American Freedoms

 American Freedoms

Thomas Allen

The 250th anniversary of the Declaration of Independence has arrived. Now is the time to reflect upon the liberties, freedoms, and rights that the Founding Fathers fought for and sought to preserve. Unfortunately, Americans have lost many, even most, of these liberties, freedoms, and rights. Sadly, people born in recent decades never had a chance to enjoy most of them. A short list follows.

1. Bill of Rights. People enjoy all the rights guaranteed and protected by the Bill of Rights unless the federal government disagrees. The Founding Fathers believed that the rights identified in the Bill of Rights were absolute and transcended and existed before government. However, today’s ruling oligarchs consider them relative, that is, governmentally granted privileges that can be withdrawn at any time and for any reason.

2. Freedom of Travel. The Ninth Amendment and its equivalent in State constitutions prohibit the federal and State governments from preventing or otherwise hindering the popular means of travel. In the early days, travel was by means of horses, boats, and then trains. Now, it is by automobiles and airplanes. Today, Americans are free to have governments hinder and even prevent travel by the present popular means (automobiles and airplanes). People need the government’s permission to travel by automobile; they need a driver’s license, insurance, etc. 

Additionally, they are free to travel on commercial airliners if the federal government allows them. Moreover, if they travel by air, they are treated like criminals but with fewer rights than a criminal. The federal government presumes all passengers are terrorists until proven otherwise, i.e., passengers are guilty until they prove their innocence. Also, the federal government violates their right to privacy with unconstitutional searches. (What would people have done in the nineteenth century if the federal government required stagecoach passengers and their luggage to be searched before they were allowed on a stagecoach? They probably would have beaten, if not killed, the agent.)

3. Freedom to Promote One’s Heritage. People are free to defend and promote their heritage and culture if that heritage and culture are not White, especially Southern. White, especially Southern, heritage and culture do not have the right to exist.

4. Schools. People are free to send their children to public schools where they can graduate with a high school diploma, despite some graduates being so illiterate that they cannot read their diplomas. Moreover, people are free to have public schools indoctrinate their children to be obedient slaves of the ruling oligarchs. Sadly, most do not even realize that they are slaves.

5. Welfare. The unproductive are free to enslave the productive to support them.

6. Corporate Welfare. People are free to be forced to bail out banks and other companies run by incompetent or greedy managers who have political influence or are deemed by the federal government to be too big to fail.

7. Money. Instead of deciding for themselves how much money the economy needs, the people have the freedom of the federal government, in collaboration with banks through the Federal Reserve System, to decide the quality and quantity of money. Moreover, people are free to be forced to use debt, Federal Reserve notes, as money instead of commodities like gold and silver that are no one’s liability. Thus, people are free to live with and use money that continuously loses purchasing power.

For additional lost freedoms, see “Freedom” by Thomas Allen.

The Founding Fathers would rebel against the above freedoms and rights. They would be ashamed of their descendants for throwing away the liberties, freedoms, and rights for which they fought.

Copyright © 2026 by Thomas Allen.

More political articles.

Critique of Achtenberg’s Speech on Fair Housing

Critique of Achtenberg’s Speech on Fair Housing

Thomas Allen

[Editor’s note: This article was submitted in 1994 for the “Southern National Newsletter” of the Southern National Party. It has been slightly edited.]

A speech delivered by Roberta Achtenberg, Assistant Secretary for Fair Housing and Equal Opportunity of the Department of Housing and Urban Development (HUD), illustrates how much the United States have deteriorated and how much deterioration will accelerate in the future. This speech illustrates the desperate need for the Southern States to secede and form a free and independent confederation of free and independent Southern States.

Achtenberg delivered this speech at the first (and hopefully the last) National Fair Housing Summit. It was a gathering sponsored by the federal government to discuss the state of fair housing and to decry the lack thereof. “Fair housing” is a euphemism that means that a landlord or homeowner has no right to rent or sell or not to rent or sell his property to whomever he pleases for whatever reason he pleases. The purpose of the meeting was to discuss ways to take away even the few rights and freedoms remaining and to discuss how to finish destroying what remains of Western Civilization in the United States.

She points out, correctly so, that where a person lives is a most important factor in determining the quality of one’s life. Thus, she concludes that all neighborhoods should be thoroughly integrated with the lowest stratum of society. There should be equality in the quality of life. “[T]he right to choose where we live is as important as the right to equal educational and employment opportunity and the right to vote.” Just as the power of the federal government has been used to destroy public education, to weaken the economy, and to corrupt the political process, it will now be used to ruin neighborhoods — or more correctly, ruin neighborhoods at an accelerated rate.

Then, she complains about the government not being more tyrannical in destroying the rights of the people in their use of their property. She praises the “advocates for the disabled, advocates for woman and for families with children, and industry leaders” for leading the fight to destroy these rights. Ah! But, thanks to the Clinton administration, a new day has dawned. The federal government will now become an active partner in the destruction of these rights (as though it has not been an active partner in destroying these rights since before the “civil rights” movement).

Moreover, she and her cohorts will lead the charge to destroy what remains of these rights, for she claims what the government does best is to lead. (Unreconstructed Southerners know differently. They know that what the government does best is to destroy.) She promises severe penalties for homeowners and landlords who do not kowtow before the fair housing overlords. Woe unto him who stands up for his rights.

Furthermore, she promises accelerated growth in the power of the federal government in housing (which really means accelerated growth of the federal government in controlling people). Programs to destroy the rights of homeowners and landlords will be instituted by every means available. The death and utter destruction of these rights are the legacy that she promises that the Clinton administration will leave America.

Also, she advocates affirmative action in housing. Yet she denies that affirmative action will lead to quotas and reverse discrimination. As anyone who has even cursorily looked at other affirmative action programs knows that affirmative action has always led to quotas and reverse discrimination. No matter how much the advocates of such affirmative action programs have denied that quotas and reverse discrimination would not occur, they always have. She fails to explain why affirmative action in housing will not result in the same.

Then, she says that “it’s time for government to act affirmatively to guarantee every American’s right to choose freely where they live.” To guarantee this so-called right means more than denying landlords the right to rent their property to whomever they please and denying homeowners the right to sell their houses to whomever they please. It also means providing people money to buy or rent in neighborhoods that they cannot afford. As a result, the politically powerful will compel the many serfs to support the privileged few. She hints that such a subsidy program is envisioned. Moreover, she equates separation by income with separation by race or ethnicity.

Next, she proceeds to inform her audience that the fair housing laws will be used to end segregated neighborhoods. Neighborhoods are to be integrated in spite of what the people in those neighborhoods think or want. Integration for integration’s sake! (As always, this integration flows only in one direction. White neighborhoods will be forcibly integrated. Black neighborhoods will not.)

Continuing, she informs her audience that integrated housing and neighborhoods are the last great unconquered frontiers for the civil rights movement. She is determined to conquer this frontier and bring it to ruin just as the civil rights movement has ruined all else that it has conquered. Yet, she fails to inform her audience of the results of the fair housing laws if they are as fully and forcibly implemented as she desires. The results are deteriorating neighborhoods, poorer housing, greater racial tension and hatred, ever-higher taxes, the loss of freedom, and a bigger government.

Her agency, HUD, is already attacking the banking industry. Banks are not to place the interest of their stockholders, owners, and depositors first. They are to place the social programs of the federal government first. They are to lend to whomever the federal government tells them to lend to — no matter how risky the loan.

Furthermore, the weight of the federal government is to be used against States and locales to coerce, extort, and bribe them into adopting analogous fair housing laws and enforcement programs. The federal government will make State and local governments coconspirators in the destruction of housing in the United States.

Finally, she comments on affordable housing and bemoans the lack of affordable housing. She claims that “there is [not] enough affordable housing, in enough neighborhoods and communities to enable people to actually make free choices about where they will live.” She does not identify the principal cause of the lack of affordable housing, which is governmental intervention, manipulation, and control of the housing market. On the contrary, she advocates more governmental intervention, manipulation, and control of the housing market. What she fails (or perhaps refuses) to realize is that her agency, HUD, and other agencies of the federal government are the cause of much of the housing problem about which she is carping.

Throughout her speech, she brags about the enforcement activities of her agency. She brags that the enforcement activities of her agency need to be increased and expanded. She brags about how the extent, domain, and coverage of her agency are to be increased and expanded. She brags about how much more intrusive into business and private affairs of all Americans her agency is to become. Never does she mention the constitutionality of what she advocates — probably because everything she advocates is unconstitutional.

The time has come for all good Southerners to free themselves from the despotism and tyranny of the megalomaniacs of HUD. They are only one example, and a small one at that, of the despotic and tyrannical rule of the United States over the Southern States. The time has come for a free and independent confederation of free and independent Southern States.

Copyright © 1995, 2025 by Thomas C. Allen.

More social issues articles.

Mosaic Economics

Mosaic Economics

Thomas Allen

In Moses the Economist (1947, Editor Ben Williams, Reprinted 2009, American Christian Ministries), C.F. Parker gives his understanding of Mosaic economics as described in the Pentateuch. Some of his descriptions and my comments follow.

– Value. Parker believes that the value of the labor used to provide a product or service determines its value. (Both Adam Smith and Karl Marx held this view.) The opinion of the consumer is irrelevant. Thus, if the labor value of a product is $100 and the consumer values it at $50, the product cannot be sold for $50. To sell it for $50 would cheat the workers of their due wages and would be an ill-gotten gain for the consumer, who has cheated the workers out of part of their wages. For the product to sit on the shelf and deteriorate is better than selling it for less than $100. How the workers are better off losing $100 by the product deteriorating to worthlessness than losing $50, Parker does not explain.

Like most people, he has the cost of labor and materials determining the selling price of the product backward. The cost of labor and other inputs to produce a product does not determine the selling price of the product. The marginal consumer does. What the consumer is willing to pay for a product determines the cost of the labor and other inputs in the production of the product.

