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Thursday, June 8, 2017

Tory Economics Versus Benjamin Franklin

https://www.philadelphiafed.org/-/media/publications/economic-education/ben-franklin-and-paper-money-economy.pdf

Franklin saw paper money as a necessary tool for local government in the colonies. The purpose of paper money was, and is, to facilitate commerce. The value of paper money is that it can be used to pay taxes, which in turn are used to pay for services performed for the local jurisdiction. This keeps enough circulation going to facilitate trade and commerce.

Money as letters of Credit

In examining the opinions of the founders about our Federal Credit system and paper money. I found that the Founders had mixed feelings on the subject. Benjamin Franklin was an advocate of Government issued notes. Hamilton despised paper money, but employed it skillfully. 60 years later Samuel Chase was able to establish our first successful national paper currency, but was opposed by "Hard money" men, for whom the conservative were for a Gold Standard and the "liberals" were for silver money. In between there was a fight between those who wanted a national bank and those who wanted a more decentralized system. This post shares some material I developed on Benjamin Franklin and some analysis of what he said.

The Value of Money

Benjamin Franklin saw that requiring money to be paid in gold or silver coins, or bullion, puts a burden on local people they cannot meet because it also draws resources out of the local economy. The money goes out, but nothing comes back. This is how the East India Company, and later the British Colonials, impoverished formerly economically healthy if not rich in gold or silver, people's all over the world, become impoverished.

In some ways I think he understood the proper value of government script better than Hamilton did. A wonderful article on his views notes:

"The Pennsylvania legislature issued its first paper money in 1723 — a modest amount of £15,000 (the equivalent of just over 48,000 Spanish silver dollars), with another £30,000 issued in 1724. This paper money was not linked to or backed by gold and silver money. It was backed by the land assets of subjects who borrowed paper money from the government and by the future taxes owed to the government that could be paid in this paper money. [Philadelphia Fed]

Money as Commerce

Paper money is like stock certificates. It's value doesn't come from its commodity value, but from the value of the goods and services it can be traded for, ultimately including the taxes that need to be paid back to the government. Too little money and economies starve. Too much and there is inflation.

"Franklin notes that after the legislature issued this paper money, internal trade, employment, new construction, and the number of inhabitants in the province all increased. This feet-on-the-ground observation, this scientific empiricism in Franklin’s nature, would have a profound effect on Franklin’s views on money throughout his life." [Philadelphia Fed]

The article is excellent and it also explain why Franklin set us on the road to paper money. I think that had others seen his observations more clearly we'd have gotten off to a better start. Hamilton and Chase would see the drawbacks of money and obsess about that.

Benjamin Franklin and The Value of Paper Money

Benjamin Franklin can be thought of as a pioneer on economics, among other subjects. He was sent to London to defend the Colonies against criticisms in parliament and to lobby them for their rights. He played a role in resolving issues that came from thoughtless laws imposed by Parliament. In the process he vigorously defended the right of the colonies to issue their own script. It may be apocryphal, as alleged by Gary North, that he told Parliament:

"In the Colonies, we issue our own paper money. It is called Colonial Scrip. We issue it to pay the government's approved expenses and charities"

However, those things were true about the colonies, where Parliament didn't suppress them from exercising that right, so it is entirely possible that he explained what they were doing at some point and Gary North's account is based on some second hand record of such a conversation. This is possible because he did vigorously defend the right to use and value of paper money to the Colonies.

Starving the Economy of Money

What is documented in what he he did say that the reasons for rebellion owed:

"To a concurrence of causes: the restraints lately laid on their trade, by which the bringing of foreign gold and silver into the Colonies was prevented; the prohibition of making paper money among themselves, and then demanding a new and heavy tax by stamps; taking away, at the same time, trials by juries, and refusing to receive and hear their humble petitions." [bartleby]

In other words, the colonies were in rebellion because Parliament at the behest of the Bank of England and other Tory forces were seeking to starve the colonies of money. And Franklin says as much:

"The Stamp Act says we shall have no commerce, make no exchange of property with each other, neither purchase nor grant, nor recover debts; we shall neither marry nor make our wills, unless we pay such and such sums; and thus it is intended to extort our money from us or ruin us by the consequence of refusing to pay it." [bartleby]

Defending Our Rights in Parliament

Bad Banking can turn a loyal country into a disloyal one. Gary North alleges that Franklin would never have defied Parliament's prohibition on printing money. I'm afraid I have to disagree. Franklin & the Colonies, did exactly that:

  1. "Do you think the assemblies have a right to levy money on the subject there to grant to the Crown?"
  1. "I certainly think so; they have always done it."
  1. "Are they acquainted with the Declaration of Rights? And do they know that, by that Statute, money is not to be raised on the subject but by consent of Parliament?"
  1. "They are very well acquainted with it."
  1. "How, then, can they think they have a right to levy money for the Crown or for any other than local purposes?"
  1. "They understand that clause to relate to subjects only within the realm; that no money can be levied on them for the Crown but by consent of Parliament. The Colonies are not supposed to be within the realm; they have assemblies of their own, which are their parliaments, and they are, in that respect, in the same situation with Ireland. When money is to be raised for the Crown upon the subject in Ireland, or in the Colonies, the consent is given in the Parliament of Ireland or in the assemblies of the Colonies. They think the Parliament of Great Britain can not properly give that consent till it has representatives from America, for the Petition of Right expressly says it is to be by common consent in Parliament, and the people of America have no representatives in Parliament to make a part of that common consent."
[bartleby]

Vigorously Defending the Rights of Our Country

Franklin vigorously defended the right of the colonies to provide enough paper money to improve commerce. He saw the negative effect of policies that drain money from British Colonies. Representation isn't just "consent", it is also, getting something back for what is given.

Nevertheless, Tories, Bankers and later Federalists and "Hard Money" Republicans would be against the use of paper money issued by the treasury. The result would be a cycle of private banks issuing credit money followed by depressions, runs on those banks, and period where money would be scarce. It might not have hurt for folks to read Franklin's 1729 paper on the subject. His role in the post office and banking was probably why the Brits would call him the "evil genius" of our revolution, but it would be better if people actually read him on both those subjects as it was his some of his ideas that made our country successful.

Further Reading and Previous Posts

Ben Franklin
The Kings Best Highway details Franklin's & Post Office role in building democracy:
http://holtesthoughts.blogspot.com/2013/09/the-kings-best-highway.html
https://www.philadelphiafed.org/-/media/publications/economic-education/ben-franklin-and-paper-money-economy.pdf
http://www.bartleby.com/268/8/10.html
Ben Franklin on Post Office
http://holtesthoughts.blogspot.com/2013/12/organizing-communities-around-post.html
http://holtesthoughts.blogspot.com/2015/07/using-post-office-to-organize-for.html
Irving Fisher and his outlines of a solution
http://holtesthoughts.blogspot.com/2015/09/origins-of-east-india-company-pirates.html
Many Kinds of Privateering
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]
http://realmoneyecon.org/lev2/images/pdfs/100percent_money.pdf
Readings on Money
Actual Book; "Money, Whence It Came, Where It Went, c1975"
Hamilton On Money
http://holtesthoughts.blogspot.com/2015/07/hamilton-on-money.html
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:
http://www.bartleby.com/268/8/10.html
Attributes of a Virtuous Commonwealth
http://holtesthoughts.blogspot.com/2012/08/attributes-of-virtuous-commonwealth.html
Commonwealth According to Locke"
http://holtesthoughts.blogspot.com/2014/09/commonwealth-according-to-locke.html
The Concept of Commonwealth as antidote to Tyranny
http://holtesthoughts.blogspot.com/2012/08/the-concept-of-commonwealth-as-antidote.html
Why Social Programs are an Investment
http://holtesthoughts.blogspot.com/2015/09/why-social-programs-are-investment-and.html

Our Common Plank Ideas

The Bogus Wall Street Article "Price Tag of Bernie Sanders’s Proposals: $18 Trillion":
http://www.wsj.com/articles/price-tag-of-bernie-sanders-proposals-18-trillion-1442271511
Derivative Business Insider Article:
http://www.businessinsider.com/bernie-sanders-isnt-as-progressive-as-you-think-2015-9
Robert Reich's Article:
http://robertreich.org/post/129306966350
Forbes: Can America Afford Sanders' Agenda? by John T. Harvey:
http://www.forbes.com/sites/johntharvey/2015/09/21/can-america-afford-sanders/
Quantum of Power by Arslan Ibrahim
https://www.linkedin.com/pulse/quantum-power-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 also I found more material on Franklin, Hamilton, Grant and the others and realized the subject was unwieldy for one post. So this post is focused on Franklin.

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