Creature From Jekyll Island by G. Edward полностью

THE CREATURE FROM JEKYLL ISLAND

could not be increased except by the exertion of labor. In other words, it was regulated by the law of supply and demand, which gave it great stability in value. In many ways, it was an ideal money. It was officially adopted as such by Virginia in 1642 and a few years later by Maryland, but it was used unofficially in all the other colonies, as well. So close was the identity of tobacco with money that the previous fiat currency of New Jersey, not a tobacco growing state, displayed a picture of a tobacco leaf on its face. It also carried the inscription: "To counterfeit is Death." Tobacco was used in early America as a secondary medium of exchange for about two-hundred years, until the new Constitution declared that money was, henceforth, the sole prerogative of the federal government.

The primary currency at that juncture, however, was still gold and silver coin, or specie, as it is called. And the immediate result of returning to a sound monetary unit was a rapid recovery from the economic stagnation previously inflicted by the booms and busts of fiat money. Trade and production rose dramatically, and this, in turn, attracted an inflow of gold and silver coin from around the world, filling the void that had been created by years of worthless paper. The law of supply and demand was visibly at work. For a while, Massachusetts had returned to specie while Rhode Island remained on fiat money. The result was that Newport, which had been the trade center for the West Indies, lost its trade to Boston and became an empty port.2 After the colonies had returned to coin, prices quickly found their natural equilibrium and then stayed at that point, even during the Seven Years War and the disruption of trade that occurred immediately prior to the Revolution. There is no better example of the fact that economic systems in distress can and do recover rapidly if government does not interfere with the natural healing process.

WAR BRINGS A RETURN OF FIAT MONEY

The War for Independence brought all of this to a sudden halt.

Wars are seldom funded out of the existing treasury, nor are they even done so out of increased taxes. If governments were to levy 1. Galbraith, pp. 48-50.

2. Paul and Lehrman, pp. 22-23.

3. "The Colonial Monetary Standard of Massachusetts/' by Roger W. Weiss, Economic History Review, No. 27, November, 1974, p. 589.

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taxes on their citizens fully adequate to finance the conflict, the amount would be so great that many of even its most ardent supporters would lose enthusiasm. By artificially increasing the money supply, however, the real cost is hidden from view. It is still paid, of course, but through inflation, a process that few people understand.

The American Revolution was no exception. In order to pay the bill for independence, both the Confederation and the individual states went heavily into the printing business. At the beginning of the war in 1775, the total money supply stood at $12 million. In June of that year, the Continental Congress issued another $2 million. Before the notes were even put into circulation, another $1 million was authorized. By the end of the year, another $3 million. In 1776, another $19 million. $13 million in 1777.

$64 million in 1778. $125 million in 1779. And still more: the Continental Army issued its own "certificates" for the purchase of supplies totalling $200 million. A total of $425 million in five years on top of a base of $12 million is an increase of over 3500%. And, in addition to this massive expansion of the money supply on the part of the central government, it must be remembered that the states were doing exactly the same thing. It is estimated that, in just five years from 1775 to the end of 1779, the total money supply expanded by 5000%. By contrast, the amount raised in taxes over the five-year period was inconsequential, amounting to only a few million dollars.

AND A MASSIVE INFLATION

The first exhilarating effect of this flood of new money was the flush of apparent prosperity, but that was quickly followed by inflation as the self-destruct mechanism began to operate. In 1775, paper Continentals were traded for one dollar in gold. In 1777, they were exchanged for twenty-five cents. By 1779, just four years from their issue, they were worth less than a penny. The phrase "Not worth a Continental" has its origin in this dismal period. Shoes sold for $5,000 a pair. A suit of clothes cost a million.

It was in that year that George Washington wrote, "A wagon load of money will scarcely purchase a wagon load c#provisions."

t- Quoted by Albert S. Bolles, The Financial History of the United States (New York: D. Appleton, 1896,4th ed.), Vol. I, p. 132.

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THE CREATURE FROM JEKYLL ISLAND

Even Benjamin Franklin began to see the light. In a mood of sarcasm, he wrote: