Monday, December 22, 2014

An Analysis of Gods of Money – Part 2

An Analysis of Gods of Money – Part 2
Thomas Allen

    17. Engdahl claims that for more than a century N.M. Rothschild & Sons set the world’s daily price of gold [p. 96]. Absurd! Here Engdahl shows his ignorance of the gold standard. First, to change the “price” of gold daily would have required Parliament, Congress, and other governments of countries on the gold standard to change the change the definition of their monetary unit daily. Under the gold standard, the price of gold is not fixed. The monetary unit is defined as a specific weight of gold. For example, between 1837 and 1934, the U.S. dollar was defined as 23.22 grains of pure gold. (To say that the price of gold is fixed under the gold standard is to say that the meter fixes how far light travels in 1/299,792,458 of a second. The distance that light travels during that time fixes the meter, so the weight of gold fixes the monetary unit.)
    If N.M. Rothschild offered to pay more than a pound for 113 grains of gold, which was the value of the pound, people would have sold all their gold to N.M. Rothschild as it would be paying more than 113 grains of gold for 113 grains of gold. If it offered to pay less, no one would have sold it any gold.
    18. According to Engdahl’s description of the New York bankers and the London bankers between the world wars in Chapter 5, the Rothschilds were not as powerful as many believe.
    19. Engdahl claims that President Franklin Roosevelt made the holding or owning gold coins, gold bullion, or gold certificates illegal [p. 123]. That is not quite true. An individual could possess $100 in gold coins. If all the gold coins then in circulation were divided approximately equally among the population, each person would have had between $2 and $3 in gold coins. The U.S. government and the Federal Reserve held 93 percent of the monetary gold. Thus, the U.S. government had no need to collect coins held by the public.
    Like most writers, Engdahl refers to Roosevelt ordering the “confiscation” of the people’s gold [p. 123]. “Confiscation” is merely a euphemism for the more accurate term “stealing.”
    20. Most opponents of the Federal Reserve and the Money Trust believe that the Money Trust or at least a faction of the Money Trust planned and deliberately caused the Great Depression. Engdahl seems to believe that stupidity, greed, arrogance, lust for power, fear, hatred, etc. of the Money Trust and governments caused the Great Depression; it was not a planned event.
    21. Engdahl states that President Hoover took a laissez faire approach to the Great Depression [p. 126]. Earlier he noted that Hoover took an interventionist approach instead of a laissez faire [p. 107]. In America’s Great Depression, Murray Rothbard shows that Hoover’s approach to the Great Depression was highly interventionist. The New Deal was built on the interventionist foundation that Hoover laid.
    22. Engdahl claims that in 1933, Roosevelt began buying newly minted gold above market price. Actually, what he did was to change the definition of the dollar from 23.22 grains of gold to 1/35 of an ounce of gold through several incremental steps. He did not buy gold at an above market price; he devalued the dollar. This action was legalized by the Gold Reserve Act of 1934.
    Engdahl states that Roosevelt resumed the gold standard under the Gold Reserve Act in January 1934 [p. 129]. That is not true. As no one could redeem paper money for gold, which Engdahl acknowledges [p. 129], the gold standard could not exist. The Gold Reserve Act formerly ended the gold standard.
    23. Engdahl calls National Review as an arch-conservative magazine [p. 242]. A better and more accurate description is “neo-conservative.” As he notes, it was and continues to be a promoter of the American Empire. One of its prime objectives was to control the right and direct it away from Washington’s noninterventionist policy and Jefferson’s small highly limited governmental policy. The Old Right, the paleo-conservatives, who advocated small limited government could not be allowed to have a voice.
    Engdahl identifies James Burnham, an operative of the OSS, as a cofounder of National Review [p. 242]. He does not identify the other cofounder, William Buckley. Buckley was a member of the Council on Foreign Relations and Skull and Bones and was a CIA agent.
    Except neo-conservatives, who are as statist as socialists, most conservatives claim that they want limited government. However, most conservatives support a large all-powerful military, i.e., knowingly or unknowingly, they support the military-industrial complex. Thus, they support the warfare state, which is incompatible with limited government.
    24. Engdahl discusses President Kenney’s Executive Order 11110 [p. 250]. Unlike many opponents of the Federal Reserve who discuss this Executive Order, he seems to realize that it dealt with silver certificates. Most write as though it dealt with U.S. notes. Then he claims or at least implies that Kennedy issued $4.2 billion in U.S. notes pursuant to this Executive Order.
    This Executive Order had nothing to do with U.S. notes. U.S. notes and silver certificates are two different types of currencies. Although both were legal tender, U.S. notes were backed by nothing; silver certificates were backed by silver. U.S. notes were an inexpensive form of fiat money. Silver certificates were an expensive form.
    During the Kennedy administration $4.2 billion in U.S. notes were issued. However, they were issued pursuant to an 1878 law that required the U.S. Treasury to maintain a fix supply of $347 billion in U.S. notes.
    The Executive Order did not order the issue of silver certificates. With this Executive Order, Kennedy delegated his power to approve the issue of new silver certificates to the Secretary of the Treasury.
    Engdahl states that Kennedy was the first President since Lincoln to issue interest free money [p. 250]. That is not true. U.S. notes were issued under nearly every President from Lincoln to Nixon. Silver certificates were issued under nearly every President from Hayes to Lyndon Johnson.
    (Engdahl believes that this Executive Order may have led to Kennedy’s assassination [pp. 249-250]. The CIA, FBI, Department of Defense, military-industrial complex, mafia, Mossad, France, Vietnam, Cuba, anti-Castro Cubans,Russia, Lyndon Johnson, and the Texas oilmen among others have been accused of being behind his assassination. If the truth were known, probably several of these were behind it. The poor man did not have a chance.)
    Engdahl suggests that Kennedy’s assassination caused the demise of the silver certificate. It did not. Inflation, deprecation of the U.S. dollar, did. The bullion value of silver in a silver dollar began exceeding the monetary value of a silver dollar. Although no silver certificates were issued after Kennedy’s assassination, or even during his administration, they continued to circulate. They were never called in as were gold certificates.
    25. Engdahl claims that gold has little intrinsic value (p. 264). To the contrary, it has a great deal of intrinsic value — much more than his beloved U.S. note. The U.S. note like the Federal Reserve note has no intrinsic value beyond crude toilet paper and its Btu content.
    He claims that gold’s scarcity made gold serve as a store of value against which countries fixed their currencies [p. 264]. This is only partially true. It is scarce in the sense that it does not exist in large quantities when compared to base metals. However, this scarcity is not what makes it ideal money. A large quantity of gold exists above ground ready to be used as money compared to newly mined gold entering the market. That is, the flow of gold (newly mined gold) is small (about 2 percent) compared to the stock of gold (above ground supply). Thus, newly mined gold has little effect on the value of the existing supply.
    Unlike the U.S. note, people freely chose gold as money. No government had to force it on them. Federal Reserve notes and U.S. notes have to be forced on people to get them to function as money. Moreover, and perhaps more important, gold can actually extinguish debt; U.S. notes and Federal Reserve notes can only discharge debt by passing it to another. Ultimately, the U.S. government ends up owning all debt as U.S. notes and Federal Reserve notes are obligations of the U.S. government.
    26. Engdahl gives the impression that the U.S. government has undergone massive deregulation beginning with the Carter administration. When the EPA came into being in 1970, I worked with two or three volumes of Title 40 of the Code of Federal Regulations. I was working with more than 20 volumes 37 years later. Since 1977 when Carter became President to today, the Code of Federal Regulations has more than doubled. If the United States had undergone massive deregulation since 1977, the Code of Federal Regulations should be much small today than it was in 1977.
    27. Engdahl spends a large part of his book describing how the Rockefellers used governments to increase and protect their wealth and power. Then he claims that they want to turn to a true free market economy to increase and protect their wealth and power [p. 276]. He goes as far as to call such economy neo-feudalism [p. 277]. Feudalism, neo or classical, is hardly free market. It is more like communism. Under feudalism, the monarch owns most of the land. He leases the land to noble families for specific services. Along with the land come the workers, serfs, who are bound to the land and, with few exceptions, cannot legally leave it.
    Based on their actions from the late 1970s, when this abandonment of statism was supposed to have begun to today, the Rockefellers and their associates have not abandon their statism in favor of the free market. Moreover, they have not abandon their control of the U.S. government. If the United States had been on a free market trend since 1977, the U.S. government and its budget would be much smaller today than it was then. To the contrary, both the government and its budget have grown unabated. The U.S. government’s control of the economy has expanded. Apparently, Engdahl has no clue what a free market economy looks like. The Rockefellers do not want a free market economy or free trade, they want a managed economy and managed trade managed for their benefit. That requires the cooperation of government, which is why they expend so many resources to control it.
    Moreover, free trade does not require any international organization like the World Trade Organization to manage it. It requires no management. Managed trade is the bane of free trade. All that free trade requires is for governments to get out of the way and let their people trade. None of the trade deals that Engdahl describes throughout his book are free trade deals. Even when he claims that free trade was behind the deals, they were not free trade deals.
    28. Engdahl calls Milton Friedman’s teachings as “radical free market dogma” [p. 276]. I am not sure what Engdahl means by a “radical free market dogma,” but Friedman was an ardent opponent of free market banking and money. He supported centralized banking, the Federal Reserve System, and the banking cartel that it entailed. Also, he was a proponent of the government controlling the monetary system and opposed the gold standard.
    Engdahl gives the impression that the Federal Reserve abandoned Keynesianism for Friedmanism. It may have abandoned Keynesianism, but it never adopted Friedman’s doctrine. Friedman advocated the Federal Reserve creating the same quantity of money month after month, year after year, without regards to employment, interest rates, or anything else.
    29. Engdahl claims that when interest rates rose from 6 to 8 percent under Volcker, wealthy bondholders reaped staggering profits on their bonds [pp. 278-279]. When interest rates rise, the value of existing bonds falls. If the interest rate doubles, the value of existing bonds falls about half. People holding bonds when the Federal Reserve raised interest rates lost wealth. People who had advance knowledge that the Federal Reserve was going to raise interest rates could profit handsomely by shorting bonds. When they knew in advance that the Federal Reserve was going to start reducing rates, they could cover their shorts and begin to buy bonds. Thus, they can receive enormous profits.
    If the Rockefellers and their banker, industrial, and government comrades were really promoting the free market, they would have dismantled the Federal Reserve. They would not have used it to manipulate interest rates or to control banking.
    The crisis that Engdahl describes that governments of several foreign countries endured following Volcker’s raising interest rates [p. 286] would not have occurred if those governments had followed the example of President Jackson. If they had no debts, a change in interest rates would not have affected them.
    Engdahl does not discuss the massive destruction of capital that came with falling interest rates. A company that borrowed $10 million with bonds at 10 percent interest was at a competitive disadvantage with a company that later borrowed $10 million with bonds at 5 percent. It had to pay twice the interest. If it bought its bonds to avoid the higher interest, it would have to pay $20 million for them. (The value of bonds rises as interest rates drop. If the interest rate falls by half, the value of bonds approximately double.) Under the gold standard, interest rates vary little and are usually low. The interest rate gyrations that have occurred in recent decades would not have happened under the gold standard.
    30. Engdahl blames the inflation of the 1970s and early 1980s on a 140 percent increase in the price of oil and not on government deficits. Inflation is a monetary phenomenon. If the money supply were stagnant, a large increase in the price of oil could cause a good deal of havoc, but it would not cause a rise in general prices. As the increased oil prices caused oil-related products, assets, and services to rise, prices of other things would have to fall.
    31.Engdahl states that President Reagan filled his administration with laissez faire economists [p. 286]. If he did, they had little influence. The size of the U.S. government and its power over the economy grew during his administration.
    Moreover, he claims that “Reagan’s free market had all but destroyed an entire national economy: the USA’s” [p. 293]. He blames this destruction on the Federal Reserve raising interest rates to very high levels and spends pages describing its destructive effect. The Federal Reserve is not a creature of the free market; it is a governmentally created entity. A governmental monopoly, such as the Federal Reserve, with the power to manipulate interest rates and to control the banking cartel is not free market.
    In Chapter 16, Engdahl describes Greenspan’s management (mismanagement?) of the Federal Reserve. He claims that Greenspan was a proponent of the free market. He describes Greenspan’s creating booms and busts in various markets via manipulating interest rates while he protected banks and other financial institutions that he deemed too big to fail. In spite of his rhetoric, Greenspan was no proponent of the free market. If he were, he would not have used his office to manipulate interest rates or to bail out banks and other financial companies to keep them from bankruptcy. Moreover, he would have pushed for the abolishment of the Federal Reserve System and would have promoted a decentralized competitive banking system without any central bank. He would have advocated returning to the classical gold standard. Then interest rates would have been steady at a low level.
    In summary, in spite of its shortcomings, Engdahl’s book is worth reading. In spite of his lack of understanding the free market and the gold standard, his book does contain a good deal of useful information.