– Taxes. Farmers bear the primary burden of funding the government. They pay 10 percent of their crops and increase in herds to the government. (If their herds decrease, does this the government reimburses them for 10 percent of their loss — probably not.) However, they pay their taxes in products and livestock instead of money.

To provide additional revenue (taxes) for the government, Parker extends this principle to manufacturers. Through some convoluted reasoning, he concludes that the use of tools powered by steam or electricity produced by coal, petroleum, natural gas, uranium, water, and now wind and solar makes their products equivalent to agriculture. Consequently, manufacturers would pay the government 10 percent of what they produce. Thus, applying the agricultural equivalency, an automobile manufacturer would give the government 10 percent of the cars and trucks that he produces. A spark plug manufacturer would give the government 10 percent of the spark plugs produced. In like manner, a toy manufacturer would pay the government 10 percent of the toys that he produces. And, likewise, for other manufacturers.

However, if furniture manufacturers or seamstresses used no power tools in producing their furniture or apparel, they pay no taxes. Yet, if they use power tools, such as electric saws and drills and electric sowing machines, they pay 10 percent of their products to the government.

Providers of services are exempted from taxation. For some strange reason, Parker puts miners, who extract God-given ore from the ground, in the nontaxpaying category. Although he is unclear whether extractors of petroleum, natural gas, and coal pay taxes or not, he seems to place them in the nontaxpaying category.

Parker does not address solar and wind energy because when he wrote his book, they were not used to produce electricity, although the wind was used to grind grain, pump water, and move ships. However, based on his agricultural principle, since God provides the wind and sun, people who use them to produce electricity should give the government 10 percent of the electricity that they produce.

– Land. Parker is a proponent of the jubilee where all land returns to the original owner every 50 years. For the Western Hemisphere, this means that all land return to the Indians (who gets the land of the extinct Indian tribes?). Or, it returns to the monarchs of Spain, Portugal, Great Britain, France, the Netherlands, Denmark, and Russia. If the principle of the right of conquest, the land belongs to whoever conquers it, is applied as it is applied to the Israelite’s conquest of Canaan, then the aforementioned monarchs are the original owners since the land was conquered for them and in their name. Consequently, the Indians have no claim. (See “Jubilee” by Thomas Allen.)

– Usury, Loans, and Debt. Of course, charging interest including fees, which is interest by another name, on loans is prohibited. Moreover, all debts are canceled after seven years —not seven years from when the loan is made but a fixed calendar seven years for all loans. Thus, a loan may be canceled a year after it is made. (See “Questions for Anti-Usurers” by Thomas Allen.)

If all debt is canceled every seven years, then all paper money and its electronic equivalent including checkbook money become void every seven years. These types of money are obligations, i.e., debts. Parker seems not to recognize this cancellation of credit or representative money, which he believes is real money like full-weight gold and silver coins. His confusion about money derives from his belief that money is a mere token. (See “What Is Money?”,  "What Are the Functions of Money,” and “What Is the Difference Between Commodity and Fiat Money” by Thomas Allen)

Although Parker does not realize it, his anti-usury stance if carried to its logical conclusion forbids farmers from saving part of their crop as seed for the next season. Deciding how much to consume now and how much to save for future consumption involves interest, usury.

Furthermore, even the holdings of Social Security, of which Parker approves, would cease to exist every seven years because they are obligations (debts) owed to the participants.

– Money. Further, Parker has little understanding of commodity money, e.g., gold and silver, and a commodity monetary system, e.g., the gold standard. He believes that the monetary commodity has a different value, usually, a lower value, from the commodity stamped as a coin. Under a true commodity standard, the commodity has approximately the same value as an equivalent weight of the commodity when stamped as a coin. Money has value in and of itself that is independent of any image, words, or numbers stamped on it. The weight of the commodity in the coin is what gives it value and not what is stamped on it. (If the monetary value of a currency exceeds the commodity of which it is made, as with paper money, it represents real commodity money and is, therefore, an obligation to pay real commodity money, i.e., it is a debt payable in real commodity money.)

If he had looked in Genesis, he would have found the attributes of real money, which are quantity, a measure of weight, and substance. According to Genesis 23:16, Abraham bought a burial plot. He paid 400 (quantity) shekels (measurement of weight) of silver (substance). All commodity money has these three attributes, which makes money more than a mere token.

Therefore, a token even if used as a medium of exchange is not Biblical money. When used as a medium of exchange, token money represents money and passes the obligation to pay real money from one person to another. When the seven-year debt cancellation comes, token money becomes a canceled debt, and the person holding it is cheated out of whatever value it had as a medium of exchange.

Nevertheless, Parker is correct about money itself not being wealth. However, the gold in a gold coin is wealth as gold bullion. (See “What is the Gold Standard?” by Thomas Allen.)

– Banks. Banking as known today would cease to exist. People who wanted to save their money in a secured vault would have to pay someone to protect their money in a vault.

As for checking accounts, people would have to pay a depositary to hold their money against which they could write checks. They may also have to pay when a check is cashed or money is transferred from one account to another account. A return to yesteryear where bill collectors visited people’s houses or businesses to collect payment may return. Most likely, people may have to visit centralized offices to pay their bills as that would be the cheapest way of making payments.

– Wages. According to Parker, people should be paid according to their effective endeavors. Also, he seems to argue for a wage system that is akin to what progressives promote from time to time. Some governmental bureaucrats establish a relative pay scale for each type of job based on their opinion of its importance and on the labor required for that job. 

Nevertheless, he maintains that workers who work more efficiently acquire more wealth than less efficient workers. The incompetent and slackers become impoverished. He is a proponent of meritocracy in the workplace, which the free market generally provides when the government does not interfere with employment.

According to Parker’s understanding of Mosaic economics, wealth is fixed and is the aggregate of the rivers, lakes, oceans, soil, plants, animals, atmosphere, and the like. Wealth has nothing to do with human intelligence in organizing and using these resources. Thus, African countries rich in resources should be wealthier than Singapore, which is extremely poor in natural resources, but most are not.

– Stocks. Corporations with publicly traded stock would cease to exist under Parker’s Mosaic economics. Paying dividends on stock is outlawed because the owner of the stock did not earn the money. Moreover, one could never sell a stock for more than he paid for it because that is ill-gotten gain. Likewise, apparently, one could never sell a stock for less than what he paid for it because that would be an ill-gotten gain for the buyer. 

– Abundances and Scarcities. Buying items such as generators and food in a region of plenty and selling them in a region of want because of a natural disaster, war, or otherwise at a price above what existed before the disaster is forbidden. One must sell the item at the predisaster market price. (Higher prices mean stronger demand relative to the supply and are a signal for more supply. By fixing prices, Parker denies this signal. He appears to have a great deal of confidence in the integrity and the subjective opinions of governmental bureaucrats to move products from a region of abundance to a region of scarcity. He seems to want to eliminate the free market.)

Moreover, in a region that has an abundance of agricultural products, he would prohibit selling the products below the pre-abundant price. To do so would cheat the farmer. Apparently, the farmer and presumably the consumer benefit more from the excess crops rotting away than from selling them at a lower price.

– Selling Used Items. Selling a used product, including antiques and old masterpiece paintings, for a profit is forbidden. One cannot sell a used product for more than what he paid for it (or the original price if the original price is lower). Consequently, if a person inherits a painting, jewelry, furniture, or anything else whose original price is unknown, he cannot sell it.

Moreover, stamp and coin collecting as an investment would cease to exist. One can never sell a stamp or coin for more than its face value.

– Insurance. Private insurance is verboten. Nevertheless, Parker accepts governmentally run Ponzi schemes like social security, which is often called insurance.

– Conclusions. If implemented, Mosaic economics, as Parker explains it, would be detrimental to today’s economy. A small minority of the country, the farmers and manufacturers, bear the tax burden; the remainder remains untaxed. This dearth of taxes does keep the government small and, therefore, limited. The government could not make up for the shortfall by deficient spending as the cancellation of debt every seven years and the illegality of charging interest would prevent most people from lending to the government.

Further, his explanation of money is flawed. Also, his requirement for governmental price fixing is highly destructive and would create continuous surplus and shortages. He asserts that the value or price of labor in producing and distributing products fixes their value or price; the subjective opinion of the consumer, i.e., what the consumer is willing to pay for the product is irrelevant in fixing its value or price. His demand to abolish interest would cause the consumption of capital until society reverts to the hunter-gatherer stage. (See “Usury” by Thomas Allen.) 

Moreover, Mosaic economics, as Parker explains it, relies heavily on the wisdom, integrity, altruism, and near omniscience of governmental bureaucrats. Although historically and biblically, governments have been much more doers of evil than doers of good, Parker displays a childlike trust and confidence in governments always being doers of good.

Parker is convinced that Mosaic economics as he understands it will eliminate poverty. However, instead of making the country prosperous as he claims, his proposals would impoverish the country.

Copyright © 2022 by Thomas Coley Allen.

More economic articles.

A Letter: Money and Conspiracy Part 2 — Conspiracy

A Letter: Money and Conspiracy

Part 2 — Conspiracy

Thomas Allen

[Editor’s note: The following is a letter written in 2004 responding to an article by Mr. Rittenouse in Countryside. This letter has been divided into two parts: Part 1 — Money and Part 2 — Conspiracy.]

