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UMI
THE EVOLUTION OF MONEY LAWS: A THEORY
IAN D. SHEEN
A DISSERTATION SUBMITTED TO THE FACULTY OF GRADUATE STUDIES IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY
GRADUATE PROGRAM IN LAW YORK UNIVERSITY, TORONTO, ONTARIO
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•+• Canada iv THE EVOLUTION OF MONEY LAWS: A THEORY
IAN D. SHEEN
ABSTRACT
This dissertation proposes a general theory on the evolution of monetary systems. This theory identifies five distinct monetary regimes for six distinct human living conditions. This theory demonstrates that the monetary regime of a particular country at particular times in history is determined by the human living condition in which the mass is living. The fundamental variables that determine the human living conditions are three: the availability and the quality of natural gifts, individual mastery of technology, and the existence of serious conflicts, internal or external. This theory is shown to be powerful enough to explain all the six monetary regimes throughout the US history. The proposed theory predicts that the US monetary system will move to the
Social Credit regime, unless a new kind of natural gifts is found in a near future. This dissertation also provides the principles of sound monetary system. However, the feasibility is not determined by human will, but by the human living condition. ACKNOWLEDGMENTS
I am grateful for the advice and guidance of Professors Benjamin Geva, G.
Thomas Johnson, and Mary Condon. I am especially grateful for Professor Geva for his untiring encouragements and unlimited trust on my ability to reach to the point of final enlightenment throughout the years of my groping. I am also deeply grateful for
Professor Condon's close reading of my drafts. Her challenges to my imprecise reasoning provided a big turning point. However, all the defects of this study are solely mine. I also gratefully acknowledge the financial support of York University. I would also like to express my appreciation for Mrs. Maureen Boyce, who always enthusiastically supported and helped me with lots of peculiar interlibrary loan requests. vi TABLE OF CONTENTS
Abstract iv Acknowledgments v List of Tables x List of Figures xi
1. Introduction 1 1.1 The Motivation and The Purpose 1 1.2 The Futility ofthe Just Monetary Regime 3 1.3 The Least Unjust and the Most Unjust Regimes 6 1.4 The Question of This Inquiry 10 1.5 A Few Authors on the Evolution of Money 12 1.5.1. Oswald Spengler 13 1.5.2. Bray Hammond 15 1.5.3. Martin van Creveld 17 1.5.4. Evans & Schmalensee 23 1.5.5. Niall Ferguson 26 1.6 The Proposed Theory 28 1.6.1. The Six Different Living Conditions 29 1.6.2. The Matching Monetary Regimes 32 1.6.3. The Three Protagonist Regimes 33 1.6.4. The Two Co-Star Regimes 35 1.6.5. Prima Facie Theory 39 1.7 The Methodology 41 1.8 The Implications of a Successful Testing 42 1.9 The Plan of This Study 44
2. Some Basics on Money and Banking 45 2.1 The Great Confusion 45 2.2 The Two Functions of Money 47 2.2.1. The Anchoring Function 48 2.2.2. The Discharging Function 50 2.2.3. MoneyinLaw 51 vii
2.3 The Relationship between Debt/Credit and Money 52 2.3.1. The Pros and Cons of Credit-based Society 53 2.3.2. The Fundamental Nature of Financial Crises (Panics) 54 2.4 The Obliteration of Money 63 2.5 Money Supply and Prices 65 2.6 The Fundamental Nature of Depression 68 2.7 The Cause of the Concentration of Wealth 72 2.8 The Role of Banks in the Concentration of Wealth 74 2.8.1. Various Theories 75 2.8.2. The True Evil of Modern Banking 77 2.9 TheMoneyLaws 85
3. Literature Review 87 3.1 Was Central Banking Spontaneous? 88 3.2 Is Legal Tender Legitimate? 90 3.2.1. Is Legal Tender Economically Wise? 90 3.2.2. Is Legal Tender Morally Right? 94 3.2.3. Is Legal Tender Legally Correct? 97 3.3 Which Monetary Regime is the Best? 98 3.3.1. Jerome: The Hamiltonian Regime 100 3.3.2. Hurst: The Federal Reserve System 109 3.3.3. Brown: The Spaulding (Chase-l)Regime 112
