson's War on the Bank
The Second Bank of the United States, established in 1816, fared no better. There was a desperate need for a central bank or similar institution, if only to regularize government transactions and the payment system, to say nothing of providing adequate commercial credit and serving as a lender of last resort for the development of the new western territories. Still, suspicion of centralized financial power again brought down the bank. Almost the only popular thing Andrew Jackson accomplished as president was to shut down the Bank when the charter came up for renewal in 1836. This was, of course, after removing Federal funds and re-depositing them in other institutions run by his friends and supporters.
A nation-wide depression brought about by inadequate circulating media and the constriction of trade, "Hard Times," resulted from Jackson's emasculation and subsequent shut down of the bank. His subsequent issuance of the notorious "Specie Circular" that prohibited the federal government from accepting payment of taxes, duties, and land sales in any form other than gold or silver coin provided the trigger.
This resulted in the famous "Hard Times Tokens." These were privately issued copper cents and half cents (or reasonable facsimiles thereof) pressed into service to supply the demand for small change. Since the 1830s were possibly one of the most politically active eras in the history of the United States, most tokens carry a political theme, usually anti-Jackson. A representative sampling is available to any collector, and a United States coin collection is not considered complete unless it contains at least a few examples.
While Old Hickory might have thought he was solving the problem of the national bank by abolishing it, the battle continued to rage. Economists, financiers and statesmen knew that something was wrong, but an acceptable solution seemed out of reach. Dozens, if not hundreds, of books and pamphlets, to say nothing of uncounted journal and newspaper articles, poured from the presses from the 1830s through the 1850s. Henry C. Carey, the first American economist to command an international reputation, caused a great deal of consternation and acrimonious debate with the publication of his 1838 book, The Credit System in France, Great Britain and the United States, in which he advocated a laissez faire "free banking" system on the Scottish model, but with no national or central bank, and complete freedom from government regulation — conveniently forgetting that some government regulation is necessary if only to set common standards.
The public, meanwhile, limped along with inadequate Federal coinage, paper currency from state-chartered banks of issue, and foreign coins. The output of the mint during the 1830s was so small that some authorities estimate that there was less than one United States coin of any denomination in circulation per capita. Industrial and infrastructural development in the United States was financed by private bank credit, backed by foreign investment, mostly from Great Britain, instead of by a domestic central bank. In essence, the United States was using the private investors of Great Britain as a central bank.
Because the few sound banks largely controlled credit, the industrial and infrastructural wealth of western development was concentrated in very few hands. Only Abraham Lincoln's 1862 Homestead Act addressed the problem of concentrated ownership, and then only in agriculture. Since the Homestead Act was based on existing assets, it did not require a central bank to provide a uniform and sound credit currency.
The National Bank Act of 1864
The American Civil War amply demonstrated the inadequacy of the financial system, both North and South. There was a complete breakdown of the currency in the South, even before the outcome of the struggle became obvious. The North suffered heavy inflation, shortages, and the disappearance of coinage in compliance with Gresham's Law, the economic principle that "bad money drives out good." Both sides financed the war with issues of paper backed only by government debt, with the dearth of small change being made up by private token issues, postage stamps, and fractional currency.
Disaster was only averted in the North because its industrial base and foreign trade were largely untouched. Confederate and state currency in the South was worthless before the end of the war. There was no industrial base to back up the flood of issues. In addition, the North shipped large quantities of counterfeits into the Confederacy to break its back economically as well as militarily. A source of particular outrage in the South was the fact that, late in the war, Northern counterfeits were accepted when authentic Confederate currency was refused. The counterfeits were better executed and printed on higher quality paper than the South had at its disposal.
Treasury Secretary Salmon P. Chase pushed through a National Bank Act in 1863, modeled on Sir Robert Peel's Bank Charter Act of 1844. This turned out to be badly flawed, and a new act was passed in 1864. The real problem, however, was not addressed. Paper currency was mandated as backed by government debt, not the present value of existing inventories or of industrial, commercial, or agricultural assets.
"The Crime of '73"
The monetary reform of 1873, while attempting to satisfy all concerns and put national finances on a sound basis, pleased no one. Twenty years after its passage, during the Great Depression that followed the Panic of 1893, populist legend grew up that the "Crime of '73" was the result of payoffs from "International Bankers" in London. For their part, financial interests in the East were certain that Congress had surrendered to Populist concerns. They accused the politicians of selling out the credit of the United States to satisfy the demands of agrarian levelers and anarchists.