    Mr. Rittenhouse pooh-poohs the thought that some cabal may be working to control governments and the world. Some high and mighty people disagree with him. Here is a sample of what some of these important people have said about this cabal. I dare say; these people had much more insider information than Mr. Rittenhouse.
    Arthur Schlesinger, Jr.: “We are not going to achieve a new world order without paying for it in blood as well as words and money.”
    Supreme Court Justice Felix Frankfurter, “the outstanding power behind the New Deal”: “The real rulers in Washington are invisible, and exercise power from behind the scenes.” At a dinner party, Frankfurter was asked who ran the United States; he replied, “The real rulers of a nation are undiscoverable.”
    John F. Hylan, mayor of New York: “The real menace of our Republic is the invisible government which like a giant octopus sprawls its slimy length over our city, state and nation. . . . At the head of this octopus are the Rockefeller-Standard Oil interests and a small group of powerful banking houses generally referred to as the international bankers [who] virtually run the U.S. government for their own selfish purposes.”
    After observing governmental leaders of the United States consistently making concessions to the Soviet Union, James Forrestal, the first Secretary of Defense, commented, “These men are not incompetent or stupid. They are crafty and brilliant. Consistency has never been a mark of stupidity. If they were merely stupid, they would occasionally make a mistake in our favor.”
    President-elect Ronald Reagan: “I think there is an elite in this country and they are the very ones who run an elitist government. They want a government by a handful of people because they don’t believe the people themselves can run their lives. . . . Are we going to have an elitist government that makes decisions for people’s lives, or are we going to believe as we have for so many decades, that the people can make these decisions for themselves?”
    A few years after resigning as President, Richard Nixon wrote, “The nation’s immediate problem is that while the common man fights America’s wars, the intellectual elite sets its agenda. Today, whether the West lives or dies is in the hands of its new power elite: those who set the terms of public debate, who manipulate the symbols, who decide whether nations or leaders will be depicted on 100 million television sets as ‘good’ or ‘bad.’ This power elite sets the limits of the possible for President and Congress. It molds the impressions that move the nation, or that mire it.”
    Jim Kirk, who had been a member of the Students for a Democratic Society, Communist Party, and the Black Panthers, said about the control of radical left groups: “Young people have no conception of the conspiracy’s strategy of pressure from above and pressure from below. . . . They have no idea that they are playing into the hands of the Establishment they claim to hate. The radicals think they are fighting the forces of the super rich, like Rockefeller and Ford, and they don’t realize that it is precisely such forces which are behind their own revolution, financing it, and using it for their own purposes.”
    Nicholas M. Butler, president of Columbia University, said to the Union League of Philadelphia: “The old world order died with the setting of the day’s sun and a New World Order is being born while I speak.” Butler was “J.P. Morgan’s chief spokesman for ivied halls.”
    Edward Bernays, chief advisor to William Paley, founder of CBS: “Those who manipulate the organized habits and opinions of the masses constitute an invisible government which is the true ruling power of the country. . . . It remains a fact that in almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons. . . . It is they who pull the wires which control the public mind, who harness old social forces and contrive new ways to bind and guide the world. . . . As civilization has become more complex, and as the need for invisible government has been increasingly demonstrated, the technical means have been invented and developed by opinion may be regimented.”
    Manly P. Hall, 33rd degree Freemason and a member of its inner circle, and probably the greatest Freemason of the twentieth century: “There exists in the world today, and has existed for thousands of years, a body of enlightened humans united in what might be termed, an Order of the Quest. It is composed of those whose intellectual and spiritual perceptions have revealed to them that civilization has secret destiny. The outcome of this ‘secret destiny’ is a World Order ruled by a King with supernatural powers. This King was descended of a divine race; that is, he belonged to the Order of the Illumined for those who come to a state of wisdom then belong to a family of heroes-perfected human beings.” He also wrote, “. . . It is beyond question that the secret societies of all ages have exercised a considerable degree of political influence. . . .”
    Winston Churchill admitted the existence of conspiracy when he wrote in 1920, “From the days of Spartacus-Weishaupt to those of Karl Marx, to those of Trotsky, Bela Kun, Rosa Luxemburg, and Emma Goldman, this worldwide conspiracy for the overthrow of civilization . . . has been steadily growing.”
    According to Lenin, the Communist Party could not survive without conspiracy. He wrote, “Conspiracy is so essential a condition of an organization of this kind that all other conditions . . . must be made to conform with it.”
    In a speech in 1931 before the Institute for the Study of International Affairs, the historian Arnold Toynbee said, “We are at the present working discreetly with all our might to wrest this mysterious force called sovereignty out of the clutches of the local nation states of the world. All the time we are denying with our lips what we are doing with our hands, because to impugn the sovereignty of the local national states of the world is still a heresy for which a statesman or publicists can perhaps not quite be burned at the stake but certainly be ostracized and discredited.”
    ABC commentator Cokie Roberts remarked, “Global bankers are really running the world.”
    James Warburg, son of Paul Warburg, the author of the Federal Reserve System: “We shall have world government whether or not you like it — by conquest or consent.”
    Benjamin Disraeli, Prime Minister of Great Britain: “The world is governed by very different personage from what is imagined by those who are not behind the scenes.”
    Benjamin Disraeli: “The governments of the present day have to deal not merely with other governments, with emperors, kings and ministers, but also with the secret societies which have everywhere their unscrupulous agents, and can at the last moment upset all the governments’ plans.”
    Franklinton Delano Roosevelt: “Nothing just happens in politics. If something happens you can be sure it was planned that way.”
    Franklin Delano Roosevelt: “The real truth of the matter is, as you and I know, that a financial element in the large centers has owned the Government ever since the days of Andrew Jackson.”
    Elliot Roosevelt, son of Franklin Roosevelt: “There are within our world perhaps only a dozen organizations, which shape the course of our various destinies as rightly as the regularly constitutional government.”
    William Colby, CIA Director: “Sometimes, there are forces too powerful for us to whip them individually, in the time frame that we would like. . . . The best we might be able to do sometimes, is to point out the truth and then step aside.”
     Gary Allen, a historian of conspiracies: “. . . many of the major world events that are shaping destinies occur because somebody or somebodies have planned them that way. If we were merely dealing with the laws of average, half of the events affecting our nation’s well-being should be good for America. If we were dealing with mere incompetence, our leaders should occasionally make a mistake in our favor. . . . we are not really dealing with coincidence or stupidity, but with planning and brilliance.”
    Andre Baron: “Remember that the constant rule of the secret society is that the real authors never show themselves.”
    If these quotations do not suggest a conspiratorial cabal, then the origins of the Federal Reserve System should. The essence of what eventually became the act that established the Federal Reserve System was written by Paul Warburg of Kuhn, Loeb and Co. Assisting him were  Henry P. Davison, senior partner of J. P. Morgan and Co.; Charles D. Norton, president of (Morgan’s) First National Bank of New York; Frank A. Vanderlip, President of (William Rockefeller’s) National City Bank of New York; Benjamin Strong, vice-president of (Morgan’s) Bankers Trust Co.; A. Piatt Andrew, Assistant Secretary of the Treasury; and Senator Nelson Aldrich, Morgan’s leading representative in Washington. This group met in secret in 1910 on Jekyll Island and drafted what eventually became the Federal Reserve System.
    The conspiratorial historians may be wrong, but the evidence strongly suggests that they are right.

Copyright © 2004, 2019 by Thomas Coley Allen.

More historical articles.
Part 1

Does the Monetary Unit Determine the Value of Bullion?

Does the Monetary Unit Determine

the Value of Bullion?

