A Brief History of Money in the USA
THE MONEY POWER VS THE CONSTITUTION
Driving 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 MANS NATURE
That 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 US.
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 UNDEFINED
Well 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 MONEY
The 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 NATURE
The 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 f actors?
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 lets 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 MONEY
English 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 MONEY
Pennsylvania, 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 L15,000 of paper money at 5% interest for 8 years. L250 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 REVOLUTION
The 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.”
Congress did not exceed its authorized issue of $200 million (except to replace worn out notes), but the British certainly did’ We don’t know how much they counterfeited, but it could have been billions; and yet the Continental currency continued to function! In March 1778 after 3 years of war, it was at $2.01 Continental for $1 of coinage.
General Henry Clinton complained to Lord George Germaine that “The experiments suggested by your lordships have been tried, no assistance that could be drawn from the power of gold or the arts of counterfeiting have been left untried but still the currency … has not failed.”
Finally it did fail, but not before providing the foundation for delivering the nation, carrying the revolution over 5 years to within 6 months of its victory. Thomas Paine wrote:
“Every stone in the bridge that has carried us over, seems to have a claim upon our esteem. But this was a corner stone, and its usefulness cannot be forgotten.” (p.116)
CONSTITUTIONAL CONVENTION DOWNPLAYED US EXPERIENCE
Yet by the time of the Convention, the great benefits of the Continentals was nearly ignored; along with much of the rest of our hard won monetary experiences. Many wanted to emphasize that the Continentals became worthless; placed all abstract money under that cloud, and rejected the idea of paper money altogether.
They ignored the fact that paper money was crucial in giving us a nation; that abstract money usually requires an advanced legal system in place; that the normal method of assuring its acceptability is to allow the taxes to be paid in it. And then there was the little matter of a War against the world’s strongest power!
Tom Paine would say it best:
“But to suppose as some did, that, at the end of the war, it was to grow into gold or silver or become equal thereto was to suppose that we were to get $200 millions of dollars by going to war, instead of paying the cost of carrying it on.” (p.117)
CONVENTION SKIRTS THE MONEY ISSUE
The Convention met from May to September, 1787, but the money question was not taken up in earnest until August 16! When we think of the “Founders” at the Convention, we should remember that Jefferson and Paine were not there; and Franklin was so advanced in age that someone else had to deliver his closing speech for him. Van Buren was 6 years old.
In addition to ignoring the nations rich practical experience with money, the convention paid little heed to the brilliant writings of John Locke and Benjamin Franklin on money. The delegates didn’t bother to find out why Locke in 1718 wrote:
“Observe well these rules: It is a very common mistake to say that money is a commodity … Bullion is valued by its weight … money is valued by its stamp.”
Locke viewed money as a pledge for wealth, rather than wealth itself:
“For mankind having consented to put an imaginary value upon gold and silver by reason of their durableness, scarcity and not being liable to be counterfeited; have made them by general consent, the common pledges … they having as money, no other value, but as pledges … and they procure what we want or desire only by their quantity, it is evident that the intrinsic value of silver and gold, used in commerce is nothing but their quantity.”
They didn’t consider the reasons Ben Franklin gave in his 1729 “Modest Inquiry Into The Nature And Necessity Of A Paper Currency, for agreeing with Locke’s view: “Silver and gold…(are) of no certain permanent value…” and “We must distinguish between money as it is bullion, which is merchandise, and as by being coined it is made a currency; for its value as merchandize and its value as a currency are two distinct things …”
THE ABUSE OF MONETARY THEORY
Unfortunately the delegates were more influenced by a crude and primitive theory which heavily supported the Bank of England, and contained several crucial monetary errors, which tended to “legitimize” the Bank’s system of finance. This theory of money was part of Adam Smith’s WEALTH OF NATIONS, published in 1776, and quoted by delegates to the Convention. Smith wrote very little about money, but his monetary mistakes and inconsistencies have had such a bad effect an mankind’s money systems, that we’ll devote a full chapter to him later. His book promoted the idea that only gold and silver are money, and never mentions the
legal concept of money, as put forward by the philosophers and jurists Bishop Berkeley, John Locke, Julius Paulus, Plato, Aristotle, and others.
In 1786, anticipating the Convention, a very curious book, “ESSAYS ON MONEY” was published anonymously in the US Its entire thrust was to “theoretically” attack the idea of government paper money:
“State bills are an absurd form of money and not money at all.”
Why? – no answer. It turned out to be written by the Clergyman, John Witherspoon. Referring to Locke and Franklin’s views, he misrepresented their point on money, saying:
“They seem to deny the intrinsic value of gold and silver.”
Discussion? – none.
