The FORGOTTEN History of Money in the U.S.

Submitted for your consideration while standing by for FURIOUS FLAMES from the FRIENDS OF PAPER MONEY!

(I wrote this a number of years ago when things were NOT going well with the economy. Trust me: They WILL get ugly once again as man -- or certain men -- cannot resist playing God. We continue to violate the universal, immutable laws of economics at our great peril.)

History proves that EVERY house of cards eventually comes down. And the higher the card house, the harder the fall when it finally comes. And when it does, the more freedoms we will voluntarily surrender to "restore order." It was the Founders' concern about this historically valid problem which prompted their attempt -- now ignored -- to keep American "money" sound and honest.)

And I certainly recognize that NO system of commodity backed paper “money” is foolproof (and we now seem to be led by some of history’s biggest fools) how’s the current UNBACKED system working out for you?

I have noted with interest that I have lately been getting far, far fewer flames from the paper money lovers out there. And when, over 2 years ago, I began ranting about the incredibly stupid financial devices (derivatives, mortgage backed securities, etc.) being created to hoodwink the greater fools out there who were snapping up these things, I could count on about half the responders to tell me I was too simple-minded to understand these highly complicated financial “products.” I guess all those really bright financial guys are too busy now washing car windows at traffic lights to post here.

And I’d ask you to consider that when gold and silver come up in the news, the talking heads fall into the old, establishment fostered trap of measuring the precious metals in the rapidly failing paper when they SHOULD remark that it is the metals that are – within the narrow confines of fluctuations caused by their uses as industrial commodities – holding THEIR value and it is the paper that is INFLATING. (The classic example is that around 1900, one could buy a fine man’s suit for one ounce of gold. YOU STILL CAN!!!)

A fiat money system of the sort we are now painfully watching collapse creates a FALSE world of FALSE feelings of well-being and elevated lifestyles. During the expansion phase of such a system, those living under it spend or borrow more than they should, have more children than they can afford and, at the national level, come to believe they can afford to allow a score of millions of illegals to come here for educations, welfare payments, medical care, etc. They reject the immutable and universal economic realities and embrace what my old friend, the late Tupper Saussy, called “the IDEASPHERE.”

Now that the inevitable economic catastrophe is upon us, how much fun is it to watch the idiots in congress who triggered this thing scramble for cover by blaming everyone else? Not much!

The only folks who feel good now are the Hank Paulsons and Obamaites of the world who are in the process of conducting what may prove to be one of the largest raids on the REAL wealth of this nation – our labor and real property – ever witnessed.

And I’ll readily concede that while a precious metals backed money system ain’t perfect, ASK YOURSELF HOW THE FIAT MONEY SYSTEM NOW COLLAPSING ALL AROUND US HAS BEEN WORKING FOR YA’?

"Liberty lies in the hearts of men and women; if it dies there, no constitution, no law, no court can save it." -- Judge Learned Hand, 1944

The Forgotten History of Money This is the fascinating story of the efforts by certain of the Founding Fathers to prevent the economic distress we find all about us today. It is also a sad story on the basis that modern, "sophisticated" Americans have abandoned the corrective institutional mechanism that remains in place to this day. As you read it, think about a world with many fewer S&L, banking and political scandals and economic problems now considered the norm.

"Blood running in the streets. Mobs of rioters and demonstrators threatening banks and legislatures. Looting of shop and home. Strikes and unemployment. Trade and distribution paralyzed. Shortages of food. Bankruptcies everywhere. Court dockets overloaded. Kidnappings for heavy ransom. Sexual perversion, drunkenness, lawlessness rampant. The wheels of government are clogged, and we are descending into the vale of confusion and darkness. No day was ever more clouded than the present. We are fast verging on anarchy and confusion. (George Washington in a 1786 letter to James Madison, describing the effects of fiat paper money inflation then ravaging America in the pre Constitutional period.)

