Accounting Money and Credit Money
The General purpose of money is to enable trade by creating a currency as a common unit of account that allows agreed on measures of value so that people can more easily exchange goods and services. Where it gets tricky hinges on the question how do you regulate the value of that currency so that it measures the value of commodity and services in a stable manner. Whether a currency is based on "commodity money" (Gold, silver by weight and purity), "fiat money", or accounting money (credits and debits/ mostly debt money); this presents an issues of sovereignty. Without sovereign money, currencies fall into the hands of bankers and speculators, grifters and frauds. When sovereignty over currency is in the hands of a Privateering Central Bank; The same. The People of the world need sovereignty over their currenies in actually sound hands. When money is available in an unsound manner, it;
.... falls into the hands of privateers:
- Money loses it's value as an accurate measure of transactions and relative value.
- It loses connection to the commodities that are supposed to back that value.
- Those with control over that currency speculate with their possessions.
- When they do some get very rich, in money terms, and...
- Suddenly part or all of the currency loses its collateral
- And everyone else gets very poor.
The Struggle to Acquire sovereignty over our Currency
The United States had to struggle to acquire sovereignty over it's own money supply, not because the issue or the constitution wasn't clear, but because the bankers, financial powers and their representatives struggled over who should have power over the banks. In many ways the Civil war wasn't only over the issue of slavery, it also was over the issue of power over banking and money. The People of the United States won a partial victory over the financial powers, and that setup the next 100+ years of oligarchy and financial mischief. I've been examining that history and this post is related to it. Samuel Chase and Ullysys S Grant's struggles with the money supply failed, in part, because of illusions about what constitutes secure money. Salmon Chase came closer than any previous economist or policy maker to getting control over the bulls and bears of managing a currency. As Treasury Secretary he saved the North from Financial Chaos during the Civil War. And as a Supreme Court Justice, appointed by Grant, he cleared up misconceptions about the power of the United States to regulate Currency. I've come to appreciate Salmon Chase a lot since starting reading on this subject. But this post is about the Grant Administration.
- Related Posts
- Issues with Notes as Legal Tender: http://holtesthoughts.blogspot.com/2016/09/issues-with-notes-as-legal-tender_81.html
- A Sustainable economic policy: http://holtesthoughts.blogspot.com/2016/08/a-sustainable-economic-policy.html
Focus on Chase, theory and solutions. But this post focuses on Grant and Mark Twain. I need to lighten up a little.
Greenbacks versus Gold and Silver
When bankers and speculators control the money supply, the result seems to always be disaster. They always come in promising solidity and security, and then they run away. The term for that kind of con man is grifter. Normally bankers have a boring profession. But when the grifters take over, formerly stolid bankers can become no better than the con men they claim to despise.
Heroics Are Not always enough
During the Civil War, the US economy was under massive pressure and stress. In the south the economic system collapsed even before the army did. in the North the heroic efforts of Lincoln and his Treasury Secretary Salmon Chase kept the country from falling apart. Ulysses S Grant understood the importance of ethics and solid money to the economy.
The Grant Administration appointed Salmon Chase to the Supreme Court partly because of his solid credentials on business ethics and economics. Unfortunately neither, despite heroic efforts, were able to forestall the boom and bust that led to scandal and economic collapse during Grant's Administration. Grant would be tarred for having a corrupt administration because the lure of easy money led too many of his officers to graft and abuse of power. The easy money made corruption easy and inflation inevitable. Illusions about what constitutes "solid money" and how to keep it secure and stable led to self sabotaging policies. Efforts to reign in "easy money," without taxing privilege and speculation, led to austerity and economic collapse. Mark Twain and the great artist/cartoonist Nash skewered the era. We can learn from them all.
The Golden Bull
- Q. What is the Chief End of Man?
- A. To Get Rich.
- Q. In what way?
- A. Dishonesty if we can; honestly if we must.
- Q. Who is God, the one only and true?
- A. Money is God. Gold and greenbacks and stocks.
- -- Mark Twain, "Revised Catechism," 1877 [Biography]
In the USA people tend to worship the Golden Bull and fear the hungry bear. Grifters can make money from either. Little has changed.
