An Abbreviated Monetary History of the USA
By Stephen Zarlenga, Director, American Monetary Institute
The MONEY POWER v. The ConstitutionDriving up McCagg Road on my way to the Martin Van Buren birthday memorial, I passed Kinderhook Creek, and a blue metal plaque appeared, marking his birth site. The original house is gone, but, even in the light rain, the site is beautiful, as it must have been when the young Van Buren was growing up in these natural and harmonious surroundings. Just a bit further up the road, his final resting place in Kinderhook Cemetery is marked by a granite obelisk. Only a mile separates these points, but the course his life took between them had a powerful effect on our new nation, and even upon the world.
During the grave site ceremony, a presidential honor guard presents arms, and wreathes are laid. Students from the Van Buren Elementary School tell us that his political genius earned him the nickname of "the little magician"; that his red hair gained him the title of "the red fox of Kinderhook" - and that after serving as Secretary of State and Vice President, Andrew Jackson's support helped him to become the 8th president of the United States.The students are clearly proud of Van Buren, and have every reason to be. For he played a big role in the formative years of our nation, and was a conscious warrior in the battle over a Grand Theme of humanity which those early years focused on - and which continues to this day. A battle which he waged as a friend of Thomas Jefferson, James Madison, and Andrew Jackson, against what he called "THE MONEY POWER" (he always capitalized it).
The Grand Theme - Over Man's NatureThat theme is a struggle over the very nature of man. Broadly and simply stated, Does Mankind need to be ruled by authority or are men capable of self-government? The outcome of the fight would not only determine our form of government, but could influence the way humanity would develop. For if authoritarianism were applied, distrusting men to make the correct choices, many might tend to act that way, and their spirits would be damaged. If on the other hand, self government was expected, many men could rise to it, and set an example to the world.
Van Buren gives us a compelling "blow by blow" of this battle in his book "The Origin of Political Parties" in The U.S. After the revolution was won in 1781, "It became at once evident that great differences of opinion existed . . . in respect to the character of the government that should be substituted for that which had been overthrown."One viewpoint held that the British system "was the best that could be devised to promote the welfare and secure the happiness of Mankind". Although they had been "prompt to resist tyranny" and were "stung by the oppressions practiced upon the colonies by the British Government", IN THEORY they "tolerated its forms and constitution." This was the view of the Federalist Party, which included most of the merchants and was led by the banker Alexander Hamilton.
It was the Federalists who had pushed for the Constitutional Convention in 1787, to re-make the Confederation of states into a stronger national government. Reacting to the Federalist thrust, the opposing popular viewpoint grouped into the Anti Federalists.In their drive for a more powerful central government, Van Buren admits that the Federalists (who he generally opposed) were right. As to their opponents, " . . . they were too much in the habit of regarding (the federal government) at that early period, as a foreign government only remotely responsible to them. Their minds had become thoroughly impressed with a conviction that the disposition to abuse power by those who were entrusted with it was not only inherent and invariable, but incurable, and that it was therefore unwise to grant more than was actually indispensable to the management of public affairs."
These Anti Federalists included most of the landowning farmers. The Americans were familiar with various forms of government, mostly what we now call "command" societies. From Feudal "might makes right" orders, to monarchs sanctioned by "Divine Right", to "constitutional" monarchies. For more self-regulating societies, they had the distant examples of Democracy in Athens and the Republican period of Rome.This antagonism between the two ideologies was compromised in the Constitution. While Hamilton's open desire for a British-style Monarchy had no chance of acceptance, the Constitution which was hammered out did strengthen the national government, but also put clever checks and balances into place, which when combined with Madison's Bill Of Rights APPEARED to block authoritarian rule.
Monetary Power Left UndefinedWell then, the Constitution gave the Federalists a stronger government, and the anti federalists had their checks and balances. Everyone would live happily ever after right? Wrong! The Constitution left open a back door through which a form of authoritarian rule could enter; a form more insidious than monarchy. More dangerous because it was less visible, and not understood, and more threatening still because its center of power was outside the nation, to the east. It would take Jefferson almost twenty years to understand what had been ignored in the Constitution, and he would spend the rest of his life doing battle against the MONEY POWER. Jackson's Presidency became literally a life-and death-struggle with the bankers. Van Buren thought he finally finished them off, in 1840, but he was overly-optimistic. What was the source of so much trouble? The constitution had failed to adequately define the monetary power in the new nation! Authoritarianism had been kept out politically, and religiously, but was allowed to sneak in monetarily. Van Buren recognized this years later when he wrote "The MONEY POWER . . . was itself . . . destined, when firmly established, to become whatever of Aristocracy could co-exist with our political system." But why did the framers of a document so far advanced in its day regarding the balance between legislative, judicial and executive power, not realize that the monetary power if left unchecked, could endanger and ultimately overwhelm the whole edifice?
Confusion Over the Nature of MoneyThe main explanation is that as a group, the founding fathers didn't have a good understanding of the nature of money! Sound far-fetched? Well, even today the various schools of economics have not accurately defined, or even agreed on a concept of money. This may be the greatest failure of economics, since money is at the heart of every aspect of it. Economists are still squabbling over the most basic question about money:
The 2nd Grand Theme - Over Money's NatureThe battle has raged for centuries over this 2nd theme - the nature of money! Simply and broadly stated, is money a concrete power, embodied in a commodity such as gold; or is it an abstract social invention - an institution of the law? Does it obtain its value from the material of which it is made, or from its acceptability in exchanges, due to the sponsorship or even legal requirements of the government? Or is it a hybrid - a combination of these factors?