Copyright © 2014 by Thomas Coley Allen.

More articles on money.

Friday, December 5, 2014

An Analysis of Gods of Money – Part 1

An Analysis of Gods of Money – Part 1
Thomas Allen

    The following is an analysis of Gods of Money: Wall Street and the Death of the American Century by F. William Engdahl (edition.engdahl: Wiesbaden, Germany; 2009). Engdahl has written an interesting book. It is an excellent general history of the self-proclaimed ruling elite working behind the scene to control the U.S. government from Lincoln to 2009.
    He identifies many powerful and important people and organizations and their relationships. He discusses their schemes to concentrate wealth and power under their control. Although he does not seem to be a supporter of free enterprise, Engdahl shows that corruption instead of free enterprise had much more to do with the people like Morgan, Rockefeller, Harriman, and several others (about 60 families) massing their fortunes during the latter part of the nineteenth century and early twentieth century [p. 28].
    Engdahl describes the rise and fall of the House of Morgan. He describes Morgan’s involvement in the Panic of 1893 and the following depression, the establishment of the Federal Reserve System, and World War I. Next he describes the rise of the Rockefellers, which began in earnest after World War I, their replacement of Morgan as the chief money power in the United States during the 1930s, and their rise to the primary money power of the world following World War II. Whereas Morgan was involved mostly in manipulating financial markets in the United States to grow his wealth and power, the Rockefellers were mostly involved in geopolitics to grow their wealth and power. He describes the Bretton Wood agreement, which the Rockefellers were behind, and the rise of the American Century. He finishes with a description of Greenspan’s scheming and its aftermath.
    Much of what he describes is basically the Hamiltonian principle of government-business partnership advocated by Alexander Hamilton, Henry Clay, Daniel Webster, and Abraham Lincoln, and most Presidents after 1860. Under this system, government works with (or for) big business, the money interest (the Money Trust), and multinational corporations to protect them and to advance their causes. The Hamiltonian philosophy calls for the concentration of economic and political power. (During the 1930s, this type of political economy was call fascism.)
    Engdahl has a weird understanding of the free market. Most of what he calls free market is governmental intervention or intervention by the Federal Reserve, a U.S. government created monopoly, in the economy.
    Unfortunately, his book contains some omissions, errors, and incorrect conclusions. Some of them are discussed below. Many of his omissions result from the scope of his book and go beyond its objective. However, other omissions can explain how bankers were able to do what they did. Moreover, Engdahl believes the Lincoln myths, which is the source of many of his errors and incorrect conclusions.
    1. Except a brief quotation from one of Lord Palmerston’s speeches, Engdahl fails to mention the four most powerful men in the world between Lincoln’s election, about when his story begins with a flashback to the Jackson administration and World War I. They were Lord Palmerston (Henry John Temple, 3rd Viscount of Palmerston), sometime after 1848 to 1865, Mazzini, 1865-1872; Albert Pike, 1872-1891; Adriano Lemmi, 1893-1906. These men were the head of the important and powerful secret societies, such as Freemasonry, which Engdahl fails to mention, of the Western world. As such, they were the power behind the powers behind the governments of the Western world.
    2. Engdahl makes the same mistake that most opponents of the Federal Reserve make [p. 9-12]. He emphasizes its private ownership to the point of implying that if the U.S. government own it, most of the country’s financial and economic problems would vanish. If true, Great Britain and other countries whose governments own and control their central banks would be economic paradises compared with the United States. The problem is central banking — not the ownership structure of the central bank.[1]
    3. Engdahl claims that the Constitution gives the U.S. government control of money and credit [p. 14-15]. The founding fathers left the control of the monetary system directly in the hands of the people. The Constitution granted only two monetary powers to the U.S. government. One was to coin money, i.e., to stamp all the gold and silver presented to the mint into coins. These coins were the property of the people who held them and not the U.S. government. The other was to define the monetary unit as so many grains of silver and so many grains of gold. The dollar used in the Constitution was understood to mean the weight of silver in the Spanish milled dollar. The Constitution grants the U.S. government no power to create and issue currency.[2] The only power that it has related to credit is to borrow money. Engdahl seems to trust the U.S. government to issue the country’s money — the same government that the Money Trust, the term that he usually used for the money interest, has controlled since 1860.
    Contrary to what governmental issued fiat money adherents like Engdahl claim, Lincoln was not an admirer of governmentally issued fiat money. However, he was a supporter of centralized banking[3] and the National Banking Act. The National Banking Act gave the U.S. government control of the largest commercial banks. Under the law, if a bank wanted to issue banknotes, it had to buy U.S. government bonds to back its notes. At that time, the National Banking Act was about as far as the public would allow the U.S. government go in establishing a central bank.
    Engdahl does describe the National Banking Act and how it gave an advantage to the larger, more powerful banks, especially those in New York City [pp. 42ff]. He errs when he writes that national banks were required to maintain reserves in gold. Between 1863 and 1879, most banks used legal-tender U.S. notes as their reserves. Only after 1878 when U.S. notes became redeemable in gold did banks begin increasingly to hold gold as reserves. Moreover, the National Banking Act places many restrictions on banks, such as no branches and no dealing in bills of exchange for exports or imports (this restriction greatly benefitted the London bankers).
    Also, Engdahl believes that the Constitution gives Congress the power to print and issue fiat paper money. It does not. The first draft of the Constitution did contain a clause that gave Congress this power. However, the drafters of the Constitution removed that clause. When they removed that clause, they were convinced that they had denied Congress the power to issue fiat paper money.[4]
    4. Engdahl presents President Lincoln as an opponent of the Money Trust [pp. 13-15]. Lincoln’s rhetoric may make him appear to be an opponent of the Money Trust, but he was not. He was the father of America’s government-business partnership. Lincoln and most of the administrations that followed him promoted the warfare state, corporate welfare, ever expanding centralization of political and economic power — all goals of the big banks and Money Trust. (As President Nixon so aptly admonished his opponents, “Watch what I do and do not listen to what I say,” or word to that effect. He tickled the ears of his supporters by telling them what they wanted to hear. His opponents got the action as he implemented their policies.)
    When the government gains control of creating and issuing all currency and credit, either directly as Lincoln’s monetary admires want or indirectly through a privately owned center bank, which always exists at the pleasure of the government, the government gains complete control of the people. That is why the founding fathers granted the U.S. government no such power.
    Between 1840 and 1865, Lincoln was a front man for the equivalent of Wall Street at that time. He favored rechartering the National Bank;[5] thus, he wanted a central bank.
    5. Engdahl believes that the Rothschilds were behind secession and Lincoln’s assassination [pp. 15-18].  To the extent that the Rothschilds were involved in encouraging Southern States to secede, their objective was not to establish a confederation of Southern States. It was to destroy the States and consolidate an all-powerful government in Washington, which would be much easier for them to control. If they had really wanted to have a confederation of Southern States, Great Britain, France, and most other European countries would have sent troops to fight for the South. The Rothschilds had an enormous amount of influence over these governments.
    6. Contrary to Engdahl’s claim [p. 14], Lincoln understood nothing about the Constitution. If he did, he would have let the Southern States go in peace as they had the constitutional right to do. He could not let the Southern States go because they provided most of the revenue while Lincoln’s Wall Street friends received most of the expenditures.
    7. Engdahl claims that Lincoln’s policies were not continued after his death and that if his Reconstruction policies had continued, the London banks could not have raised the world price of grain [p. 16]. For the most part Lincoln’s policies were continued after the War and are still being implemented today. That Lincoln would have treated the South any better than it was treated during Reconstruction is speculation. Like most Presidents, Lincoln was notorious for saying one thing and doing the opposite. His lust for power would have caused him to try to out do the Radical Republicans so that he, instead of them, would control the Republican party. President Johnson was almost removed from office for standing up to them.
    As for the price of grain, it did trend upward after the War until the Panic of 1873. Then it trended downward for several decades. The South was not noted as a grain growing region. Tobacco and cotton were the major Southern crops. Grains came mostly from the Midwest and Prairie States. The price of cotton and most other agricultural products followed the same trend as grain. However, much influence the London banks had on them is difficult to prove. If they suppressed their production to profit from high prices for a few years after the War, why did they not continue to bribe and extort governments to implement policies to keep prices up during the late 1870s, 1880s, and 1890s?
    If Engdahl is correct about the Rothschilds and other London bankers using Reconstruction to suppress the South’s economy, then the Radical Republicans would have been doing the bidding of the London bankers. The Radical Republicans were the ones who adopted and implemented the Reconstruction laws.
    8. Engdahl seems to oppose the gold standard and believes that it is easily manipulated [pp. 16-17]. Fiat paper money, such as the greenback, is much easier to manipulate than is the true gold standard. Consequently, the Money Trust has fought to replace the gold standard with paper fiat money and its electronic equivalent. Under the true gold standard, the monetary system can operate without banks or government. Although he shows little understanding of the classical gold standard, he does realize that it comes as close as possible to separate money from the state and that it is an automatically correcting system [p. 99].
