This continues a post Tory Economics Versus Benjamin Franklin which in turn completes something I wrote back in 2015. Benjamin Franklin was no angel, but his observations about money and economics were on point. And he made some important points about the money supply that seem to have been deliberately forgotten, again and again, in subsequent years.
The Value of Accounting Money
Franklin's main points still stand. The value of money is related to the aggregate value of the goods and services in an economy:
"It is not legal tender laws or fixed exchange rates between paper money and gold and silver coins but the quantity of paper money relative to the volume of internal trade within the colony that governs the value of paper money. An excess of paper money relative to the volume of internal trade causes it to lose value (depreciate). " [Ben Franklin]
Accounting Money should measure value
The material that money is made of can fluctuate in value, or even become worthless, depending on the use of that material. So, as Frankling points out:
"gold and silver are of no permanent value and so paper monies linked to or backed by gold and silver, as with bank paper money in Europe, are of no permanent value." [Ben Franklin]
The Continental Congress ignored Franklin's ideas
It would have saved Hamilton, Jefferson, A. Jackson, the Morrises not to mention Salmon Chase & Grant, Herbert Hoover or F.D. Roosevelt.... if only they'd paid attention to Franklin's little treatise. Hamilton and the Morrises threw out Franklins ideas, and by the time they did he was too tired to try to argue with them.
"The Continental dollar was not backed by land assets through a land-bank scheme. It was backed by future taxes to be collected by the states rather than by Congress, which could not yet enact its own taxes. In the end, these taxes were seldom collected. [Ben Franklin]
A Land Bank Would have Made Sense
And that could come back to haunt them. The United States acquired vast tracts of lands, let speculators speculate on it, and suffered a massive depression caused by the collapse of that speculation in the 1790s which put Robert Morris in debtors prison and helped elect Thomas Jefferson. I imagine Franklin's shade whispering "I told you so" to them because he had warned them.
"that land is a more certain and steady asset with which to back paper money. For a given colony, its supply will not fluctuate with trade as much as gold and silver do, nor will its supply be subject to long-run expansion." [Ben Franklin]
Yes as the country expanded the amount of land expanded rapidly, but that was a good thing. And the frontier was often hampered by the same issues that Franklin talked about in his testimony to Parliament [see Tory Economics] All that could have been mitigated with:
"“coined land” or a properly run land bank will automatically stabilize the quantity of paper money issued — never too much and never too little to carry on the province’s internal trade. If there is too little paper money, the barter cost of trade will be high, and people will borrow more money on their landed security to reap the gains of the lowered costs that result when money is used to make transactions. A properly run land bank will never loan more paper money than the landed security available to back it, and so the value of paper money, through this limit on its quantity, will never fall below that of land" [Ben Franklin]
Such a land bank also would have (or should have) ensured that there was sufficient revenue to local and national government. As the money and land privilege could have been explicitly subject to legitimate and legal taxation.
But even before the Constitutional Convention:
"Colonial legislatures did not always follow this land-bank institutional design. They often issued large amounts of paper money directly to pay for emergency military expenditures, promising to redeem the paper money through future taxes. Imbalances between money issued in this way and then withdrawn from circulation through future taxes could potentially push the economy away from Franklin’s automatically stabilizing monetary equilibrium." [Ben Franklin]
Politicians don't always listen to sages
A Right and Duty to Regulate the Currency and Commerce
Good ideas, whether they are Keynesian, Georgist, or from elsewhere are neither Sailor nor Admiral Proof in the face the temptations of greed and ambition. Robert Morris thought he could make a killing by buying Continental Soldier pay that was tied to land grants. He lost his shirt instead. The boom and bust cycle is not driven by invisible forces but by hubris and greed. The outlines for economies that work have been obvious for hundreds of years, yet regularly get ignored.
But there is no real moral objection to society regulating itself and Benjamin Franklin stated it.
“Where there is a free government, and the people make their own laws by their representatives, I see no injustice in their obliging one another to take their own paper money. It is no more so than compelling a man by law to take his own note." [Ben Franklin]
Within our communities we need to be able to regulate our own commerce. Between our communities we need "consent of the governed" to extend that control. It is this forcing of people to accept unfair trade exchanges that is oppressive and keeps people down.
Further Reading & related Posts
- Principles of Federalism
- Sustainable Economic Policy
Each has links to other posts and articles