In deference to the year-end demands of the academic calendar, our comments from distinguished scholars on the subject of monetary reform will continue in July and September, going through the Fall. Other topics will be interspersed. We will be hearing from the Modern Monetary Theory movement, from Conservative scholars, from Libertarian scholars, from Liberal scholars and from scholars involved in monetary reform abroad.
For new readers, our present series concerns the prospect of restoring a vital touch of monetary orthodoxy that has helped our country avoid needless debt in the past and allowed for investments in infrastructure required for progress from one stage of economic development to another.
A government official mentioned to us the 150th anniversary of the founding of the Department of Agriculture. “150 years ago. That would have been under President…” “Lincoln”, she replied. Well, add that one to the list, along with the Reconstruction (which began during the Civil War), provisions for veteran’s benefits, the creation of our modern hospital system, the Freedmen’s Bureau, the creation of the land grant college system resulting in 69 of our colleges and universities, the founding of the National Academy of Sciences, the construction of a network of roads and canals to support the Industrial Revolution, many provisions for the westward expansion including a Transcontinental Railroad all the way to California, the creation of Yosemite National Park, the completion of the US Capitol with its magnificent dome, and many other public works undertaken in a style projecting the image of a re-unitable nation bound for much bigger and better things than ever before.
All this was done during our most economically disruptive war, all by a government that had teetered on the brink of bankruptcy in 1861 as its southern revenue stream was removed, and all in a period when credit for government and the private sector was available only at greatly increased cost due to the uncertainties of the war. If we had had Federal Reserve Notes as our monetary unit at the time, and only them, we would have suffered far more in debt costs and inflation than under the system Lincoln and his Republican Congress implemented. For the government to finance a deficit using Federal Reserve Notes would have required reliance on selling bonds in like amount, saddling the country with massive debt and making it more difficult to sell special issues of war bonds. Selling all those bonds would have meant a drain on the capital markets at the very time when businesses were also desperate for credit, making it more difficult to fund production and trade needed to create adequate economic supply. Inflation, already a problem due to wartime scarcities, would have been exacerbated more by the use of deficit spending based on Federal Reserve Notes than by the simpler and more conventional alternative the government used.
Just as the colonies had used publicly-issued Colonial Scrip over many decades with low rates of inflation and high levels of financial stability¹; just as the Continental Congress had, in another war, issued the Continentals (currency), and then stabilized their value through the economy-developing investments of the Bank of the United States; just as rulers throughout history have issued sovereign currencies to build great empires; so the government under the Lincoln Administration directly issued Greenbacks (currency) in an amount reaching 40% of the money supply and spent them into the economy to pay for the costs of the War and for the “plans for hope and a future” (Lincoln would have liked the reference) that inspired the North and gained the acquiescence of the divided South as it considered its long-term prospects within versus outside of the Union. Like all wars, it was, in part, an economic war.
Though it is a segway, this strategy of formulating and projecting palpable images of a united future versus just beating down rebels – it was also embodied in the Marshall Plan for rebuilding Europe – should be contrasted to so many sad examples where it has been assumed it is possible to crush the rebels and go home. In our present climate borne of artificial scarcity, are we approaching our withdrawal from Iraq and Afghanistan with a sense of ability to provide a “Marshall Plan” for them both in terms of aid and in terms of economic ideas we can impart…or are we too timid to even mention to them what our nation has learned from our recovery from a revolutionary war and a civil war? Have we been, in fact, too timid to discuss amongst ourselves what our forebears did in dealing with the economic aspects of such situations, in relation to things like providing timely care for our veterans to equal the great hospitalization and benefit advances provided by Lincoln’s government?
Whenever the Greenbacks were used by the Lincoln Administration, it was at zero cost to the taxpayers and with zero accumulation of debt by the Federal Government. As in our upper 1% of families, the next generation of the national family inherited assets, but not debt, to the extent those assets had been acquired by Greenbacks on a pay-as-you-go basis. Today we have the opportunity to follow suit. Once again, our government can procure infrastructure and other assets on the basis of money rightfully issued and indeed earned by the government, not just taxed from others, using sovereign privilege stemming from the services government provides. These public resources need not be based on what our children can afford to repay, as in our present system based on excess generosity to the banks, but can again be based on the more economically sound basis of the amount of credit and of money spent into the economy limited as Lincoln (and many others) said it should be: by what can be absorbed by the economy within the bounds of non-inflationary growth.² Rather than create as much debt as it needs, the government can create as much money as it needs within that one economically meaningful constraint, which should be our sole guide in this matter.
What we have created, in the aftermath of the 19th-century struggle between the Populists and the Greenback Party on the one hand and the interests of the upper 1% and bankers in particular on the other, is a system that mocks the disciplines of free enterprise and accountability. Imagine a program for the poor whereby selected vendors would be given government-furnished goods to sell and then be told to go out there and compete in the “free” market. Well, this would not be a true free market, in which the vendors would have to produce or buy at wholesale what they sell at retail. Why produce or buy what you can get free as a hand-out from the government? Yet, as a program to help the destitute poor, it might be worth some study.
