Guest Essayist: Robert E. Wright


Essay Read By Constituting America Founder, Actress Janine Turner


“And since a Plentiful Currency will be so great a Cause of advancing this Province in Trade and Riches…I cannot think it the Interest of England to oppose’ us in making as great a Sum of Paper Money here, as we, who are the best Judges of our own Necessities, find convenient. And if I were not sensible that the Gentlemen of Trade in England, to whom we have already parted with our Silver and Gold, are misinformed of our Circumstances, and therefore endeavour to have our Currency stinted to what it now is, I should think the Government at Home had some Reasons for discouraging and impoverishing this Province, which we are not acquainted with…” – Benjamin Franklin, A Modest Enquiry into the Nature and Necessity of Paper Currency, Benjamin Franklin, April 3, 1729.

For over half a century, the colonists living in mainland British North America sought a monetary system like that described by Benjamin Franklin in his 1729 Modest Enquiry into the Nature and Necessity of Paper Currency. In other words, they wanted their own “inside” money composed of paper “bills of credit” (fiat notes like today’s Federal Reserve notes) useful only in local trade and an “outside” money composed of full-bodied gold and silver coins (referred to collectively as specie) useful in international trade.

All the colonies eventually emitted fiat paper bills of credit but only the Middle Colonies of New York, New Jersey, Pennsylvania, Maryland, and Virginia managed to do so without causing massive inflation, which the colonists perceived as depreciation of the bills of credit in terms of the “outside” or “real” money, specie.

As with most things in life, too much of a good thing can lead to bad outcomes. The colonists wanted “inside” money because each unit of it  (confusingly, for us, called “pounds”) they emitted into circulation allowed the same amount of gold or silver to be used to purchase goods abroad. That helped the colony’s economy but only until all the specie had been exported. The effect of issuing more bills of credit after that point was to make each unit less valuable domestically – price inflation or currency depreciation depending on your perspective.

The northernmost and southernmost colonies greatly exceeded that break-even point because they found it easier to finance their many wars against the French, Spanish, and their American Indian allies by printing more inside money than by raising taxes. Double-digit inflation ensued, which injured the interests of creditors, the rich people who lent money. That is because the purchasing power of the depreciated money they were repaid with, even with single-digit interest paid in addition, was less than they expected.

Those rich lenders had the ear of policymakers in London, who in 1764 prohibited the colonists, even those in the Middle Colonies, from emitting any more bills of credit. This may have merely miffed the colonists had the restriction not taken place in the midst of a postwar economic downturn and a period of toughened trade restrictions that made it difficult for the colonists to trade enough with the right partners abroad to maintain sufficient amounts of specie in domestic circulation. Instead of inflation, the colonists suffered from massive deflation.

As a result, foreign and domestic trade decreased markedly, as did real estate prices. Interest rates increased on mortgages, when they could be had at all, because money was in such limited supply. Money matters became so desperate that squirrel scalp bounties began to circulate as cash in Bucks County, Pennsylvania and newspapers published odes to coins that colonists rarely saw in circulation anymore.

By 1765, borrowers began to default and lose all their property at sheriff’s sales. Many found themselves still owing money even after all their assets had been sold at low prices and ended up in debtors’ prison, where some died. The colonists pleaded for relief but instead the “Mother” Country implemented the Stamp Act, which imposed new taxes and threatened to denude the colonists of all their remaining specie.

The colonists successfully protested the Stamp Act but in the process initiated a series of increasingly violent conflicts that ended with the Declaration of Independence and Revolutionary War. The Americans funded much of the war effort with a new inside money called Continentals, issued far too many, and saw them depreciate in value, at first slowly but later essentially to zero. No longer constrained by British trade policies and with help from French infusions, specie again became the predominate form of money in America.

Yet Franklin and younger financially savvy policymakers, like Robert Morris, Thomas Willing, and Alexander Hamilton, knew that inside money could help to stimulate the economy, so long as it did not displace all of the specie once again. So they created new institutions, commercial banks, that issued two forms of inside money, deposits and notes, convertible on demand into a fixed amount of specie.

When the new Constitution was framed, the financiers managed to ban state governments from issuing fiat money but were silent about the new federal government’s power to issue it. For over a century, it did so only during major wars and afterwards withdrew it from circulation via taxes, as the Middle Colonies had done.

Before the Federal Reserve became operational in 1914, most money in America took the form of bearer or “cash” instruments like banknotes and specie coins, supplemented by money of account in the form of bank deposits transferable by check. Deposits could be tracked but the government rarely tried to access private bank records because of strong customs concerning confidentiality. Notes and specie provided anonymity and hence even stronger privacy protections.

From its inception, America defined its dollar in terms of specie, eventually settling, as most other nations did, on gold alone. Dollar denominated banknotes and deposits were not legal tender but convertible into legal tender coins on demand. They circulated because they were more convenient than coins but always could be exchanged for them.

Retail convertibility meant that international trade, not policymakers, determined America’s money supply. Gold flowed in when exports exceeded imports and out when imports outstripped exports. As explained by Scottish Enlightenment thinker David Hume and well understood by policymakers like Hamilton, the gold flows automatically adjusted the domestic money supply and interest rates towards more balanced international trade and long-term price stability.

During the New Deal of the 1930s, however, the nature of money changed dramatically in America, starting a process that culminated in the 1970s with the nation’s monetary system returning to its Revolutionary War roots, or in other words a fiat inside money delinked from specie and of constantly declining value.

Some dispute the Constitutionality of the current monetary regime, which simultaneously greatly diminished the privacy of bank accounts. A planned central bank digital currency (CBDC) threatens to end anonymous cash transactions entirely and wipe away the last legal vestiges of transaction privacy. Benjamin Franklin and the other Founders and Framers would not approve. Instead, they would urge moving back to the retail specie standard that the nation enjoined from its inception until the New Deal.

It will be up to the American people to push for a return to Constitutional money, though, because politicians dislike the constraints that come with linking the dollar to gold, or anything else, like Bitcoin, in relatively fixed supply. Unlike the statesmen of the founding generations, partisan policymakers today want to borrow and spend so they can appear to help some people without immediately increasing taxes on others. In the process, though, they run huge deficits that have compounded over the last few decades into a massive national debt that would be impossible with a gold-linked dollar.

Robert E. Wright is a Senior Research Fellow at the American Institute for Economic Research. He is the (co)author or (co)editor of over two dozen major books, book series, and edited collections, including AIER’s The Best of Thomas Paine (2021) and Financial Exclusion (2019). He has also (co)authored numerous articles for important journals, including the American Economic Review, Business History Review, Independent Review, Journal of Private Enterprise, Review of Finance, and Southern Economic Review. Robert has taught business, economics, and policy courses at Augustana University, NYU’s Stern School of Business, Temple University, the University of Virginia, and elsewhere since taking his Ph.D. in History from SUNY Buffalo in 1997.

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