Chaos and Greenbacks
A biography of Grant tells us that in 1869 when Ulysses S Grant took office:
"the national debt, which stood at $64 million in 1860, had grown to a staggering $2.8 billion." [Biography]
Sound Money Versus Civil Rights
To the emerging "liberal Republicans", and some of the "Radical Republicans" of the late 1860s, this was a more important issue than slavery. Paper Money, as issued by private banks had time and time again proven worthless. Even compassionate persons like Ulysses S. Grant felt that "sound money" was gold or silver coin and that paper money, especially "greenbacks" issued by treasury.
"The problem was compounded as hundreds of millions of dollars in unredeemable paper money -- "greenbacks" -- had pushed gold coins out of circulation." [Biography]
Of course the real problem with greenbacks is that the way they were issued (to pay for war-material) inflated the income of profiteers and monopolists and they were employed into speculation, graft and usurpation of property. To ordinary people greenbacks were a great thing! Commoners were not afraid of greenbacks. Issued by the Government, backed by the Treasury, they represented real wealth. It was the financial classes that despised them. To them, especially foreign financiers/monied men. For the leadership of the time the national debt and greenbacks
"all of this left the nation's credit in precarious shape." [Biography]
Unredeemable is not always important
But people using those greenbacks didn't see it that way. Greenbacks might be "unredeemable" in terms of Gold and Silver, but one can pay taxes with them, pay debts with them, and they provided the money needed to drive commerce. What was needed was a tax to "tax back" unearned privileges derived from them. Any currency needs to be regulated, that involves enforcing rules on the use of money. Congress needed to "regulate the Value" of greenbacks by taxing speculation and hoarding. Greenbacks were very good money from the point of view of measuring value and being used. Just not secure, without regulation, against misuse.
Gold and Silver were being pushed out of circulation and being hoarded due to "Gresham's law."
Gresham's Law: "In economics, Gresham's law is a monetary principle stating that "bad money drives out good". For example, if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will disappear from circulation."
What is Meant by Bad Money!
For Gresham's law to be understood one has to define what is meant by "bad money." In the case of money treated as a commodity. Bad money would be money that can't be exchanged for its commodity value. If one melts 10 Gold coins weighing the same as 10 silver coins. The Commodity silver is about 1/15 the value of the commodity Gold. So a gold coin equivalent to a silver coin should weigh about 1/15 the weight of its Gold equivalent. The term "bad money" is a term indicating the buying power of that money. If A Gold coin denominated at 1$ has the same buying power as a silver coin with the same nominal value, then as money they are the same. But if the Gold within the Coin is worth more than its face value, then the Gold coin is now "bad money" in the sense that it is worth more melted down. The "bad money" in this case will be hoarded and/or melted down. "Bad money" in the Gresham's law means money whose commodity value is less than its value as money, or less than the value of other money.
When "bad money" is actually very good money!
Thus greenbacks as the ultimate "Bad money" in terms of nominal value became money that was readily available. Gold and Silver coins became collectors items or went into treasure chests. People hoard precious commodities to keep them expensive or because they are expensive and portable. Remember, a grifter is a con artist who leaves town before he can get caught in his swindles. When people live insecure lives they typically keep valuable items they can pawn or sell in an emergency.
However, greenbacks, as long as they were legal tender, fiat money, valid for "all debts public and private", don't need to be redeemed for gold or silver. They needed to be rolled over into new issues of greenbacks, the excess taxed out of existence. As long as there are no (or minimal) interest charges on them, this could happen indefinitely. And indeed there are still treasury notes in limited quantities in circulation to this day and nobody is worried about them being "irredeemable." They do worry about them losing value due to inflation. Greenbacks needed to be "regulated," not redeemed. The sovereignty of US currency needed to be regulated, not the "bad money" retired from circulation. It wasn't bad as money. Gresham's law is misleading except when talking about money as a commodity.
Indeed by 1873 Ulysses S Grant would say about our currency:
"The experience of the present panic has proven that the currency of the country, based, as it is, upon the credit of the country, is the best that has ever been devised. Usually in times of such trials currency has become worthless, or so much depreciated in value as to inflate the values of all the necessaries of life as compared with the currency. Everyone holding it has been anxious to dispose of it on any terms. Now we witness the reverse. Holders of currency hoard it as they did gold in former experiences of a like nature." [5th Annual Message]
That currency he referred to, included Greenbacks.
