The A B C of Finance

The Lessons of History

LESSON XII.

To compress anything like a history into a single chapter is, indeed, extremely difficult. Still, there are certain general and universal features in the history of paper money, both in this and other countries, which are too instructive to be neglected. To understand what those features are, we must revert to some ideas set forth in Lesson IV., viz., that the words “dollar,” “pound,” etc., are mere names of some tangible thing; and that if the things to which those names attach differ from each other, the fact that they are called by the same name does not give them any common value. It is said that in one period of Roman history the Gauls had to pay a certain monthly tribute to the Romans, and that one of the governors of Gaul ordered that the year should be divided into fourteen months, in order that the Gauls should thus be compelled to pay a greater amount of tribute in the course of a year. The meaning of the words in a contract was thus altered after the contract had been made, in order that it might mean something different from what the parties originally intended. This kind of legal fraud is so obvious, and so repulsive to every sentiment of honor in the mind of man, that it can never be practised except when the alteration in the meaning of words is not apparent. The only case in which people can be readily imposed on by such alteration is that of money; and the great feature of the history of money, especially paper money, to which I wish to call attention, is the manner in which words expressing value, such as “dollar,” “shilling,” “pound,” “florin,” “mark,” etc., were made to express different degrees of real value at different times, in order to meet the supposed exigencies of the hour.

We scarcely know when this kind of fraud began. It is said that the Roman Emperor Elagabalus, being entitled to receive annually from his subjects a certain number of pieces of gold, each of which pieces was called an
aureus, cunningly increased the amount of gold in this coin so that they had to pay him more than they bargained for. The history of England in its earlier stages affords many instances in which the cheat was in the opposite direction. It has been no new thing, when a king of England found himself heavily in debt, to diminish the amount of silver in the pound sterling, in order that the debt might be more easily discharged. From the Norman Conquest until the reign of Edward the Third, the pound sterling contained a pound of silver. It has now less than one-third of its original value; that is, a pound silver is now worth more than three pounds sterling. In Scotland the practice was carried still farther. The house of Stuart, in a century and a half, reduced the quantity of silver in the pound to less than one-twentieth of its original amount. This kind of fraud was just as mean as if the kings had owed their subjects a certain number of yards of cloth, and had then by royal decree made a yard measure shorter, in order that they might more easily discharge their debts.

In the times which we have described, paper money was almost unknown. A few centuries ago it was gradually discovered by bankers that a bill of credit in any form whatever, entitling the holder to a certain amount of gold in a bank, would pass from hand to hand as money just as readily as the coin itself. As this sort of currency had some advantages over gold, and could be made profitable to the bankers, the paper-money system of the present time was gradually introduced into nearly all civilized countries. Then arose the delusion, the exposure of which is one of the objects of these lessons, viz., that because these pieces of paper passed from hand to hand without being immediately returned to the bank for the gold to which they entitled the bearer, it was not necessary that they should entitle the bearer to anything. It was thought that if the Government would only declare these papers to be themselves pounds, florins, dollars, marks, piastres, etc., they would be just as valuable, and would take the place of these several coins. A regard for common-sense and honesty has, however, prevented this policy from being carried out except under two conditions. One of these conditions is that of such gross ignorance of political economy on the part of the public that they think there must be some real connection between the value of these pieces of paper and that of the coins called by the same name. The other condition is that of the Government failing to collect sufficient revenue to meet its expenses, and thus being driven to pay these expenses by issuing paper money to its creditors. A Government having the power to make its issues a legal tender can get along for a while without revenue by paying its expenses in this kind of money; and if the Government is a weak one, engaged in war, the temptation to this policy is especially strong.