Thomas Allen

    One of the debates that economists had during the era of the gold-coin standard[1] was whether the monetary value of the gold coin determined the value of gold bullion or gold bullion determined the value of the gold coin. Is the value of each unit of money determined by the value of the bullion in each unit? Or, is the value of bullion in each unit of money determined by the value of the monetary unit? In other words, is the monetary unit the independent variable, or is gold bullion the independent variable?[2]
    In his book Money (1882), George Weston argues that the value of bullion is determined by the value of coin, the monetary unit. The value of coin is determined by the quantity of coins and paper money. Weston is a proponent of the quantity theory of money. Other things being equal, the quantity of money fixes the value of the monetary unit, which he usually seems to mean its purchasing power. This is true not only for inconvertible fiat government paper notes, it is also true of full-weight gold coins and other types of money. According to him, governments can keep their government notes from deprecating by properly controlling their quantity. Moreover, he seems to prefer fiat paper government notes to full-weight gold coin. (A full-weight gold coin is a coin whose monetary value equals the value of its gold content.)
    Weston believes that a parity between full-weight coin and paper money can be permanently maintained by limiting the quantity of paper money. Moreover, he contends that controlling the quantity of paper money is more reliable than redeeming paper money in coin on demand, which he considers to be “hopelessly treacherous as it is costly and clumsy.” He adds that using the requirement to redeem bank notes in gold coin on demand to regulate the issue of bank notes is “false and fraudulent . . . and had proved itself in practice one of the worst scourges which has ever afflicted mankind.” Such a system causes the quantity of money to fluctuate too much. A superior system is to use the price of gold to regulate the issue of inconvertible paper money. Perhaps, he is correct, but no government has ever achieved the goal of maintaining parity or near parity of paper money with coin or bullion for more than a few years without redemption. Furthermore, rarely does a government use the price of gold to regulate the issue of inconvertible paper money. Such methodology is too restrictive and obviates the purpose of resorting to inconvertible paper money, which is to issue money based on politics and not on economics.
    Weston prefers a static supply of bank notes as the banking systems of England and most other European countries had where nearly all bank notes were backed by gold coin. A major problem with this static money supply is that to fit periods of high demand for notes, such as around Christmas, a large quantity of notes has to remain unused in vaults for most of the year. European countries overcame this inelasticity problem with checkable deposits, which Weston rejects as money. By expanding checkable deposits when demand was high and contracting them when demand was low, banks satisfied the markets’ monetary needs.
    Moreover, Weston believes that the law gives gold its value. Furthermore, the value of gold as merchandise is not an element constituting its value as money. This monetary value of gold can be regulated by varying the quantity of paper money in circulation. Increasing the quantity of paper money decreases the value of gold coin. Here he seems to confuse value with purchasing power. The two are different. Besides, increasing the quantity of paper money does not always lead to a decline in purchasing power of gold coin. In the United States, during the last quarter of the nineteenth century, the purchasing power of gold coin rose while it was accompanied by a rising supply of paper money (some fiat like the U.S. note[3] and some not like national bank notes[4]) and legal-tender silver dollars.[5] However, fiat paper money and fiat silver dollars may have prevented prices from declining more than they did.
    Also, Weston seems to believe that gold and silver are not money (Murray Rothbard strongly disagrees; he declares that gold is money, whatever its form.) People desire them because of ease of converting them to money — presumably, he means coin and possibly bullion as reserves for paper money. However, gold bullion has been used as money, and not merely as backing for paper money, before and after coinage.
    According to him, civilized people today (1884) do not desire gold for ornamentation but solely for its use as money. If true, the manufacturing of gold jewelry would be an unprofitable undertaking.
    Weston claims that silver coin can be kept at parity with gold coin by limiting the quantity of silver coins. He cites several examples in Europe. Silver coins in the countries that he mentions were either subsidiary coins to gold coin or soon became subsidiary coins. These countries were on the gold standard, and their silver coins were convertible to gold either directly or indirectly. This convertibility — not their quantity — kept the monetary value of these coins at par with gold coin, although the silver content of these coins was worth less than the monetary value of the coin. (If the monetary value of a coin fixes the value of its bullion content as Weston contends, why did not the value of silver rise to match the monetary value of the silver coin?)
    Weston seems deceitful about subsidiary coins and uses them to support his contention that the metal content of a coin does not determine the value of the coin, but the value of the coin determines the value of its metal content. Subsidiary coins are token coins used for transactions so small that full-weight gold coins cannot be used without receiving change in token coins. Moreover, token coins can be redeemed in gold coin. If a subsidiary coin is to circulate, the value of its metal content has to be less than its monetary value or else it will be melted for its metal.
    Nevertheless, his comments on the European silver coins fit the silver dollar in the United States at that time. The silver dollar was fiat money whose quantity was fixed by Congress and the Secretary of the Treasury. According to Weston, it was kept at par with the gold dollar by limiting the quantity of silver dollars manufactured. Although the value of the metal content of the silver dollar was worth less than a dollar, Congress declared the silver dollar to have a legal-tender value of one dollar. Although the silver dollar could not be directly converted to gold, it could be converted indirectly to gold. One means of achieving this conversion was to deposit silver dollars in a bank and then withdraw the money in gold coin. This indirect conversion to gold kept the silver dollar at par with gold.
    Historical examples argue against Weston’s position. As shown below, the value of bullion controls the value of the coin, and not the monetary value stamped on the coin.
    In 1985, Congress authorized the minting of a one-ounce gold coin with a legal tender value of $50 and a one-ounce silver coin with a legal tender value of $1. This action occurred 14 years after gold had ceased having any formal part of the world’s monetary systems. Likewise, it occurred decades after silver had any formal part of the world’s monetary system except as subsidiary coins, which use ended in the mid-1960s.
    If the monetary value of gold coin determined the value of its gold bullion content, which was $327 at end of 1985, then the gold coin should have pulled the value, price, of bullion down to $50 per ounce. Instead of the coin pulling the value of bullion down, bullion raised the value of the coin up. Likewise, silver bullion in the one-ounce $1 silver coin raised the value of the coin instead of the silver coin pulling the value of bullion down to $1 per ounce.
    Under the  Bretton Woods system, the US government guaranteed the US dollar to have the value of one thirty-fifth of an ounce of gold and exchanged one ounce of gold at the rate of $35 per ounce when a foreign government or its central bank redeemed its dollars. During the 1960s, the value, price, of gold bullion rose above $35 per ounce. If Weston were correct in that the value of the monetary unit determines the value of bullion, such a dichotomy could not have occurred. The price of gold could not have risen above $35 per ounce. As a result of the divergence between the monetary unit and bullion, the Bretton Woods system was abandoned in 1971.
    The same effect occurred in Weston’s day when Congress authorized the issuance of government notes called US notes and nicknamed greenbacks. Soon after issuance, the $10 US note began trading at a discount to the $10 gold coin. Although the magnitude of the discount varied, the US note did not exchange at par with gold coin until it became redeemable in gold. If the monetary unit determines the value of bullion, then the $10 US note should have remained at par with the $10 gold coin. Moreover, if the monetary unit determined the value of bullion, then subsidiary silver coins should have remained in circulation. They did not. For several years subsidiary silver coins ceased circulating because their value as bullion exceeded their value as money.
    According to Weston, the value of the dollar is determined by the quantity of coin and paper money. As S. McLean Hardy’s statistical study shows, during the War, the value of the dollar had more to do with Confederate victories and defeats than with its quantity. Confidence, not quantity, gives inconvertible paper money its value, although its quantity affects confidence. Convertibility gives paper money its value whatever its quantity.
    Weston does acknowledge that paper money can depreciate against gold coin and cause gold coins to cease circulating. How can this be if the value of money determines the value of gold bullion in the coin? How can the value of the bullion content of a $10 gold coin rise above the $10 monetary value stamped on the coin, if the monetary value of the coin determines the value of its bullion content? The experience that he witnessed with the US note proves that the value of the monetary unit does not fix the value of its bullion content.
    Centuries before the first precious metal coin was ever minted, people bought and sold goods and services with gold and silver bullion. Genesis 23:16 records such an event when Abraham bought a burial plot for his deceased wife by weighing out silver.
    More proof that a coin’s bullion content governs its monetary value is that well-worn coins exchange by their weight rather than by the monetary value stamped on them unless the law prohibits such discounting. In which case, the law is often ignored by refusing to accept the worn coin in trade at its full monetary value. (Unfortunately, creditors often had to accept worn coins in payment of debt.) Some countries under the gold standard allowed by law exchanges of well-worn coins by weight rather than by tale. Even in some countries that prohibited such discounting guaranteed the full-weight of their coins by exchanging new full-weight coins for worn coins.
    Weston asserts that suspension of the gold standard, i.e., the suspension of convertibility of paper money, in one country adds to the number of gold coins in other countries. The resumption of the gold standard, i.e., returning to convertibility of paper money in gold coin, draws gold coins from other countries. He ignores the large sink of hoarded coins, gold bullion, jewelry, ornamentation, plate, and other gold products that can absorb the excess gold under suspension and can return it under resumption. Thus, according to him, the abandonment of the gold standard in one major commercial country causes the value of gold in other countries to fall. Resumption of the gold standard causes the value gold in other countries to rise.
    When a country suspends species payments, Weston claims that its coins flow to other countries and reduce the value of money, and by that, the value of gold, in these countries. If so, the effect is only temporary. The value of gold as bullion and in coin is nearly equal worldwide. Moreover, the global quantity of gold available for monetary use is so massive compared with what may flee one country that the effect of the fleeing gold would be small or even insignificant. Weston would counter that this new supply of gold is sufficient to lower its value worldwide.