    9. Engdahl correctly notes that Eastern banks wanted greenbacks to be redeemed in gold [p. 17]. They were not the only ones who wanted gold redemption. Others included the Calvinist and Reform clergy, many Baptist and Methodist ministers, academic classical economists, Liberal Republicans and Mugwumps, merchants who favored free trade and an end to governmental extortion via protective tariffs, and merchants in the export-import business except the speculators. The mercantilists, industrialists, manufacturers, many businessmen, speculators in the export-import business, promoters, the Careyites, and the greenbackers (intellectuals and politicians with their working class and rural followers) typically opposed redemption. Even some bankers opposed redemption. Engdahl does mention many of these groups. Moreover, in 1869 Congress promised redemption.
    Engdahl seems to be an admirer of Henry Carey [p. 17], a leading opponent of the gold standard and proponent of fiat paper money like the greenback. He was essentially a nineteenth century Keynesian.
    10. In Chapter 2, Engdahl describes how J.P. Morgan and others profited from redeeming U.S. Treasury securities for gold and drawing the U.S. Treasury’s gold reserves used to back U.S. notes dangerously low [pp. 22-27]. What he does not show is that if the U.S. government had not undertaken issuing fiat money in the form of U.S. notes (greenbacks) and Treasury notes of 1890, Morgan’s scheme would not have worked. (To drive up the price of silver, Congress ordered the Secretary of the Treasury to buy silver at the market price with Treasury notes, called Treasury notes of 1890. This silver served as a reserve for the Treasury notes. However, the Secretary of the Treasury had the option of redeeming these notes in silver or gold.) The U.S. Treasury should not have had any paper money to redeem other than gold certificates, which are basically warehouse receipts for gold and fully backed by gold that can be redeemed for gold.
    He suggests that the Depression of 1893-1899 was the result of Morgan and his associates manipulating financial markets. No mention is made of the malinvestment caused by the inflationary Bland-Allison Act and the Sherman Act. No mention is made of the Tariff Act of 1890, commonly called the McKinley Tariff, which raised tariffs by almost 50 percent.
    11. In Chapter 3, Engdahl discusses the Panic of 1907 and Rockefeller’s and especially Morgan’s involvement in orchestrating it [pp.34-38]. What is omitted is that if banks had been practicing sound banking, they would have survived a bank run without the threat of bankruptcy. The major sin of banking is borrowing short and lending long — a formula for disaster once confidence is lost. Another sin is creating banknotes and demand deposits to buy assets other than gold and real bills of exchange.
    12. Engdahl claims that the U.S. government had the constitutional power to regulate credit and be the lender of last resort [p. 38]. It does not although Lincoln and other Hamiltonian wanted the U.S. government to have that role. They wanted to let their comrades in banking profit handsomely from high risk speculation while having the U.S. government bail them out if the speculation went wrong.
    Engdahl mentions the Secretary of the Treasury seeking authority to have a slush fund to manipulate bank lending and to change reserve requirements. He also wanted the power to contract national banknotes [pp. 38-39]. With a minor change in the law or procrastination on his part, the Secretary of the Treasury could have achieved much of his goal by manipulating the supply of U.S. notes. As recent history has shown, having a lender of last resort for banks makes the economy more volatile rather than smoothing it.
    Engdahl comments on the U.S. government hoard of gold in 1895 and notes it was larger than any central bank’s hoard [p. 39]. What is left unsaid is that this gold was held as backing for gold certificates and for partial backing of U.S. notes and to a lesser extent Treasury notes of 1890.
    Moreover, Engdahl seems to believe that when the government manages the gold standard, the money is stronger than when banks manage it [p. 39]. The gold standard is the same regardless who manages it. All the gold presented to the mint, which can be a private mint, is coined, and the coins are the property of the person presenting the gold. Furthermore, no restrictions are placed on the melting of coins and using the metal for nonmonetary purposes. No restrictions are placed on the importing or exporting of gold.
    13. Throughout his book, Engdahl describes the lackeys, cronies, toadies, and agents of Morgan, the Rockefellers, and other bankers capturing key posts in the U.S. government, chiefly the Secretary of the Treasury and often the President, where they faithfully serve the interest of the Money Trust. Does he really believe that these bankers would cease putting their people in these key positions if the Federal Reserve were abolished and the U.S. government issued paper fiat money directly? To the contrary, they would have even more incentive to control these positions. As the U.S. government acquires more of the power that Engdahl wants it to have, the more the bankers seek to control it, and the more corrupt it becomes.
    Engdahl notes that the big international banks seek to gain control of governments and their countries’ money primarily through governmental debt [p. 42]. If true, if the U.S. government had followed the example of President Jackson, the bankers would not have gained the power that they have in the United States. They would have no U.S. debt securities to buy.
    14. Engdahl remarks that the Federal Reserve Act gave private banks total control over note issue, over money [p. 53]. This statement may be true today, but it was not before 1933. Between the adoption of the Federal Reserve Act in 1913 until the end of the gold standard in 1933, banknotes, including Federal Reserve notes, were not legal tender. No one was required to accept them in payment of debt. The only legal tender moneys then were gold, U.S. notes, which was redeemable in gold, and silver certificates.
    Moreover, throughout the history of the United States only banks chartered by the States or the U.S. government could issue banknotes. In that sense, private banks have always had a monopolistic control over note issue. The Federal Reserve Act merely centralized control over note issue. As a result, banks expanded and contracted bank credit money in concert. Thus, inflating and speculating banks no longer had to worry about prudent bankers demanding gold for their notes; after the end of the gold standard in 1933, they could no longer demand gold.
    15. In Chapter 4, where Engdahl describes the events and corruption lending to the United States’ entry into World War I, he fails to mention the importance of the Zionist connection.[6] He also fails to mention that at this time the Federal Reserve Act prohibited the Federal Reserve buying and selling U.S. government securities. During the war, it bought U.S. government securities in violation of the law. As it was doing the U.S. government a service and a favor by buying its securities, those who were charged with enforcing the law refused to do so. Later, Congress legalized the Federal Reserve’s buying and selling U.S. government securities.
    16. When Engdahl discusses the gold standard following World War I, he often gives the impression that it was the gold standard that existed before World War I [pp. 84ff]. (He does note that the classical gold standard separated money from the state and was self-correcting [p. 99].) The impression that he gives is that the only important difference between the two was that the center of financing world trade was moving from London to New York. The two gold standards were entirely different. Before World War I, the United States, Great Britain, France, and most other important countries of the world were on the classical gold standard albeit an adulterated form. Following the war, the United States remained on the classical gold standard, but without the accompanying real bills doctrine. To control trade with Germany, the Allies abandoned the real bills doctrine. Under the real bills doctrine, manufacturers could finance their productions and pay employees and suppliers before their goods were sold without having to borrow. When the real bills doctrine was abandoned, they had to borrow from banks to finance their production. Without the real bills doctrine, gold could not withstand the strain of world trade under the highly bastardized, politically contrived gold-exchange standard instituted after World War I.
    Following World War I, the gold-exchange standard replaced the classical gold standard. Under the classical gold standard, gold was the world reserve currency. Under the gold-exchange standard, the British pound and U.S. dollar functioned as the world reserve currency. Banks and governments found manipulating money under the gold-exchange standard much easier than manipulating it under the classical gold standard. Even under the gold-exchange, gold prevented unrestrained money manipulation. That is why it was abandoned a few years after implementation for a pure fiat monetary system.
    Engdahl does discuss the gold-exchanged standard [pp. 88ff]. However, his failure to explain adequately the difference between the classical gold standard that existed before World War I and the gold-exchange standard that existed after World War I can confuse readers who do not understand the difference.
    Following World War II, the Allies again tried to institute another gold-exchange standard, which was even more bastardized than the one adopted after World War I. It was called the Bretton Woods agreement. The Bretton Woods gold-exchange standard differed in some important aspects from the gold-exchange standard adapted after World War I. Under the latter, the United States remained on the gold-coin standard that existed before the War while Great Britain replaced the gold-coin standard with the gold-bullion standard. Thus, in both countries, the domestic users of the currency could exchange their currency for gold. Also, under the latter, countries defined their monetary unit in gold. Under Bretton Woods, the U.S. dollar was backed by gold, but domestic users of the dollar could not exchange dollars for gold; only foreign central banks and governments could redeem dollars for gold. Countries defined their monetary unit in the U.S. dollar instead of gold [pp. 214, 217-218].
    Under the Bretton Woods gold-exchange standard, the U.S. dollar, which was the only currency redeemable in gold, became the world reserve currency. In reality, the Bretton Woods monetary system was more a dollar standard than a gold standard. It lasted longer than the gold-exchange standard adopted after World War I. It too was abandoned for a pure fiat monetary system.