However, have we ever given that kind of critical study to our present system of giving banks a product to sell – money - that is actually a government-produced product? Its basis of value is one thing and one thing only: the law of the land, which only the government can promulgate and uphold. The product is a legal certificate from the government stipulating that it is “Legal tender for all debts, public and private”. Through the fractional reserve system – essentially the only way money is created, these days - we have given to private banks a license to electronically summon “out of thin air” and to deposit into borrower’s accounts the government’s product of money, and to charge interest on it for the banks’ own benefit. This gift lacks no embellishment - we have insured those banks with the ability to make good on those credits to their borrower’s accounts, should cash management needs require, by borrowing from the Federal Reserve or, if necessary, coverage by the FDIC, with a back-up of TARP-style bail-out’s. Try talking conservatives into a welfare program like that for poor vendors!
But wait, there’s more. Unlike the hypothetical vendor hand-out’s, the government has also obligated itself to go to the banks and to buy from them the very same government money it has given them a license to lend - hundreds of billions of dollars every year that the government doesn’t need to borrow, that it could again just issue directly for its own use. Mother lode of generosity! And here the voters in the boondocks have been told it was working mothers eligible for food stamps that were the cause of the national debt! It is, in fact, because of the unreal system we have set up, the system of unnecessary debt and artificial scarcity all for the sake of profiting a powerful lobby, that we are not able to replicate the reality of what Lincoln did, as the founding fathers intended, through the constitutional power of the government to create money and “regulate the value thereof” (not to create too much or too little of it).
Are we down on the Federal Reserve? Not really. It serves some very useful functions, as does fractional reserve banking. Does Policy Winners (we have to be careful to distinguish, these days, as we publish the varying opinions of others) espouse the full-blown, original Chicago Plan, proposing the government create 100% of the money supply rather than private banks, leaving the banks to concentrate on their other functions? NO. De we propose the government create 40% of the money supply, as at the height of the Civil War? NO. In our October, 2013 newsletter, we proposed the government create 5% of the money supply debt-free, for its own use, to be spent into the economy for government purposes under the current approved budget, in order to close the deficit without raiding the capital markets and borrowing from the banks. The banks can go right on with their profitable deal for the creation of 95% of the money supply under their existing sweetheart deal, as far as we are concerned. We’re not quite sure why some people are so concerned about inflation from the 5% of the money supply the government would create and use for public purposes limited by the budget, and don’t mention concern for the 95% of the money supply created by the banks and sometimes used for purposes that more directly feed inflation. But it does seem to us – and this is one reason we want to preserve the Fed – that whatever it does to control credit and money availability overall will, unavoidably, take care of the tiny 5% of the money supply created by the government as well as the 95% created by banks via fractional reserve lending.
We should not give the impression that the re-introduction of government-issued money is an idea dormant since the Lincoln Administration. The idea has come up not only in theory but in practice continuously ever since, including the present day. In our country, it reached a crescendo (but not a finale) during the 1930’s. At that time hundreds of leading economists including Federal Reserve Chairman Marriner Eccles, American Economic Association President John Commons, Henry C. Simmons of the University of Chicago, Irving Fisher of Yale, Lauchlin Currie of Harvard and Richard Lester of Princeton advocated reforms along the lines of the Greenback –based Chicago Plan. Congress agreed to the extent of authorizing the Roosevelt Administration to issue Greenbacks under the Agricultural Adjustment Act of 1933. Banking system reforms were enacted along lines advocated by Chicago Plan supporters. However, Roosevelt believed Keynesian deficit spending and other New Deal programs (notably involving direct government issuance of and insuring of credit – effectively a form of government-issued money via some fractional reserve lending of its own) were effectively bringing the country out of the Great Depression without taking on the banking interests across-the-board by switching to 100% government-issued money as per the Chicago Plan. We have uncovered no record of whether anyone ever suggested 5% government-issued money instead of 100% - perhaps Roosevelt would have been a Policy Winners reader and given some thought to this. As it turned out, Roosevelt got nervous about the deficit spending that was being done as the 1936 election approached and cut back sharply. Many scholars today believe that decision triggered the Second Depression of 1937, which ended only with the more massive deficit spending of the Second World War.
But where does the discussion of the Great Depression era debate in the US leave us? It does not provide an example of anyone “bringing back the Greenbacks” with massive success. However, that was not the only story, during the crisis of the Great Depression.