    If Weston is correct in that whatever gold that flees a country that has suspended the gold standard flows into the monetary system of other countries, only a small part will end up in circulating gold coins. Most will go to banks as deposits and become the basis for credit expansion. Most of the money created by this expansion will be as checkable deposits while some will be as bank notes. This credit expansion is what causes monetary inflation and the resulting rising prices. Its contraction results in deflation and decline in prices. However, many problems associated with credit expansion can be avoided by using sound banking practices (not fractional reserve banking practices, which allows multiple parties to use the same money simultaneously). Sound banking practices include not borrowing short and lending long and backing all checkable deposits 100 percent with full-weight coin or commercial money.[6] (Commercial money is a real bill of exchange that is self-liquidating usually within 90 days or less; it can only function under a commodity standard like the gold standard.)
    The decline in purchasing power, Weston contends, results from a reduction in demand for gold as coin when the gold standard is suspended. However, he claims that the loss in purchasing power results from a loss of the value of gold coin. The reverse occurs when the gold standard is resumed and paper money is again convertible in gold. Purchasing power of coin and paper increases because the value of gold increases. He ignores the quality of money theory, which explains the fall and rise of money’s purchasing power, which he calls value. When the gold standard is suspended, low-quality inconvertible paper money, which has less value and purchasing power than gold, replaces gold coin. When the gold standard is resumed, a high-quality money, gold coin and paper money convertible in gold, replaces low-quality inconvertible paper money.
    Moreover, he seems to credit the rise and fall in prices mostly on changes in the supply and demand for monetary gold. He sees the changes in prices being caused by changes in the value of gold. He ignores changes in credit money, except bank notes, which he considers to be real money and not credit money,[7] have much more effect on prices than changes in the supply of gold.
    Weston fails to explain how the monetary unit gets its initial value. Under the gold standard, the monetary unit gets its value from gold. The monetary unit is defined as a specific weight of gold and the monetary unit has the value of that weight of gold. For example, the Gold Standard Act of 1900 defined the dollar as 23.22 grains of gold. Therefore, the dollar had the value of 23.22 grains of gold. This is more proof that the monetary unit derives its value from its metal content as the value of bullion precedes the monetary unit.
    This notion Weston rejects. He claims that the value of the monetary unit, the dollar, gives the 23.22 grains of gold its value. The dollar may give 23.22 grains of gold its price, but it does not give the gold its value. Value and prices are not the same things. Value is subjective; price is objective. Moreover, not everything that has value, has a price; for example, love of one’s mate and children has great value but no price.
    An example of the difference between price and value is that, under the gold standard, when a person buys a shirt for $10, the shirt has the value of 232.2 grains of gold and a price of $10. (Today, when one buys a shirt with a $10 federal reserve note, what is the value of the shirt? Without defining the dollar in terms of itself, which is a poor and unsatisfactory definition that should be unacceptable and not used, such as the value of the dollar is a dollar’s worth of goods, no one can definitively define the value of the dollar.)
    Before any commodity became money, a medium of exchange, it had to have value independently of its monetary use. Its monetary use adds to its value as a commodity, but does not create it. Weston acknowledges that gold had value as ornamentation, etc. before being coined, and its uses as coin add to that value and even gives gold its highest actual value. If true, no gold coin would ever be melted for use as ornamentation, for the highest value of gold is that in the form of a coin. However, as gold coins were often melted for their gold and that gold was used for other purposes, gold as coin is not always its highest use.
    Moreover, Weston is unclear about how paper money gets its value other than the government limiting its quantity. How this limitation initially gives paper money, especially inconvertible paper money, its initial value, he does not explain. Convertible paper money derives its value from the gold that it represents. Inconvertible paper money derives its value from the gold coin that it replaces. Quantity has nothing to do with this initial value.
    In his argument to prove that coin fixes the value of bullion, Weston shows that government can easily manipulate their monetary systems and the purchasing power of their money — usually to the detriment of the people. However, he fails to identify or to describe a governmentally manipulated monetary system that works better than, or even as well as, the gold-coin standard accompanied by a well-functioning credit system, although as an example, he offers Brazil, which used the price of gold as an index to regulate its fiat paper money supply.
     Under the gold-coin standard, the government does not regulate the quantity of gold coins produced. However, it often intervenes to restrict the quantity of bank notes issued, although such intervention is not necessary and probably undesirable as it can distort the markets. Market forces decide the quantity of gold coins minted and gold coins melted. When the government does not intervene, and to some extent, even when it does, market forces regulate the quantity of bank notes issued.
    Whether bank notes and government notes[8] are convertible or inconvertible to full-weight gold coin, Weston argues that they are money in their own right. They are real money and are not merely forms of credit money. True, they are used as a medium of exchange. Also, when they are inconvertible, they nearly always become the unit of account, especially if the government makes them legal tender. However, real money like full-weight gold or silver coin performs one monetary duty that these notes cannot perform. That is, full-weight coin not only discharges debt, it also extinguishes debt because it is no one else’s liability. Bank notes and government notes can only discharge debt. They do so by passing the obligation to another, which is ultimately the person or entity responsible for the note.[9] For example, the US government is the responsible party for today’s federal reserve note. Contrary to Weston’s assertion, bank notes and government notes are not real money; they are credit money and cannot extinguish debt.
    Weston rejects the notion that bills of changes and checkable deposits are money. According to him, they do not have the effect as bank notes and do not increase the quantity of money. Today, as checkable deposits far exceed bank notes as money in industrialized countries, most monetary disturbances like inflation comes from changes in checkable deposits than fluctuation in bank notes.
    Therefore, Weston’s quantity theory of money ignores commercial money, real bills of exchange, as part of the quantity of money. Like bank notes, commercial money is a form of credit money that can be used to purchase goods and discharge debts. Unlike bank notes, commercial money has a specific life, usually 90 days or less, before it expires. Commercial money often exceeds bank notes in quantity and even exceeds the quantity of coins and paper money. If the quantity of money is the sole determinant of the value of money, other things being equal, as Weston asserts, or even the primary determinant, then how can he ignore commercial money? Nevertheless, Weston rejects the notion that bills of exchange are money and, therefore, need no consideration as part of the quantity of money or any quantity of money theory.
    Likewise, Weston’s quantity theory of money also ignores checkable deposits, checkbook money, as part of the quantity of money. Like bank notes, checkable deposits are a form of credit money that can be used to purchase goods and discharge debt. Unlike bank notes, which can pass through many hands before returning to a bank, checks usually pass through only one or two hands before returning to a bank. The major difference between a bank note and checkbook money is that a bank note is an order drawn on a bank to transfer gold from the bank’s account to the bearer and a check is an order to transfer gold from the drawer’s account to bearer. In Weston’s time (1884), in the United States, checkable deposits exceeded bank notes and coin in purchasing goods and discharging debt. He acknowledges that checks are used for most transactions. Moreover, under fractional reserve banking, which was practiced in his day as it is today, checkable deposits exceed species, commercial money and in Britain bank notes and in the United States silver dollars and US notes held by the bank; thus, they exceed what Weston considers real money. Any quality of money theory that ignores checkable deposits is a highly deficient theory. Nevertheless, Weston rejects the notion that checkable deposits are money and, therefore, need no consideration as part of the quantity of money or any quantity of money theory.
    A bank note is merely a check that a bank writes on itself. (Under the system advocated by Weston as modeled after the British system after 1844, this is not the case. Under the British system, what were called bank notes were similar to gold certificates issued in the United States. Whereas gold certificates were fully backed by gold, a fraction of the British notes was backed by nontradable government securities. Like gold certificates, they were warehouse receipts promising to pay the bearer in gold. Unlike US gold certificates, which were not legal tender, British notes were legal tender. Although Weston implies that making bank notes legal tender makes them real money, he seems to accept gold certificates as real money though they were not legal tender.) A bank note, even if it is merely a warehouse receipt, is a credit instrument because it is someone else’s liability. Weston rejects the notion that bank notes are credit instruments: a check that the issuer writes on itself to pay the bearer money, i.e., gold coin. To him, bank notes are money in their own right and are not promises to pay money, i.e., gold coin.
    An interesting note cited by Weston is that John Stuart Mills mused that under the right conditions, deposits and checks might replace currencies altogether. Weston thought that such a replacement was absurd. However, today, most countries are moving to eliminate currency and to force people to use bank deposits and checks, preferably with debit cards instead of paper checks. If this happens, the quantity of money, according to Weston’s theory, goes to zero: Money would cease to exist by his definition of money. Then what would fix the value of gold bullion?
    Weston displays inordinate confidence in the government to manage the country’s monetary system. As the history of the last 100 years shows, governments are highly incompetent in managing their monetary systems if the objective is to avoid inflation, hyperinflation, panics, depressions, recessions, and other economic and monetary disturbances and disasters. If the objective is to transfer wealth and power from the common people to the rich and powerful, they has been highly successful.
    When his quantity theory of money fails, Weston has an out, which is “everything else being equal.” When it fails, it is because “everything else is not equal.”
    In conclusion, Weston argues that the value of gold bullion does not control the value of gold coin or paper money kept at par with it. To the contrary, the opposite is true: The maximum value of gold bullion fluctuates with and is regulated by the value of gold coin and paper money at parity with gold coin. Moreover, the value of the monetary unit depends, other things being equal, on the quantity of monetary units, both coin and paper money.
    Weston errs when he claims that the value of the monetary unit gives gold bullion its value. To the contrary, the value of gold bullion gives the monetary unit its value. The value of gold preceded its use as money, and its use as money preceded its use as coin. Weston confuses value with price. The monetary unit gives gold its price, which is objective, but it does not give gold its value, which is subjective.