 1.  Thomas Coley Allen, Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money (Franklinton, North Carolina: TC Allen Company, 2009), pp. 204-218.

2. Ibid., pp. 72-82.

3.  Thomas J. DiLorenzo, Lincoln Unmasked (New York: Three Rivers Press, 2006), p. 128.

4.  Allen, pp. 72-82.

5.  DiLorenzo, p. 128.

6.  Thomas Coley Allen, Zionism: A Brief History, 1800-1949 (Franklinton, North Carolina: TC Allen Company, 2007), pp. 38-40.

Copyright © 2014 by Thomas Coley Allen. 

More articles on money. 

Tuesday, November 4, 2014

Is Integration a Moral Law?

  Is Integration a Moral Law?
  Thomas Allen

    Martin Luther King argued that integration is a moral law and a law of God, and conversely, segregation is not. The following statement of King from his "Letter from a Birmingham Jail," April 16, 1963, shows King’s belief that integration is a moral law and a law of God. In his argument for integration and against segregation, he states:
    A just law is a man made code that squares with the moral law or the law of God. An unjust law is a code that is out of harmony with the moral law. To put it in the terms of St. Thomas Aquinas: An unjust law is a human law that is not rooted in eternal law and natural law. . . . All segregation statutes are unjust. . . . [Segregation] is morally wrong and sinful.
    If compatibility with the God-given principles and rules in the Bible decides the moral law and the law of God, then segregation is moral, and integration is immoral. Segregation, not integration, harmonizes with the Bible and the law of God, and, therefore, with the moral law. Integration conflicts with the Bible and the law of God and, therefore, with moral law. Thus, segregation is moral and just. Integration is immoral and unjust.

    The God of the Bible is a god of segregation; He is not a god of integration. If King really believed that integration is a moral law and a law of god, then his god is not the God of the Bible.

    Because of integration, God sent the great flood of Noah’s day. The daughters of man (the Adamites) integrated with and married the sons of god (Gen. 6:2).

    God confused the language of the people building the tower of Babel to force them to segregate. “And the LORD said, Behold, the people is one, and they have all one language; . . . let us go down, and there confound their language, that they may not understand one another’s speech. So the LORD scattered them abroad from thence upon the face of all the earth: and they left off to build the city” (Gen. 11:6-8). Thus, God used language to segregate people. If He were a God of integration, he would not have confounded their language to force them to segregate.

    The book of Exodus is a story of segregation. It is a story of the Israelites segregating themselves from the Egyptians. In Exodus 33:16, Moses says, “. . . so shall we be separated, I and thy people, from all the people that are upon the face of the earth.” God commanded this segregation.

    In Leviticus 20:26, God told the Israelites to segregate from other people: “And ye shall be holy unto me: for I the LORD am holy, and have severed you from other people, that ye should be mine.” Thus, God is a segregationist.

    In His code of moral conduct for the priests of Israel, God ordered any priest who married to take “a virgin of his own people to wife” (Leviticus 21:14). Thus, He forbade priests to marry outside their race. As Christians have supplanted this ancient priesthood (Revolution 1:6, 5:10), they are to marry within their own race.

    Chapters 23 and 24 of Numbers describe how Balak, King of Moab, attempted to subdue the invading Israelites by having his people integrate with them. Balak knew he could not defeat the Israelite in combat. Following Balaam's advice, he sought to subdue them by having his people integrate with the Israelites, have sexual relations with them, and intermarry with them. Naturally, God was not pleased with what He saw. Moses ordered the execution of those guilty of the sins of integration and miscegenation (Numbers 25:1-5).

    This sin is referenced in Revelation 2:14: “But I have a few things against thee, because thou hast there them that hold the doctrine of Balaam, who taught Balac to cast a stumbling block before the children of Israel, to eat things sacrificed unto idols, and to commit fornication.” Of coarse, the Israelites or the church in Pergamos could not have committed these sins without first integrating.

    Chapter 9 and 10 of Ezra are among the clearest condemnations of integration and the inevitable miscegenation if one refrains reading into these chapters what is not there. After Ezra had arrived in Jerusalem, he learned that the Israelites were guilty of a great abomination. They had not segregated themselves. Instead they had integrated with the inhabitants of that area and had intermarried with them. The religious leaders were among the worst offenders (Ezra 9:1-2). This news devastated Ezra, and he cried unto God his shame (Ezra 9:3-15). He identified integration and the resulting miscegenation as rebellion against God’s law (Ezra 9:14) and as a sin (Ezra 9:15, 10:2, 10). Ezra’s solution was for the men of Israel to separate themselves from their alien wives and to send them and the children born from these immoral mixed marriages away (Ezra 10:3-5, 11-19). Ezra read the law to the people of Israel (Nehemiah 8:1-8). The Israelites responded by segregating themselves from the rest of the people in the land and vowing not to intermarry with them (Nehemiah 10:28-31).

    Integrationists read religious differences into these passages. They claim that the divide was made based on religion: Believers separated themselves from unbelievers. Which by the way is an act of segregation. A careful, or even cursory, reading of these chapters clearly reveals that the divide was not made on religious grounds. The separation was not believers from unbelievers. No exception was made for believing wives or their children. Whether they were believers or unbelievers, all wives were divorced and sent away. Furthermore, no Israelite was sent away because he was an unbeliever. Whether they were believers or unbelievers, all Israelite men remained. The issue was clearly race, not religion.