4. Checking on the Living Conditions 118 4.1 In the Eve of the Hamiltonian Regime 119 4.2 In the Eve of the Jacksonian Regime 122 4.3 In the Eve of the Chase-1 Regime 125 4.4 In the Eve oftheChase-2 Regime 131 4.5 In the Eve of the Federal Reserve-1 Regime 135 4.6 In the Eve of the Federal Reserve-2 Regime 143 4.7 Chapter Summary 146 viii
5. Checking on the Identity of Each Regime 147 5.1 The Hamiltonian Regime (1791-1836) 147 5.1.1. TheMoney 148 5.1.2. TheCause 153 5.1.3. The Controller 155 5.1.4. TheQuantity 163 5.2 The Jacksonian Regime (1836-1862) 167 5.2.1. TheMoney 169 5.2.2. TheCause 175 5.2.3. The Controller 179 5.2.4. TheQuantity 181 5.3 The Chase Regime (1862-1913) 184 5.3.1. TheMoney 186 5.3.2. TheCause 192 5.3.3. The Controller 195 5.3.4. TheQuantity 197 5.4 The Federal Reserve Regime (1913-Present) 203 5.4.1. TheMoney 204 5.4.2. TheCause 205 5.4.3. The Controller 211 5.4.4. TheQuantity 213 5.5 A Summary Table 216 5.6 Identification of Each Regime 217 5.7 The Synthesis of the Findings of Chapters 4 and 5 219
6. Checking on the Implicit Assumptions 220 6.1 The Axioms on the Nature of Human Existence 221 6.1.1. ADetritovore 222 6.1.2. The Prosthetic Animal 228 6.1.3. ASummary 234 6.2 The Axioms on Human Nature 235 6.2.1. The Reversionary Nature 237 6.2.2. The Xenophobic Nature 241 6.3 ASynthesis 247 6.4 Chapter Conclusion , 249 ix
7. Checking on the Future Regimes 251 7.1 The Social Credit Regime 253 7.1.1. The Social Credit Doctrine 254 7.1.2. The Personality of the Social Credit Doctrine 262 7.1.3. The Case of Alberta 264 7.1.4. Checking Forward 266 7.1.5. A Supporting Theory 272 7.2 The Higher Money Regime 276 7.2.1. The Legality of New Money 277 7.2.2. Checking Forward 278 7.2.3. A Supporting Theory 280
8. Conclusion 283 8.1 ASummary 283 8.2 Two Unhappy Implications 284 8.3 The Limitation of This Study 287
References 290
Glossary 305 X LIST OF TABLES
Table 2.1. Liabilities and Reserves of Various US Financial Sectors 58
Table 2.2. Comparison of the Crisis of 1839 with that of 1929 69
Table 2.3. The Differences between the Crisis of 1839 and that of 1929 70
Table5.1. The Key Features ofthe Four Major US Monetary Regimes 216
Table 5.2. The Observed Facts ofthe Six US Monetary Regimes 219
Table 6.1. Common Behavioural Tendencies 236 XI LIST OF FIGURES
Figure 1.1. The Characterization of the Six US Monetary Regimes 12
Figure 1.2. The Six Living Conditions 31
Figure 1.3. Living Conditions and the Corresponding Monetary Regimes 32
Figure 1.4. The Basic Pattern of Monetary Evolution 33
Figure 1.5. The Proposed Theory Applied to US History 39
Figure 2.1. The Explosion of Base Money in the US since September 2008 56
Figure2.2. Money and Credit 57
Figure2.3. Circulating Medium 59
Figure2.4. Current Credit and Non-Current Credit 60
Figure2.5. Currency 61
Figure 2.6. Public's Increased Wish Not to Use Credit and to Hoard Money 61
Figure 2.7. Precipitous Decline of Consumer Credit Outstanding in the US 62
Figure 2.8. Oil Prices from 1861 through 2008 74
Figure 2.9. Home Price-to-income Ratio in Canada 82
Figure 3.1. Different Assessments of the Four Major US Monetary Regimes 100
Figure 4.1. The Living Condition in the eve of the Hamiltonian Regime 121
Figure 4.2. The Living Condition in the eve of the Jacksonian Regime 124
Figure 4.3. The Living Condition in the eve of the Chase-1 Regime 130
Figure 4.4. The Living Condition in the eve of the Chase-2 Regime 135 xii
Figure 4.5. The Living Condition in the eve of the Federal Reserve-1 Regime .... 142
Figure 4.6. The Living Condition in the eve of the Federal Reserve-2 Regime .... 145
Figure 4.7. The Locus of the Six Living Conditions 146
Figure5.1. Federal Reserve and Upper Limit of Bank Money 165
Figure5.2. The US Population between 1890 and 2000 167
Figure 5.3. The Increase of World Population 168
Figure 5.4. The Relationship between Species and Prices 181
Figure5.5. The State of US Finances: 1792-1860 185
Figure5.6. The State of US Finances: 1792-1890 185
Figure 5.7. The Federal Deficits during the Civil War 193
Figure 5.8. Financing the Federal Spending during the Civil War 200
Figure 7.1. The A+B Theorem Explained by Demand-Supply Curve 259