One good result of the reform of 1873 was that the United States had an adequate supply of sound circulating media for the first time in its history. To prevent the practice of "Wildcat Banking," all banks of issue had, since 1864, been required to meet stringent reserve requirements, and all had to be properly chartered by the federal government. True, the reserves had to be in the form of federal securities — debt — but as long as the American economy remained sound, there couldn't be too many problems . . . could there? In any event, the mints finally managed to meet the demand for coin, and sufficient credit was available domestically to finance internal development.
The weights of American subsidiary silver were changed to conform to the metric standards that had been effective in France before the Latin Monetary Union of 1865. The arrows that had been placed at the date on the Seated Liberty coins in 1854 to indicate a reduced weight, now reappeared in 1873 and 1874 to indicate increased weight. The Dime, for example, was now 2-1/2 grams of .900 fine silver. This was the same as the pre-1865 French Demi (Half) Franc.
The 20 Cent piece, introduced in 1875, matched the specifications of the pre-1865 Franc. Only the Dollar, the official legal tender coin, retained its original weight under the coinage act of April 2, 1792. This was 412-1/2 grains of silver (.7736 of a Troy ounce), although the original fineness had been increased from .8924 to .900. The US. Dollar was thus heavier than the Latin standard of .7324 ounces for the primary legal tender coin of the Union, although presumably equal in value.
Conforming U.S. coinage to metric weights was the first move in an abortive attempt to conform the United States to an international standard. Eventually the weight of the Dollar would have been reduced to match the standard legal tender coin of the Latin Monetary Union. The fineness of the subsidiary coinage (Dime through Half Dollar; the coinage act of 1873 abolished the silver Trime — three cent piece — and Half Dime) would have been reduced to .835 in order to reduce 20¢ US to the 19.3¢ of the Franc, Lira, Peseta, and so on.
A few years later, in 1879, patterns were developed for an international-standard 4 Dollar gold piece, the Stella. This coin would have fit into the bimetallic standard of the Latin Union. In 1873, however, the Latin Monetary Union effectively abandoned the bimetallic standard. This was a result of the French reparations due to Prussia and the increasing flood of silver on world markets.
Complications arising from having a domestic arrangement of an effective gold standard within an official bimetallic standard while attempting to reconcile the system with an international currency changing from a bimetallic standard to the gold standard proved too much to handle. When combined with a policy of avoiding foreign entanglements — and what could be more entangling than an international currency union — any effective attempt to have the United States meet international currency standards had to be abandoned. The domestic currency, however, was finally put on a sound basis.
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Monday, July 12, 2010
Common Cause, Part XIV: The Latin and Scandinavian Monetary Unions
One of the fruits of the French Revolution was an attempt to put private and public life on a "scientific" basis. This was partly to conform to the official State worship of Reason, and partly to eliminate anything having to do with the ancien régime. Virtually everything was to be swept away, from the old calendar (based on papist idolatry, i.e., the reforms of Gregory the Great), to the ancient provinces with their customs, languages and laws. Political units were rearranged arbitrarily as new "Departments" of the French Republic. These generally had no relation to geography, traditional divisions, or the indigenous populations.
Some changes, such as the transformation of the seven-day week to the ten-day decade, were ephemeral. They were not implemented effectively even during their official life. Some changes were more permanent, such as the new political divisions and legal and tax reform. Other changes have kept on returning, such as attempts to change the calendar to reflect sectarian, social, or political agenda. Had the revolutionary changes in France continued, perhaps something could have been done about the various unscientific irregularities of the French language.
An Imposed Reform
One of the more enduring changes to come out of France was the reform of the coinage in "L'An 4," that is, in Year 4 of the Revolution. This is better known to history as 1796. The monetary reform was made infinitely more difficult than it otherwise would have been, however, by the financing of the Revolution and its various foreign adventures with vast issues of unbacked "Assignats." Assignats, although construed "officially" as small denomination, non-interest-bearing government loan paper, were effectively a fiat currency printed by the government and spent into circulation to cover its deficits. It would have been unwise to call the Assignats paper money, as the disastrous Mississippi Scheme of John Law was still at the edge of living memory.
The new French currency was to be strictly "scientific." The unit of currency was the Franc. The basic coin was the 5 Franc piece, weighing exactly 25 grams, and containing 22-1/2 grams of pure silver (.7234 of an unrevolutionary Troy ounce). The original fineness was .900. The Franc was divided into a scientific 100 "Centimes" or "Hundredths."
As the Revolution was spread throughout Europe by the forces of liberation, the new currency and its standards were implemented in the various new "Sister Republics" established in liberated areas by the Armies of France. These were revolutionary republics in name only, frequently existing only on the sufferance of the Republique Française as puppet states. The ultimate purpose of the Sister Republics was generally to provide financial milch cows to support the perpetually embarrassed Revolutionary Government. In communist style, however, the stated object was liberating people who often didn't particularly want to be liberated.