    God commanded the Israelites to segregate themselves from other people. Whenever they defied God’s law of segregation and integrated, they encountered a loss of freedom and hardship. Eventually integration led to their lost of national identity. (Today we are witnessing this destructiveness of this iron-law of integration.)

    A favorite verse of integrationists is the first part of Acts 17:26. They ignore the second part, which states: “. . .  and hath determined the times before appointed, and the bounds of their habitation.” According to this verse, God made all nations of man and determined the bounds of their habitation. Thus, God intended the various races of man to segregate. (A nation consists of one race. A race comprises several nations.)

    In Revolution 5:9. 7:9, 11:9, 13:7, 14:6, 17:15, and 21:24, John describes mankind in the plural: peoples, nations, kindreds (tribes), and tongues (languages). Integration leads to the amalgamation of the races, which destroys all distinction among the various races, peoples, and nations involved. If God had intended for humans to integrate and thus amalgamate, John would have described heaven as containing only one people, nation, kindred, and tongue.

    God abhors integration so much that He bans the racially mixed, the result of integration, from His congregation: “No half-breed may be admitted to the assembly of Yahweh; not even his descendants to the tenth generation may be admitted to the assembly of Yahweh” (Deuteronomy 23:2, The New Jerusalem Bible).

    As the above passages show, the God of the Bible is a god of segregation. He is not a god of integration. Being a God of segregation, His moral law is segregation. If integration is the moral law of King’s god, then, his god is not the God of the Bible.

Copyright © 2014 by Thomas Coley Allen.

 More articles on religion. 

Monday, October 20, 2014

U.S. Note Part 4

Part 4: The U.S. Note, 1862 – 1879

Thomas Allen

[Editor’s note: Footnotes in the original are omitted.]
    One of the worse results of the legal tender acts is that they taught people to believe lies. They lead them to believe that government bonds were payable in U.S. notes. The Act of 1862 stated that U.S. notes could not be used to pay interest on U.S. bonds. When the law was enacted, no one imaged that the government would pay bonds sold for gold with anything but gold. The second legal-tender act clarified that the principal of bonds was also to be paid in gold. Payment of the principal in gold was reaffirmed in law in 1869. However, the controversy of paying the principal in U.S. notes did not end. It continued until the silver issued overshadowed the greenback issue.
    Another lie was that the greenback dollar was a real dollar. It was not a real dollar as it expressly promised to pay a dollar. The $1 U.S. note stated on the front that it “will pay the bearer one dollar.” Other denominations had the same statement except the amount. For a greenback dollar promising to pay for itself with itself is an absurdity. (In 1868 the Supreme Court ruled that the U.S. note was a promise to pay a dollar in gold.)
    Proponents of the U.S. note, especially during the 1870s, believed that the government could maintain a fixed and stable value of its fiat money. In spite of what history has shown, fiat money adherents still believe this lie.
    The greatest lie was that the U.S. government could create money out of nothing and give it value. Money derived its value from the sovereign act of government and rested on the wealth, prosperity, and power of the country. Its value was not derived from the materiel of which it was made or represented. This lie is one that most Supreme Court Justices from 1871 onward, fiat money reformers, Friedmanites, Keynesians, and other proponents of fiat money continue to believe until this day.

    Many people who supported or opposed the U.S. note did so because they knew that government notes were inflationary. However, many proponents of the U.S. note failed to understand the difference between government notes and bank notes. Yet, some significant and important differences exist between bank notes under the gold standard and government notes. Whenever bank notes are not redeemable in specie on demand, they behave like government notes.
    If bank notes represent newly manufactured consumer goods (goods expected to be sold in less than 91 days to the final consumer), they are wholly beneficial in their effect. They replace a corresponding amount of specie in coin and reduce the cost of distribution. On the other hand, government notes are wholly maleficent in their effect; they are an unmitigated evil. The worst effect of government notes is that they impoverish the masses by transferring their wealth to the wealthy few resulting in economic stagnation.[1]
    When properly issued, bank notes always evidence capital that provides the means for their retirement. They represent the gold or silver value of merchandise that will be sold in less than 91 days — thus, providing the means for their retirement. They are instruments of distribution and facilitate trade. A person exchanging the bill of exchange for bank notes pays the bank a discount on the bill. Bank notes maintain a direct relationship between money and production and consumption. (Production produces the money needed for consumption of the products produced under the real bills doctrine.) The holder of bank notes can convert them to specie on demand. Thus, bank notes circulate at par with coin. At least two parties, the maker and endorser of the bill discounted, guarantee the notes issued to buy the bill. Bank notes are not legal tender and can circulate without being legal tender. They respond to and serve the needs of the commerce. When their work is done, they are removed from circulation. When the bill representing the merchandise that a bank has converted to bank notes is paid, the payment extinguishes the bank notes. “Their use largely increases the amount of coin in a country, from the powerful influence they exert in enlarging its production and trade; the coin, and paper representing merchandise of equal value, circulating side by side in proportions to suit the public convenience.”[2] Although the quantity of bank notes can fluctuate greatly, their issue and retirement do not lead to price inflation or deflation because they represent new goods being sold in the market. If bank notes are issued only for real bills, bank notes can never be over issued. They will not cause prices to rise because they disappear as the merchandise that they represent is sold. They will always remain at par with gold.
    Government notes function entirely differently than bank notes. As government notes do not represent anything being offered for sale, they lose value and raise prices. When used to buy goods, they continue to exist and can be used multiple times to buy consumable goods. They are completely independent of commerce. They do not evidence capital. To the contrary, their purpose is to transfer capital to the issuing government. The government is always a borrower of money and wealth and never a lender. Government notes are not automatically retired; they are retired at the prerogative, whim, and discretion of the issuing government. The government does not issue its notes to discount bills, and they do not represent anything that is immediately available for sale for specie. No interest or discount is connected to the issue of government notes. Because the government cannot pay its notes in specie on demand, its notes are never made payable on demand. (If it could pay on demand; it would not have to issue notes.) Not representing capital, they become instruments of excess consumption that leads to price inflation. Government notes destroy the relationship between money and production and consumption. Once issued, government notes never disappear until the government decides to retire them. If they were not legal tender, they would have difficulty circulating.
    As they are always the last resort of exhaustion and incompetency, they are always made legal tender in the discharge of contracts equally with coin as a necessary condition of getting them into circulation. Otherwise no one would receive them as money. Such provision may for a time give them a high value, but can never raise them to the value of coin, for the reason that they can serve only one function of coin — the payment of debts. . . . They lose a considerable portion of their value so soon as the debts existing at the time of their issue are discharged, as no one will contract to receive them at a future day as the equivalent of coin. Their value, consequently, comes to depend upon the time that, in public opinion, is to elapse before they are paid.[3]
Government notes promise to pay with no provision for payment. They are debt payable at the pleasure of the issuing government. Such payment is almost never made.
    Economics drives the issue of bank notes and determines the quantity in circulation. Politics drives the issue of government notes and determines the quantity in circulation. Government notes are low quality currency. If the real bills doctrine is followed and the gold standard is maintained, bank notes are high quality currency.

    Many fiat money reformers consider the U.S. note issued between 1862 and 1879 as an almost ideal money. It possessed ten important characteristics. First, it came into existence solely by the will of the government. Second, the U.S. government issued it directly and spent it into circulation. Third, it was backed solely by the faith and credit of the government and was not backed by gold, silver, or any other commodity or tangible asset. Fourth, the material of which it was made was irrelevant to its value (money should be made of the cheapest material available). Fifth, Congress decided how many U.S. notes to issue. It could regulate the value of money by manipulating its supply. Sixth, it was legal tender. Seventh, it derived its value from its ability to discharge tax obligations and from the government forcing creditors to accept it as payment for debts (its value derived solely from its monetary services as, unlike gold and silver, it had no other use). Eighth, it was not convertible into gold or silver. Ninth, it replaced gold as the medium of exchange and the standard of prices. Tenth, unlike gold or silver, it was a nonexportable money; money was national, not international.
    However, from the perspective of fiat money reformers, the U.S. note did possess some major flaws. First, it could not be used to pay tariffs, a major source of revenue for the U.S. government and the real cause of Southern secession.[4] Tariffs had to be paid in gold. Second, in 1875 Congress declared that U.S. notes would become redeemable in gold in 1879, and the U.S. government began acquiring gold to back U.S. notes. Third, interest on and principal of government bonds were paid in gold instead of U.S. notes. Fourth, the West Coast and many parts of the South after the war conducted business using gold instead of U.S. notes. To this list, most fiat money reformers would add that Congress should have continued to increase the quantity of notes instead of contracting and then freezing the quantity that could be issued. Some fiat money reformers would object to banks issuing bank notes even though they were not legal tender.
    Under the greenback standard, the exchange rates between the U.S. currency and foreign money freely floated. Also, the U.S. government no longer committed “to selling gold at a fixed price to all offered legal tender.”[5]
    Friedmanites, Keynesians, fiat money reformers, and other proponents of fiat paper money liked that, unlike the gold dollar and silver dollar, the greenback dollar was undefined. The value of the gold dollar and silver dollar had a definite definable value independent of themselves. The gold dollar had a value of 23.22 grains of gold between 1837 and 1934. The silver dollar had a value of 371.25 grains of silver. However, the value of the greenback dollar lacked such definition. Its value could only be defined in terms of itself. Its value was the value of what a greenback dollar could buy.
    Before fiat money reformers and other fiat money promoters use the greenback era to support the superiority of fiat money over the gold or silver, they need to remember an extremely important aspect of this era. Something extremely rare happened with the fiat money, the U.S. note, during this era. In the years following the War, the fiat money supply contracted. Nearly all fiat money reformers and other proponents of fiat money call for schemes to expand the money supply year after year.
    Contrary to what fiat money reformers imply, if not right out claim, fiat legal tender paper money issued by the government has no inherent value over fiat paper money issued by banks. If it did, the greenback dollar would have traded at a premium to the Federal Reserve note dollar after 1932. It never did. It always traded at par with the Federal Reserve note dollar.