Then, using a rhetorical device, he stated some arguments for government paper money, and stonewalled them, pretending they didn’t matter. Concerning those with personal knowledge of some of the colonies paper money systems:
“We are told by persons of good understanding that (paper money) contributed to (the colonies) growth and improvement.” Rebuttal ? – none. Concerning the fall of the Continental Currency:
“(Some say it was due to the) Counterfeiting … of our enemies”.
Disagreement? No germane discussion.
THE BANKERS UNDERSTOOD
Those delegates who understood money were mainly the bankers, Hamilton, and Robert Morris. Both had attempted to set up private banks to issue money, since 1779, even before the revolution was won. They didn’t want the Nation to have the money power because their intention was to assume that power themselves – to take it from the nation, as had been done in England.
This would soon be demonstrated, when as Van Buren tells us Hamilton and his associates put forward “a funding system, upon the English plan, … as the first great measure of the new government…”
“TO EMIT BILLS OF CREDIT”
The coveted monetary power was contained in those 5 “magic” words. They were already in the Articles of Confederation which was being supplanted. They were the authority under which the Continental Currency came to be issued. “To emit bills of credit” is what the various colonies had done when they created their paper moneys.
Madison recorded the arguments over this provision:
Gov. Morris (Pa.) “The moneyed interest will oppose the plan of government if paper emissions be not prohibited.”
Mr.-Mason (Va.) “The late war could not have been carried on had such a prohibition existed.”
Mr. Ellsworth (CT.) “By withholding the power from the new government, more friends of influence would be gained to it than by almost anything else.”
Madison thought the power was needed for emergencies, but wanted to make its acceptability voluntary, not a legal tender.
The power to create money, long regarded as a key element of sovereignty, was withheld from the new government by the “Moneyed interest”, while they proclaimed the need to strengthen the national government! They tried to get a clause forbidding it, but failed. the Constitution is silent on the power, neither conferring or forbidding it.
What would be the effect of ignoring this power? Delegate Gorham of Massachusetts sluffed it off-. “The power so far as it is necessary or safe, is involved in that of borrowing.”
Really? In other words the government would be forced into borrowing “money’ instead of creating it.
The honest patriots would assume that the government would be borrowing physical assets – gold and silver commodities – and paying interest on it. The bankers however, knew that they would soon have the government borrowing paper bills of credit emitted out of thin air by their private bank, and paying interest on it to the bankers, as was being done in England at the time.
Their bank would be allowed to do what they had blocked the government from doing – to create paper money – their own bank notes, pretending to back them with gold and silver. The bank would be issuing paper money notes not really backed by metal, but pretending to be redeemable in coinage, on the condition that not a lot of people ask for redemption!
So the real question in practice was not whether money was a legal power or a commodity, but whether private banks or the government would be allowed to create paper money. Will the immense power and profit of issuing currency go to the benefit of the whole nation, or to the private bankers? That’s always been the real monetary question in this country.
LIMITED US MONEY “POWERS”
Having been sold the idea of money as a commodity, in particular gold and silver, the Convention took minimal monetary actions. The entire Federal monetary powers in the Constitution are:
” Art.1, sec. 8. The Congress … shall have power … to borrow money on the credit of the United States …
to coin money, regulate the value thereof, and of foreign coin … to provide for the punishment of counterfeiting.”
Regarding the individual States, the Constitution declared:
“Art.1, sec.10. No State shall coin money nor emit bills of credit, nor make anything but gold and silver coin a tender in payment of debts…”
That’s it folks. Note that the monetary power was explicitly denied to the individual states. Alexander Del Mar, the great monetary historian and once head of the US Bureau of Statistics, described this result in his 1899 book THE HISTORY OF MONEY IN AMERICA:
“Never was a great historical event followed by a more feeble sequel. A nation arises to claim for itself liberty and sovereignty. It gains both of these ends by an immense sacrifice of blood and treasure. Then when victory is gained and secured it hands the national credit – that is to say a national treasure over to private individuals, to do as they please with it! … Americans of the revolution had before them … the historical examples of Greece and Rome. In all these states the main contention from first to last between the aristocratic and popular factions arose out of and centered in the monetary system; that greatest of all dispensers of equity or inequity. …
They had only to take care that the seed they planted was genuine and uncontaminated. Nature was certain to do the rest. Well they planted; and now look at the fruit and see what it is that they planted! They planted financial corporations … they planted private money … they planted financial exemptions from public burdens…In a word they planted another revolution.”
Very strong sentiments, but perhaps it was put better by Congressman Benjamin F. Butler in an 1869 speech to Congress on the money question:
“We marvel that they saw so much but they saw not all things.”