In our July, 2013 issue, we recounted the story of the Wörgle Experiment in Austria during the 1930’s. This was the case where a mayor introduced his town’s own currency and used it to pay for a program of public works. The money could be used to pay taxes and could be exchanged, at a discount, for Austrian Schillings. The currency was readily accepted and rarely exchanged for the national currency. It circulated with a very high rate of velocity. The town climbed out of desperate economic circumstances to such dramatic prosperity that within a year 170 other Austrian towns followed suit, with similar results. Finally the Austrian government put an end to this runaway prosperity, reasserting the primacy of its central bank over the monetary system. Wörgl and the towns around it quickly sank back into the depths of the Great Depression. Our July, 2013 newsletter went on to survey the use of some 120 local currencies today in Europe and throughout the world (including the US). We pointed out the distinction between local currencies being competitive with national currencies (an idea that some, notably Libertarian followers of the economist Friedrich Hayek, praise), and local currencies being complementary with national currencies, as advocated by others we cited.
But even if the Wörgle experiment and its many modern-day sequels are parallels to the Greenbacks (and the Continentals, and the Colonial Scrips used in America), these cases don’t provide an example of a modern national government self-consciously re-creating Lincoln’s Greenbacks to create a massive, national economic success. So it is that we run the risk of being mis-quoted and of pointing out that there was one government that did exactly that, during the period 1933-1945. That country was Germany. The bibliography at the end of this newsletter references the writings of several scholars concerning this example.
It is ironic that some people point to rare cases of failed third world regimes as an argument against any and all government-issued money. Economic historians like Richard Lester of Princeton have cited governments issuing sovereign money over very long periods of time exhibiting exceptional price stability…notably, in a study by Prof. Lester, the colony of Pennsylvania.³ Other examples include the UK islands of Guernsey and Jersey, which have used this system for over 200 years. Even the inflation record of the US Greenbacks wasn’t that bad, when looked at over their entire period of use rather than just the period of the worst wartime scarcities during the Civil War. We have argued earlier that inflation would have been worse if we had had and used Federal Reserve Notes for government expenditures rather than Greenbacks.
A true irony is to be found in the fact that one of the examples of “printing press” money that is often used is that of the Weimar Republic in Germany (1919 to 1933). Faced with extraordinary reparations burdens, other economic / trade burdens unique to its geo-political post-World War I situation, and the onset of the Great Depression, Germany did issue a great deal of “printing press money”- although not money issued directly by its government, money issued by its central bank, the Reichsbank.⁴ That would be equivalent to our Federal Reserve System creating a lot of money, not to our Treasury issuing money. To bring the issue up-to-date and on our shores, a report by the Congressional Research Service says that the use of government-issued money today would not be more inflationary than the use of Federal Reserve Notes. See Congressional Research Service Report for Congress #96-672, section titled “Other Forms of Currency”, fourth paragraph.
What is particularly ironic in the case of Germany is that it was the use of a direct copy of Lincoln’s Greenbacks (and Wörgl’s notes) that actually arrested the hyper-inflation of the Weimar Republic. Yes, it was the bad guys who stumbled upon a good idea and used it to build the blind allegiance, toward tragic ends, of so many disgruntled German workers. It was the new government that embarked, in 1933, on a massive public works (today, we would say infrastructure) program funded by its version of Greenbacks, which were called Labor Treasury Certificates. The amount spent into the economy (always the critical issue) was determined by a calculation of the costs of the resources to be employed to complete the list of projects. The rate of pay to workers and suppliers in terms of Labor Treasury Certificates was based on the material and labor resources required to complete the projects. The guiding principle was simple: “For every mark that was issued we required the equivalent of a mark’s worth of work done or goods produced.”⁵ That was how Germany brought inflation under control largely by using their sequel to Lincoln’s Greenbacks, Labor Treasury Certificates. It is how, within a few years, Germany was transformed from an economy so decimated people were literally starving in the streets to a power able to threaten the whole world. It is why it was able to fight a world war for so many terrible years when it was pummeled from all sides and whole cities were bombed to oblivion.
Why isn’t there more talk about these things today? Lincoln’s Greenbacks are literally an example from the horse-and-buggy era, and the most striking example of the same economic idea being used by a modern state is buried within an era so abhorrent we don’t even want to think about it –much less, seem to be giving any credit to evil leaders. Yet, the question must be raised: If even the government of the Third Reich, for all the self-defeating hatreds found within it and its leader’s inability to think through a rational strategy for the war, was able to latch onto a good idea in economics and use it so effectively – then why can’t we? We were the inventors of Greenbacks, not the Third Reich. Why can’t we familiarize ourselves with and comprehend our own accomplishments the way our enemies did, but use our past accomplishments again for good?
At this point we have brought the issue up to the end of World War II, within the lifetimes of many of our readers. Did post-war Germany, post-war Austria and the other nations of Europe forget about the powers of government-issued money? They most certainly did not. Europe has an overlay of pan-European, national, regional and local monetary systems that has evolved in too complex a way to be treated here. We have covered some of this ground in the July, 2013 issue of Policy Winners. But what are the trends in European thinking today? Our reading has brought to our attention many movements toward monetary reform away from the direction of 100% control of money creation by private banks. In an upcoming issue we will survey some of these. We have already mentioned, in our May 2014 issue, the recent editorial advocacy of the London-based but internationally-read Financial Times for Chicago School type reforms of central banks, and also provided a link there to an influential book published in the UK including a number of comments upon the subject by leading economists with leading organizations globally. More material will follow.