[Editor’s Note: An appendix listing major monetary events of the greenback era, an appendix  giving Poor’s comment on the Resumption Act of 1875 and the list of references are omitted.]


1. Poor, pp. 13-14.

2. Poor, p. 11.

3. Poor, p. 12.

4. Charles Adams, For Good and Evil: The Impact of Taxes on the Course of Civilization (Lanham, Maryland: Madison Books, 1993), pp. 323-337.

Copyright © 2013 by Thomas Coley Allen. 

Part 3

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Monday, October 13, 2014

U.S. Note Part 3

Part 3: The U.S. Note, 1862 – 1879

Thomas Allen

[Editor’s note: Footnotes in the original are omitted.]

    Below are tables showing some monetary statistics from 1862 to 1879. Table 1 shows the quantity of legal tender and credit money. The numbers in the table are annual averages. Table 1 does not include money from demand deposits, i.e., checking accounts. When demand deposits are included, the per capital money stock grew from $45 to $72 between 1869 and 1879.[1]

     Table 2 shows the percent change in money as presented in Table 1. The percent change in these tables is from the previous year.

Table 3 shows the price of gold in U.S. notes and the price of U.S. notes in gold. The price of gold is the average for each year.

    The six most important factors, politically and economically, causing the fluctuation of gold in terms of U.S. notes shown in Table 3 were:
 First, the increase in the amount of greenbacks as, for example, reflected in the rapid rise of premium after July 11, 1862, the date of the second legal-tender act; secondly, the condition of the treasury as disclosed from time to time by the secretary’s reports; thirdly, the credit of the government from week to week as shown in the quotations of its bonds; fourthly, changes in the personnel of the government, either in the treasury department or in Congress through political elections; fifthly, state of the foreign relations of the country; sixthly, the war news and the fluctuation between hope and discouragement consequent upon military success or defeat.[2]
    Speculation was another contributor to the fluctuation in the gold premium. Basically, the cause of the difference between gold and the U.S. note was opinion and sentiment.

    Table 4 shows the change in purchasing power of the U.S. note and gold based on the Falkner Index. Between 1862 and 1879, the Falkner Index was in terms of the U.S. Note. Falkner converted the index to gold by proportionating it to the depreciation of the U.S. note as indicated by the premium on gold. The Falkner Index is an index comprised of 223 articles important to the average workingman and weighted in estimated importance. The base year is 1860. The index is that of January 1 of each year. It is an arithmetic mean and uses both weighted and unweighted prices.[3]


    The fluctuations in Table 4 result mostly from the change in value, purchasing power, of the U.S. note. The change in its value results mostly from changes in the opinion of the people about its future purchasing power. Gold’s value, i.e., purchasing power, trends upward over time because of increased productivity. Thus, under the gold standard, prices trend downward.

    How much of the price changes in Table 4 reflect changes in demand for money or changes in supply of money cannot be conclusively determined. During war, the demand for money declines as hundreds of thousands of men are sent off to die. A decline in the demand for money pushes its value down and prices up. After the war, as soldiers return to productive activities, the demand for money increases. An increase in the demand pushes its value up and prices down.

   Also, how much of the price decline during this era resulted from changes in the supply of and demand for products cannot be satisfactorily ascertained. This was an era of economic growth and growing output.

   Johnson contributes the decline in value, purchasing power of the U.S. note between 1862 and 1865 to three causes: “(1) their increasing quantity; (2) the lessening demand for money on account of the war and on account of the fact that the South had a money of its own; (3) the fluctuating acceptability of the greenback, its future being uncertain as long as the war was undecided.”[4]

   Like all good fiat money people, the promoters and supporters of the greenback blamed the loss of its purchasing power of the U.S. note on gold speculators. Obvious to them the decline did not result from over issuing irredeemable legal-tender U.S. notes.

    After the U.S. government began contracting the quantity of U.S. notes, prices began to fall. However, wages continued to rise until the Panic of 1873. From then until 1879, wages fell, but not as much as prices.[5]

    A decreasing supply of legal tender money and increasing demand for money accounts for the decline in prices between 1865 and 1875. The retirement of interest-bearing legal tender notes accounted for most of the decrease in the money supply (as shown in Table 1). Probably the biggest factor causing the decline in price was revolutionary development in production technology and intense competition.

    Several things contributed to the decline in prices between 1875 and 1879. With the enactment of the Resumption Act in 1875, certainty was given to the future purchasing power of the U.S. note. Also, the Panic of 1873 led to a contraction in credit. Moreover, production increased as the money supply declined, which pushed prices lower.

   After reviewing several price and other economic indices and indicators, Friedman and Schwarz concluded that the annual rate of decline in prices from January 1869 to February 1879 was around 3.5 percent.[6] Between 1867 and 1879, output rose at an average rate of 3.6 percent per year or 54 percent for the 12 years.[7] Per capita output averaged 1.3 percent per year during these 12 years.[8]

    Between 1869 and 1879, the net national product rose an average of 3.0 percent per year in current prices, or 6.8 percent per year in constant prices. During these 10 years, real per capita income grew at an average rate of 4.5 percent per year.[9] (Using a different methodology, Friedman and Schwartz lowered these averages to 0.5, 4.3, and 2.0 percent per year, respectively.[10])

    Capital investment in iron and steel grew from $76 million to $231 million between 1860 and 1880[11] in spite of the price of iron and steel falling most of these years. However, the wages of workers in the metal trade remained relatively high.[12]

    The ten years between 1869 and 1879 were years of economic growth in spite of the Panic of 1873 and the business contraction that lasted until the middle of 1879. Robust economic activity[13] accompanied by a lack of growth in legal tender money caused most of the decline in prices.

    The decade of the 1870s, as does the era from 1865 to 1900, shows that economic growth can occur under deflation. During much of this period output and real wages grew while prices fell.

    About falling prices accompanying economic growth and increasing output in the 1870s, Rothbard remarks:
when government and the banking system do not increase the money supply very rapidly, free-market capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too) economic growth, and the spread of the increased living standard to all the consumers.[14]

Endnotes - Continued 

1.Unger, p. 36.

2. Dewey, p. 295.

3. Johnson, p. 109.

4. Johnson, p. 282.

5. White, p. 164.

6. Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States 1867-1960 (Princeton, New Jersey: Princeton University Press, 1963), p. 33.

7. Friedman and Schwartz, p. 34-35.

8. Friedman and Schwartz, p. 36.

9. Friedman and Schwartz, p. 37.

10. Friedman and Schwartz, p. 38-40.

11. Ungar, p. 48.

12. Unger, p. 49.

13. Friedman and Schwartz, pp. 34-37 and 41-42.

14. Rothbard, p. 155.

Copyright © 2013 by Thomas Coley Allen.

Part 2 Part 4

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Friday, October 3, 2014

U.S. Note Part 2

Part 2: The U.S. Note, 1862 – 1879

Thomas Allen

[Editor’s note: Footnotes in the original are omitted.]

    Following the War, the future of the U.S. note was hotly debated. U.S. notes presented two vexing problems: (1) a loss of purchasing power and (2) redemption in gold. These two issues lasted until 1879 when U.S. notes became redeemable in gold and thus achieved the purchasing power of gold.
    One group, the hard money people, wanted to return to the gold standard and either to retire all U.S. notes or to make them convertible in gold. The other group, the soft money people, opposed returning to the gold standard. They wanted the country to remain on the greenback standard.