Figure 7.2. The US Federal Spending and Debt Level 1792-2009 269
Figure 7.3. US Household Debt as % of GDP 269
Figure 7.4. Debt of US Businesses as % of GDP for 1974-2007 270
Figure 7.5. Change in Equity Capital by US Corporations 271
Figure 8.1. The Price of Consumables in England 285
Figure 8.2. Human Population in a Long View 286 1 1. INTRODUCTION
1.1. THE MOTIVATION AND THE PURPOSE
This dissertation is the final output of this writer's dozen year old groping for the
'just' monetary regime, which was prompted by the Asian Financial Crisis of 1997-1998.
However, after an active inquiry, which started about six years ago, it was learned that the just monetary regime is largely beyond human capability by the reason that will be provided in the next section.
Such being the case, what seems to be more significant is to know why the monetary system1 has evolved as it did. This knowledge seems to be more useful in our secular life in that it would tell us which monetary regime would be the most appropriate one for the given living conditions.
When we understand evolution in nature as a series of changes that occur to a species as a whole as a collective being, even though the act of natural selection occurs to individual members of the species, we may also call a series of changes that occur to a human aggregate's monetary system an evolution, even though the preference of individual members for or against certain monetary regimes may be all different. The assumptions here are (a) that the masses will choose such a monetary regime that suit them best, and (b) that the masses will eventually prevail.
1 A monetary system is a set of social agreements in practice on how money of account is to be defined and supplied amongst the members of the society. The definition of money of account will be given in a moment. 2 The purpose of this dissertation is to propose a theory that explains such evolutionary process of monetary system with three self-imposed qualifications:
First, it should be able to explain the phenomenon only with universal variables, which are found in any human aggregates, and without relying on peculiar variables that are found only in a particular human aggregate. This is a requirement to make the theory universally valid.
Second, it should be free from historic determinism, a fatal error that some historiographers, including Karl Marx, often commit. This is based on the recognition that "man is and will always continue to be essentially a wild and not a tame animal."2
The implications of this recognition are many, but suffice it to say here that neither the uniformity nor the specialization that many Utopians aspire to can be achieved in man, because selective breeding by a master breed is impossible for human beings, by the reasons that Darwin (1952) elaborated.
Third, it should be free from the so-called 'progressivism' or the 'idea of progress', which "holds out an infinite perspective of increasingly 'good times',"3 the idea that "has dominated Western thought since at least the eighteenth century."4
Progressivism cannot last indefinitely because of at least two reasons. One is that the nature is finite. The other is that progressivism has a seed in it that destroys the civilization, by the reasons that Hoggart (1957) elaborated.
2 Darwin (1952) at 85. 3 Hoggart (1957) at 166-67. 4 Berger, Berger & Kellner (1973) at 3-4. 3 1.2. THE FUTILITY OF THE JUST MONETARY REGIME
Although there are many different concepts of justice, when it comes to the issue of just money, anyone would agree that it should satisfy at least two conditions. First, the just money must be able to provide a stable "money of account."5 Second, the just money must not be subject to any arbitrary interferences, controls, or manipulations.
The first condition is another way of saying that funny money cannot be just money, which would be axiomatic. The second condition is coming from the wisdom from ages of experiences that human beings are such frail beings that power tends to corrupt them and absolute power corrupts them absolutely.