In our own country there has been an outpouring of calls for monetary reform involving some level of use of government-issued money rather than the 100% privatized system of money creation by banks to which we are now constrained. There have been bills before Congress to effect such monetary reforms such as Rep. Dennis Kucinich’s HR 2990 (the NEED Act) and Rep. Ray LaHood’s HR1452 (the State and Local Government Economic Empowerment Act). We believe these bills have been burdened by two obstacles: First, they describe sweeping monetary and fiscal initiatives, rather than the simple current deficit tempering goal we think should be the initial focus. Second, there is so much “balkanization” of political and institutional groups that communication of the kind that could lead to any societal consensus is severely constricted. Our polarized environment spawns simplistic and extreme politics and deadlock rather than broad-based communication and creative solutions.
Policy Winners has proposed an initial step that, logically, should have few opponents. Our first priority is getting the deficit under control. Few would not like to do that. We have proposed a one-time authorization of government-issued money (thought of as Lincoln’s Greenbacks, also called United States Notes – currency still in circulation but not issued after 1972)…to be spent in accordance with the current budget and in a suggested amount to close the deficit in that approved budget (less than 5% of the money supply). But we have asked our commenters whether, in their opinion, there is any set of limitations or restrictions under which we should consider the re-introduction of such government-issued money. All of our commenters to date have said yes, but we are expecting some “no’s”. We have even gone out of our way to invite people to participate who we expect will answer “no”. We are doing everything we can to make this an honest, representative discussion.
As we move forward, we will treat this subject as not only the orthodoxy of great civilizations past, the constitutional intention of our forefathers, and the system in use at various times in American history up to the Civil War and the Reconstruction. We will also treat is as the monetary reform theory and practice of the 1930-1945 era and as reform theory and practice from 1945 to the present in the US, Europe, Australia and other nations. This is a discussion that can benefit from the involvement of economists, economic development specialists, mathematicians, historians, experts in banking reform, business people, experts in the practices of foreign nations, and experts in government and politics. The truth is, the technicalities of introducing and using government-issued money have already been worked out; we used Greenbacks the way Lincoln and his congress envisioned them extensively, and they have circulated side-by-side with Federal Reserve Notes for 101 years. It’s not just the technicalities that need commenting on - we’ve been there and done that.
All of what should be our purposes and goals today call for reflection and comment.
Among our readers are scholars with much to add as we array a series of what may be brief comments in the upcoming issues of Policy Winners. We would like to receive your comments. Our most direct means of contact are shown immediately below. We hope all of our readers will find it interesting to read the thoughts of their colleagues concerning this important policy choice that so well may be an idea whose time has come.
Footnotes
Footnote #1: We quote the following excerpts from “How to Pay for What we Need”, by Richard Striner,
published in The American Scholar winter 2012 issue and accessed via the following link:
http://theamericanscholar.org/how-to-pay-for-what-we-need/#.U1K541e0pM8
[Richard] Lester did some research on the methods employed by Benjamin Franklin and others in colonial times – methods whereby the Pennsylvania magistrates printed up money and lent it into public circulation. According to Lester’s findings, inflation was never a problem under this system:
“The price level during the fifty-two years prior to the American Revolution and while Pennsylvania was on a paper standard was more stable than the American price level has been during any succeeding fifty-year period.” As late as the 1970’s, the eminent economist John Kenneth Galbraith agreed that colonial Pennsylvania “handled paper money with what must now be regarded as astonishing skill and prudence.”
Footnote #2: Senate Document #23, page 91, 1865, seen at the following link (which may have to be copied
into your search bar):
http://mikenormaneconomics.blogspot.com/2009/10/abe-lincolns-monetary-policy.html
Footnote #3: See Footnote#1 above
Footnote #4: The comment that it was the Reichsbank rather than the German government that flooded the German economy with an excessive quantity of money has been cited by American Monetary Institute founder Stephen Zarlenga based on review of a German-language book by Hjalman Schacht, who was the head of the Reichsbank and an economic mastermind, titled The Magic of Money, published in 1967. The Wikipedia article on Hjalman Schacht does not directly mention this point but is very interesting as to the complexities of the time and of this man, who opposed, with imprisonment as a consequence, what we would regard as the signature ills of the Nazi regime. See the following link:
http://en.wikipedia.org/wiki/Hjalmar_Schacht
See, also, John Weitz, Hitler’s Banker. (Great Britain, Warner Books, 1999; also published by Little, Brown and available through the site linked just below). In it we see that Weitz gives Schacht a cautiously clean bill of health.
http://www.nytimes.com/books/98/01/25/bib/980125.rv121038.html
Footnote #5: See Stephen Zarlenga, The Lost Science of Money, pages 591-601. Valatie, New York:
American Monetary Institute, 2002.