        Much of the support for the greenback, especially for expanding its quantity, came from the mercantilists, who believed that expanding the money supply created prosperity.
    Industrialists, manufacturers, many businessmen, and some bankers opposed contraction and a return to the gold standard. Although a few businessmen favored increasing the supply of U.S. notes, most soft money businessmen preferred expansion through the banking system.
    Some merchants involved in the export-import business opposed returning to the gold standard. They could enhance their profit by speculating on a rising gold premium. If the price of gold in U.S. notes rose between the time that they bought their goods and sold them, they made money on change the U.S. note price of gold in addition to the profit from the selling the goods.
    Promoters especially opposed resumption of the gold standard. They needed easy money to finance their schemes.
    Careyites were in the forefront of opposing the contraction U.S. notes and return to the gold standard. Careyites were the American School of political economy that Henry Carey created in 1850. He rejected the “wage fund” theory of labor against employer and the Ricardian rent theory. He believed that producing classes (agriculturalists, wage earners, and industrialists) had a common interest. That common interest was domestic industrial growth. Protective tariffs benefitted all producing classes. His political economy made manufacturers the great benefactors of the country. His great social enemy was money lenders and the scarcity of capital. Money lenders were the enemies of productive capital instead of being the enemy of the poor. Interest rates needed to be pushed lower and the money supply expanded. Expanding the money supply would drive interest rates down. He accepted the mercantile principle that money creates prosperity; it precedes prosperity instead of accompanying or following it. An abundance of money would drive interest rates down and stimulate the economy. Cary was a nineteenth century Keynesian.
    Another important group opposing contracting U.S. notes and returning to the gold standard were the greenbackers. They were mostly intellectuals and politicians with their working class and rural followers. Some were outright inflationists. Most considered inflation unimportant. For the most part, they opposed banks issuing bank notes; only the government should issue paper money. They saw the greenback as a way to push down interest rates; to them high interest rates were a bane on the economy. Greenbackers ranged from the pragmatic to the utopian.
    In summary proponents of the greenback and opponents of contraction and resumption of the gold standard fall into three groups:
One of these, identified politically with western and Pennsylvania Republicans, drew its support from promotional business elements. . . . A second soft money force was compounded largely of political elements—Jeffersonian Agrarianism, Democratic opportunism, and Copperhead thirst for revenge. . . . A third current, which drew from the same ideological reservoir as the postwar greenback Democracy, was utopian and reformist in nature and expressed the frustrations and aspirations of labor and the extremist humanitarian reformers in the uncongenial postwar era.[1]
    Proponents of redeeming U.S. notes in gold had a common goal: resumption of the gold standard. They varied on the best way to achieve this goal.
    Some wanted to return to the gold standard immediately or at least as quickly without waiting for U.S. notes to contract. A second group supported quickly accumulating a gold reserve to raise the value of U.S. notes to that of gold. (This was the plan that was eventually adopted.) Others wanted to retire or contract U.S. notes until the value of the U.S. note and gold were equal. A fourth group proposed redeeming U.S. notes in gold below value. Another group wanted to do nothing: Just wait for production and commerce to increase the value of the U.S. note until it was at par with gold and then return to the gold standard. Because of the depreciation in the value of U.S. notes, redemption was delayed until the premium of gold over the U.S. note narrowed significantly.
    Calvinist and Reform clergy favored returning to the gold standard. They viewed the gold standard as an honest and ethical monetary system unlike the greenback monetary system, which was dishonest and unethical. Irredeemable paper money was immoral and a curse. Many Baptist and Methodist ministers also supported returning to the gold standard.
    Another group promoting returning to the gold standard was the academic economists. Most of them accepted classical economics and Ricardo’s and Mill’s anti-mercantilist capital theories.
    The reformers out of whom came the Liberal Republicans and later the Mugwumps also supported returning to the gold standard. Along with advocating hard money, they also advocated free trade and civil service reform. They were mostly from the middle and upper classes. Most came from New England or were descendants of New Englanders.
    Two important business groups supported the gold standard. One was the Republican merchant who wanted free trade and an end to governmental extortion. This group resided primarily in New England and was mostly involved in the textile business. The other was the merchant involved in the export and import business. (One important exception were the importers and exporters who speculated on the change the gold premium.) They centered around Boston, New York, and Philadelphia. Merchants not involved in the import-export or textile business were divided over returning to the gold standard although most were inclined toward returning. Being off the gold standard made foreign trade speculative and risky as the U.S. note price of gold fluctuated.
    The big eastern national banks favored returning to the gold standard. However, eastern private bankers and bankers in the Midwest generally opposed contracting U.S. notes in preparation of returning to the gold standard although they were inclined toward the gold standard.
    Until 1873, most farmers favored the gold standard. After 1873, many switched to favoring the greenback.
    In summary proponents of the gold standard “were a socially superior breed, representing an older elite of eastern merchants, commercial bankers, textile manufacturers, professional men, gentlemen reformers, and respectable literati.”[2]


1. Unger, p. 118.

2. Unger, p. 162.

Copyright © 2013 by Thomas Coley Allen. 

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Friday, September 19, 2014

U.S. Note Part 1

Part 1: The U.S. Note, 1862 – 1879
Thomas Allen

[Editor’s note: Footnotes in the original are omitted.]

    The U.S. Note, commonly called the greenback, was legal-tender paper money. It was fiat money. Congress and the Secretary of the Treasury, instead of the markets, decided the quantity to issue. Until 1879, it was not redeemable in specie. Even after it became redeemable at par in gold in 1879, it remained fiat money. First, Congress still decided the quantity to issue. Second, unlike gold certificates, which were fully backed and not legal-tender, gold backed only about one-third to one-half of the outstanding U.S notes, which remained legal tender.
    Between 1862 and 1879, the history of the U.S. notes falls into two periods: the inflationary period from 1862 to 1865 and the deflationary period from 1866 to 1879 when it became redeemable in gold.
    On the money issue of this era, people fell into two camps: soft money and hard money. Soft money people preferred legal-tender paper money that was not redeemable in specie. Moreover, if issued, bank notes should be redeemable only in government issued legal tender paper money. Hard money people preferred the gold standard and requiring U.S. notes, if retained, and bank notes and all other forms of credit money to be redeemable in gold on demand.
    The U.S. Note was introduced as a necessity to finance Lincoln’s War against the Southern States. Proponents of the greenback claimed that legal tender paper money was a wartime necessity. Senator Sherman, who favored the legal tender law, argued the “necessity to give currency to treasury notes, necessity to provide money which would in turn purchase bonds.”[1] Senator Sherman expected the legal tender notes that Congress was about to authorize to lose value. That is the primary reason that he insisted that U.S. notes could not be used to pay tariffs on imports.
    Rothbard refutes the necessity claim:
    The spuriousness of this argument is seen by the fact that greenbacks were virtually not issued after the middle of 1863. There were three alternatives to the issuance of legal tender fiat money. (1) The government could have issued paper money but not made it legal tender; it would have depreciated even more rapidly. At any rate, they would have had quasi-legal tender status by being receivable in federal dues and taxes. (2) It could have increased taxes to pay for the war expenditures. (3) It could have issued bonds and other securities and sold the debt to banks and non-bank institutions. In fact, the government employed both the latter alternatives, and after 1863 stopped issuing greenbacks and relied on them exclusively, especially a rise in the public debt. The accumulated deficit piled up during the war was $2.614 billion, of which the printing of greenbacks only financed $431.7 million. Of the federal deficits during the war, greenbacks financed 22.8 percent in fiscal 1862, 48.5 percent in 1863, 6.3 percent in 1864, and none in 1865. This particularly striking if we consider that the peak deficit came in 1865, totaling $963.8 million. All the rest was financed by increased debt. Taxes also increased greatly, revenues rising from $52 million in 1862 to $333.7 million in 1865. Tax revenues as a percentage of the budget rose from a minuscule 10.7 percent in fiscal 1862 to over 26 percent in 1864 and 1865.[2]
    Some believe that Lincoln could not have fought his war even if the North had adopted an effective system for selling bonds and stringent taxation in 1861. The War could not have been financed with specie because of a lack of confidence in the Lincoln administration; legal tender paper money was necessary. Perhaps this explanation has merit. (This argument is correctly based on the premiss that when people lose confidence in their government, they hoard gold and spend government notes as fast as they can before the notes become worthless.) However, Napoleon fought much of the world for more than a decade and conquered most of Europe with specie; he did not resort to fiat paper money.
    (Issuing irredeemable, noninterest bearing, nonlegal tender Treasury notes was considered. Their issue was rejected because banks might not accept them and customers might refuse to accept them if a bank offered them. Without being legal tender for private debt, people would refuse them unless they wanted the notes to pay taxes.)
    Taxes paid less than 20 percent of the cost of the War.[3] Adopting a highly protective tariff, the Morrill tariff, significantly cut the tax revenue of the U.S. government. If it had the courage to raise taxes much more than it did, the U.S. government could have financed the War with taxation. Any shortfall could have been covered with borrowing. By financing the War with governmental notes, it paid:
    an average premium of 50 per cent on all its purchases from the beginning of 1862 till May 1865. The total expenditure of the four years was $3,352,380,410, of which it is safe to say that $2,500,000,000 consisted of purchases in the open market where the greenback dollar procured only 66 cents’ worth of property. In other words we obligated ourselves for $2,500,000,000 and got $1,630,000,000 in actual value. The difference, $870,000,000, is the unnecessary cost to the taxpayers, caused by the use of a depreciated currency.[4]
    Resorting to legal tender paper money greatly increased the cost of the War. According to Dewey, “The total effect of paper issues in increasing the cost of the war has been estimated at between $528,000,000 and $600,000,000; even this large amount is small when compared with the burdens which inflated prices placed upon the people in the ordinary relations of trade and industry.”[5]
    About resorting to the use of legal tender paper money, Representative Morrill, speaking in opposition said, “It will injure credit; it will increase prices; it will increase many fold the cost of the war.”[6]
    The use of legal tender government notes could have been avoided if:
        1. The Lincoln administration had instilled confidence of the public about the success of Lincoln’s War, which caused depositors to withdraw their money in gold from banks.
        2. The government had used bank checks and clearing houses instead of insisting that banks transfer the principal of government loans immediately in specie instead allowing them to retain the funds temporarily on deposits.
        3. Congress had enacted an extensive system of taxation.[7]