The trouble, however, is that there is no "solution" that satisfies these two conditions at the same time, because these two conditions are a pair of opposites. In order for the money to be able to serve as a stable money of account, its quantity had better be largely proportional to the production activities of the relevant monetary community; but since the production activities of a monetary community are affected by various factors such as the natural endowments, population, technology, social organization, creed, and others, the money that would best serve as a stable money of account had better be controlled by a central authority that decides the optimal quantity of money at any one time. However, this arrangement runs counter to the second
5 The "money of account" is some common measure that reduces debts, credits, and prices into a single unit. The money of account always exists even in the absence of money in circulation. Where money exists, the money of account does not necessarily match with the money in circulation. However way the unit is determined, once it is established, it is bound to have certain continuity, because there is no human society where each and every member's debts exactly balance against his/her credits every day with no exception. See Hawtrey (1930) at 2-3 for a more detailed exposition. condition, which precludes such arbitrary power. Thus, achieving just money is one of the so-called divergent problems, which cannot be solved by applying "ordinary logic" or by establishing a "correct formula."6
A divergent problem is a problem that can only be reconciled or transcended by higher forces so that the opposites cease to be opposites. For example, in the case of the
French Revolution, the pair of opposites - Liberty and Equality - was to be transcended by a higher force, Fraternity. For another example, in the case of education, the pair of opposites - students' Freedom to be creative and the Discipline to obey teachers - needs to be transcended by a higher force, i.e., teachers' Love and Compassion for the students.7
Likewise, satisfying the two conditions of achieving just money requires transcendence of those who have the power to control money to higher forces, say, a higher moral standard, higher prescience, and higher insight to human affairs. But the problem is that the act of transcendence is "a human quality beyond the reach of institutions"; and it can be achieved "only by individual persons mobilizing their own higher forces and faculties,"8 and by everyone's becoming better a person individually.
To repeat, it cannot be institutionalized.
Moreover, even the people of higher forces or of higher awareness cannot maintain such transcendence completely or consistently, because transcendence tends to
6 Schumacher (1977) at 123 & 126. 7 The examples are fromSchumache r (1977) at 122-24. 8 Schumacher (1977) at 124. make people perplexed, dismayed, hesitant, confused, baffled, stressed, and painful, as
Tyrrell observed.
According to Tyrrell, every human being is originally born Homo Faber, i.e., practical working man, who is completely adapted to the nature, who takes everything for granted, and who is immersed in the practical world. Thus, Homo Faber is whistling at his/her job in the absence of self-awareness, because Homo Faber has unquestioning frame of mind. "For Homo Faber, the mind, the muscles, the senses and the external world must be fused into a single world."9 Nothing causes Homo Faber hang back because his/her mind and body are acting in unison as Nature designed them to do. The reason why all the physical endeavours, such as exploration, mountain-climbing, sports of all kinds, rebellions, war, and political intrigues exercise a strong attraction is
"because, in it, the body and the mind work together in unison, as Nature fitted them to do."10
On the other hand, Home Sapiens, i.e., wise man, who is able to leave the adapted level of consciousness, at least partly, and to rise to higher stages of awareness, lives often far more strained and difficult life than those human beings who are immersed in the practical world. The truly Homo Sapiens is "distraught in the very same circumstances in which ordinary people feel most at home; for he is at work in a region in which adaptation hinders rather than helps him."11 In every upward step
9 Tyrrell (1951) at 81. 10 Mat 84. 11 Ibid. 6 towards higher awareness or transcendence, "Homo Sapiens is dogged by Homo Faber and his/her instincts."12
What this means to the issue of monetary management is that even if a human aggregate is successful in choosing truly wise men and put them in the helm of the monetary authority, their transcendence cannot be durable and consistent. Furthermore, there is no guarantee that the human aggregate will choose truly wise men for the job to begin with. In sum, it is futile to expect that the just monetary regime can be institutionalized.
1.3. THE LEAST UNJUST AND THE MOST UNJUST REGIMES
If the best is unreachable, we can always settle for the second best. What would be the second best monetary regime, then?