Endnotes:
1. See “What is the Gold Standard” by Thomas Allen.

2. See “Is the Price of Gold Fixed Under the Gold Standard” by Thomas Allen.

3. See “The U.S. Note, 1862-1879" by Thomas Allen.

4. See “National Banking System” by Thomas Allen.

5.  See “The Silver Dollar 1873-1900" by Thomas Allen.

6. See “Real Bills Doctrine” by Thomas Allen.

7. See “Differences Between Real Money and Fiat Money” by Thomas Allen.

8. See "Difference Between Bank Notes and Government Notes" by Thomas Allen.

9. See “Extinguishing Debt” by Thomas Allen.

Copyright © 2017 by Thomas Coley Allen.

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Poor on Gilbart

Poor on Gilbart

Thomas Allen

    In 1877, Henry Varnum Poor (1812-1905) wrote Money and Its Laws: Embracing a History of Monetary Theories, and a History of the Currency of the United States. He was a financial analyst and founder of a company that evolved into Standard & Poor’s. Poor was a proponent of the real bills doctrine and the classical gold-coin standard and, thus, the quality theory of money. He gave little credence to the quantity theory of money — especially if credit money, such as bank notes, were convertible on demand in species. Also, he contended that the value of money depends on and is derived from the value of the material of which it is made and with paper money, its representation of such value.
    In the latter part of his book, he discusses leading monetary theorists from Aristotle (350 B.C.) to David A. Wells (1875). Most of the economists whom he discussed were proponents of the quantity theory of money. We will look at his discussion on James Gilbart. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.
    James W. Gilbart (1794–1863) was an English banker and author. Among his works is Practical Treatise on Banking (1827), The History and Principles of Banking (1834), and Principles and Practice of Banking (1873), which is an abridged and combined edition of 1827 and 1834 books. Poor reviews Principles and Practices of Banking.
    About Gilbart, Poor writes, “Gilbart was a striking instance of a voluminous writer upon money, without any proper comprehension of its nature and laws. . . . As a Political Economist, he belonged to the school of Tooke and Mill, in holding that the convertible notes of no other Bank than that of the Bank of England could influence prices or the rates of exchange” (p. 368).
    Gilbart writes, “The bankers in issuing their notes do not make any reference to the quantity of gold in the country; but they make reference to their ability to discharge these notes when retained to them for payment” (p. 368). He argues that banks cannot issue bank notes in excess. However, if a bank has a monopoly on issuing bank notes and issues notes for gold, then an inflow of gold could lead to a large issue of notes, which could lead to speculation. When many banks are issuing notes, these notes are quickly returned to the issuing bank by other banks for redemption. When only one bank issues notes, those notes are only returned for gold when gold is needed for foreign exchange (pp. 368-369). [Thus, it is easier for a central bank with a monopoly on issuing bank notes to overissue notes than it is for competing banks to overissue notes.] According to Gilbart, paying interest on deposits also prevents the excessive issuance of notes by encouraging notes to be deposited. The criteria used by the Bank of England to issue notes causes prices to rise and reduce interest. (The criteria are issuing notes against gold bullion and to purchase Exchequer bills and government stock.) However, “if notes are issued merely to pay for transactions that have previously taken place, and are drawn out by the operations of trade, those notes will have no such effect” (p. 369).
    Poor summaries Gilbart’s explanation for the inability of private banks and bankers to overissue their notes: “1st, from their constant retirement ‘by the interchange by the Banks with each other of their different notes and checks, once or twice a week;’ and, 2d, for the reason that, by allowing interest on deposits, ‘all the surplus circulation is called in, and lodged with the Banks’” (p. 370). Poor does not believe that retiring notes by exchanges among banks reduces excess notes. [Poor errs somewhat. If bank notes increase in response to increased production as represented by buying real bills of exchange, then bank exchanges will remove currency and prevent excess. However, he has a point if bank notes are issued to buy financial bills like government treasury bills or to finance a speculative venture. These notes are more than what is needed to clear consumer goods from the markets. Therefore, they are inflationary as Poor describes. A major disagreement that Poor has with Gilbart is that Gilbart believes that the Law of Reflux is sufficient to regulate bank credit money and prevent its excessive quantity. {The Law of Reflux claims that banks cannot overissue bank credit money, bank notes and checkbook money, because any overissued currency quickly returns to the issuing bank for redemption.} Poor does not believe that it is sufficient. He believes that more is needed, such as adherence to the real bills doctrine.]
    Poor refutes Gilbart by noting, “An inflation may take place to a very large extent where exchanges are daily made, and where the Banks are on a specie basis, provided the issuers are all actuated by similar sentiments and move in a similar direction” (p. 370). [Most bankers prefer a centralized banking system, as countries now have, because it ensures that all bankers move in a similar direction. With a decentralized banking system, bankers usually vary greatly in their sentiment and move in various direction.]
    Poor argues that bank notes or checkable deposits used by a country bank for speculation, to buy government securities, or to finance businesses affect prices and interest as bank notes issued by the Bank of England to buy Exchequer bills (p. 371). “Once in the market, they perform precisely the same functions, and are subject to precisely the same laws. They are equally promises to pay coin on demand; and must be equally discharged within similar periods, by the payment of coin or its equivalent” (p. 371). [If the country bank’s loan of bank notes or checkable deposits comes from the bank’s capital or from savings deposits, then these notes and deposits should not have the same effect as the central bank issuing notes to buy government bills. The country bank has not added any additional currency, but it has merely transferred currency from one person to another. The central bank has added additional currency.]
    Poor remarks that since bank notes and checkable deposits issued by private banks far exceed those issued by the Bank of England, their effect must likewise be much greater. He writes, “It is certain that the former [private banks] do exert a much greater influence over prices and the rates of exchange, in ratio to their amount, than the latter [the Bank of England]; for the reason that they have a much more intimate connection than those of the Bank [of England] with the foreign commerce of the country, and are usually made upon securities, as a class, inferior to those which the rules of the Bank allow it to take” (p. 372).
    Poor summaries Gilbart’s comments before the Committee of 1840-41 about the actions that he would recommend for the Bank of England to follow in the event of war: “Mr. Gilbart, in the event of a war, would suspend specie payments, — would demonetize gold and silver, as a means of retaining them in the country” (p. 373). About Gilbart’s recommendation, Poor remarks, “He would cut off the handle of your axe, and render it useless, so as to prevent an enemy from striking off your head. But how was the enemy to get hold of the handle? By paying the price both for that and the axe. If he paid the price, he might thereby put in the hands of the owner that wherewith to defend himself far better than with the axe” (p. 373). He continues, “But if the gold of a country at war be demonetized, the enemy or some other nation will be sure to get it, not in exchange for powder and ball, but for wines and silks, — for that which, instead of arming and furnishing it for the fight, would inevitably tend to its emasculation, to the destruction of all patriotism and manhood” (p. 373). Moreover, Poor writes, “The effect of a war is always to turn the exchanges of a country engaged in it in its favor, for the reason that every one orders home the proceeds of his exports in coin, in order to have in hand that upon which he can certainly rely, should the event prove unfavorable, should domestic order be disturbed, or the wonted industries of the country fail” (p. 373). [This is not exactly true — especially if the prospect for one’s country winning the war is slim. If a person has the means, he may want to leave some of his wealth in a neutral country if he has to flee.] Poor notes that when Lincoln’s war to suppress Southern independence broke out gold and goods flowed into the United States. At the end of 1861, specie payments were suspended, and U.S. notes, greenbacks, were first issued in February 1862. After the suspension, exports far exceeded imports for the remainder of the war. [Some, perhaps most, of this difference is accounted for by the high tariff that the Republican Congress imposed. This tariff was the primary reason for the secession of the States of the Deep South.] Poor concludes his remarks about Lincoln’s war:

If legal-tender notes had not been issued, the United States would have laid all the world under tribute. The fast impulse of a people when they find themselves about to be plunged into a war is to forego every article that does not rank among the necessities of life. Their silver and gold are the first things they place beyond the reach of harm. Foreigners cannot get them, unless they pay more than they are worth. This they will not do, for the reason that they can get them of nations at peace, for their worth. The position of the United States, so far as its currency was concerned, was impregnable, but for its voluntary demonetization (p. 374).

The United States “lost their gold as soon as it could be taken away from them by lavish and wasteful expenditure” (p. 374). Poor is convinced that “[t]he civil war in the United States would have been ended in half the time, and at half the cost, but for demonetizing their coin” (p. 374).
    Gilbart states that banking capital is employed in discounting bills. According to him, when a bank of circulation [a bank that issues bank notes against bills] buys a bill, it increases the amount of money by the amount purchased. [This statement not exactly true as the bill of exchange can itself function as money in discharging debt and other financial obligations. However, other bills, such as treasury bills and bills of accommodations, seldom function as currency.] Gilbart claims that if a bank of deposit buys a bill, it does not increase “at all the amount of money in the country; but it will have put into motion . . . [money] that would otherwise have been idle” (p. 375). [This statement may or may not be true. If a bank buys the bill with money from its capital or from savings, then it is true. If it buys the bill by creating checkable deposits, it is not true. Checkable deposits are functionally the same as bank notes.] In both cases, Gilbart argues, the effects of bank notes issued by the bank of issue and the effects of checkable deposits created by private banks are the same. If notes issued by the bank of issue can cause high prices, overtrading, and speculation, so can checkable deposits created by private banks.
    Poor responds that the two differ in that one bank’s capital is in a form proper for loans [this comment applies to banks of deposit] and in the other “no capital whatever is created or provided” (p. 375) [this comment applies to the central bank of issue]. He writes, “To say that notes, without the least provision for their redemption, are the equivalent of deposits, which may be wholly in the form of coin or of notes representing coin, is to say that fiction equals reality, and shadow substance” (p. 375). Issuing bank notes without anything to support them may well result in problems for the bank while lending “the capital made up of deposits might prove most advantageous to all parties to the loan” (p. 375).
    Poor concludes, “Mr. Gilbart, undoubtedly, possessed a capacity of intuitively measuring the person who wanted to borrow his money; but he was wholly out of his sphere when he undertook to write upon its laws” (p. 375).

Copyright © 2017 by Thomas Coley Allen.

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America’s Adulteration of the Gold Standard