    U.S. notes were like a loan forced on the people. However, unlike real loans, they paid no interest and had no promise of repayment. Actually, the recipient paid the interest, which was the discount to specie. They were imposed on rich and poor, prudent and spendthrift, and speculator and cautious indiscriminately. Nevertheless, the burden fell more heavily on the poor, prudent, and cautious than on the rich, spendthrift, and speculator. As with all fiat monetary systems, a few people win, but most lose. Senator Fessenden, an opponent of legal-tender U.S notes, said that “the loss would fall most heavily on the poor.”[8]
    Besides, if the U.S. government had been willing to pay a higher interest rate, selling its bonds at a discount, it could have obtained sufficient funds. Not wanting to pay higher interest on its bonds had more to do with resorting to the U.S. note than the U.S. note being necessary to finance the War. U.S. notes accounted for less than 17 percent of the cost of the war.[9] The necessity argument was much more palpable and saleable than the stingy, parsimony argument.
    Moreover, once banks stopped redeeming their bank notes, the U.S. government had a choice to make. It could let the banks issue an evermore growing supply of bank notes or the government could issue irredeemable government notes. It could receive the profits from issuing irredeemable currency or let banks reap the profits. Congress chose to take the profits for itself.
    Issuing U.S. notes was a policy decision. Congress had a choice of issuing fiat legal tender paper money, i.e., the U.S. note, or paying a higher interest rate on its bonds. Congress and the Lincoln administration chose the former. Furthermore, Congress preferred receiving the gain from irredeemable paper money instead of letting the banks receive the gain.
    On January 1, 1861, the supply of paper money, bank notes and demand deposits, stood at $459,234,000.[10] (The country had $250 million in gold.[11]) On January 1, 1866, the paper money supply had risen to $1,418,572,000 of which 422,000,000 were U.S. notes.[12] The money supply rose 959,339,000. In 1860, the quantity of paper money per capita was $14.[13] In 1866, it was $41. During the War, “the money supply rose from $45.5 million to $1.733 billion, an increase of 137.9 percent or 27.69 percent per annum.”[14]
    Although many people suffered from the inflation brought on by the U.S. note, other people gained. The people who benefitted most from the greenback during the inflation years were banks, industrialists, railroad owners, borrowers, and speculators.
    Bankers benefitted greatly from the greenback monetary system. State bank notes and deposits rose from $510 million in 1860 to $743 million in 1863, or an increase of 15.2 per cent per year.[15] They could add U.S. notes to the reserves on which they based their loans. Moreover, banks paid out gold deposits made before the legal-tender law in depreciated U.S. notes. When the War began, banks were the largest debtors in the country. Inflation generally benefits debtors. Furthermore, the robust war economy gave banks the opportunity to make many profitable loans.
    Another group that benefitted from the greenback was the industrialists, especially the iron and steel manufacturers. Because foreign exchange markets expected further depreciation of the U.S. note, the U.S. note tended to depreciate faster than prices. A falling greenback dollar and a rising gold premium caused domestic prices to be cheaper and the prices of imports to be higher. Thus, the greenback functioned like a protective tariff. Also, the inflationary policy provided manufacturers with easy credit.
    Railroad owners also benefitted from the depreciating greenback because they were large debtors. They could pay their debts with money worth less than what they had borrowed.
    Furthermore, the legal tender U.S. note was a great benefit to debtors who had borrowed gold. Much of the money lent to them had been gold. Now they could repay these gold loans with depreciated U.S. notes and cheat their creditors.
    Speculators saw a way to profit from the difference in values between gold and U.S. notes. When the U.S. note was first issued, the silver in a dollar of silver coins was worth 97 cents in gold. As the U.S. note depreciated, the value of silver in a dollar of silver coins rose above a dollar in U.S. notes. Massey describes one way that speculators profited from depreciating U.S. notes with silver coins:
    A broker in New York, for example, would buy up quantities of silver coins, offering a premium in paper money to get them. These coins were taken to Canada, where they were accepted as the equivalent of gold. The broker brought back the gold to the United States and sold it at a large profit for more paper money.[16]
    The biggest winner was the U.S. government. It got to spend the U.S. notes first before they depreciated.
    Inflation also brings losers. One big loser during the inflation of 1863 to 1865 was the wager earner. During the War, the cost of living closely followed the gold premium. As with all inflations, wages lagged behind the rise in prices. Thus, workers suffered from the issue of U.S. notes as their standard of living declined. “In 1865, when price index stood at 217 as compared to 100 in 1860, wages had only touched 143.”[17] Salaries and wages of soldiers and governmental employees rose even slower than wages of private employees. Wages of soldiers were $13 per month from the beginning of the War until May 1864 when Congress raised their pay to $16. By the time of their pay raise, prices had about doubled.[18] Unfortunately for them, the U.S. note continued to depreciate.
    Perhaps the people who lost most during the inflation were those who lived on fixed incomes. They ranged from widows, pensioners, college professors, and clergymen to affluent lenders of capital.
    Bondholders, with one exception, lost. The exception was bondholders who had bought U.S. government bonds with U.S. notes and were paid interest and principal in gold and were not taxed on this income.
    Landlords also lost because rents fail to rise as fast as commodity prices.[19] The poor lost as many necessities were priced beyond their reach.
    When the government ceased expanding U.S. notes and other legal-tender currency and began contracting them, deflation followed. During the deflationary period, the winners during inflation typically became losers, and losers during inflation typically became winners.
    One big winner during the deflationary period was the lender. The exception was loans to borrowers who failed to payoff their loans. Therefore, the more conservative investors, such as banks and trustees for widows and orphans, preferred government bonds since the government was less likely to default. Unlike during inflation when lenders were paid with money worth less than what they had lent, during deflation, they were paid with money worth more. Thus, borrowers were big losers during deflation.
    Falling gold prices in terms of U.S. notes hurt domestic manufacturers because it made foreign goods from Great Britain and other countries on the gold standard cheaper in U.S. notes. Foreign goods were bought with gold.
    Importers also suffered; they lost money on their goods if the premium on gold fell between the time that they bought their goods and the time they sold them. They also suffer during the inflationary years when the gold premium fell.
    However, speculators could profit from a fluctuating gold premium if they bought and sold while the premium was rising as occurred during both the inflationary era and deflationary era. Moreover, any good speculator could profit from the fluctuation in the U.S. note price of gold no matter whether the gold premium was rising or falling. All they needed were fluctuating prices.
    Regardless of inflation or deflation, which is caused by inflation, the U.S. note transferred wealth from most people to a few wealthy people.

1. Davis Rich Dewey, Financial History of the United States, 8th edition. (1922, Rpt. Adamant Media Corp., 2005), p. 287.

2.  Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II (Auburn, Alabama: Ludwig von Mises Institute, 2005), pp. 131-132.

3. Irwin Unger, The Greenback Era: A Social and Political History of American Finance 1865-1879 (Princeton, New Jersey: Princeton University Press, 1964), p. 16.

4. Horace White, Money and Banking (Boston, Massachusetts: Ginn & Company, 1896), p. 162.

 5. Dewey, p. 293.

6. Dewey, p. 286.

7. Dewey, pp. 282-283.

8. White, p. 163.

9. Robert P. Sharkey, Money, Class, and Party: An Economic Study of Civil War and Reconstruction (Baltimore, Maryland: The John Hopkins Press, 1959), p. 16.

10. Henry V. Poor, Resumption and the Silver Question: A Handbook for the Times (1878 Rpt. New York, New York: Greenwood Press, Publishers, 1969), p. 197.

11. Joseph French Johnson, Money and Currency in Relation to Industry, Pieces, and the Rate of Interest, Revised Edition (Boston, Massachusetts: Ginn and Company, 1905), p. 278.

12. Poor, pp. 197-198.

13. Poor, p. 199.

14. Rothbard, p. 130.

15. Rothbard, p, 129.

16. J. Earl Massey, America’s Money: The Story of Our Coins and Currency (New York, New York: Thomas Y. Crowell Company, 1968), p. 159-160.

17. White, p. 163.

18. Dewey, p. 294.

19. Unger, p. 23.

Copyright © 2013 by Thomas Coley Allen. 

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