If we define justice as giving everyone what they deserve, or as allowing everyone to benefit/suffer from the consequences that naturally derive from their actions or choices, the least unjust monetary regime would be the one that has the least amount of negative externality13, i.e., the one that would cause the least amount of grudges to the least number of people.
12 Id. at 52. 13 Externality or spill-over effect arises when the people who are directly involved in a transaction do not either bear all the costs or reap all the benefits. The former situation is said to produce negative externality, while the latter situation is said to produce positive externality. More specifically, the monetary regime that gives people the biggest number of choices without imputing its costs to others would be the second best regime. Such a regime in practice is the Free Banking regime. In Free Banking, bankers conduct their banking business solely based upon their own credit without relying on the credit of public authorities or any other banks or banking associations, and when they become insolvent, they are to go through the same bankruptcy procedure as any other businessmen. Also in Free Banking, creditors to banks and depositors are to deal with the banks solely based on their own risk-taking responsibility without seeking for help from others when the banks they patronize go bankrupt.
When the monetary justice is viewed in this light, the most unjust monetary regime that has ever existed in human history would be the current, modern-day central banking regime, no matter how beneficial it would be to the entire economy as a whole.
This is because it has the greatest potential negative externality if it goes wrong. When the central banking regime goes wrong, it does not only affect the problem banks and their patrons, but also affect numerous third parties.
Indeed, one common feature of financial crises is that the default of a handful of large corporations and/or banks inflicts enormous misery on the vast majority of the innocent population, who have nothing to do with the default, by such forms as a sudden increase of debt burden, domino bankruptcies, and mass unemployment. In the meantime, the culprits of the crisis are usually bailed out with public funds because they are too big to fail. Whereas the general public is penalized doubly by dislocation or loss 8 of income and by increased burden of various taxes, the culprits are quite often intact, and moneyed people obtain once-in-a-lifetime chance of picking up precious assets in fire sale prices.14
Every nation that has suffered a financial crisis seems to go down the path of moral decay, mammonism, and alienation. This is because both the whole process of resolving the crisis and the final results are so unjust and egregiously unfair. That is why once it happens, no law and no creed tends to be able to restore the injured' lost feeling of unity and solidarity for the monetary community, to which they belong. It would not be too difficult to understand why. For one, the emergency situation justifies employers' abandonment of the implicit long-term commitment with their employees, who have been investing in the company-specific technology, which is largely worthless for any other potential employers. It is natural for the terminated employees to feel betrayed and uprooted. It is also not uncommon that a large number of families are dissolved upon financial crises due to the consequential pauperization. The most intimate and the most precious human relationships are destroyed in this process. It is only natural for the affected people to feel the feeling of guilt, shame, betrayal, and anger, while the might of money is painfully clear in the background. It may not be an exaggeration to say that financial crises are the epitome of the evils of the modern money economy.
14 This is why there are many people who believe that financial crises do not happen by accidents, but are manufactured by bankers and moneyed class. More details will follow in later chapters. 9 By one reason or another, increasingly more human relationships become
extremely short-term in the absence of trust. Money becomes the only device that can
fill the gap left off by the withdrawal of long-term commitment, moral obligation, or
trust. As a result, people cannot help worshiping money. No honour, no virtue, no justice and no love can rival money in sustaining one's life and getting things done.
Human relationship is infinitely fragmented based one's immediate use value of the
other. Eventually, a large part of the population is alienated from neighbours, from the
community, from the society, and even from self.
When one thinks it over, it would be plain where the problem lies. The
fundamental reason why innocent people get hurt is the 'national' money.
Overdeveloped economy or excessive economic interdependence may be another
important reason for the injury of innocent people; but this factor alone does not
produce a nation-wide panic. The value of a nation's money against other nations' is
determined by its population's collective solvency. The collective solvency is
determined primarily by its collective foreign exchange or precious metal reserves,
which are usually concentrated in the hands of its central bank. Thus, even a single firm
can trigger a crisis if its foreign debt obligation at any moment is large enough to
overwhelm the nation's reserves. When a nation finds itself in this situation, the whole
nation suffers the consequences of the collective bankruptcy, which arise from sharply
depreciated value of its currency, sudden recall of bank loans, political rationing of 10 credit, paralyzed business transactions amidst uncertainties, and the domino effect of defaults.