"The annihilation (of the paper money) was so complete that barber shops were papered in jest with the bills; and sailors, on returning from cruises, being paid off in bundles of this worthless money, had suits made of it, and with characteristic lightheartedness, turned their loss into frolic by parading through the streets in decayed finery which in its better days had passed for thousands of dollars." (Contemporary writer, Breck, 1786)

"Paper money polluted the equity of our laws, turned them into engines of oppression, corrupted the justice of our public administration, destroyed the fortunes of thousands who had confidence in it, enervated the trade and husbandry, and the manufactures of our country, and went far to destroy the morality of out people." (Peletiah Webster, 1786)

At the drafting of the U.S.Constitution, there were many "Friends of Paper Money" present. On August 16, 1787, when the discussion arose on Article 1, Section 8, the proposed wording was this: "The Legislature of the United States shall have the power to...coin money...and emit bills of credit of the United States."

A hot argument ensued on the power to emit bills of credit, which is another way of saying "printing paper money".

Here are the actual words James Madison wrote describing the debate in his diary: "Mr.G.Morris moved to strike out *and emit bills of credit.* If the United States had credit, such bills would be unnecessary; if they had not, unjust and useless.

MADISON: Will it not be sufficient to prohibit the making them a tender? This will remove the temptation to emit them with unjust views. And promissory notes in that shape may in some emergencies be best. MORRIS: Striking out the words will leave room still for notes of a responsible minister which will do the good without the mischief. The monied interest will oppose the plan of the Government, if paper emissions be not prohibited. COL.MASON: Though he had a mortal hatred to paper money, yet as he could not foresee all emergencies, we was unwilling to tie the hands of the Legislature [Legislature = Congress]. MR.MERCER:(A friend to paper money) It was impolitic...to excite the opposition of all those who were friends to paper money. MR. ELSEWORTH thought this was a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By withholding the power from the new Government, more friends of influence would be gained to it than by almost anything else...Give the Government credit, and other will offer. The power may do harm, never good. MR.WILSON: It will have a most salutary influence on the credit of the United States to remove the possibility of paper money. This expedient can never succeed whilst its mischiefs are remembered, and as long as it can be resorted to, it will be a bar to other resources. MR.READ thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelation. MR.LANGDON had rather reject the whole plan than retain the three words *and emit bills*".

Historian George Bancroft later wrote: "James Madison left his testimony that *the pretext for a paper currency, and particularly for making the bills a tender, either for public or private debts, was cut off.* This is the interpretation of the clause, made at the time of its adoption by all the statesmen of that age, not open to dispute because too clear for argument, and never disputed so long as any one man who took part in framing the constitution remained alive."

(Bancroft – founder of the U.S.Naval Academy at Annapolis among other accomplishments – wrote a book on this very subject entitled “A Plea for the Constitution of the United States: Wounded in the House of Its Guardians.” During WWII, FDR – a serious friend of paper money – ostensibly to supply the war effort, ordered the printing plates for many historical books smelted. Bancroft’s book was among them. A photocopy of one of the remaining originals can be found here

http://books.google.com/books?hl=en&id=bE7PP1ePQwgC&dq=Constitution+wounded+in+the+house+of+its+guardians&printsec=frontcover&source=web&ots=iiJ1_2B_IA&sig=ByRM-kVMIDAs4S5OttEqkCXGm8s#PPA4,M1 )

ROGER SHERMAN(1721 1793)should be a name familiar to every American. As familiar as Washington, Madison, Jefferson and Adams. He is the only man to have signed all 4 documents surrounding the formation of the United States of America: The Continental Association of 1774, The Declaration of Independence, The Articles of Confederation and The United States Constitution. He was a Judge of the Superior Court in New Haven, Connecticut, serving that office with distinction from 1766 until 1788. He served as Treasurer of Yale University from 1765 to 1776. He was renouned for his high intelligence and unswerving honesty and was described by John Adams "as honest as an angel and as firm in the cause of American independence as Mount Atlas." He served in the U.S.Senate from 1791 until his death in 1793.