The Sister Republic revolutionary governments usually succeeded in overthrowing not only the existing political regime, but often the entire economy as well. In many cases the local currency reverted to pre-revolutionary standards after the Congress of Vienna of 1815 attempted to restore the pre-1789 status quo (and, in many respects, failed completely). The new currency, however, was firmly established in France itself.
Coinage during the actual revolutionary period was sporadic. It was not until Napoleon changed France and its revolutionary conquests from a Republic into an Empire that the coinage program was put on a sound and regular basis. Part of the Little Corporal's program was in conscious imitation of Roman history, and an attempt to out-do Charlemagne in restoring the glory that was Rome. This would have resulted in making Paris the "Fifth Rome," after Constantinople, Moscow and Aix La Chappelle, of course. Most of the impetus behind the coinage program and other reforms was due to Napoleon's all-encompassing vision of a "Franco-Roman" civilization, and an attention to detail that would have driven a lesser man insane. There was also the need, like Alexander, to finance a program of conquest with a sound currency.
Napoleon's efforts resulted in the first full range of coinage since before the Revolution. Some denominations were issued only sporadically, or dropped as their lack of utility became apparent, such as the 5 Centimes. For the most part, however, Napoleon as "First Consul" and, later, as Emperor, provided an adequate supply of sound circulating media. This obviated one of the more hated aspects of the Revolution, the inflationary issues of paper money.
Regular minor issues consisted of a billon 10 Centimes, and Quarter and Demi (Half) Francs in .900 fine silver. The 10 Centimes displayed the famous wreathed and crowned N of the Man of Destiny on the obverse, with the denomination and date on the reverse. The Quart- and Demi-Franc were standard monarchical-style portrait issues, although France remained officially a republic for some time, even after Napoleon became Emperor.
The remaining silver issues consisted of the 1, 2 and 5 Francs. While the silver 5 Franc was the official legal tender coin, the best known, most popular, and longest-lasting item to come out of the reformed coinage was the gold 20 Francs, the "Napoleon," a term also applied to brandy and pastries. Containing .1867 ounces of .900 fine gold, this standard continues to be minted today as a bullion item, usually in the form of "official restrikes," but often, in some countries, as a special commemorative. A gold double Napoleon, 40 Francs, was also minted.
All Napoleonic regular issue coins are popular with collectors and historians. Particularly popular are the large silver 5 Francs. These illustrate graphically the changes in France from Revolutionary Republic (the "Hercules" issues of "L'An 10-11"), to Consulate (Napoleon as dictator or "First Consul" in L'An 11-12), to Early Republican Empire ("Bare Head" of Napoleon and identification of France as "Republique Française" in L'An 12-14 and 1806-1807 of the resurrected Gregorian calendar), and, finally, to Late Monarchical Empire (Laureate head of Napoleon, and identification of France as "Empire Française" in 1809-1814), not forgetting the various transitional types and "The Hundred Days" issue along the way.
The Revolution Spreads
The influence of the French Revolution and the subsequent career of Napoleon were pervasive throughout the world. Many countries far outside the direct French sphere of influence adopted the basic French standard for their currency, at least for a while. The new republics in Central and South America were particularly susceptible to the spirit of ça ira. Much of this, ironically, resulted from the revolutionary fervor that swept through the western hemisphere after Napoleon effectively dismantled the Spanish Empire by forcing the abdication of the Spanish king and putting his own relative on the throne. The Spanish-American revolutions of 1810-1820 were started largely in support of the Spanish crown against the usurping Bonapartes. It was only later that the revolutions became wars of liberation. Many current historians and politicians generally ignore this fact.
The new republics frequently adopted the French standard once they got their treasuries and exchequers in order, either by choice or by force. There may have been some idea of eventually establishing a world revolutionary state, as the French had originally set out to do, and as internationalists such as America's Dr. Benjamin Franklin is said to have envisioned. There was, however, no formal process of adopting the French system as a proto standard for the world.
Among the South and Central American countries that adopted the French standard in some degree in the early nineteenth century (usually for the major coin, based on the 5 Franc of .7234 ounces of silver, .900 fine) were Bolivia, Chile, Columbia, Ecuador, Guatemala, Honduras, and Venezuela. Bolivia was the latest addition to this group, and may have adopted the standard in 1864 in anticipation of the French-sponsored Latin Monetary Union of 1865. Latecomers to this informal French monetary community in the Americas were the Dominican Republic, Haiti and Puerto Rico (through Spain's adherence to the provisions of the Latin Monetary Union, although never an official member).