Further Reading
Henry C. K. Liu, “Nazism and the German Economic Miracle”, Asia Times (May 24, 2005)
For new readers, our present series concerns the prospect of restoring a vital touch of monetary orthodoxy that has helped our country avoid needless debt in the past and allowed for investments in infrastructure required for progress from one stage of economic development to another.
A government official mentioned to us the 150th anniversary of the founding of the Department of Agriculture. “150 years ago. That would have been under President…” “Lincoln”, she replied. Well, add that one to the list, along with the Reconstruction (which began during the Civil War), provisions for veteran’s benefits, the creation of our modern hospital system, the Freedmen’s Bureau, the creation of the land grant college system resulting in 69 of our colleges and universities, the founding of the National Academy of Sciences, the construction of a network of roads and canals to support the Industrial Revolution, many provisions for the westward expansion including a Transcontinental Railroad all the way to California, the creation of Yosemite National Park, the completion of the US Capitol with its magnificent dome, and many other public works undertaken in a style projecting the image of a re-unitable nation bound for much bigger and better things than ever before.
All this was done during our most economically disruptive war, all by a government that had teetered on the brink of bankruptcy in 1861 as its southern revenue stream was removed, and all in a period when credit for government and the private sector was available only at greatly increased cost due to the uncertainties of the war. If we had had Federal Reserve Notes as our monetary unit at the time, and only them, we would have suffered far more in debt costs and inflation than under the system Lincoln and his Republican Congress implemented. For the government to finance a deficit using Federal Reserve Notes would have required reliance on selling bonds in like amount, saddling the country with massive debt and making it more difficult to sell special issues of war bonds. Selling all those bonds would have meant a drain on the capital markets at the very time when businesses were also desperate for credit, making it more difficult to fund production and trade needed to create adequate economic supply. Inflation, already a problem due to wartime scarcities, would have been exacerbated more by the use of deficit spending based on Federal Reserve Notes than by the simpler and more conventional alternative the government used.
Just as the colonies had used publicly-issued Colonial Scrip over many decades with low rates of inflation and high levels of financial stability¹; just as the Continental Congress had, in another war, issued the Continentals (currency), and then stabilized their value through the economy-developing investments of the Bank of the United States; just as rulers throughout history have issued sovereign currencies to build great empires; so the government under the Lincoln Administration directly issued Greenbacks (currency) in an amount reaching 40% of the money supply and spent them into the economy to pay for the costs of the War and for the “plans for hope and a future” (Lincoln would have liked the reference) that inspired the North and gained the acquiescence of the divided South as it considered its long-term prospects within versus outside of the Union. Like all wars, it was, in part, an economic war.
Though it is a segway, this strategy of formulating and projecting palpable images of a united future versus just beating down rebels – it was also embodied in the Marshall Plan for rebuilding Europe – should be contrasted to so many sad examples where it has been assumed it is possible to crush the rebels and go home. In our present climate borne of artificial scarcity, are we approaching our withdrawal from Iraq and Afghanistan with a sense of ability to provide a “Marshall Plan” for them both in terms of aid and in terms of economic ideas we can impart…or are we too timid to even mention to them what our nation has learned from our recovery from a revolutionary war and a civil war? Have we been, in fact, too timid to discuss amongst ourselves what our forebears did in dealing with the economic aspects of such situations, in relation to things like providing timely care for our veterans to equal the great hospitalization and benefit advances provided by Lincoln’s government?
Whenever the Greenbacks were used by the Lincoln Administration, it was at zero cost to the taxpayers and with zero accumulation of debt by the Federal Government. As in our upper 1% of families, the next generation of the national family inherited assets, but not debt, to the extent those assets had been acquired by Greenbacks on a pay-as-you-go basis. Today we have the opportunity to follow suit. Once again, our government can procure infrastructure and other assets on the basis of money rightfully issued and indeed earned by the government, not just taxed from others, using sovereign privilege stemming from the services government provides. These public resources need not be based on what our children can afford to repay, as in our present system based on excess generosity to the banks, but can again be based on the more economically sound basis of the amount of credit and of money spent into the economy limited as Lincoln (and many others) said it should be: by what can be absorbed by the economy within the bounds of non-inflationary growth.² Rather than create as much debt as it needs, the government can create as much money as it needs within that one economically meaningful constraint, which should be our sole guide in this matter.
What we have created, in the aftermath of the 19th-century struggle between the Populists and the Greenback Party on the one hand and the interests of the upper 1% and bankers in particular on the other, is a system that mocks the disciplines of free enterprise and accountability. Imagine a program for the poor whereby selected vendors would be given government-furnished goods to sell and then be told to go out there and compete in the “free” market. Well, this would not be a true free market, in which the vendors would have to produce or buy at wholesale what they sell at retail. Why produce or buy what you can get free as a hand-out from the government? Yet, as a program to help the destitute poor, it might be worth some study.