America’s Adulteration of the Gold Standard

Thomas Allen

    Between 1879, when the United States returned to the gold standard, and 1914, when World War I began, was the peak of the gold-coin standard. However, a pure gold coin standard did not exist. Perhaps the United States had the most adulterated gold standard among the major countries. The United States adulterated the gold standard with various forms of fiat money.
    In 1789, Congress adopted a silver standard with a bimetallic silver-gold system. It defined the dollar as 371.25 grains of fine silver. It fixed the silver-to-gold exchange rate at 15 to 1 (the value of 15 ounces of silver equaled the value of 1 ounce of gold).  This ratio overvalued silver relative to gold. Thus, gold coins did not circulate.
    To encourage the circulation of gold coins, Congress changed the silver-to-gold ratio from 15 to 1 to 16 to 1 in 1834. It did so by reducing the weight of gold in a dollar to 23.20 grains of fine gold from 24.75 grains. Three years later it changed the weight of gold in the dollar to 23.22 grains of fine gold. (Thus, a $10 gold coin with 232.2 grains of fine gold was equivalent as legal tender to 10 silver-dollar coins with a total of 3721.5 grains of fine silver.) These changes placed the United States on a de facto gold standard. As the dollar continued to be defined as 371.25 grains of silver, the United States remained on a de jure silver standard. (They remained of a de jure silver standard until 1900 when Congress changed the definition of the dollar to 23.22 grains of fine gold.)
    In 1837, Congress changed the gold content of the dollar to 23.22 grains. It remained at this weight until 1933 when the United States abandoned the gold standard.
    In 1863, Congress enacted the National Banking Act. A key part of the Act was requiring banks charted under the Act to secure their bank notes with U.S. government bonds. (Later bank notes of State-chartered banks were taxed out of existence.) Thus, the Act guaranteed a market for U.S. government bonds. As a result, bank notes represented U.S. government bonds instead of the gold value of goods on which real bills of exchange were drawn — the real bills doctrine. Bank notes did not increase or decrease in response to the market demand for them pursuant to the real bills doctrine. They increased and decreased in response to the expansion and contraction of U.S. government debt. (As hard as it is now to believe, there were times when the U.S. government’s debt actually decreased.)
    The first major adulteration came in 1862 when Congress authorized the issue of legal-tender government notes, called U.S. notes and nicknamed greenbacks. These notes immediately became undervalued relative to gold. Thus, the United States quickly converted to the U.S. note standard.  (The West Coast remained on the gold coin standard. In the East, gold traded at a premium to U.S. notes. In the West, U.S. notes were discounted against gold.)
    After reducing the quantity of U.S. notes during the late 1860s and early 1870s, Congress fixed the quantity of U.S. notes at $346,681,000. It required the Secretary of the Treasury to maintain this level.
    Pursuant to an 1875 law, U.S. notes became redeemable at par with gold on January 1, 1979. In anticipation of redemption, the U.S. government acquired enough gold to back about a third of the U.S. notes.
    After U.S. notes became redeemable in gold, U.S. notes remained a fiat currency for two reasons. First, the government instead of the markets determined the quantity issued. Second, they were never fully backed by gold.
    The next major adulteration came in the form of the silver dollar. With the Coinage Act of 1873, Congress ended the free coinage of silver. (This Act became known as the Crime of  ’73.) Ending the free coinage of silver ended bimetallism in the United States. However, under the Act, silver dollars continued to be full legal tender in unlimited amounts. (No rational person would have used silver dollars to pay a debt when this law was enacted. Then the silver content of a silver dollar was worth more than a dollar in gold, which was worth more than a U.S. note dollar.)
    Soon after the enactment of this law, the value of silver began to fall relative to gold. Thus, if the free coinage of silver had remained, the United States would have returned to the silver standard.
    Because of the fall in the value of silver, the sliver mining interest, greenbackers (people who wanted the country to remain on the irredeemable U.S. note standard), populists (most of whom came out of the greenbackers), and debtors agitated for the free coinage of silver at the 16 to 1 ratio. In response, Congress passed the Bland-Allison Act in 1878.
    The Bland-Allison Act ordered the Secretary of the Treasury to buy silver bullion and coin it into silver dollars. It declared the silver dollars legal tender. Moreover, they were not directly redeemable in gold. It required the Secretary to buy between $2 million and $4 million of silver bullion each month for coinage.
    Although each of these silver dollars contained 371.25 grains of silver, they were fiat money — albeit expensive fiat money. Instead of the markets deciding the quantity of silver dollars to issue, Congress and the Secretary of the Treasury decided. Furthermore, the monetary value of a silver dollar exceeded the value of its silver content. Unlike silver dollars coined under free coinage, these silver dollars were the property of the U.S. government. (Silver dollars coined under free coinage were the property of the person presenting the silver bullion for coinage.)
    In 1890, Congress revised the Bland-Allison Act with the Sherman Act, also called the Silver Purchasing Act of 1890. The Sherman Act created a new fiat money: legal-tender Treasury notes of 1890. It ordered the Secretary of the Treasury to buy 4.5 million ounces of silver bullion each month at the market price with Treasury notes until silver reached $1.29 per ounce. This was the price at which 16 ounces of silver had the same value as 1 ounce of gold, i.e., the 16 to 1 ratio. The purchased bullion was coined into silver dollars as necessary to redeem the Treasury notes. However, the Secretary had the discretion to redeem them in gold. In 1893, Congress repealed the silver purchasing provision of the Sherman Act and by that the issue of Treasury notes.
    With the enactment of the Gold Standard Act in 1900, Congress placed the United States formally and clearly on the gold standard. It defined the dollar as 23.22 grains of gold. It required the redemption of U.S. notes and Treasury notes of 1890 in gold only. Thus, it converted Treasury notes into government notes redeemable in gold. Treasury notes were to be replaced gradually with silver certificates. As silver dollars became convertible in gold on demand, the Act made the silver dollar a subsidiary coin like dimes, quarters, and half-dollars. However, silver dollars remained full legal tender. However, even with the enactment of the Gold Standard Act, the silver dollar because of its legal-tender status remained a fiat currency along with the U.S. note.
    The monetary system of the United States began as a bimetallic silver-gold system with the dollar defined as 371.25 grains of silver. Between 1862 and 1879, the United States were on the fiat U.S. note monetary standard. As long as the United States remained on the gold standard, the U.S. note and the silver dollar adulterated the gold standard. The United States never operated on a pure gold coin standard.

Copyright © 2015 by Thomas Coley Allen.

Paper Money and the Gold Standard

Paper Money and the Gold Standard

Thomas Allen

    Many people who are hostile toward the gold standard assert or imply that all purchases have to be made with gold coins or perhaps gold bars under the gold standard. Paper money, checks, and electronic transfers are not used. Some suggest that they would be prohibited. Some hold this view out of ignorance; others, out of hatred of gold as money. Unfortunately, even some proponents of the gold standard seem to hold this view.
    To the contrary, paper money and checks were used during the era of the gold standard. More purchases were made with paper money, checks, and token coins than with gold coins. When the gold standard returns, many more purchases will be made with paper money, checks, token coins, and electronic transfers than with gold coins.
    The primary purpose of gold coins is to keep everyone honest. It prevents an unsustainable expansion of credit. Redemption of paper money (bank notes, government notes, checkable deposits) on demand keeps credit under control and smooths the business cycle.
    Under the gold standard, people, especially business people, often deposed gold coins in checking accounts. Others exchanged their gold coins for paper money because paper money was more convenient to carry.
    A check under the gold standard is an order to the bank to transfer gold from the account on which it is drawn to the bearer of the check. A bank note is essentially a check that a bank draws on itself. It is an order to the issuing bank to pay the bearer of the note the amount of gold stated on the note when redeemed.
    The major problem with bank notes and checkable deposits is that banks can over issue them. It can do so either deliberately or accidentally. For example, when a bank buys treasury bills with bank notes or checkable deposits in excess of its unencumbered gold deposits, it is deliberately over issuing. When it converts a real bill of exchange to bank notes or checkable deposits and the person on whom the bill is drawn and the endorser of the bill go bankrupt, it inadvertently over issued (this lost should be covered by gold reserves set aside for this purpose).
    Thus, as banks do today, banks under the gold standard can, often did, practice unsound banking — borrowing short and lending long. Also, when banks use the same money (gold) for multiple loans, it is practicing unsound banking. However, unlike the current fiat monetary system that enables unsound banking to be used for an extended time, the gold standard ends such practices fairly quickly with bank runs — the conversion of bank credit money (bank notes and checkable deposits) into gold.

Copyright © 2016 by Thomas Coley Allen.

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Poor on Hume

Poor on Hume

Thomas Allen

   In 1877, Henry Varnum Poor (1812-1905) wrote Money and Its Laws: Embracing a History of Monetary Theories, and a History of the Currency of the United States. He was a financial analyst and founder of a company that evolved into Standard & Poor’s. Poor was a proponent of the real bills doctrine and the classical gold-coin standard and, thus, the quality theory of money. He gave little credence to the quantity theory of money — especially if credit money, such as bank notes, were convertible on demand in species. Also, he contended that the value of money depends on and is derived from the value of the material of which it is made and with paper money, its representation of such value.
    In the latter part of his book, he discusses leading monetary theorists from Aristotle (350 B.C.) to David A. Wells (1875). Most of the economists whom he discussed were proponents of the quantity theory of money. We will look at his discussion on David Hume. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.
    David Hume (1711-1776) was a Scottish historian and philosopher. He influenced two schools of philosophy: skepticism and empiricism. His writings include A Treatise of Human Nature (1739-1740), Essay Moral and Political (1741-1742), An Enquiry Concerning Human Understanding (1748), Political Discourses (1749-1752), and History of England (1754-1762).
    According to Poor, Hume was a disciple of Aristotle. However, Aristotle was more truthful and had an earnestness that attracted sympathy. On the other hand, to Hume, “truth was a matter of secondary importance” (p. 89), and Hume’s lack of earnestness repelled sympathy. Also, like Aristotle, Hume “assumed all his premises without consideration or reflection, and disposed, by a single stroke of his pen, of questions, to solve which by any proper method a lifetime might hardly suffice” (p. 89).
    Hume believes that the value of money (gold and silver) is mostly fictitious and that this value is of no consequence. Money is not a subject of commerce; it is only an instrument agreed upon to facilitate trade. Moreover, the quantity of money that a country possesses is immaterial. Only governments receive any advantage from a large supply of money, and then only in regards to wars and negotiations with foreign countries. Hume states, “dearness of every thing, from plenty of money, is a disadvantage which attends an established commerce, and sets bounds to it in every country by enabling the poorer States to undersell the richer in all foreign markets” (p. 90). An increase in money leads to an increase in trade, which results in a shortage of labor. Moreover, Hume doubts the benefit of banks and paper credit. He states:

But there appears to be no reason for increasing that inconvenience by a counterfeit money which foreigners will not accept of in any payment, and which any great disorder in the State will reduce to nothing. . . . And in this view it must be allowed that no Bank could be more advantageous than such a one as locked up all the money it received (as was the case with the Bank of Amsterdam), and never augmented the circulating coin, as is usual, by returning a part of its treasure into commerce. A public Bank by this expedient might cut off much of the dealings of private bankers and money-jobbers; and though the State bore the charge of their salaries to directors and tellers of this Bank (for according to the preceding supposition it would have no profit from its dealings), the national advantage resulting from the lower price of labor and the destruction of paper credit would be a sufficient compensation (p. 90).