One of the most unexpected members of this quasi-union were the Danish West Indies. Before their purchase by the United States, the islands adopted a kind of hybrid "Franco-American" standard in preference over the currency of the Scandinavian Monetary Union of 1873, in which the parent country Denmark participated. Peru also had a unique situation, where the standard silver currency, the Sol (Sun), was based on the French standard, while the gold currency, the Libra (pound) was, naturally enough from the name, equal to the weight and fineness of the British sovereign, .2354 ounces of gold, .917 pure. Even the United States changed the basic weights of its coinage to metric equivalents in 1873 to conform to prevalent international weights and measures.
A Formal Arrangement
It was not until 1865, however, that a formal currency union was adopted among a number of the nations of Western Europe. The basic idea was to facilitate trade among the countries in the French Common Market. With, however, the adoption of a uniform currency throughout the German states in 1857, there was also a need to counter the economic might of the Prussian-sponsored Zollverein, the German Customs Union established in 1819. In 1865, therefore, France, Belgium, Switzerland, Italy and, eventually, Greece formed the "Latin Monetary Union." The French standard was adopted for the Union. The basic coin was to be the silver 5 Francs, or whatever its equivalent was in the local currency, such as Lire or Drachma.
Provisions of the Union were straightforward. Each country was to take steps to ensure that its currency did not deviate in value from the standards of the Union. As no central bank for the Union was established, this left the decision as to whether to comply with the treaty purely local and voluntary, although it was clearly in the best interest of the members to keep their currencies at par.
Gold coins and the standard silver 5 Francs (or Lire or Drachma) were considered "Union Currency." These were to pass at par anywhere within the Union, regardless of the issuer. Subsidiary silver (i.e., less than 5 Francs or its local equivalent) and bank notes were considered "national" and not "union." Members of the Union did not have to accept them, although they usually passed without difficulty everywhere in the Union, anyway.
The basic 5 Francs coin was to consist of 1/200 of a kilogram of silver, the equivalent of 1/3,100 of a kilogram of gold. The fineness for the legal tender silver coin was set at .900, while that of subsidiary silver (less than 5 Francs) was established as .835. In 1873, owing to the massive depreciation of silver, all formal members of the Latin Monetary Union agreed to limit the coinage of the silver 5 Francs or its local equivalent. The effect of this was to take the Union off the bimetallic standard and put it on the gold standard, regardless of the official provisions of the treaty.
A sizable number of other countries, although not formally members of the Latin Monetary Union, adopted the same standards for their national currency. This, of course, would facilitate trade with the economic powerhouses of industrialized Western Europe. It would probably come as a kind of quasi-political statement aligning them with the West, and not with the increasingly intimidating Prussian-dominated Zollverein of Middle Europe. Luxembourg (through Belgium), Spain, the Papal States, Montenegro, Serbia, San Marino, Romania and Bulgaria based their domestic currencies on that of the Union. Later, Austria, Hungary, Albania and Liechtenstein (through Switzerland) were to reform their currencies along the same lines.
A Standard Product
The Latin Monetary Union presents collectors with a virtual wonderland of opportunity. Because the basic silver coin was the 5 Francs or its local equivalent, the vast majority of all crown-sized coins outside the German states in the nineteenth and twentieth centuries are of exactly the same standard, and every country that belonged to the Union or based its currency on it issued a large silver coin of exactly the same size.
The Latin Monetary Union lasted for over half a century, from 1865 until World War I destroyed the basic economies and currencies of most of Europe and the United States as well. While this is, perhaps, a surprising statement to make, considering the great strides in economic development and commercial advances that have been made since then, the fact is that most world currencies are now backed by nothing more than a government's promise to pay as a direct result of the Great War.
To finance the hideous cost of total war, governments turned to what seemed a money machine, open market operations of their central banks, eschewing the discount mechanism designed to provide liquidity to the private sector. This has resulted in currencies that are intrinsically inflationary, and only as sound as the taxing power of the government that backs them, instead of the underlying strength of the economy.
The Scandinavian Monetary Union
Of course, the German and the Latin monetary unions were not the only efforts to achieve a stable international currency system before World War I, although the effect of the Latin Monetary Union was the most widespread, to the chagrin of Bismarck, the Prussian Chancellor. When the Prussian prince wasn't trying to make certain of Prussia's ascendancy over Austria, there was always France to worry about — at least until 1870.
A monetary union that probably didn't cause Bismarck any problems was the Scandinavian Monetary Union established in 1873. As far as most of Europe was concerned, the hey-day of the Scandinavian countries had passed with the empire of Gustavus Adolphus and the subsequent bankruptcy of Sweden after the Great Northern War of 1700-1721. There appeared to be little to fear from expansionism from that quarter. The northern countries couldn't even hold on to what they had. Sweden, for example, gained Norway in 1814, but only at Denmark's expense. The Schleswig-Holstein affair demonstrated to Bismarck's satisfaction the complete inability of Denmark to defend herself and her interests without the help of powerful allies, as well as the apparent lack of solidarity among the former Scandinavian empire.