Why is Roger Sherman*s name unfamiliar? HE WAS AN ENEMY OF PAPER MONEY!! In 1751, Roger Sherman and his brother William sued James Battle for paying a debt to their shop in New Milford, Connecticut, in depreciating paper currency. Over a period of 15 months, Battle had charged "divers wares and merchandizes" amounting to 129 pounds of what Sherman assumed were pounds of Connecticut "Old Tenor", a stable currency whose value were well preserved by taxation taking it out of circulation. But Battle assumed the debt was denominated in pounds of ever depreciating Rhode Island currency, tendered in same, and the Shermans took a beating in the payment and sued for recovery of loss by depreciation. The Shermans lost when Battle argued that he was merely following the accepted custom of the day. In 1752, Sherman wrote his book "A Caveat Against Injustice or An Inquiry into the Evils of a Fluctuating Medium of Exchange" indicting UNBACKED PAPER MONEY.

It was this experience that Sherman brought to the Constitutional Convention and prompted him to rise on August 28,1787 and propose new, more restrictive wording to Article 1,Section 10. The standing version under consideration was worded this way: "No state shall coin money; nor grant letters of marque and reprisal; nor enter into any Treaty, alliance, or confederation; nor grant any title of Nobility." (From Madison’s Notes of the Convention) "Judge Sherman and Mr. Wilson moved to insert the words *coin money* the words *nor emit bills of credit, nor make any thing but gold and silver coin a tender in payment of debts* making these prohibitions absolute, instead of making the measures allowable with the consent of the Legislature of the U.S. Mr. Sherman thought this a FAVORABLE CRISIS FOR CRUSHING PAPER MONEY. If the consent of the Legislature could authorize emissions of it, the friends of paper money would make every exertion to get into the Legislature in order to license it." Mr. Sherman*s and Mr. Wilson*s motion was quickly agreed to and became the supreme law of the land.

"All the perplexities, confusion and distress in America arise not from defects in the constitution or confederation, nor from a want of honor or virtue so much as from downright ignorance of the nature of coin, credit and circulation" (John Adams in a letter to Thomas Jefferson, 1787)

"I deny the power of the general government to making paper money, or anything else, a legal tender." (Thomas Jefferson)

"You have been doubtless been informed, from time to time, of the happy progress of our affairs. The principal difficulties seem in great measure to have been surmounted. Our revenues have been considerably more productive than it was imagined they would be. I mention this to show the spirit of enterprise that prevails." (George Washington in a letter to the Marquis de LaFayette, June 3, 1790 AFTER the United States Constitution prohibited unbacked paper money at Article 1, Section 10)

"Since the federal constitution has removed all danger of our having a paper tender, our trade is advanced fifty percent. Our monied people can trust their cash abroad, and have brought their coin into circulation." (December 16, 1789 edition of The Pennsylvania Gazette)

"Our country, my dear sir, is fast progressing in its political importance and social happiness." (George Washington in a letter to the Marquis de LaFayette, March 19, 1791)

"The United States enjoys a sense of prosperity and tranquility under the new government that could hardly have been hoped for." (George Washington in a letter to Catherine Macaulay Graham, July 19,1791)

"Tranquility reigns among the people with that disposition towards the general government which is likely to preserve it. Our public credit stands on that high ground which three years ago would have been considered as a species of madness to have foretold." (George Washington in a letter to David Humphreys, July 20, 1791)

"It is apparent from the whole context of the Constitution as well as the times which gave birth to it, that it was the purpose of the Convention to establish a currency consisting of the precious metals. These were adopted by a permanent rule excluding the use of a perishable medium of exchange, such as certain agricultural commodities recognized by the statutes of some States as tender for debts, or the still more pernicious expedient of PAPER CURRENCY." (Andrew Jackson, 8th Annual Message to Congress, December 5, 1836)

DESPITE WHAT YOU WERE TAUGHT IN SCHOOL, THE HISTORICAL RECORD IS CRYSTAL CLEAR: AMERICA WAS TO HAVE BEEN SPARED THE DESTRUCTIVE EFFECTS OF AN UNBACKED PAPER MONEY SYSTEM. MOST OF THE PROBLEMS WE FACE TODAY CAN BE TRACED TO WHAT ANDREW JACKSON CALLED "THE PERNICIOUS EXPEDIENT OF PAPER MONEY".