    Hume remarks, “money is nothing but the representation of labor and commodities, and serves only as a method of rating or estimating them” (p. 90). Furthermore, he contends that greater quantity of money is an inconvenience because the greater quantity requires more trouble to keep and transport it. Greater quantities of money lead to higher prices and wages (p. 91).
    According to Poor, “Hume followed Law where the latter was wrong, and rejected him wherever he was right” (p. 91). About the value of money, Poor summarizes Hume’s notion: “The value of money . . . is fictitious; its greater or less quantity, therefore, is of no consequence; nothing is to be gained by increasing the dimensions of a fiction; it is not valuable to a country in its commerce, for it is not the subject of commerce, only the oil which lubricates its wheels” (p. 91).
    Poor refutes Hume’s idea that money is a fiction with a question: “Is not that a subject of commerce, the possession of which is the great object of commerce, and in which all the profits or balances arising in commerce are payable” (p. 91)? People who pay and receive money do not act as though it is a fiction. Moreover, if money is a fiction in one country, why would it not be a fiction in another country or even all countries? Why would a large quantity of this fiction give one country an advantage over another country with which it wars? How can a thing considered pure fiction in one country be a solid reality in another? Then Poor asks, “Is not that valuable which every people seek to obtain by exchanging therefor whatever they possess; and which will always, at its cost, command all other kinds of property” (p. 91)? [This notion that money is a fiction shows up in the arguments of many proponents of fiat paper money and its electronic equivalent. The government can decree whatever it wants to be money as money. Moreover, it can decree the value of the monetary unit and can maintain this value by following some magic formula or scheme.]
    According to Hume, “In all respects, except in wars and negotiations, the abundance of money . . . may be, and often is, a disadvantage, as prices are raised thereby in ratio to its abundance. In this way, poor countries having no money are enabled to undersell the rich having a great deal of money, and drive them out of their accustomed markets” (p. 91). [Wars often lead to an overabundance of credit money, that is, inflation. This inflation often leads to a rise in general prices during and after the war.] Poor declares, “The exact reverse of all this is the truth” (p. 91). He continues, “Prices are either low in ratio to the abundance of money, or, what is the same thing, the amount which a people are able to consume is in ratio to such abundance” (pp. 91-92). He illustrates his assertion with examples of poor countries lacking money to import goods because they lack money to transport what they do have to trade. Thus, the price of imported goods is inverse to the amount of money available (p. 92).
    About paper money, Poor writes, “So with a symbolic currency, — with paper money. This is the representative of capital. If one be abundant the other must be; and, if abundant, prices must be low, for prices are high or low in ratio to the abundance or want of the articles to which they relate. Whatever the form of money or currency, therefore, the greater the abundance the lower are prices” (p. 92). [Poor is correct if the money comes into existence via production. However, if the money comes into existence by governmental fiat, spoils of war, or thief, the results is usually higher prices. These higher prices may show up in financial assets like bonds and stocks or they may appear in commodities and consumer goods.]
    He continues, “Paper credits — that is currencies — issued by Banks are one of the most important conditions of low prices, as they serve as the cheapest possible means of distribution” (p. 91). [Here, Poor is referring to the real bills doctrine. Bills of exchange are a form of credit money, commercial money, created by the manufacturer or wholesaler and the retailer. When a bank discounts a bill, it converts it to bank credit money, bank notes or checkable deposits. The bank has not really added to the money supply. It has merely converted one form of credit money, commercial money, to another and more usable form of credit money, bank credit money. This is the type of credit money to which Poor refers. However, when a bank buys a financial bill, like a treasury bill, with bank credit money it expands the money supply because financial bills do not come into being as a result of production. Poor opposes creating bank credit money to buy financial bills.]
    Poor comments on Hume’s claim that a compensation “for the inconvenience of too great an abundance of coin [is] that it can be used in foreign wars, but Bank paper can never be used out of the country in which it is issued” (p. 92). Poor notes that the costs of articles used in a war far exceed the coin available. [At the time Hume and Poor wrote, most countries used gold or silver coin for money.] Poor asks, “If they [articles of war] can be had by means of paper money, equally with coin, does not the former possess for the government the same value as coin” (p. 92)? He continues: “Hume would have all Banks . . . collect every thing into their vaults, and let nothing out! But how, in such case, are exchanges to be effected? There must be either coin or symbols, or all commerce must speedily come to a dead stand. In such event, a people, in the course of a few months, would be reduced to the very brink of ruin” (p. 92).
    Continuing on Hume’s opinion about gold and silver as money, Poor writes, “With Hume, gold and silver derive their importance to a nation solely from their use in its wars and negotiations. Considered by itself, their abundance is of no consequence whatever” (p. 93).
    Poor identifies an inconsistency or contradiction in Hume’s assertion about money: “Hume asserts the value of money to be imaginary, and at the same time that a great abundance of it is injurious by raising the price of commodities” (p. 93). [If the value of money is imaginary, then its quantity should be irrelevant. If its abundance raises price, then it must have some value so that it can raise prices — at least until hyperinflation destroys all its value.]
    About value, Poor notes:

But what constitutes the value of any article? The amount of demand that exists for it. There can be no other test or measure.  We can form no idea of the value of any article but by comparing it with that of some other. If it have no exchangeable value, it has no value. It may have uses, without having values.  . . . An imaginary value, therefore, is no value; so that the very foundation upon which Hume erected his argument has no existence whatever. Only that which possesses value can affect the value of other things. If money had no value, its greater or less abundance could exert no influence whatever on the value or price of other articles (p. 93).

[Poor does acknowledge that things, such as air, are important and even necessary for life, but they have no value in the proper economic sense of the term.]
    About Hume’s pontification on money, Poor remarks that “a little thought and reflection would have shown” (p. 93) him that he was wrong. “[B]ut this way was not Home’s way. Reflection and analysis are laborious and painful processes, to which he was by no means inclined. To truth he was wholly indifferent. His object was effect, provided that could be produced by very little labor and pains” (p. 93).
    Hume was also a proponent of coin debasement. He believed that if all silver coins were recoined to contain less silver but maintain the same denomination, prices would not increase. Moreover, foreign trade would be invigorated. Because of more coins circulating, domestic industry would also increase (p. 94). [Many advocates of fiat paper money believe that debasement of money enlivens the economy and is, therefore, good.]
    In effect, Hume claims that money can be debased, yet “at the same time maintain its value” (p. 94). Moreover, he claimed that while maintaining its value,  it would “derive an advantage from its debasement in diminishing prices” (p. 94). Thus, “[i]n the same sentence, the value of money was to be both maintained and reduced” (p. 94). Poor continues,

From diminished prices at home, foreign trade was to be enlivened, and domestic trade receive some increase and encouragement from the greater number of pounds and shillings in circulation. But how could more pounds and shillings be in circulation, if the debased coins would purchase as much as those of full weight and value? (p. 94)

[Historically, the purchasing power of debased coin fell to equal the purchasing power of its metal content — thus causing prices to rise in nominal terms, but not in metallic terms. Even draconian laws could not prevent the fall in value of the debased coin.]
    Commenting on Hume, Poor writes:

With Hume, from the perversity or credulity of human nature, a falsehood plausibly told, and well stuck to, would have all the potency of truth. . . . He contrived by artful fabrications to falsify the whole course of English history, and to make the world believe, almost for a century, that slavery, not freedom, was the birthright of Englishmen (p. 94).

    Hume maintains that if the quantity of money remains unchanged, then, over time, everything becomes cheaper. “[T]he proportion between the circulating money and the commodities in the market . . . determines the prices” (p. 95). Poor replies, “The degree of wealth of a people depends upon their means of distribution. The one must always be in ratio to the other. Their money must increase as their industries increase, by a law as inexorable as that of gravity” (p. 95).
    About Hume’s “plan for benefitting the public by reducing prices, by reducing the amount of money” (p. 95), Poor retorts that his plan “is equivalent to taking off one-half of the cars from a railroad, where the whole had only sufficed for its operations” (p. 95). Poor continues:

Such a process would reduce greatly the price or value of merchandise to the producer. It would, at the same time, add very largely to the price paid by the consumer. Both would be equally injured by the restricted capacity of the instrument of distribution. The former would receive much less; the latter would pay much more. So with money. With its decrease, production would decrease in far greater ratio. With such decrease, cost of production would increase (p. 95).

[Poor is thinking of the real bills doctrine where money supply matches production. The quantity of money grows as production grows and contracts and production contracts.]
    Hume claims, “These institutions of Banks and Paper Credits render paper the equivalent of money” (p. 95). To which, Poor responds:

It is the capital such paper represents that makes it the equivalent of money. By representing capital, and serving in the place of coin as the means of its distribution, it reduces instead of “raising proportionably the price of labor and commodities.” His assumption consequently is exactly opposed to the fact (pp. 96-97).

    Poor notes, “With Hume, money was not capital at home while it was capital abroad” (p. 97). To the contrary, “[i]t is the highest form of capital at home, for that reason it is the highest form of capital abroad” (p. 97).
    Poor writes:

With Hume, the evil of paper money is, that it displaces a corresponding amount of coin, — sinks it below its level, compared with other countries. . . . Its paper currency, by assisting in the exchanges, may have secured to it a larger amount of coin than it would have had without such currency. His assumption, therefore, that the notes in circulation replaced a corresponding amount of coin is wholly gratuitous (p. 97).

    Poor adds,

It is from this assumption, however, that Economists have drawn their celebrated dogma or axiom that the proper measure of issue of paper money is the amount of gold that would have been in circulation but for such issue; overlooking the fact that paper money is not based upon coin so much as upon merchandise; and that the amount of the coin of a nation is to be measured not by that which it possesses, but by that which it can command (p. 97).

[Here, Poor is referring to the real bills doctrine. Bank notes come into circulation by converting bills of exchange, commercial money, into bank credit money, bank notes and checkable deposits. Bills of exchange arise out of production. Therefore, the quantity of bank notes in circulation depends on production and not on the quantity of gold. The greater a country’s production, the more gold it can command.]
    In his concluding remarks on Hume, Poor writes:

Hume was one of the earliest writers to refer to the subject of currency to be issued by Banks. An opportunity was thus opened to him, had he chosen, by unfolding its nature and laws, of performing a substantial service for mankind. He preferred to talk rather than to investigate, — to appear wise and learned rather than to be so. . . . As the reputation enjoyed by Aristotle forbade all investigation of the truth of his dogmas, and secured for them immunity through the ages, so Hume impressed himself so strongly upon the opinions of mankind as to be received, for nearly a century, as authority upon most of the subjects upon which he wrote, although his works were full of errors and falsifications. He is still constantly quoted, with approbation, upon the knotty points of monetary science; although, as far as any knowledge of the subject was concerned, a Kaffir might as well be quoted for an authoritative opinion upon the Code of Menu (p. 98).

Copyright © 2016 by Thomas Coley Allen.

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