A BIT OF LITTLE KNOWN
MONETARY HISTORY

By: Tom Rose

It was the early sixties, the Kennedy Administration was in full swing with its pro-Keynesian monetary and fiscal policies, and the country still enjoyed the sparkling tinkle of real silver coins. We were not yet cursed with clunky cupra-nickel dimes, quarters, and half-dollars. Anyone could go to their bank and trade a paper Federal Reserve Note for a real silver dollar that weighed three-quarters of an ounce of 90-percent pure silver.

At that time I was serving as director of economic education for a state manufacturers' organization called the Associated Industries of Missouri in St. Louis, Mo. Monsanto Company’s, home office was also in St. Louis. It had sponsored a two-week economics seminar for mid-level executives, to which I had been invited. There were 26 attendees, with the lecturer being a professor of economics from the University of Chicago, the citadel of modern monetarism. Things went well during the first week while the topics centered on basic economics and labor relations. But when discussion turned to monetary and fiscal policy during the second week, a deep difference in philosophy began to developed. I found myself pitted against the professor and the other 25 young executives. They all favored a high degree of governmental involvement in the economy and a steady policy of gradual monetary inflation to "keep the economy stimulated towards full employment" (a monetarist viewpoint).

One day in the heat of discussion I pointed out that the federal government was at that very moment in the process of inflating the money supply, which would eventually erode the purchasing power of the dollar. The other attendees scoffed at this, saying that the dollar would always be worth 100 cents! I agreed that a dollar will always have 100 cents because it is officially denominated as 100 cents, nevertheless I pointed out that it did not necessarily follow that those 100 cents would buy as many goods and services ten years in the future if the federal government continued its present inflationary monetary.

In the early 1960s the money supply was expanding at approximately two percent per year, and the general price level was also rising about the same rate. Today, of course, the money supply is being inflated somewhere between 8-12 percent per year, depending upon which monetary statistic one chooses as a guide! And the US dollar, as a result, has been falling in value relative to foreign currencies. It is interesting to note that, as this article was being written in the fall of 1994, the Federal Reserve Bank and the central banks of other leading nations recently purchased some three billion of American dollars in the foreign exchange market in a vain attempt to prop up the price of the Dollar internationally. The long-continued monetary inflation, pursued by the Federal Reserve since the early 1960s, has served to weaken the desire of investors and speculators to hold dollar-denominated bonds. For many years Federal Reserve officials have been wearing "false whiskers" when making public pronouncements: To the public, they have consistently posed as defenders of the purchasing power of the dollar; but in practice they have insidiously served as compliant accommodators to a spendthrift Congress through their willingness to buy government bonds to monetize the government's spiraling debt.

When both the lecturer and the other young executives hooted at the idea that the dollar would ever lose its purchasing power, I responded by telling them that I had been hoarding silver coins for some time and also had been taking silver certificates to the Federal Reserve Bank in St. Louis to exchange them for real silver dollars. At this, the other attendees and the lecturer scoffed and retorted that I was engaging in a useless exercise. My reply was simple and direct: That the price of silver had been steadily rising. That soon (Remember, this was back in 1963.) the price of silver would reach the point where it would be profitable to take silver dollars and subsidiary silver coins and melt them down for sale as bullion. And, at that point, we would see silver coins begin disappearing from circulation. My recommendation was for them to start hoarding both silver coins and silver dollars, for the day was soon coming when the silver coins would no longer be in circulation. This advice generated loud hoots of derision, to which I replied, "Remember this discussion ten years from now, then we will know who is right and who is wrong!"

I continued accumulating silver coins as the price of silver gradually crept higher. Furthermore, as I received silver certificates in day-to-day monetary exchanges, I put them in a special place in my wallet. About twice a month I would visit the St. Louis Federal Reserve Bank and exchange them for silver dollars. I continued this process during 1964 (when the cupra-nickel coins first came into circulation). From mid-1964 to 1967, silver coins did indeed gradually disappear from circulation as growing numbers of the public also began to hoard silver coins. I suspect, though I can't prove, that the Treasury Department and the Federal Reserve were also busy calling in as many silver dollars and subsidiary silver coins as they could, because the U.S. Government was increasingly being called upon to redeem silver, and its reserves were being sorely depleted. In looking back, my only regret is that I, as a young man with a growing family, couldn't spare more paper dollars to purchase silver currency than I did at the time.

Finally, on one of my last visits to the Federal Reserve Bank in July,1967, I attempted to exchange 15 silver certificates for silver dollars. The clerk at the teller's window said he could not give me silver dollars, but only subsidiary coins in exchange for my certificates. Here’s the exchange that took place:

"But it says right on the face of the dollar bill that the U.S. Treasury will redeem this certificate upon demand for a dollar's worth of silver. Do you mean to say the U.S. Government is reneging on its promise?"