Commodity Money and Private Banking
But there was a darker reason why greenbacks were opposed. Financiers and monied men prefer Commodity Money because it works for them. All money needs to be backed up by the faith and credit --> and sureties, of an institution that can redeem the value of debts and obligations. Commodity money was the residue for chaotic, piratical government. One can verify the purity and weight of gold and silver. Pirates can exchange gold and silver with other pirates from any culture, language or nation. All that is needed is standard weights and measures. Moreover, bankers learned long ago that they can hoard money and still turn a profit. They do this with letters of credit.
Banking as Privateering
Indeed it was privateering money that made officials, economists and leading people afraid of public money. Monied Privateers (bankers and pirates alike) could issue letters of credit based on their hoards of gold or silver can be hoarded. By issuing those letters of credit as debt money, they not only never had to touch their own gold, but should anything go wrong could seize the assets of the people they loaned to!
Debt Money and Capitalism
What drives capitalist society is debt money. And what makes debt money pernicious is that it operates as a rigged casino. The players in a capitalist casino have to pay for their chips, pay interest on their chips and the bank always wins the bets too. When that the "bad money" of debt, pushes the "good money" of gold or silver out of circulation, it accumulates to a tiny portion of society. So in any society where debt money is allowed to take the place of sovereign or commodity money, the debt takes its place. Who needs canon or a ship when one can lend people money and use constables and sheriffs to take their property?!?
Privateering with printed money
Thus Private money is the circulation of debt. Thus it is a privateering form of Fiat Money! Of course without the law (fiat) it is only a fraudulent kind of fiat money once something goes wrong with the private money supplier. [expect that with bitcoin] Because of this efforts to reform the banking system just led to the US Government restamping private notes as legal tender. This, rather than long term stabilizing, spread risk, and thus allowed the risk of unscrupulous banks transferred to their victims and national government. Greenbacks were not the problem. Privateering bank notes were. But Salmon Chase and Grant never figured out they were being conned.
There is never enough Gold or Silver to support an economy. And where those kinds of money are mixed with other kinds of money, the other kinds of money will only enable the gold or silver to be hoarded or traded to other countries unless such trade is regulated and taxed. If a country cannot control its currency, then merchants won't accept the currency. When a country privatizes its money supply, the incentives are all on the privateers to exchange good money for bad money and hoard the good money or assets backing the money. Private money had a disturbing tendency to be printed in quantities exceeding the assets that purportedly back it. So before we nationalized our money supply banks regularly suffered "runs on themselves." Using a Central bank to avoid that spreads the risk but doesn't eliminate it. Fiat printed money run through privateers is a sure way to enrich the few and empoverish the many.
Greenbacks were actually a healthy kind of money. But that is not how they were depicted. And the Grant Administration suffered from this happening on their watch. The Privateers treated greenbacks as "irredeemable debt" and disparaged that form of money, while turning a blind eye to private notes which were far less safe.
Money as a Unit of Account.
Even when money is based on a commodity like gold or silver, money's real value has always been as a "unit of account." Money is a measure of "relative value." For example 15 ounces of Silver are usually approximately equivalent to one ounce of gold, because silver is more common as a commodity than Gold, and because Gold has qualities that people value 15 times more than silver of the same weight. Measuring apples against Oranges is possible due to the relative value of apples and oranges, which is a function of the relative availability/scarcity of those goods, and their quality as food compared to other goods that people have a budget of trade goods to exchange them for. Money allows those values to have a common measure. Money is a creature of good government, of "standard weights and measures." And this is true whether one is talking about commodity money like Gold or Silver, or fiat money, money's value depends on its exchange value in markets.
Therefore what makes money valuable is that it can be used to measure value. What makes it dangerous is when it is issued as debt money and when the amount of debt starts to exceed the ability of folks to carry that debt.
Grant and his officials weren't prepared for what happened to the economy when they tried to "fix it." by fixing the wrong problem. On this subject, (and at the time this subject only) it was the Democrats who had been right.
