President Abraham Lincoln is considered to be the moral savior of the United States for ending slavery. To pay for the war, he made enormous changes in the basic relationship between the federal government and money. These changes greatly diminished individual property rights and increased the power of Washington over the private economy.
The paper money created by Abraham Lincoln to finance the Civil War was the first crypto currency. Lincoln relied on the issuance of nonconvertible paper currency to support the military effort, in today's terms like forcing people to accept buttons or miscellaneous crypto tokens in payment. Lincoln used interest bearing paper "money" or "greenbacks" to finance the Civil War and, more significant, passed laws mandating the acceptance of paper currency as "legal tender" for all debts.
When Treasury Secretary Salmon Chase asked Congress to pass the legislation in order to maintain government bond prices and procure supplies for the army, the law provided that import duties and interest on the public debt would still be paid in gold. Paper money was seen as inferior to gold. In fact, paper was not seen as money at all, but rather as a form of debt.
Though the Founders made provision under the Commerce Clause of the Constitution for trade between the states free of tariff, there was no provision for a common currency or banking system to tie together the nation or even the individual states. State-chartered banks issued various forms of debt to the public in return for some future promise to pay in hard money that is, gold or silver.
The major difference between the private money of the 1700s and modern crypto tokens is that the former at least promised payment in a tangible asset gold. The latter explicitly promises nothing save a speculative flutter on price appreciation. When you buy a crypto currency, you buy an option on finding a greater fool, but nothing more, a transaction that would have provoked contempt in Lincoln's day.
Around 1869 the already wealthy speculator Jay Gould, who was a partner of Jim Fisk in the Erie Railroad, took notice of the fluctuation between the price of gold and greenbacks. The period of the Civil War and Reconstruction was one of opportunity, particularly for the new class of speculators and criminals attuned to the possibilities created by the federal government and Washington politicians on the one hand and government debt and paper currency on the other. These predecessors of today's financial buccaneers in the world of crypto currencies built fortunes upon foundations of debt and paper money.
The period of great economic growth and financial excess from the Civil War to the creation of the Federal Reserve System in 1913 was arguably as "pure" a private national banking model as ever existed in the United States. One of the ironies of the period was that the United States eventually restored the convertibility of the fiat dollar into gold by 1879. The decision to return to convertibility was actually made by President Grant in 1875, who ordered that convertibility would resume four years later. At the time, the paper currency was trading at about a 20 percent discount to gold, meaning that it took $120 in greenbacks to purchase $100 worth of gold.
By the end of the 1800s, the proponents of using silver as currency managed to force legislation through the national Congress to force the US Treasury to buy silver for coinage by using newly issued greenbacks. The silverite tendency was more a religious crusade than a coherent economic or political faction focused on money. In the twenty-first century, the same true believer perspective that animated silverites is visible with supporters of crypto currencies. When the Treasury purchased silver with greenbacks, Americans immediately sold the greenbacks and bought gold, creating a huge wave of inflation. The gold sales by the Treasury almost caused the financial collapse of the United States before the turn of the century. But in those days, the idea of inflation was popular.
The action by the Republican Congress to placate the advocates of free coinage of silver and higher inflation was a response to internal political pressures and the approaching election, but the results were felt around the world. The Progressive Party polled over a million votes in 1892 based on a platform that embraced the free coinage of silver at the old 16:1 ratio with the price of gold. By then, the price ratio between gold and silver was closer to 40:1, but the Progressives cared not. Today the ratio between the price of gold to silver is around 100:1.
By 1900, the Congress had ended the inflationary purchases of silver and restored the gold standard. With the Republicans in control of Congress and the White House, the stage was set for one of the most conservative pieces of monetary legislation in modern U.S. history, the Gold Standard Act of 1900. This law passed by Congress in March of that year established gold as the only standard for redeeming paper money, and prohibited the exchange of silver for gold. For the moment, at least, this reassured the public as to the value of paper money issued by private national banks.
Between the end of silver purchases by the Treasury in 1897 and the start of World War I in 1914, the money supply of the United States grew at a reasonably steady rate. This begs the question as to whether the supply of money in the U.S. financial system or the ebb and flow of a growing, free market society was the more important factor behind successive financial crises. The growth in the supply of gold coins and greenbacks was in excess of 100 percent over the 15 years leading up to the first great World War. Yet despite(or perhaps because of) the fact of gold convertibility, the United States experienced years of instability in markets and the banking sector.
Before the creation of the Federal Reserve System in 1913, the movement of gold and the overall trade balance were the chief determinants of the amount of credit available in the U.S. economy. The Fed gave the country and its political class "choices," observed Washington polymath Timothy Dickinson in an April 2010 interview. He went on to compare the creation of the Fed with the unanticipated increase in the supply of gold produced in the 1880s and 1890s, necessarily increasing the supply of money and also the means for politicians to buy votes.
During the 1930s, Franklin Roosevelt caused even greater change for the perception and reality of money in America. The Banking Act of 1933 authorized FDR to seize gold held by individual Americans and banks. After a few minutes of debate and no amendments, the law was passed by the House and the Senate soon followed suit. The first section of the law simply endorsed all the executive orders given by the president or secretary of the Treasury since March 4. Congress gave FDR the power to confiscate gold, seize banks, and impose currency controls, a remarkable agenda of socialist expropriation that terrified American citizens.
Even before the Banking Act was passed, the Federal Reserve Board was preparing lists of people who had withdrawn gold from banks in the previous weeks, a none-too-subtle reminder that hoarding gold now carried criminal penalties. The Fed then announced that it was widening the hunt for gold hoarders to withdrawals made in the past two years. By the end of the first week of FDR's term, enough gold had been returned to the banking system to support nearly $1 billion in new currency issuance. In those days, there was still a link between gold and the amount of paper dollars in circulation.
The bankers who were then in charge of the House of Morgan provided intellectual support for FDR's move against gold. Their despicable actions would have shocked J.P. Morgan, who fought to restore the gold standard only decades earlier. But the fact was that the seizure of gold was more than anything else a political move by FDR. Roosevelt knew that Americans and foreigners were voting with their feet and running away from the Democrats, selling paper dollars and buying gold even as he tried unsuccessfully to resuscitate the sagging U.S. economy.
Many Americans remember President Richard Nixon for closing the gold window at the Treasury in 1971, a mostly symbolic act that ended any pretense of a link between the dollar and gold. Yet by ending the use of gold as money in America four decades earlier, FDR ensured the political survival of the Democratic Party, enshrined the paper dollar as de facto money and put America on the road to hyperinflation and excessive debt a century later. The dollar today is simply a crypto currency supported by the legal monopoly of the United States.
Editor's note: Christopher just released a new version of his best-selling book, Inflated: Money, Debt and the American Dream. Here's what the legendary James Grant, founder of Grant's Interest Rate Observer, has to say about it:
"Who says that the sequel never stacks up with the original? The new edition of Inflated brings Christopher Whalen's marvelously accessible history of American finance right down to the present day. Securities analyst, central banker, investor, deal-doer and author, Whalen is no mere recounter of the past but also an informed and provocative critic of the present. His ideas about the future will likely save his readers some large multiple of the price of his book."
This highly anticipated new version of Inflated is hot off the presses and can be ordered on Amazon.
The Daily Reckoning