With little outside interest in their affairs, it is no wonder than the Scandinavian countries largely turned inward for most of the nineteenth century and concentrated on internal and domestic development. The formation of a monetary union in 1873 among Sweden, Denmark and Norway two years later was a natural move in response to the almost worldwide demonetization of silver and the change to the gold standard. The problems associated with linking discrete regional economies to the larger international economy with very different interests through association with, for example, the Latin Monetary Union, could be avoided. In addition, the benefits of a common currency could be fully realized by forming a common market among countries with similar economic goals and interests. This would avoid the "balkanization" of the local economies by tying them to something that took the larger picture into consideration.
The inclusion of Norway as a formal partner in the union in 1875 was more of a courtesy than a necessity. Norway was under the rule of Sweden until a peaceful separation was arranged in 1905 by the two parliaments. As far as the rest of the world was concerned, the union was effectively between Sweden and Denmark.
The Scandinavian Monetary Union brought about fundamental changes in the partners' currency systems. Sweden had been using a reformed quasi-decimal system. Denmark had a reformed, but still archaic and very complex system ultimately derived from the one current in Medieval Scandinavia. For its part, Norway had been saddled with a hybrid Swedish and Danish system due to its political realignment in 1814. Decimalization and uniformity was not the least of the benefits associated with the treaty.
A New Currency
Instead of selecting the currency of the dominant partner in the Union, as had been the case with the Latin Monetary Union, an entirely new currency was introduced. The basic unit of currency was the Krone (Denmark and Norway) or the Krona (Sweden), divided into 100 Øre. The weights and standards of the subsidiary coinage were similar. There was some minor variation in silver content in the billon coinage, but even the designs were close enough to appear the same to casual scrutiny. Variations in silver weight were unimportant because of the change to the gold standard. The actual value of silver in the coinage was far below the face value in any event.
The similarity of even the minor coinage was the result of the provisions of the treaty, which went much farther than those of the German unions or even the Latin Monetary Union. Subsidiary coinage was included as Union currency, which meant that minor coinage would pass at par anywhere within the Union, regardless of the issuer. The banks of issue of each country agreed to open non-interest charging accounts for the other partners in the Union. Eventually bank notes were included as Union currency, by agreement between Sweden and Norway in 1894 and Denmark in 1900, making for a much more convenient and uniform system.
When Norway officially became independent in 1905, she retained membership in the Union. The Scandinavian Monetary Union, although not officially terminated until later, was effectively abolished with the financial chaos precipitated by World War I. This was largely as the result of the reparations provisions of the Treaty of Versailles, which had repercussions far beyond the borders of Germany.
The standard denominations were the 1, 2 and 5 Øre in bronze, the 10 Øre in billon (.400) silver, the 25 and 50 Øre in .600 silver, and the 1 and 2 Krone(r) in .800 silver. Sweden was the only country during the treaty period to issue a 5 Kroner, in gold. All three countries issued gold 10 and 20 Krone(r).
Most Union numismatic specimens from 1873 to the beginning of World War I can be readily and inexpensively obtained. The only real difficulty would be among the gold and silver Norwegian portrait issues. Possibly this is because Norway was under Sweden during this period. Portrait issues displayed the same king with minor differences in the order of the obverse legends. Since the currencies passed at par, anyway, why produce more than a token amount?
The important point to understand about the Scandinavian Monetary Union, however, is not that it provides coin collectors with some interesting opportunities. It does that, of course, but it also provides a model of a trade union that did not give in to the usual temptation. It did not simply follow the most powerful member of the union, and was not the precursor of external domination. The flaw, of course, was that there was no acknowledgement of the necessity of widespread direct ownership of the means of production.
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Some changes, such as the transformation of the seven-day week to the ten-day decade, were ephemeral. They were not implemented effectively even during their official life. Some changes were more permanent, such as the new political divisions and legal and tax reform. Other changes have kept on returning, such as attempts to change the calendar to reflect sectarian, social, or political agenda. Had the revolutionary changes in France continued, perhaps something could have been done about the various unscientific irregularities of the French language.
An Imposed Reform
One of the more enduring changes to come out of France was the reform of the coinage in "L'An 4," that is, in Year 4 of the Revolution. This is better known to history as 1796. The monetary reform was made infinitely more difficult than it otherwise would have been, however, by the financing of the Revolution and its various foreign adventures with vast issues of unbacked "Assignats." Assignats, although construed "officially" as small denomination, non-interest-bearing government loan paper, were effectively a fiat currency printed by the government and spent into circulation to cover its deficits. It would have been unwise to call the Assignats paper money, as the disastrous Mississippi Scheme of John Law was still at the edge of living memory.
The new French currency was to be strictly "scientific." The unit of currency was the Franc. The basic coin was the 5 Franc piece, weighing exactly 25 grams, and containing 22-1/2 grams of pure silver (.7234 of an unrevolutionary Troy ounce). The original fineness was .900. The Franc was divided into a scientific 100 "Centimes" or "Hundredths."
As the Revolution was spread throughout Europe by the forces of liberation, the new currency and its standards were implemented in the various new "Sister Republics" established in liberated areas by the Armies of France. These were revolutionary republics in name only, frequently existing only on the sufferance of the Republique Française as puppet states. The ultimate purpose of the Sister Republics was generally to provide financial milch cows to support the perpetually embarrassed Revolutionary Government. In communist style, however, the stated object was liberating people who often didn't particularly want to be liberated.
The Sister Republic revolutionary governments usually succeeded in overthrowing not only the existing political regime, but often the entire economy as well. In many cases the local currency reverted to pre-revolutionary standards after the Congress of Vienna of 1815 attempted to restore the pre-1789 status quo (and, in many respects, failed completely). The new currency, however, was firmly established in France itself.
Coinage during the actual revolutionary period was sporadic. It was not until Napoleon changed France and its revolutionary conquests from a Republic into an Empire that the coinage program was put on a sound and regular basis. Part of the Little Corporal's program was in conscious imitation of Roman history, and an attempt to out-do Charlemagne in restoring the glory that was Rome. This would have resulted in making Paris the "Fifth Rome," after Constantinople, Moscow and Aix La Chappelle, of course. Most of the impetus behind the coinage program and other reforms was due to Napoleon's all-encompassing vision of a "Franco-Roman" civilization, and an attention to detail that would have driven a lesser man insane. There was also the need, like Alexander, to finance a program of conquest with a sound currency.
Napoleon's efforts resulted in the first full range of coinage since before the Revolution. Some denominations were issued only sporadically, or dropped as their lack of utility became apparent, such as the 5 Centimes. For the most part, however, Napoleon as "First Consul" and, later, as Emperor, provided an adequate supply of sound circulating media. This obviated one of the more hated aspects of the Revolution, the inflationary issues of paper money.
Regular minor issues consisted of a billon 10 Centimes, and Quarter and Demi (Half) Francs in .900 fine silver. The 10 Centimes displayed the famous wreathed and crowned N of the Man of Destiny on the obverse, with the denomination and date on the reverse. The Quart- and Demi-Franc were standard monarchical-style portrait issues, although France remained officially a republic for some time, even after Napoleon became Emperor.
The remaining silver issues consisted of the 1, 2 and 5 Francs. While the silver 5 Franc was the official legal tender coin, the best known, most popular, and longest-lasting item to come out of the reformed coinage was the gold 20 Francs, the "Napoleon," a term also applied to brandy and pastries. Containing .1867 ounces of .900 fine gold, this standard continues to be minted today as a bullion item, usually in the form of "official restrikes," but often, in some countries, as a special commemorative. A gold double Napoleon, 40 Francs, was also minted.
All Napoleonic regular issue coins are popular with collectors and historians. Particularly popular are the large silver 5 Francs. These illustrate graphically the changes in France from Revolutionary Republic (the "Hercules" issues of "L'An 10-11"), to Consulate (Napoleon as dictator or "First Consul" in L'An 11-12), to Early Republican Empire ("Bare Head" of Napoleon and identification of France as "Republique Française" in L'An 12-14 and 1806-1807 of the resurrected Gregorian calendar), and, finally, to Late Monarchical Empire (Laureate head of Napoleon, and identification of France as "Empire Française" in 1809-1814), not forgetting the various transitional types and "The Hundred Days" issue along the way.
The Revolution Spreads
The influence of the French Revolution and the subsequent career of Napoleon were pervasive throughout the world. Many countries far outside the direct French sphere of influence adopted the basic French standard for their currency, at least for a while. The new republics in Central and South America were particularly susceptible to the spirit of ça ira. Much of this, ironically, resulted from the revolutionary fervor that swept through the western hemisphere after Napoleon effectively dismantled the Spanish Empire by forcing the abdication of the Spanish king and putting his own relative on the throne. The Spanish-American revolutions of 1810-1820 were started largely in support of the Spanish crown against the usurping Bonapartes. It was only later that the revolutions became wars of liberation. Many current historians and politicians generally ignore this fact.
The new republics frequently adopted the French standard once they got their treasuries and exchequers in order, either by choice or by force. There may have been some idea of eventually establishing a world revolutionary state, as the French had originally set out to do, and as internationalists such as America's Dr. Benjamin Franklin is said to have envisioned. There was, however, no formal process of adopting the French system as a proto standard for the world.
Among the South and Central American countries that adopted the French standard in some degree in the early nineteenth century (usually for the major coin, based on the 5 Franc of .7234 ounces of silver, .900 fine) were Bolivia, Chile, Columbia, Ecuador, Guatemala, Honduras, and Venezuela. Bolivia was the latest addition to this group, and may have adopted the standard in 1864 in anticipation of the French-sponsored Latin Monetary Union of 1865. Latecomers to this informal French monetary community in the Americas were the Dominican Republic, Haiti and Puerto Rico (through Spain's adherence to the provisions of the Latin Monetary Union, although never an official member).
One of the most unexpected members of this quasi-union were the Danish West Indies. Before their purchase by the United States, the islands adopted a kind of hybrid "Franco-American" standard in preference over the currency of the Scandinavian Monetary Union of 1873, in which the parent country Denmark participated. Peru also had a unique situation, where the standard silver currency, the Sol (Sun), was based on the French standard, while the gold currency, the Libra (pound) was, naturally enough from the name, equal to the weight and fineness of the British sovereign, .2354 ounces of gold, .917 pure. Even the United States changed the basic weights of its coinage to metric equivalents in 1873 to conform to prevalent international weights and measures.
A Formal Arrangement
It was not until 1865, however, that a formal currency union was adopted among a number of the nations of Western Europe. The basic idea was to facilitate trade among the countries in the French Common Market. With, however, the adoption of a uniform currency throughout the German states in 1857, there was also a need to counter the economic might of the Prussian-sponsored Zollverein, the German Customs Union established in 1819. In 1865, therefore, France, Belgium, Switzerland, Italy and, eventually, Greece formed the "Latin Monetary Union." The French standard was adopted for the Union. The basic coin was to be the silver 5 Francs, or whatever its equivalent was in the local currency, such as Lire or Drachma.
Provisions of the Union were straightforward. Each country was to take steps to ensure that its currency did not deviate in value from the standards of the Union. As no central bank for the Union was established, this left the decision as to whether to comply with the treaty purely local and voluntary, although it was clearly in the best interest of the members to keep their currencies at par.
Gold coins and the standard silver 5 Francs (or Lire or Drachma) were considered "Union Currency." These were to pass at par anywhere within the Union, regardless of the issuer. Subsidiary silver (i.e., less than 5 Francs or its local equivalent) and bank notes were considered "national" and not "union." Members of the Union did not have to accept them, although they usually passed without difficulty everywhere in the Union, anyway.
The basic 5 Francs coin was to consist of 1/200 of a kilogram of silver, the equivalent of 1/3,100 of a kilogram of gold. The fineness for the legal tender silver coin was set at .900, while that of subsidiary silver (less than 5 Francs) was established as .835. In 1873, owing to the massive depreciation of silver, all formal members of the Latin Monetary Union agreed to limit the coinage of the silver 5 Francs or its local equivalent. The effect of this was to take the Union off the bimetallic standard and put it on the gold standard, regardless of the official provisions of the treaty.
A sizable number of other countries, although not formally members of the Latin Monetary Union, adopted the same standards for their national currency. This, of course, would facilitate trade with the economic powerhouses of industrialized Western Europe. It would probably come as a kind of quasi-political statement aligning them with the West, and not with the increasingly intimidating Prussian-dominated Zollverein of Middle Europe. Luxembourg (through Belgium), Spain, the Papal States, Montenegro, Serbia, San Marino, Romania and Bulgaria based their domestic currencies on that of the Union. Later, Austria, Hungary, Albania and Liechtenstein (through Switzerland) were to reform their currencies along the same lines.
A Standard Product
The Latin Monetary Union presents collectors with a virtual wonderland of opportunity. Because the basic silver coin was the 5 Francs or its local equivalent, the vast majority of all crown-sized coins outside the German states in the nineteenth and twentieth centuries are of exactly the same standard, and every country that belonged to the Union or based its currency on it issued a large silver coin of exactly the same size.
The Latin Monetary Union lasted for over half a century, from 1865 until World War I destroyed the basic economies and currencies of most of Europe and the United States as well. While this is, perhaps, a surprising statement to make, considering the great strides in economic development and commercial advances that have been made since then, the fact is that most world currencies are now backed by nothing more than a government's promise to pay as a direct result of the Great War.
To finance the hideous cost of total war, governments turned to what seemed a money machine, open market operations of their central banks, eschewing the discount mechanism designed to provide liquidity to the private sector. This has resulted in currencies that are intrinsically inflationary, and only as sound as the taxing power of the government that backs them, instead of the underlying strength of the economy.