"As his first Presidential Act, Grant signed a law promising that the Federal Government would pay holders of U.S.Bonds in 'gold or its equivalent' and would redeem the greenbacks as soon as practicable." [Biography]
Farmers didn't want greenbacks out of circulation. Only the wealthy, well connected or high status employed thought redeeming all greenbacks was a good idea.
"Grant initiated strong federal action to pay down the national debt. He believed 'sound money' was the best way to restore the economy, whereas Democrats focused on relief for farmers and small business owners through printing paper money." [Biography]
The risk of Gold and Silver
The Democrats were right on this subject too. The problem is that what they thought was "sound money:" debt money and gold/silver, have their own risks.
"Grant gave his talented chief financial officer, George Boutwell, wide latitude to carry out his mandate to reduce the national debt. With Grant's support, Senator John Sherman steered through the Senate the Public Credit Act, which allowed those who had purchased bonds to support the Civil War to be repaid in 'gold coin or its equivalent.'" [Biography]
This setup speculative attempts of insiders to corner the market.
"Boutwell instigated reforms at the Treasury Department to improve tax collection and limit counterfeiting." They kept the money supply level, the price of gold low and reduced the national debt." [Biography]
Most of this was good policy. In that time, a gold standard was necessary to protect the US economy in a world system that used the Gold Standard. However, the money supply level did not need to be contracted or kept small. It needed to be big enough to sustain the economy.
they sold "gold at a discount" and bought up "wartime bonds." "Grant and Boutwell intended to reduce the supply of greenbacks, or paper money, and replace them with gold. By the end of May (1861) Boutwell had reduced the national debt by 12 million."[Biography]
Never Enough Gold
This policy sounded "sound" but there would never be enough gold or silver to sustain a growing economy. It pretty much guaranteed that eventually the economy would collapse. And ....
Meanwhile James Fisk, who owned the Erie Railroad, and Jay Gould, who'd made a fortune war-profiteering worked with Abel Rathborne Corbin who'd married Grant's sister, conspired to try to corner the Gold Market. Boutwell had kept the price of gold stable, but he lobbied the President to think that letting the price rise would be a good thing. And that continued until Grant caught on to being played. At which point he directed that Boutwell sell enough Gold to bring the game to an end.
"Along with finally loosening Gould and Fisk’s grasp on the gold market, the news sent Wall Street into a tailspin. “Possibly no avalanche ever swept with more terrible violence,” the New York Herald later wrote. Within minutes, the inflated gold prices plummeted from $160 to $133. The stock market joined in on the plunge, dropping a full 20 percentage points and bankrupting or inflicting severe damage on some of Wall Street’s most venerable firms. Thousands of speculators were left financially ruined, and at least one committed suicide. Foreign trade ground to a halt. Farmers may have felt the squeeze most of all, with many seeing the value of their wheat and corn harvests dip by 50 percent." [black Friday]
The thing is that while Gould and Fisk's efforts to corner the Gold market was the proximate cause of the resulting panic, it was probably Boutwell's efforts to reduce the money supply and put the country on a Gold Standard that made depression inevitable. Depression hit the country with the proximate cause of the Credit Mobilier Scandal of 1873. And continuing of "hard money" policies made the panic worse:
"absence of government relief -- meant untold misery and suffereing spread as fall turned to the winter of 1873-1874." [Biography]
Grant's policies didn't work because the problem wasn't with greenbacks or Federal Debt, but with private debt and corruption.
Irving Fisher on Credit Money and Dysfunction
50 years after the civil war and over 100 years ago Irving fisher pointed out the insanity of the money as debt system. An article on Fisher in "The Economist" notes about how money as debt, and excessive borrowing can destabilize an economy. Historically he was referring to the periodic and awful "panics" and depressions that had occurred in prior years, including Grant's efforts to balance the budget:
"As the underlying collateral declines in value and incomes shrink, the real burden of debt rises. Debts go bad, weakening banks, forcing asset sales and driving prices down further. Fisher showed how such a spiral could turn mere busts into depressions." [Economist]
It might have sound like a sound idea to reduce the money supply, but it enabled monied men like Gould and the perpetrators of the Credit Mobilier scandal to speculate and convert public money to their own pockets.