HISTORY TEACHES THAT AN "ARTIFICIAL" MONEY CREATES AN "ARTIFICIAL" WORLD WHERE THE PRICE FOR SOME ITEM...EVEN OUR MOST POPULAR WELFARE "PROGRAM"...CAN BE DEFERRED TO FUTURE GENERATIONS (OUR $11 TRILLION NATIONAL DEBT) OR PAID WITH A "MONEY" CREATED OUT OF THIN AIR WHICH ROBS THE VALUE FROM THE MONEY WE MIGHT BE UNFORTUNATE ENOUGH TO HAVE IN OUR POCKETS AT THAT MOMENT (INFLATION). AND ONE THING YOU MUST REMEMBER ABOUT INFLATION IS THAT IT IS NOT AN "EQUAL OPPORTUNITY" DESTROYER: THOSE FIRST IN LINE TO GET THEIR HANDS ON THE NEW MONEY ROLLING OFF THE PRESSES (THE MODERN FRIENDS OF PAPER MONEY) HAVE A CHANCE TO SPEND IT BEFORE IT LOSES ITS VALUE. THE LITTLE PEOPLE (THAT’S US, FOLKS!) FARTHEST DOWN THE LINE ARE THE ONES WHO FEEL THE FULLEST EFFECTS OF THIS DESTRUCTIVE PROCESS.

Fractional reserve banking refers to what percentage of demand deposits are actually backed by currency. The way it has been taught to me practically is that fractional reserve banking implies that both depositor and whoever has acquired a loan from the bank have access to the depositor’s money.

By that definition, in your example, so long as the depositor understands that he can not access more than 10% of his money until x amount of time has passed, there is no fractional reserve banking, only the combination 2 different kinds of banking, i.e. deposit banking and loan banking.

If however the bank loans out the gold coins without the depositor’s knowledge and the depositor still expects to be able to use of his money, the bank has effectively said there is $1,900 ($1,000 for the depositor and $900 for the borrower) of gold when there is only $1,000. The depositor will likely soon find out his money isn’t there and the bank will go bankrupt. Or perhaps a deal can be made whereby the depositor agrees to wait for the loan to be repaid in exchange for some of the bank’s interest on that loan, in which case we have something like the example above.

If the bank issues paper instead of actually loaning out the physical gold, then you will have a situation where there is $1,900 in currency ($1,000 in gold coins and $900 of paper redeemable in gold) backed by only $1,000 in gold. So long as nobody cashes in the paper for gold, the downside here is *only* an inflation of $900, which could potentially be destroyed upon repayment of the loan. Though here we have a situation resembling embezzlement: even if you return the company’s money without anyone finding out, you have still committed an illegal act.

Fractional reserve banking refers to what percentage of demand deposits are actually backed by currency.

Try banks hold a fraction of deposits as reserves.

The way it has been taught to me practically is that fractional reserve banking implies that both depositor and whoever has acquired a loan from the bank have access to the depositor’s money.

Wrong. The borrower already took their money.

By that definition, in your example, so long as the depositor understands that he can not access more than 10% of his money until x amount of time has passed

Wrong, the depositor can access 100% of his money.

If however the bank loans out the gold coins without the depositor’s knowledge

If you don't know that the bank wants your deposit so they can loan it out, you're too dumb to have a bank account.

the bank has effectively said there is $1,900 ($1,000 for the depositor and $900 for the borrower) of gold when there is only $1,000.