"No. The government isn't going back on its promise, a dollar's worth of subsidiary coins is equal in value to a silver dollar."

"But, Sir, that's not so! A silver dollar has 3/4 of an ounce of silver in it, but ten dimes, four quarters, or two half-dollars only have 2/3 ounces of silver in them! It certainly looks like the government is going back on its promise to pay upon demand!"

At this point, the frustrated clerk turned his back, strolled across the room and handed me a letter he had just received from Mr. Dillon, the Secretary of the U.S. Treasury. It instructed the various district federal reserve banks to no longer redeem silver dollars for silver certificates. And if anyone insisted, the Federal Reserve Banks were to inform people that redemption of silver certificates would be honored until April, 1968, at only two places in the country: the U.S. Treasury in Washington, D.C., or at the U.S. Mint in San Francisco, California. I requested a copy of Mr. Dillon's letter, but the clerk refused to comply.

Clearly, the U.S. Government had reneged on its written promise (printed on the face of each silver certificate) to redeem its paper certificates upon demand! It had breached its fiduciary responsibility to citizens by printing more warehouse receipts (silver certificates) than the amount of silver it had stored in its warehouse. A commercial warehouseman, operating in the free market, would have been jailed immediately for such a gross act of malfeasance! But who can put an entire government in jail when it similarly defrauds the public?

I later discovered that the federal government went to great lengths in its blatant act of repudiating its legal contract to accept paper silver certificates and pay out a dollar's worth of real silver upon demand: To those citizens who insisted on their legal right to cash in the government’s paper warehouse receipts (silver certificates), the government gave little brown envelopes which contained 3/4 ounce of white granules (silver oxide?). To this day I'm not sure what kind of silver derivative the brown envelopes contained, but I was told that the contents evaporated into smoke if heated outside of a pressurized container. (Is there a metallurgist among my readers who can enlighten me about this?)

To people who still trust government in monetary affairs, it is almost unbelievable that the U.S. Government would go to such extremes to repudiate its promise of silver redemption upon demand (though a similar action was engaged in during the Roosevelt Administration to repudiate the government's promise to redeem gold in exchange for gold certificates in the 1930s). To anyone who doubts the veracity of my story, I extend a challenge to check the truth of this little-known facet of American monetary history: How? Just check the classified ads of your local newspaper during the time period of July, 1967, to April, 1968. If your newspaper services a sizable readership, you will likely find some ads making offers like this: "I will pay $1.15 (or sometimes $1.20) for silver certificates."

Why were such ads run during this nine-month period? The answer is that entrepreneurial-minded individuals all over the country, who were following monetary affairs, suddenly saw a money-making opportunity to collect silver certificates locally, by paying premium prices, and then sending them to an associate in Washington, D.C., or in San Francisco, Calif., to exchange for silver dollars (or, as it sometimes turned out, little brown envelopes containing some form of silver derivative). These would then be sold for their value as bullion or as collectors' items. The very existence of such ads in local newspapers serves to verify the truth of this story.

Now, are there any lessons that we can learn from this bit of monetary history? Yes, indeed!

First, let us remember that there has never been a civil government in the entire history of mankind that did not eventually debauch the currency used by its citizens. So what has happened, and is continuing to happen in these United States of America, is nothing new. The all-time prize for monetary integrity certainly goes to the ancient Byzantine rulers who maintained the full value of their gold bezant for over 700 years without debauching, but they, too, finally ended up by debauching the currency.

Second, let us remember that citizens who have good commodity money (gold and silver) for currency also tend to maintain effective control over their governing officials, instead of being controlled by them. That is why government rulers all over the world eventually attempt to wean people away from gold and silver coinage and onto unbacked paper as a medium of exchange. I teach my students that "power is where the gold is." That is, he who holds gold (or silver) wields the power. If politicians and bureaucrats hold the gold, they are the ones who wield power and control over the people; but, if ordinary citizens have the unquestioned right to convert their paper money into gold (or silver), then they can make their political rulers bow to them! It simply boils down to a question of , "Who is going to control whom? Will political leaders control the people? (as happens in economies where governments impose irredeemable paper money on the people), or will citizens be in a position to overrule the grandiose spending plans of politicians?," (as happens in economies where the promise of converting paper money into gold or silver exists is legally enforced).