The national money can be compared to the Cao Cao's fleet, in which all the ships were bound from stern to stern with a single platform for reducing seasickness, in the Battle of Red Cliffs over the Yangtze River in 208, only to be set ablaze by enemy's fire ships. A financial crisis is the situation where the national money is set ablaze by the mishap of a few firms while everyone in the nation is bound by single money in a central banking scheme with a view to reduce the fluctuation of its external value, primarily for the benefit of large corporations. The troubling part is the implicit assumption behind the whole scheme: Small people are expendable for the benefit of the few big firms.
1.4. THE QUESTION OF THIS INQUIRY
If the current, modern day central banking regime is the most unjust monetary regime that the human history has ever produced, then how do the people of almost all the world over come to live under such an unjust regime? Is this a living proof that evil forces are stronger than the good? Does this imply that unjust people are fit for survival better than just ones? Or does this mean that human gene keeps degenerating so as to efface itself of its sense of righteousness? 11 Apparently, none of these seems to be true in that the historical pattern of developments of monetary system is neither consistent centralization nor consistent decentralization. The United States [Hereinafter the US] would be the case in point.
There have been six different monetary regimes throughout the US history.15 They are the Hamiltonian Regime (1791-1836), the Jacksonian (1836-1862), the first phase of the
Chase Regime (1862-1865), its second phase (1865-1913), the first phase of the Federal
Reserve Regime (1917-1951), and its second phase (1951 -present). If we label them H,
J, C(l), C(2), F(l), and F(2), respectively, and characterize them in terms of the degree of centralization and the nature of the power holder, their relative positions may look like Figure 1.1. The arrows indicate the transitions from one regime to another.
On the face of it, hardly any clear, consistent pattern of evolution is noticeable.
It looks like a random walk, moving up and down and rolling from side to side. It looks chaotic. There does not seem to be any systematic reasons behind the whole developments. However, must there not be some good reasons for the changes from one regime to another considering the importance of money in anyone's life? Would it not reflect some absolute necessities of doing so? This is the question of this inquiry.
15 It is often said that there have been four different monetary regimes throughout the history of the US: the Hamiltonian Regime (1791-1836); the Jacksonian (1836-1862); the Chase (1862-1913); and the Federal Reserve (1913-present). This seems to be the most popular classification scheme among monetary historians. See for example Jerome (1935), Nussbaum (1950), Hurst (1973), and Lovett (1992). To be more precise, however, there have been actually seven different regimes. This is because the Chase Regime developed in two distinct phases and the Federal Reserve Regime, in three. Disregarding the very brief, first phase of the Federal Reserve Regime, we can count six regimes. 12
Centralization 4 High
Medium
Low Power Holder Private Public
Figure 1.1. The Characterization of the Six US Monetary Regimes
1.5. A FEW AUTHORS ON THE EVOLUTION OF MONEY
It is beyond this writer whether there were scarcely any people who asked this question or there have been many people who actually tried to answer this question but did not succeed. What this writer can tell is that no theoretical work was found that answers this question in spite of more than five years of full-time search. All that could be found was a handful of authors who have given a sweeping thought about money in general while they were dealing with some other phenomena as their main subjects. 13 1.5.1. Oswald Spengler
For example, Oswald Spengler (1880-1936) dealt with the subject of money in
Chapters XX and XXI in his book, The Decline of the West, while he was discussing the fundamental nature of human civilization and its future course. His understanding of monetary phenomenon even before he reached his age of 40 is so penetrating that it should make younger students ashamed even today, more than 90 years after his writing.
He believed that money is fundamentally a product of civilization, where civilization is basically increasing urbanization along with increasing occupational specialization.
According to Spengler, "all higher economic life develops itself on and over a peasantry."16 Peasantry does not presuppose any basis but itself, and it makes up what he calls the "producing kind of economy." Every culture begins an economic life of settled form just like plants, and the life of the population is entirely that of peasant in the countryside. In this early stage there is no conception of money of account, the general measure. Even if there were gold or coins, they are not money, but goods, for peasants.