Wrong again. The bank has $1000 in assets and $1000 in liabilities.

The depositor will likely soon find out his money isn’t there and the bank will go bankrupt

Yeah, that's why every bank goes out of business after they make their first loan.

If the bank issues paper instead of actually loaning out the physical gold

If you deposited gold, they have gold to loan. If you deposit paper, they can loan paper. It's not that complicated.

You do have to be able to add and subtract.

Aren’t we talking about a hypothetical situation under a gold standard?

***Try banks hold a fraction of deposits as reserves.***

That’s never the context it’s used in, in all my experiences. If that’s the definition then yes, it is entirely possible to have a gold standard and fractional reserve banking. If however the definition is that demand deposits are only fractionally backed by currency, then a true gold standard isn’t possible. Like I said, that’s the definition I’ve always seen used.

***Wrong. The borrower already took their money.***

What? In your example, yes the borrower has already taken the money, but in a fractional reserve system the money is supposed to be available to both parties. I’m confused as to what you’re saying I’m wrong about.

***Wrong, the depositor can access 100% of his money.***

How can the borrower access his money if 90% of it is loaned out? Are we not talking about a system where loans are made from a banks demand deposits with no monetary inflation?

***If you don’t know that the bank wants your deposit so they can loan it out, you’re too dumb to have a bank account.***

In today’s world that’s probably true, but irrelevant to the discussion.

***Wrong again. The bank has $1000 in assets and $1000 in liabilities.***

I didn’t say the bank increased it’s liabilities and assets. I said it effectively is saying that there is now $1,900. If the depositor expects full use of his funds ($1,000) and that’s the message the bank gives him, and they make a loan from his money of $900, then of course they haven’t increased their liabilities or assets, but they are in effect saying that there is $1,900, because they have implied that the depositor may get his money any time he likes. Obviously that isn’t true and the bank is hoping the depositor doesn’t come in and collect his money until the loan is repaid.

***Yeah, that’s why every bank goes out of business after they make their first loan.***

What? This is a completely hypothetical situation in which a bank is engaging in loaning out the depositor’s money and the depositor comes in to collect his money. In that case, the bank would not be able to pay the depositor and it would go bankrupt.

***If you deposited gold, they have gold to loan. If you deposit paper, they can loan paper. It’s not that complicated.***

A bank doesn’t have to lend gold if gold was deposited. That’s what I meant by loaning paper (i.e. paper receipts to gold in their vaults, or in other words paper backed by gold). I thought that was understood, but I guess mea cupla if it wasn’t.

Aren’t we talking about a hypothetical situation under a gold standard?

No, we're talking about how banks worked under a gold standard.

If however the definition is that demand deposits are only fractionally backed by currency,

If a bank can loan any part of deposits, their deposits are only fractionally backed.

in a fractional reserve system the money is supposed to be available to both parties.

If you borrowed money, you already have the money. Nothing "available" about it. It's in your hand.

How can the borrower access his money if 90% of it is loaned out?

The bank can sell the loan to get the funds you withdraw. They can borrow excess reserves from another bank. They can sell CDs or raise additional deposits.

Are we not talking about a system where loans are made from a banks demand deposits

We are.

with no monetary inflation?

Who said anything about that?

I didn’t say the bank increased it’s liabilities and assets. I said it effectively is saying that there is now $1,900.

The depositor has $1000, the borrower has $900.

A bank doesn’t have to lend gold if gold was deposited.

If all deposits are gold, they have to lend gold.

***No, we’re talking about how banks worked under a gold standard.***

That’s what I said. The situation is hypothetical and it’s under a gold standard.

***If a bank can loan any part of deposits, their deposits are only fractionally backed.***

I understand that, but the key is whether depositors are allowed to access all of their deposits at any time. If they can only access 10% of their deposits and they understand this, then total deposits on demand (that isn’t a technical term in this case, I’m just using the words to show deposits that depositors are allowed to access at any time, i.e. on demand) are only equal to 10% of total deposits (assuming the bank is loaning to its capacity.