A review of monetary history shows that civil rulers tend to follow a general pattern of insidiously weaning citizens from a commodity-based money in order to impose a system of government fiat money on them. The steps generally followed go something like this:

Step 1: The people of a country, as a result of commonly accepted practice, voluntarily come to accept some commodity or another as a general medium of exchange. (Note: It is the peoples’ act of voluntary acceptance that creates money. Money is not created by governments). Such money voluntarily accepted by the people is usually gold or silver, but it can be anything that the people agree generally to accept. (This points to an interesting fact that is likely to escape the attention of many people in our modern world; that is, that the appearance of money in society is not dependent on the action of civil government; rather, it is a natural step in the free-market process. The appearance of money in society is nothing more than voluntarism in action.

Step 2: The civil government then takes it upon itself to declare, by legal fiat, that the people's prior voluntary choice of money is now "legal tender." That is, the civil government declares that all citizens are now obliged, by force of law, to accept for the payment of debts that which they have been willing to accept voluntarily all along! This mandate seems to have no practical effect immediately, for the government has simply ratified by law what the people were already doing. At this point, such a mandate seems to be harmless, but it will have a very important impact later, to the people's detriment.

Step 3: The civil authority then starts to issue representative money (silver and gold certificates) which it promises to redeem on demand. It promises to hold in reserve a specified amount of precious metal for each certificate issued. In effect, the civil authority promises to serve as a responsible warehouseman. The government leaders find they must do this to maintain the confidence of the people, who have, as yet, found no reason not to trust their political leaders. The representative money is also declared to be legal tender.

Step 4: The country's political leaders eventually start to spend more than they receive in tax revenue, so additional amounts of representative money are serrupticiously issued, above and beyond the amount of precious metal held in reserve. This extra "representative" money is actually fiduciary money since it is based on trust. At this point, an insidious deception has already occurred because, unknown to the people, all of the so-called representative money cannot be redeemed as promised. The people do not realize that their money is being insidiously debauched, so they remain unconcerned.

Step 5. Finally, such vast amounts of so-called representative money (really fiduciary money) are issued that certain observant individuals start wondering if the monetary authorities might be over-issuing representative money. They start "testing the waters" by turning in some of their paper money for redemption into gold coins (or silver coins, if the money is silver-based). Requests for redemption are honored at first, but as the "testing of the waters" gradually spreads from citizen to citizen, the monetary officials soon realize that continued redemption will soon become impossible. Thus, public statements about "safety of the monetary system" begin to be voiced from official sources. But such statements only cause the public to think, "The lady indeed protesteth too much," so public fever to test the integrity of the printed statement of redemption found on the face of paper bills gradually spreads and spreads. The cruel fact is that the monetary authorities have already debauched the currency, for the large majority of the "representative" money is reallyl no longer backed by precious metal held on reserve.

The trusting people's medium of exchange — their currency — has been insidiously debauched by the very authorities who legally promised to protect it. The monetary authorities have failed in their important fiduciary trust, but the people are powerless to take effective legal action. Indeed, the vast majority of the public remain blissfully ignorant of what is and has been going on. They are like dumb sheep waiting to be sheared; and the most ignorant of them continue to loyally trust their untrustworthy civil rulers. They even tend to attack those citizens who do question the integrity of the monetary authorities as unpatriotic! But, in spite of continued ignorance and apathy on the part of the general public, the redemption fever continues to spread both by word-of-mouth and by example. Finally, the reserves of precious money are depleted and the monetary authorities are forced to repudiate the government's legal promise of redemption.

Since the government has for many years declared the money as "legal tender," most citizens still are not too disturbed. Although prices by now have begun to climb in response to the government-induced increase in the supply of money, citizens have come to believe wrongly that the civil government's act of declaring money as "legal tender" is what gives value to it.

I remember what a pastor friend of mine said in his Sunday sermon a few years ago. He said, in speaking about the value of civil government to society, that the US dollar would have no value at all if it weren't for a strong federal government." On my way out of church that day, I complimented him on his sermon in general, but I pointed out that his statement about civil rulers and the value of money was not historically accurate. This piqued his interest (I love open-minded members of the clergy!), so he invited me and my wife home for lunch, where he was amazed to find out that, under the leadership of the Federal Reserve, the value of the US dollar over the last 50 years had depreciated in value by over 90 percent! Truly, his innocent trust in the integrity of government monetary authorities had been betrayed!

Step 6: At this stage the people's money is nothing more than fiat money — money that is money simply because the civil authority mandates it to be money. It is fiat money even though it still looks the same as money that the people have grown accustomed to using, first as actual representative money, and then as fiduciary money. The ever-increasing flood of government-created fiat money continues as the civil rulers are pressed politically by special-interest groups to increase spending beyond its tax revenues. Look how rapidly total federal spending has been increasing during the last 20 years especially, and how the yearly deficits are increasing. During the last few years, federal deficits have been growing by more than one billion dollars per day! (Remember: This was written in 1994!)

In this scenario, prices which had begun a gradual creep upward with each yearly increase in the money supply, then begin to spiral ever higher and higher.

Step 7: Finally, a hyper price-inflation occurs. The quantity of fiat money is eventually expanded so rapidly that it loses practically all of its purchasing power. The German inflation of 1921-1923 is an excellent example of this stage of monetary inflation during the Twentieth Century. More recently we have seen the same process occur in the ex-Soviet Union, in Bolivia, and in other countries. And very recently, we have seen the value of the US dollar tumble in value relative to foreign currencies.

Today (2011), the Euro is collapsing because of monetary inflation, and so is the American Dollar. Interesting enough, what we used to call "emerging nations" in Central and South America and Asia are now following sound monetary policies, while the "developed nations (USA, Britain, and the European EURO nations) are following irresponsible inflationary monetary policies)!

Step 8: It would be hoped, at this stage, that a once-trusting populace would slowly awake to discover that money is too-important a commodity to entrust to the care of civil rulers. But, sadly, this is not yet true in our country. But, if monetary inflation continues unabated, the people will finally reach the point where they refuse to accept debauched currency any longer. They then will begin, by common choice and through general practice, to accept something else in exchange for goods and services — that is, to accept as money. The government's money, since it is then no longer acceptable to an abused and untrusting public, therefore ceases to serve as money any longer. It is then regarded as "not worth a Continental." The new commodity might then be a precious metal (probably), or it may be anything else that the people come to impute a value on as a usable unit of exchange. Usually the people will turn to gold or silver because of the inherent characteristics these metals have. Order thus slowly begins to grow out of chaos — a chaos originally caused by an untrustworthy government's intentional debauching of the people’s currency — and an order that naturally results from free-market forces.

Step 9: Government leaders once again intervene to meddle in the people’s free choice of a general medium of exchange to serve as money (as in Step 2) and declare the people's new choice of money to be "legal tender." And the whole debauching process soon beings anew, because the general public still has not learned the hard lesson of 6,000 years of monetary history: that the function of money is so very important to the life blood of society that it is too dangerous to entrust the care of money to civil rulers. Some 6,000 years of monetary history has proven, without one exception, that government rulers cannot be safely entrusted with care of the people’s money!

Civil rulers tend to be the world's greatest "legal counterfeiters" and the most consistent debauchers of money in the history of mankind. In their continuous scramble to get more money to spend, that is, to get their hands on more money than the people are willing to pay in taxes, they break two crucial rules of sound money:

Rule 1: Money must be earned before it is spent. Government-created money, like counterfeit money, does not and cannot represent values which have already been produced and offered for sale in the marketplace. When civil rulers create new money, the newly created money does not represent true earning power. Rather, the newly created money dilutes the real earning power of previously existing money. This, of course, constitutes a moral wrong — a breaking of the commandment "Thou shalt not steal" (Exodus 20:15); "A false balance is abomination to the Lord, but a just weight is his delight" (Proverbs 11:1).

Rule 2: There must be a balance between the amount of money in existence and the quantity of goods and services that money represents. When government authorities continuously expand the money supply with unearned money, people will react to the increased supply by taking the excess money and using it to buy goods and services in the marketplace (including the stock market), thus causing a general rise in price levels. It is this general upward spiral of prices which is popularly (but wrongly) called "inflation" But true inflation is the creation of unearned new money by government authorities. The general rise in price levels is simply a subsequent response of the prior monetary inflation that has already occurred. [Think of blowing air into a balloon (monetary inflation) and watch the circumference of the balloon expand (the subsequent effect on price levels).]

Let us hope that some day trusting Americans will indeed learn the one great, inescapable monetary lesson of history: That civil rulers cannot safely be entrusted with the care of their money. Such care should only be entrusted to private entities in the free market who can be legally held accountable if they should dare to debauch the people’s choice of money.

There is a rich history of privately minted coins in these United States, but that is a story for another time.



"Published originally at EtherZone.com : republication allowed with this notice and hyperlink intact."

Tom Rose is retired professor of Economics at Grove City College, PA.  He is author of eight books and hundreds of articles on free-market economics. He is a regular columnist for Ether Zone.

Tom Rose may be reached at: tomgrose@wk.net

We invite you to visit his website at: www.biblicaleconomics.com.

Published in the February 6, 2012 issue of  Ether Zone.
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