Part 4: The U.S. Note, 1862 – 1879
[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.
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.” 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.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. 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.”
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.]
ENDNOTES -- CONTINUED1. 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.
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