Why Paper Money Was the End of Honest Money

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‘You shall not crucify mankind on a cross of gold.’

– William Jennings Bryan

The season of fasting is upon us. No more high living. It’s time to cinch up our belts… to put on a gaunt face and a smug look. Alone among friends and associates, we will keep Lent.

So neglected is Lent that even Google has forgotten about it. When we searched for it, Google proposed ‘lentil soup’.

Lent is meant to rehearse the 40 days that Jesus spent fasting in the desert before going public. We remember the lean days with prayer, meditation, and self-denial. No alcohol will cross our lips from Ash Wednesday ’til Easter Sunday. Except Sundays. And saints’ days. And national holidays. And days that begin with the letter ‘T’ or have a date that is a prime number.

Yes, dear reader, we will be true to the church calendar, with a few emendations of our own.

Why? Because we wish to remember that periods of gluttony and wantonness must be followed by periods of fasting and correction. Yin and yang must be kept in balance. Pain and pleasure…good and bad…right and wrong – all must get what is coming to them. Otherwise, the entire world gets out of whack.

We fast to remind ourselves that there are hardships… there are lean periods in life. Not just our drinking lives…but in our economic lives…and our emotional lives too. There is adversity. There is pain and penance. We fall in line, observing church rituals, so that we don’t fall apart when real adversity hits us in the face. We endure Lent so we can enjoy Easter.

Yes, corrections are a part of life. You correct your mistakes… or you are corrected by them. No other outcome is possible.

But along comes the doctrine and practice of modern central banking. Ben Bernanke & Co have a different idea. They work tirelessly to avoid correction…to prevent pain…and to bring back the good times of free-spending revelry. Now they have a programme – QE to infinity – which promises to keep the economy pain-free forever.

To fully understand how this came about, we step back to the founding of the United States of America, where in the constitution itself, today’s central bank money was specifically prohibited. The states (which had the power then to mint their own money) were not to ‘make any thing but gold and silver coin legal tender in payment of debts’.

Allowing paper money was described by James Madison, in the Federalist Papers, as an ‘improper or wicked project’. And in his 1819 Dartmouth College v Woodward decision, Chief Justice John Marshall explained that paper money had ‘weakened the confidence of man in man and embarrassed all transactions between individuals by dispensing with a faithful performance of engagements’.

Not that paper money was necessarily the work of the devil, but Satan had a hand in it. When you can counterfeit money and get away with it, it’s a hard habit to stop. You are soon hooked on it.

Congress resorted to paper money – ‘greenbacks’ – during the US War Between the States. 500 million paper dollars were issued. This led to higher prices, which pleased debtors. They had borrowed in dear money, they repaid in cheap greenbacks. Prices in the north rose 75% from 1860 to 1865.

After the war, the greenbacks went away, but the desire for cheap money continued. Farming was the largest sector of the economy in the 19th century. Typically, farmers borrowed to expand their farms during booms, when prices were high. Then, in the correction, they cursed the bankers who had lent them money and railed against the gold standard.

William Jennings Bryan took up their cause as his own, late in the century. The rural proletariat had gone bust in the farm crash of the 1880s…and now found itself so deep in debt it was willing to take up with a fool like Bryan if he promised relief.

The roads choked up with dust when Bryan came to a cow town in the Midwest. There, he ranted and raved against all that the farm-folk detested, often sweating like a hot shower in the summer heat.

‘You shall not crucify mankind on a cross of gold’, he roared, to the approving hallelujahs of the yokels. The speech had a ring to it. It was a rhetorical flourish with great power. Remembered and repeated… it is still today probably more readily recognised than Lent.

But it was empty, nothing more than bombast and fraud. There is some liturgical disagreement about it, but Lent generally ends on Good Friday, when Jesus was crucified on a cross of wood. Since then, millions have been crucified financially by paper money (a wood product). No one has ever been nailed to a cross of gold.

What Bryan had against gold was the same thing that all paper money pushers – including modern central bankers – had had against it. Gold is uncooperative and stiff necked. You borrow it and you have to pay it back.

The lender expects to get his money back in real money. And since the supply of gold rarely grows faster than the supply of goods and services for which it is exchanged, prices remain more or less stable. Debtors are not let off the hook.

Prices rose from 1800 to 1913 (when America’s central bank was founded) by 176%, says Paul Moreno. New discoveries of gold in Alaska, South Africa and Australia had increased the money supply significantly. But that was nothing. In the 100 years since, when paper money was the stuff most often issued by the US Treasury, prices have gone up 448%.

Bryan got his way after all. Nobody in America suffers from an honest currency. Nobody pays back as much as he has borrowed. Even contracts with ‘CPI adjustment’ clauses fail to make the lender whole. The feds have seen to that too.

More to come.

Regards,
Bill Bonner
for The Daily Reckoning Australia 

From the Archives…

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Uranium: The Commodity Like Gold Ten Years Ago
6-02-13 – Byron King

How Australia-China Relations Are Caught in the Monetary Battle Space
5-02-13 – Dan Denning

The Great Rotation Into Stocks
4-02-13 – Dan Denning

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Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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