The case where the depositors do expect to be able to use their money is what I’m referring to when I say fractional reserve banking, just so we’re on the same page.

***If you borrowed money, you already have the money. Nothing “available” about it. It’s in your hand.***

It’s still “available” if it’s in your hands. If I hold my friends $20 bill, it isn’t available to me, but it is in my hands. If I have $20 in my wallet then it’s available to me but not in my hands. The more important part of the point I’m making is whether or not it’s available to the depositor, because obviously it’s available to the borrower since he has the money, like you said.

***The bank can sell the loan to get the funds you withdraw. They can borrow excess reserves from another bank. They can sell CDs or raise additional deposits.***

But then the bank is still taking money from someone else. It must wait for the loan to be repaid before it is clear of it’s obligations. In the case of a CD for example though, that’s just as if it told the depositor initially that he may not access 90% of his money until the loan made from it is repaid. The CD has a specified date of maturity, and the purchaser obviously recognizes that he can’t access his money by the very nature of a CD. If a depositor says to the bank that the bank may use 90% of his money and that he expects some of the interest the bank earns at the time of loan repayment (in addition to his 90% of course), he is very nearly the same thing as a purchaser of a CD.

If the bank just takes the money from another depositor then it hasn’t really helped itself. Sure it could issue CD’s or borrow from another bank, but why not just make a deal with the depositor in the first place saying that the depositor will not have access to 90% of his funds until the loan made on them is repaid?

***Who said anything about that?***

Monetary inflation is implied and necessary if both the depositor and the borrower of his funds have access to the money. If the depositor put in $1,000 and a loan is made of $900, if the depositor wants his money, monetary inflation is necessary, which goes back to the whole idea of fractional reserve banking (where a depositor is still able to access all of his funds) being inconsistent with a gold standard.

***If all deposits are gold, they have to lend gold.***

Are you saying the bank isn’t allowed to issue paper money backed by gold? Meaning the bank gets $1,000 in gold coins. it puts that in the vault and loans out $900 of paper money backed by $900 in gold coins (currently in its vault) while allowing $100 in gold coins to be used by the depositor. The makeup of currency has changed ($100 in gold coins and $900 in paper backed by gold; as opposed to $1,000 in gold coins), but the total amount hasn’t. And if the paper is brought in for redemption in gold, the paper will be stored away or destroyed and the makeup of currency in circulation will change again, but not the amount.

***The situation is not hypothetical.***

Someone doing to a bank and depositing $1,000 in gold coins is a hypothetical situation, is it not?

***Remember “It’s a Wonderful Life”? Any bank that takes deposits and loans out any funds is vulnerable to a bank run.***

Sure, but that’s because both depositors expect to be able to use their funds, when in reality about 90% of those funds are loaned out, or in some way used by the bank. If depositors could only use 10% of their money until the loans made on them were repaid, there would be no problem.

***Banks haven’t been allowed to do that for a long time.***

Whether they’re allowed to do it or not is not important to the point I was making; that being that it is possible to receive only gold in deposits and issue paper backed by gold (but paper nonetheless) when making loans. Obviously banks haven’t been allowed to issue bank notes in a long time, but then again we haven’t been on a gold standard in a long time either.

Someone doing to a bank and depositing $1,000 in gold coins is a hypothetical situation, is it not?

Back when we had a gold standard, that's how things worked. Gold standard and fractional reserve banking, at the same time.

Sure, but that’s because both depositors expect to be able to use their funds, when in reality about 90% of those funds are loaned out

That's why banks borrow excess reserves from each other and from the Discount window of the Fed.

that being that it is possible to receive only gold in deposits and issue paper backed by gold

Well, if you want to allow banks to do things that had been outlawed for more than 100 years, then banks can issue their own notes with no deposits.

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