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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