The conception of money always comes in only when middlemen, traders, or dealers come as an intervener in the world of barter. Whereas a peasant is producer primarily for his/her own consumption, a dealer is not. His/her goal is "exchange turnover." He/she acquires wares, not goods, from others, and passes them to still some
Spengler (1918 & 1922) at 401. 14 others, and realizes profit in the process. Here arises what Spengler calls the
"acquisitive kind of economy."
The decisive point at which the producing economy is transmuted into the
acquisitive economy is when the urban life becomes prevalent. This is because urban
workers are not producers in its true sense. They do not have inward linkage with goods.
Goods merely pass through their hands. Their livelihood is not coming from producing per se, but from passing goods from one form to another or from one location to another.
Thus, their frame of mind is nothing different from that of middlemen, traders, or
dealers. They live in the acquisitive economy, which makes use of the producing
economy "as an object - as a source of nourishment, tribute or plunder."17
In the acquisitive economy, goods become wares and then further become
abstract number, which constitutes the thinking in money. In the producing economy,
those things that modern-day people would call money are magnitude, value-token,
and/or material of the payment-medium. On the other hand, in the acquisitive economy,
money is a category of thought, mere function, and something that is mentally devised.
Spengler said, "Thinking in money generates money."18 Indeed, no more succinct
statement would point out the very essence of modern money than this.19
As to the fate of money, Spengler had the following to say:
11 Id. at 401. 18 Id. at 408. 19 Why this is so, hopefully, will be clear by the end of this dissertation. 15 If it [money] were anything tangible, then its existence would be forever - but, as it is a form of thought, it fades out as soon as it has thought its economic world to finality, and has no more material upon which to feed. It thrust into the life of the yeoman's countryside and set the earth moving; its thought transformed every sort of handicraft; today it presses victoriously upon industry to make the productive work of entrepreneur and engineer and labourer alike its spoil. [However,] The machine with its human retinue, the real queen of this century, is in danger of succumbing to a stronger power. Money, also, is beginning to lose its authority, and the last conflict is at hand in which Civilization receives its conclusive form - the conflict between money and blood. ...A power can be overthrown only by another power, not by a principle, and only one power that can confront money ... Money is [to be] overthrown and abolished by blood.20
1.5.2. Bray Hammond
The earliest author, as long as this writer knows of, who looked at the developments of the US monetary regimes in the eyes of evolution was Bray Hammond
(1886-1968). He served as Assistant Secretary of the Board of Governors of the Federal
Reserve System between 1944 and 1950, and published his famous book, Banks and
Politics in America: from the Revolution to the Civil War, in 1957 in his age of 71.
Although he experienced the Federal Reserve Regime as an informed insider, he dealt with only the first two US regimes with only a brief sketch on the third leading up to year 1865.
Spengler (1918 & 1922) at 413-14. The emphasis is Spengler's. The words in bracket are this writer's. 16 One prominent feature in his interpretation of the US monetary history is his unmistakably negative attitude toward the Jacksonian Regime as if it had been an anomaly. His condemnation of President Andrew Jackson and his democrats is disproportionately excessive, almost approaching the level of calumny.
It would be anyone's guess why he was of such an excessively negative opinion with respect to the Jacksonian Regime; but this writer's conjecture, as one of the students of history, is that it might have been the result of his frustration that the actual history did not fit his worldview. That is, presumably he was a student of the progressivism or the socio-Darwinism and was puzzled with the seemingly disorderly developments of the US monetary regimes, which could not be explained by the idea of progress, which asserts that human society is perpetually going forward and getting better. In the eyes of people of progressivism, presumably, banking ought to evolve from smaller, decentralized free banking regime to tightly knit national central banking regime. Thus, the transition from the centralized Hamiltonian Regime to decentralized
Jacksonian Regime must have been viewed by these people as an unacceptable retrogression. The only way for Hammond and his likeminded contemporaries to make the history conform to their world view was to portray President Jackson and his democrats as cunning, corrupt, and unscrupulous power players, who turned back the clock of the US history in their ruthless pursuit of personal gains.
This of course is this writer's unsubstantiated, pure conjecture on what might have gone through the mind of Hammond. Hammond might have rather dismissed 17 President Jackson's cause out of his patriotism toward the federal nation or out of his loyalty to the central bank he had served. Or there might have been more personal, familial vendetta between the Hammonds and one of the Jacksonian democrats. We cannot possibly know; but whatever the reason was, the point here is that the evolutionary path of the US monetary system cannot be explained by the idea of progress or the Darwinian evolutionism.