However, have we ever given that kind of critical study to our present system of giving banks a product to sell – money - that is actually a government-produced product? Its basis of value is one thing and one thing only: the law of the land, which only the government can promulgate and uphold. The product is a legal certificate from the government stipulating that it is “Legal tender for all debts, public and private”. Through the fractional reserve system – essentially the only way money is created, these days - we have given to private banks a license to electronically summon “out of thin air” and to deposit into borrower’s accounts the government’s product of money, and to charge interest on it for the banks’ own benefit. This gift lacks no embellishment - we have insured those banks with the ability to make good on those credits to their borrower’s accounts, should cash management needs require, by borrowing from the Federal Reserve or, if necessary, coverage by the FDIC, with a back-up of TARP-style bail-out’s. Try talking conservatives into a welfare program like that for poor vendors!
But wait, there’s more. Unlike the hypothetical vendor hand-out’s, the government has also obligated itself to go to the banks and to buy from them the very same government money it has given them a license to lend - hundreds of billions of dollars every year that the government doesn’t need to borrow, that it could again just issue directly for its own use. Mother lode of generosity! And here the voters in the boondocks have been told it was working mothers eligible for food stamps that were the cause of the national debt! It is, in fact, because of the unreal system we have set up, the system of unnecessary debt and artificial scarcity all for the sake of profiting a powerful lobby, that we are not able to replicate the reality of what Lincoln did, as the founding fathers intended, through the constitutional power of the government to create money and “regulate the value thereof” (not to create too much or too little of it).
Are we down on the Federal Reserve? Not really. It serves some very useful functions, as does fractional reserve banking. Does Policy Winners (we have to be careful to distinguish, these days, as we publish the varying opinions of others) espouse the full-blown, original Chicago Plan, proposing the government create 100% of the money supply rather than private banks, leaving the banks to concentrate on their other functions? NO. De we propose the government create 40% of the money supply, as at the height of the Civil War? NO. In our October, 2013 newsletter, we proposed the government create 5% of the money supply debt-free, for its own use, to be spent into the economy for government purposes under the current approved budget, in order to close the deficit without raiding the capital markets and borrowing from the banks. The banks can go right on with their profitable deal for the creation of 95% of the money supply under their existing sweetheart deal, as far as we are concerned. We’re not quite sure why some people are so concerned about inflation from the 5% of the money supply the government would create and use for public purposes limited by the budget, and don’t mention concern for the 95% of the money supply created by the banks and sometimes used for purposes that more directly feed inflation. But it does seem to us – and this is one reason we want to preserve the Fed – that whatever it does to control credit and money availability overall will, unavoidably, take care of the tiny 5% of the money supply created by the government as well as the 95% created by banks via fractional reserve lending.
We should not give the impression that the re-introduction of government-issued money is an idea dormant since the Lincoln Administration. The idea has come up not only in theory but in practice continuously ever since, including the present day. In our country, it reached a crescendo (but not a finale) during the 1930’s. At that time hundreds of leading economists including Federal Reserve Chairman Marriner Eccles, American Economic Association President John Commons, Henry C. Simmons of the University of Chicago, Irving Fisher of Yale, Lauchlin Currie of Harvard and Richard Lester of Princeton advocated reforms along the lines of the Greenback –based Chicago Plan. Congress agreed to the extent of authorizing the Roosevelt Administration to issue Greenbacks under the Agricultural Adjustment Act of 1933. Banking system reforms were enacted along lines advocated by Chicago Plan supporters. However, Roosevelt believed Keynesian deficit spending and other New Deal programs (notably involving direct government issuance of and insuring of credit – effectively a form of government-issued money via some fractional reserve lending of its own) were effectively bringing the country out of the Great Depression without taking on the banking interests across-the-board by switching to 100% government-issued money as per the Chicago Plan. We have uncovered no record of whether anyone ever suggested 5% government-issued money instead of 100% - perhaps Roosevelt would have been a Policy Winners reader and given some thought to this. As it turned out, Roosevelt got nervous about the deficit spending that was being done as the 1936 election approached and cut back sharply. Many scholars today believe that decision triggered the Second Depression of 1937, which ended only with the more massive deficit spending of the Second World War.
But where does the discussion of the Great Depression era debate in the US leave us? It does not provide an example of anyone “bringing back the Greenbacks” with massive success. However, that was not the only story, during the crisis of the Great Depression.
In our July, 2013 issue, we recounted the story of the Wörgle Experiment in Austria during the 1930’s. This was the case where a mayor introduced his town’s own currency and used it to pay for a program of public works. The money could be used to pay taxes and could be exchanged, at a discount, for Austrian Schillings. The currency was readily accepted and rarely exchanged for the national currency. It circulated with a very high rate of velocity. The town climbed out of desperate economic circumstances to such dramatic prosperity that within a year 170 other Austrian towns followed suit, with similar results. Finally the Austrian government put an end to this runaway prosperity, reasserting the primacy of its central bank over the monetary system. Wörgl and the towns around it quickly sank back into the depths of the Great Depression. Our July, 2013 newsletter went on to survey the use of some 120 local currencies today in Europe and throughout the world (including the US). We pointed out the distinction between local currencies being competitive with national currencies (an idea that some, notably Libertarian followers of the economist Friedrich Hayek, praise), and local currencies being complementary with national currencies, as advocated by others we cited.