The Scandinavian Monetary Union
Of course, the German and the Latin monetary unions were not the only efforts to achieve a stable international currency system before World War I, although the effect of the Latin Monetary Union was the most widespread, to the chagrin of Bismarck, the Prussian Chancellor. When the Prussian prince wasn't trying to make certain of Prussia's ascendancy over Austria, there was always France to worry about — at least until 1870.
A monetary union that probably didn't cause Bismarck any problems was the Scandinavian Monetary Union established in 1873. As far as most of Europe was concerned, the hey-day of the Scandinavian countries had passed with the empire of Gustavus Adolphus and the subsequent bankruptcy of Sweden after the Great Northern War of 1700-1721. There appeared to be little to fear from expansionism from that quarter. The northern countries couldn't even hold on to what they had. Sweden, for example, gained Norway in 1814, but only at Denmark's expense. The Schleswig-Holstein affair demonstrated to Bismarck's satisfaction the complete inability of Denmark to defend herself and her interests without the help of powerful allies, as well as the apparent lack of solidarity among the former Scandinavian empire.
With little outside interest in their affairs, it is no wonder than the Scandinavian countries largely turned inward for most of the nineteenth century and concentrated on internal and domestic development. The formation of a monetary union in 1873 among Sweden, Denmark and Norway two years later was a natural move in response to the almost worldwide demonetization of silver and the change to the gold standard. The problems associated with linking discrete regional economies to the larger international economy with very different interests through association with, for example, the Latin Monetary Union, could be avoided. In addition, the benefits of a common currency could be fully realized by forming a common market among countries with similar economic goals and interests. This would avoid the "balkanization" of the local economies by tying them to something that took the larger picture into consideration.
The inclusion of Norway as a formal partner in the union in 1875 was more of a courtesy than a necessity. Norway was under the rule of Sweden until a peaceful separation was arranged in 1905 by the two parliaments. As far as the rest of the world was concerned, the union was effectively between Sweden and Denmark.
The Scandinavian Monetary Union brought about fundamental changes in the partners' currency systems. Sweden had been using a reformed quasi-decimal system. Denmark had a reformed, but still archaic and very complex system ultimately derived from the one current in Medieval Scandinavia. For its part, Norway had been saddled with a hybrid Swedish and Danish system due to its political realignment in 1814. Decimalization and uniformity was not the least of the benefits associated with the treaty.
A New Currency
Instead of selecting the currency of the dominant partner in the Union, as had been the case with the Latin Monetary Union, an entirely new currency was introduced. The basic unit of currency was the Krone (Denmark and Norway) or the Krona (Sweden), divided into 100 Øre. The weights and standards of the subsidiary coinage were similar. There was some minor variation in silver content in the billon coinage, but even the designs were close enough to appear the same to casual scrutiny. Variations in silver weight were unimportant because of the change to the gold standard. The actual value of silver in the coinage was far below the face value in any event.
The similarity of even the minor coinage was the result of the provisions of the treaty, which went much farther than those of the German unions or even the Latin Monetary Union. Subsidiary coinage was included as Union currency, which meant that minor coinage would pass at par anywhere within the Union, regardless of the issuer. The banks of issue of each country agreed to open non-interest charging accounts for the other partners in the Union. Eventually bank notes were included as Union currency, by agreement between Sweden and Norway in 1894 and Denmark in 1900, making for a much more convenient and uniform system.
When Norway officially became independent in 1905, she retained membership in the Union. The Scandinavian Monetary Union, although not officially terminated until later, was effectively abolished with the financial chaos precipitated by World War I. This was largely as the result of the reparations provisions of the Treaty of Versailles, which had repercussions far beyond the borders of Germany.
The standard denominations were the 1, 2 and 5 Øre in bronze, the 10 Øre in billon (.400) silver, the 25 and 50 Øre in .600 silver, and the 1 and 2 Krone(r) in .800 silver. Sweden was the only country during the treaty period to issue a 5 Kroner, in gold. All three countries issued gold 10 and 20 Krone(r).
Most Union numismatic specimens from 1873 to the beginning of World War I can be readily and inexpensively obtained. The only real difficulty would be among the gold and silver Norwegian portrait issues. Possibly this is because Norway was under Sweden during this period. Portrait issues displayed the same king with minor differences in the order of the obverse legends. Since the currencies passed at par, anyway, why produce more than a token amount?
The important point to understand about the Scandinavian Monetary Union, however, is not that it provides coin collectors with some interesting opportunities. It does that, of course, but it also provides a model of a trade union that did not give in to the usual temptation. It did not simply follow the most powerful member of the union, and was not the precursor of external domination. The flaw, of course, was that there was no acknowledgement of the necessity of widespread direct ownership of the means of production.
#30#
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