Money as Debt
"Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money. The very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate…the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip." [Economist]
Austerity is Counter Productive
Austerity on a family budget model is counter productive.
In 1911, in “The Purchasing Power of Money”, Fisher formalized the quantity theory of money, which holds that the supply of money times its velocity—the rate at which a dollar circulates through the market—is equal to output multiplied by the price level. Perhaps more important, he explained how changing velocity and prices could cause real interest rates to deviate from nominal ones. In this way, monetary forces could produce booms and busts, although they had no long-run effect on output. Furthermore, Fisher held that the dollar's value should be maintained relative not to gold but to a basket of commodities, making him the spiritual father of all modern central banks that target price stability. [Economist]
Spending Money into Existence
Fisher was drawing on experiences including those of the Civil War and Reconstruction. And it turns out that asserting sovereignty over money is key to fiscal policy being successful. The further refinement is that fiscal or money policy must be targeted at key industry and expansive investment or it is less effective.
"Keynes's advocacy of aggressive fiscal policy overcame the limitations of Fisher's purely monetary remedies for the Depression."[Economist]
If the government is sovereign over its money than purely monetary remedies aren't burdened by excessive interest and can focus on relief and investment in the infrastructure and key industries to be successful. Which then happens!
What Scares the Pirates!
The very idea of sovereign money scares some conservatives but not all of them, for example 2 years ago the writer/"economist" John T. Harvey, in an article, "Can America Afford Bernie Sanders' Agenda?" conceded that Sovereign Money:
"The US can never be forced to default on the national debt, no matter how large."
All Grant had to do was to ensure that there was enough money for people to do their business and that taxes and law enforcement were used to reduce hoarding, speculation and monopoly power. As Harvey noted when talking about Bernie's agenda:
“anyone who says the federal government doesn’t have the budget to manage Sanders’ (or anyone else’s) programs doesn’t understand how modern macroeconomies work. The federal government’s budget is not analogous to your own and it cannot run out of money (for a longer explanation of this, see The Big Danger In Cutting The Deficit). If they want to say instead that his agenda (Bernie Sanders: Agenda for America) will push us to the point that our resources will be fully employed, that’s possible.” Harvey
We can learn from the mistakes of other people.
Aristotle explained the real problem:
“The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of any modes of getting wealth this is the most unnatural.” [Quantum of Power]
Sources from Grant Biography
- "American Ulysses, A Life of Ulysses S. Grant by Ronald C White"
- Black Friday: http://www.history.com/news/the-black-friday-gold-scandal-145-years-ago
Further Reading and Previous Posts
- Sovereign Money:
- Irving Fisher
- Economist: http://www.economist.com/node/13104022
- Irving Fisher and his outlines of a solution
- First Post on Stamp Scripts & Irving Fisherhttp://holtesthoughts.blogspot.com/2015/02/postal-banking-stamp-scripts-and-fixing.html
- Second Post on Stamp Scripts: [http://holtesthoughts.blogspot.com/2015/02/irving-fisher-and-stamp-script.html]
- Readings on Money
- Actual Book; "Money, Whence It Came, Where It Went, c1975"
- Hamilton On Money
- Franklin on Money
- This guy Gary North, claims that the famous franklin quote is bogus [http://www.garynorth.com/public/6882.cfm]
- But Franklin's speech to Parliament refutes any idea that Franklin accepted Parliament's authority to prohibit paper money:
- Attributes of a Virtuous Commonwealth
- Commonwealth According to Locke"
- The Concept of Commonwealth as antidote to Tyranny
- Why Social Programs are an Investment
- The Bogus Wall Street Article "Price Tag of Bernie Sanders’s Proposals: $18 Trillion":
- Derivative Business Insider Article:
- Robert Reich's Article:
- Forbes: Can America Afford Sanders' Agenda? by John T. Harvey:
- Quantum of Power by Arslan Ibrahim
- I started this post back in September 28, 2015 as part of a review of the book "Innocent Fraud" and some reading I'd done on James Galbraith and Irving Fisher. I was intending to finish it as a pseudo academic work pointing to the evils of aristocracy and what to do about them. But then we elected Donald Trump. And it keeps morphing.