But even if the Wörgle experiment and its many modern-day sequels are parallels to the Greenbacks (and the Continentals, and the Colonial Scrips used in America), these cases don’t provide an example of a modern national government self-consciously re-creating Lincoln’s Greenbacks to create a massive, national economic success. So it is that we run the risk of being mis-quoted and of pointing out that there was one government that did exactly that, during the period 1933-1945. That country was Germany. The bibliography at the end of this newsletter references the writings of several scholars concerning this example.
It is ironic that some people point to rare cases of failed third world regimes as an argument against any and all government-issued money. Economic historians like Richard Lester of Princeton have cited governments issuing sovereign money over very long periods of time exhibiting exceptional price stability…notably, in a study by Prof. Lester, the colony of Pennsylvania.³ Other examples include the UK islands of Guernsey and Jersey, which have used this system for over 200 years. Even the inflation record of the US Greenbacks wasn’t that bad, when looked at over their entire period of use rather than just the period of the worst wartime scarcities during the Civil War. We have argued earlier that inflation would have been worse if we had had and used Federal Reserve Notes for government expenditures rather than Greenbacks.
A true irony is to be found in the fact that one of the examples of “printing press” money that is often used is that of the Weimar Republic in Germany (1919 to 1933). Faced with extraordinary reparations burdens, other economic / trade burdens unique to its geo-political post-World War I situation, and the onset of the Great Depression, Germany did issue a great deal of “printing press money”- although not money issued directly by its government, money issued by its central bank, the Reichsbank.⁴ That would be equivalent to our Federal Reserve System creating a lot of money, not to our Treasury issuing money. To bring the issue up-to-date and on our shores, a report by the Congressional Research Service says that the use of government-issued money today would not be more inflationary than the use of Federal Reserve Notes. See Congressional Research Service Report for Congress #96-672, section titled “Other Forms of Currency”, fourth paragraph.
What is particularly ironic in the case of Germany is that it was the use of a direct copy of Lincoln’s Greenbacks (and Wörgl’s notes) that actually arrested the hyper-inflation of the Weimar Republic. Yes, it was the bad guys who stumbled upon a good idea and used it to build the blind allegiance, toward tragic ends, of so many disgruntled German workers. It was the new government that embarked, in 1933, on a massive public works (today, we would say infrastructure) program funded by its version of Greenbacks, which were called Labor Treasury Certificates. The amount spent into the economy (always the critical issue) was determined by a calculation of the costs of the resources to be employed to complete the list of projects. The rate of pay to workers and suppliers in terms of Labor Treasury Certificates was based on the material and labor resources required to complete the projects. The guiding principle was simple: “For every mark that was issued we required the equivalent of a mark’s worth of work done or goods produced.”⁵ That was how Germany brought inflation under control largely by using their sequel to Lincoln’s Greenbacks, Labor Treasury Certificates. It is how, within a few years, Germany was transformed from an economy so decimated people were literally starving in the streets to a power able to threaten the whole world. It is why it was able to fight a world war for so many terrible years when it was pummeled from all sides and whole cities were bombed to oblivion.
Why isn’t there more talk about these things today? Lincoln’s Greenbacks are literally an example from the horse-and-buggy era, and the most striking example of the same economic idea being used by a modern state is buried within an era so abhorrent we don’t even want to think about it –much less, seem to be giving any credit to evil leaders. Yet, the question must be raised: If even the government of the Third Reich, for all the self-defeating hatreds found within it and its leader’s inability to think through a rational strategy for the war, was able to latch onto a good idea in economics and use it so effectively – then why can’t we? We were the inventors of Greenbacks, not the Third Reich. Why can’t we familiarize ourselves with and comprehend our own accomplishments the way our enemies did, but use our past accomplishments again for good?
At this point we have brought the issue up to the end of World War II, within the lifetimes of many of our readers. Did post-war Germany, post-war Austria and the other nations of Europe forget about the powers of government-issued money? They most certainly did not. Europe has an overlay of pan-European, national, regional and local monetary systems that has evolved in too complex a way to be treated here. We have covered some of this ground in the July, 2013 issue of Policy Winners. But what are the trends in European thinking today? Our reading has brought to our attention many movements toward monetary reform away from the direction of 100% control of money creation by private banks. In an upcoming issue we will survey some of these. We have already mentioned, in our May 2014 issue, the recent editorial advocacy of the London-based but internationally-read Financial Times for Chicago School type reforms of central banks, and also provided a link there to an influential book published in the UK including a number of comments upon the subject by leading economists with leading organizations globally. More material will follow.