Among our earliest colonists, the first of these conditions was completely fulfilled. To say that they knew nothing of political economy is not a reproach to them, because such a science did not then exist. The delusion that value depended in some way upon the stamp or word of the Government, and not on the desire of men to possess useful things, had a strong hold on the minds of men everywhere. There was so little specie in the colonies that a resort to some substitute seemed an absolute necessity; and the most convenient substitute of all was the issue of bills of credit by the several colonial governments, because these bills cost the governments nothing but the expense of printing, and could be used to pay out to the public creditors. Ingenious as are the projects now afloat for the issue of paper money, I do not believe there is one which you will not find to have been tried during those times, and to have proved a total failure. The amount of money afloat was increased and diminished without any regard to the wants of commerce, and thus the most disastrous fluctuations in its value were produced; so that no one who had to pay a debt of five pounds could say, two or three years in advance, what the value of the pounds would be at that time. Our colonists tried notes with interest, and notes without interest; notes issued to pay their expenses, and notes issued as a loan on security; but the result was always the same. The more they were issued, the more they were depreciated, the measure of this depreciation being the rise in the price of silver. As they depreciated, they drove what little silver currency there was from the colonies, and it did not return until the notes were withdrawn.

The most well known of these paper money systems was that of the Continental Congress, known as “Continental money.” The first issue of these notes, to the amount of six millions, was made in 1775. They were, perhaps, the nearest approach on record to the ideal paper money for which our greenback friends are now wishing. They were, in fact, simple certificates that the bearer thereof was entitled to a certain number of Spanish milled dollars, without any statement as to when or how he was ever going to get these dollars. They bore no interest; they were not convertible into coin or any kind of bonds; they were not secured by anything at all. The only point in which they failed to conform to the ideal greenback of the future was, that instead of being declared “dollars” pure and simple, the words “Spanish milled dollars” were used. After the issue exceeded a certain limit, the inevitable process of depreciation commenced. It continued slowly, but regularly, throughout the whole Revolutionary War. Every fall in the value of the paper necessitated larger and larger issues, until, finally, two hundred millions of it were in circulation, and all hope of redemption vanished. It might have been supposed that when the war closed, and the power which issued it became a recognized independent nation, its value would increase; but such was not the case. Instead of increasing, it became so completely worthless that it no longer served the purpose even of money, but had to be completely thrown aside, and replaced by silver coin and issues based upon coin.

The worst feature of this issue was not, however, its depreciation, nor its final disappearance from commerce; but the premium which it offered to speculators who foresaw what was coming. Keen-sighted men, knowing the result of this continual issue of paper money, saw very well that the prices of all commodities, especially those which were necessary to carry on military operations, would inevitably rise. Accordingly, it became good policy for these men to invest all the money they could earn or borrow in food and clothing, and to hold on to this food and clothing until the price should rise. For instance, suppose that flour was now ten dollars a barrel. A man borrows a thousand dollars from his patriotic neighbor, and with it buys a hundred barrels of flour. He keeps this flour a year, and the price having doubled in the mean while, or, to speak more exactly, the dollars he has to pay being only worth half as much as they were when he borrowed them, he can sell out half of his flour for money enough to pay his whole debt, and can keep the other half as a clear profit on the operation. We had an expedience very similar to this in the earlier years of our Civil War, when gold speculators, foreseeing the depreciation of the Government currency, made their fortunes by buying gold on time. Returning to the Revolutionary period, many of my readers may remember the complaint of Washington of the great injury done the country by the “forestallers,” as these speculators were called, and his wish that they could all be hanged. Such complaints were very natural, but they were simply complaints of what, taking human nature as it is, were the inevitable results of the financial policy pursued by the Government.

When the Constitution of the United States was framed, the members of the Convention met together with the experience of more than a century of paper money weighing upon their minds. They saw innumerable evils without any good to counterbalance them. Every argument for the alluring cause of the evil had been refuted by the bitter test of experience. They thought that one of the greatest boons they could bestow upon their posterity would be that of making this crying source of national evil impossible. Accordingly, they introduced a provision absolutely prohibiting the States from ever issuing bills of credit. As no power to issue such bills was given to the United States, they no doubt supposed that in doing this they had forever relieved the country from the greatest source of financial trouble with which it had ever been afflicted. This provision of the Constitution was deemed so important by Judge Story that we shall quote his words, and those of the
Federalist, to show the views of the subject taken by those who spoke more directly from experience than we do:

“The prohibition to emit bills of credit cannot, perhaps, be more forcibly vindicated than by quoting the glowing language of the
Federalist, a language justified by that of almost every contemporary writer, and attested in its truth by facts from which the mind almost involuntarily turns away at once with disgust and indignation. ‘This prohibition,’ says the
Federalist, ‘must give pleasure to every citizen in proportion to his love of justice and his knowledge of the true springs of public prosperity. The loss which America has sustained since the peace from the pestilent effects of paper money on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government, constitutes an enormous debt against the States chargeable with this unadvised measure which must long remain unsatisfied, or, rather, an accumulation of guilt which can be expiated no otherwise than by a voluntary sacrifice on the altar of justice of the power which has been the instrument of it.’

“It was the object of the prohibition to cut up the whole mischief by the roots, because it had been deeply felt throughout all the States, and had deeply affected the prosperity of all.”

So great a reform as the prohibition of irredeemable paper could not, however, be inaugurated all at once, any more than a country could become civilized in a single generation. The evil which it was sought to blot out forever has always reappeared from time to time, in a milder form, it is true, but one which is still an evil, namely, over-issues of bank-notes.

The story of our bank-notes is very much of the same general nature with that of our colonial money, only not so bad. In times when business is brisk, when everybody is happy, and when speculation is rife, the banks would issue paper, and discount the notes of merchants to an unusual extent. What little specie there was in the country would then, in great part, leave it; and after a while the inevitable crash would come. The banks would be compelled at the same time to suspend specie payments, and to contract their issues. Speculators would be unable to meet their engagements, and a general fall of prices would result, accompanied with great distress among the laboring classes. The most notable case of this, a case which every one of my readers either remembers or has heard of, is that of the great crash of 1837. We are just finishing up a similar experience at the present time. The enormous issue of paper money by our Government and our national banks during the Civil War is now followed by precisely the same consequences which have followed every previous issue recorded in history.

In our own case, it is remarkable that the depression and crash have come before the withdrawal of the paper money. We have still in circulation nearly all the greenbacks and all the national-bank notes ever authorized; and yet the general distress and depression of business could not have been greater if they had all been absolutely withdrawn from circulation, and people had been left to get a new currency as best they could.

The French, during the earlier years of their Revolution, had an experience not dissimilar to our own. The national expenses were so much in excess of the revenues of that nation, that it was determined to issue bills of credit known as assignats. These bills bore a greater resemblance to some of our earlier legal-tender notes than any other system of paper money with which I am acquainted. Not only were they a legal tender, but they were declared to be redeemable in land; each note bearing a certain daily interest, and entitling the holder to confiscated lots equal in value to the face of the note, just as our early notes entitled the holders to certain United States bonds. At first the new scheme worked well, as such schemes always do. The people were delighted to be freed from the visits of the tax-gatherer. The assignats paid off the public creditors, purchased army supplies, and kept the Government going. They furnished the people with money, the great national want. Very soon, however, the other side of the picture began to be seen. All the necessaries of life gradually rose in price. There was an almost total stoppage of productive industry, everybody trying to make money in any other way than by regular work. The Convention, backed by the mob and by the guillotine, vainly endeavored to fix a maximum of prices. Bakers who refused to sell their loaves at the old prices had their heads cut off and carried through the streets on poles by the mob; but the only result was to make bread still more scarce by frightening the bakers from their work.

So great did the evil become, that in the year 1796, in the very midst of the first Italian campaign, when the twenty years’ struggle of France with the other European powers was but just fairly begun, the paper money had to be entirely withdrawn and its place filled by coin. If our theories of the necessity of paper money are correct, this downfall of the circulating medium must have been disastrous in the extreme. But so far was this from being the case, that productive industry rapidly recovered from the depression of the paper money. Men raised grain and made bread in the full confidence that no mob would punish them for their pains by compelling them to part with it for worthless rags. The war was continued nineteen years without any attempt to issue more paper money; and in the only instance since that time in which irredeemable bills have been allowed to circulate in France, their amount was carefully limited so as to be insufficient for the purposes of currency, and thus necessitate the circulation of more or less specie.