The supreme importance of the definition of money will now become evident, for if money is primarily a commodity, convenient for making trades, which obtains its value out of "intrinsic" qualities, then it could be viewed more as a creature of merchants and bankers than of governments. However if the true nature of money is an abstract social institution embodied in law - that is, a legal institution, then it is more a creature of governments, and the Constitution had better deal with it adequately.Describing how a uniform currency is to be provided, controlled and kept reasonably stable, in a just manner. So the stakes involved in understanding this "money game" are enormous - whether a nation's rule book, will promote justice, or allow a form of slavery! You may already have an opinion about the "answer" but let's look at some facts first; and remember the saying - "Its not what we don't know that gets us into trouble, but what we think we know, that isn't so!" If the answer to this 2nd grand theme were obvious, the world would be facing far fewer difficulties.
How To Answer the Money Question?There are two basic approaches to this question. A logical, or theoretical approach; and a practical approach based on experience- on the facts- what is called an empirical approach. This last was Van Buren's favored method: " . . . experience, the only unerring test . . . ", he wrote. In the field of money this factual approach relies on history, since that's where mankind's experience with money is found! We also have memories of our own experiences, but the effects of monetary systems often require several generations to become apparent. Keeping in mind that logic can become too divorced from reality, and that experience can be misinterpreted, lets take a look at:
The Colonial Experience With MoneyEnglish laws forbade sending coinage to America. She didn't want the colonies to trade with each other, but to send raw materials back home. The scant coinage in the colonies came mainly from pirates or trade with the Spanish West Indies. The colonists were in dire need of a money system and England refused to provide it, continually placing them in distress. For 10 to 20 years after 1640, more people were going back to England, than were coming here. Out of necessity, the colonies became a kind of monetary laboratory, devising several different monetary solutions.
In the"Country pay period" (1632-1692) many agricultural products were legally declared to be money, at values fixed from time to time. But this wasn't any more efficient than barter everyone wanted to pay with the least desirable commodities, in the worst condition. In 1652 Massachusetts allowed a mint for gold coinage, but the coins quickly found their way back to England, hardly circulating in the colonies. Guarding its monetary prerogative, the Crown called the mint treason, and it was closed.From 1675 to 1739 several privately owned land banks were formed, issuing paper money backed by land. But the colonists shunned this privately issued money, considering that currency should be a function of government, as it was in England until 1694.
Massachusetts Paper Money Experiment
Then in 1690 Massachusetts embarked an a radical experiment, and began to issue "Bills of Credit"; a form of paper money not backed by any physical thing. Rather than a promise to pay any thing, it was a promise to accept the paper bills for all monies due to Massachusetts. At first, this paper was not made a legal tender - that is the people were not forced to accept them, but everyone did and the bills immediately began circulating as money, ending the colony's distress. This money didn't flow back to England like the coinage. This worked exceptionally well for two decades, so long as they were not issued in too great a quantity.Other colonies copied Massachusetts, emitting similar bills of credit. Invariably they transformed life in the colonies, improving industry and commerce; building real infrastructure. When the colonial governments authorized the issuance of too many bills - and this sometimes occurred - their value dropped. But when the paper issues were moderate - and there was no exact science to this - they kept their value well. Of great importance is that the colonies did not issue more bills than their legislatures authorized. They were learning one of the basic laws governing the value of money; that if too much money is circulating, in relation to the work it has to do, its value will start to decline.
Pennsylvania's Paper MoneyPennsylvania, thanks partly to the support of Benjamin Franklin, created a different form of paper money, which was loaned into circulation. In 1723, Pennsylvania was petitioned by a group of merchants to alleviate "the evident decay of the province . . . for want of a medium to buy and sell with, and praying that a paper currency be established." A state loan office was created, authorized to loan, £15,000 of paper money at 5% interest for 8 years. £250 was the maximum loan and the borrower had to pledge collateral - mostly land, and annually pay the interest and 1/8 of the principal.
The results of this circulating medium were so good that more were authorized, and as the loans were repaid, they were loaned out again to others. Pennsylvania used the interest it earned on this paper money, which it created out of thin air, for colonial expenses, thereby reducing taxes.The Lords of Trade and Plantations, the British group charged with overseeing the colonies, had sporadically attacked the colonists paper money systems, but in 1763 they passed a general law against all of them, and in so doing, provided one of the main causes of the revolution.
Continental Currency - Lifeblood of the RevolutionThe skirmishes at Lexington and Concord are considered the start of the Revolt, but the point of no return was probably May 10, 1775 when the Continental Congress assumed the power of sovereignty by issuing its own money. Congress authorized a total of $200 million; and though at first, they had no legal power to do so, had no courts or police, or power to levy taxes; the Continental currency functioned well in the early years and became a crucial part of the revolution. In 1776, it was only at a 5% discount to coinage, when General Howe took over New York city and made it a center for British counterfeiting. Newspaper ads openly offered the forgeries:
"Persons going into other colonies may be supplied with any number of counterfeit Congress notes for the price of the paper per ream. They are so neatly executed that there is no risque in getting them off . . . Enquire for Q.E.D. at the Coffee House from 11 PM to 4 AM."
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