In our own country there has been an outpouring of calls for monetary reform involving some level of use of government-issued money rather than the 100% privatized system of money creation by banks to which we are now constrained. There have been bills before Congress to effect such monetary reforms such as Rep. Dennis Kucinich’s HR 2990 (the NEED Act) and Rep. Ray LaHood’s HR1452 (the State and Local Government Economic Empowerment Act). We believe these bills have been burdened by two obstacles: First, they describe sweeping monetary and fiscal initiatives, rather than the simple current deficit tempering goal we think should be the initial focus. Second, there is so much “balkanization” of political and institutional groups that communication of the kind that could lead to any societal consensus is severely constricted. Our polarized environment spawns simplistic and extreme politics and deadlock rather than broad-based communication and creative solutions.
Policy Winners has proposed an initial step that, logically, should have few opponents. Our first priority is getting the deficit under control. Few would not like to do that. We have proposed a one-time authorization of government-issued money (thought of as Lincoln’s Greenbacks, also called United States Notes – currency still in circulation but not issued after 1972)…to be spent in accordance with the current budget and in a suggested amount to close the deficit in that approved budget (less than 5% of the money supply). But we have asked our commenters whether, in their opinion, there is any set of limitations or restrictions under which we should consider the re-introduction of such government-issued money. All of our commenters to date have said yes, but we are expecting some “no’s”. We have even gone out of our way to invite people to participate who we expect will answer “no”. We are doing everything we can to make this an honest, representative discussion.
As we move forward, we will treat this subject as not only the orthodoxy of great civilizations past, the constitutional intention of our forefathers, and the system in use at various times in American history up to the Civil War and the Reconstruction. We will also treat is as the monetary reform theory and practice of the 1930-1945 era and as reform theory and practice from 1945 to the present in the US, Europe, Australia and other nations. This is a discussion that can benefit from the involvement of economists, economic development specialists, mathematicians, historians, experts in banking reform, business people, experts in the practices of foreign nations, and experts in government and politics. The truth is, the technicalities of introducing and using government-issued money have already been worked out; we used Greenbacks the way Lincoln and his congress envisioned them extensively, and they have circulated side-by-side with Federal Reserve Notes for 101 years. It’s not just the technicalities that need commenting on - we’ve been there and done that.
All of what should be our purposes and goals today call for reflection and comment.
Among our readers are scholars with much to add as we array a series of what may be brief comments in the upcoming issues of Policy Winners. We would like to receive your comments. Our most direct means of contact are shown immediately below. We hope all of our readers will find it interesting to read the thoughts of their colleagues concerning this important policy choice that so well may be an idea whose time has come.
Footnotes
Footnote #1: We quote the following excerpts from “How to Pay for What we Need”, by Richard Striner,
published in The American Scholar winter 2012 issue and accessed via the following link:
http://theamericanscholar.org/how-to-pay-for-what-we-need/#.U1K541e0pM8
[Richard] Lester did some research on the methods employed by Benjamin Franklin and others in colonial times – methods whereby the Pennsylvania magistrates printed up money and lent it into public circulation. According to Lester’s findings, inflation was never a problem under this system:
“The price level during the fifty-two years prior to the American Revolution and while Pennsylvania was on a paper standard was more stable than the American price level has been during any succeeding fifty-year period.” As late as the 1970’s, the eminent economist John Kenneth Galbraith agreed that colonial Pennsylvania “handled paper money with what must now be regarded as astonishing skill and prudence.”
Footnote #2: Senate Document #23, page 91, 1865, seen at the following link (which may have to be copied
into your search bar):
http://mikenormaneconomics.blogspot.com/2009/10/abe-lincolns-monetary-policy.html
Footnote #3: See Footnote#1 above
Footnote #4: The comment that it was the Reichsbank rather than the German government that flooded the German economy with an excessive quantity of money has been cited by American Monetary Institute founder Stephen Zarlenga based on review of a German-language book by Hjalman Schacht, who was the head of the Reichsbank and an economic mastermind, titled The Magic of Money, published in 1967. The Wikipedia article on Hjalman Schacht does not directly mention this point but is very interesting as to the complexities of the time and of this man, who opposed, with imprisonment as a consequence, what we would regard as the signature ills of the Nazi regime. See the following link:
http://en.wikipedia.org/wiki/Hjalmar_Schacht
See, also, John Weitz, Hitler’s Banker. (Great Britain, Warner Books, 1999; also published by Little, Brown and available through the site linked just below). In it we see that Weitz gives Schacht a cautiously clean bill of health.
http://www.nytimes.com/books/98/01/25/bib/980125.rv121038.html
Footnote #5: See Stephen Zarlenga, The Lost Science of Money, pages 591-601. Valatie, New York:
American Monetary Institute, 2002.
Further Reading
Henry C. K. Liu, “Nazism and the German Economic Miracle”, Asia Times (May 24, 2005)
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