1.5.3. Martin van Creveld
The two main subjects of Martin van Creveld (1946-present) are war and the nation-State [Hereinafter the State], and he discusses money concomitantly. According to Van Creveld, the money as we know it today is the creation of States, and its evolution is also a reflection of the evolution of States. Thus, to hear him tell it, the fate of money will be concomitant with that of States, too.
According to Van Creveld, the concept of State was invented by Thomas Hobbes
(1588-1679) in his 1651 book, Leviathan. In this book, Hobbes, for the first time, defined a State as a corporation, i.e., an entity separate both from the person of the ruler or from the ruled people.
Then where did the State come from? It is from war. According to Van Creveld, long before the concept of the State as a corporation was established in the mid 17th century, the State system had already started to develop around 1300, when gunpowder was first brought to Europe from China. The introduction of gunpowder and canon 18 made the defence ever more expensive, and only the richest and most powerful rulers could afford the effective fortifications. As a matter of fact, even the richest and most powerful rulers could not afford war by the time the Treaties of Westphalia were signed in 1648,21 and war soon became the State's monopoly. In other words, Van Creveld effectively argues that wars, which have been getting ever more expensive, were the cause of the States.
The significance of State is that it eventually became the God of its people. How did this come about? According to Van Creveld, modern Europeans have become ever more ruthless, barbarous, and cruel over time. This is the result of the Enlightenment and socio-Darwinism. The Enlightenment, which started around 1680s, destroyed modern Europeans' belief in God, and inspired them with the idea of progress.
According to Van Creveld, the idea of progress is the mental attitude that takes the world as Europeans' "oyster."22 That is, the main content of the 'progress' is nothing but the Europeans' freedom to plunder and exploit the world's living beings as well as its raw materials. Thus, Europeans were divorced from both God and nature.
Its people being divorced from both God and nature, the State was capable of
"doing anything,"23 and the only entities capable of challenging the State were others of the same kind. The State's power has come to far outstrip that of the mightiest empires of old, thanks to its three characteristics: (a) its immortal collective personality, (b) the
21 Van Creveld (1999) at 160. 22 Van Creveld (1991) at 64. 23 Van Creveld (1999) at 183. The emphasis is Van Creveld's. 19 lack of the symbol of the ruling class, to which people can vent their anger and passion,
and (c) enormously expanded financial resources that the ruling class can tap.24
On top of this, the socio-Darwinism of the mid-19th century aggravated the
shamelessness of Europeans. They started to take human beings simply as a biological
organism like any other, subject to no rule but the law of the jungle. Under the
influence of the socio-Darwinism, "it became hard to see why one's fellow humans
should not be treated as animals."25 As a result, wars have become ever more brutal,
knowing no self-restraints of any kind. In this ever crueler world, the ruled, who used to be aloof from the ruler, willingly participated in the State, i.e., the incorporation between
rulers and the ruled,26 and lapsed into nationalism, which Van Creveld calls the 'Great
Transformation'.27
Then what do the State and wars have to do with the evolution of money? It
seems that Van Creveld's thought on this subject can be summarized into the following
six points:
(a) Initially, money was a constraint; it held previous polities in check28;
(b) The advancement of military technology, however, drove the price of wars ever higher, and this prompted the emergence of the State;29
Id. at 258. Van Creveld (1991) at 65. Van Creveld (1999) at 321. Id. at 336. Id. at 224. This point is derived by implication. It was never explicitly mentioned by Van Creveld. 20 (c) By the early 18th century, for the first time in history the State succeeded in creating and maintaining paper money only upon the guarantee of the government with little solid assets for its backing, thanks to the separation between the monarch's person and the State;30
(d) By the early 19th century, the States redefined the very meaning of money by the creation of a new term, "legal tender", upon which the States freed themselves from financial constraints;31
(e) The total wars of the early 20th century marked the culmination of a 200-year process by which the State seized its control over money, and "money had become simply so much paper;"32 and
(f) The States, having finally succeeded in conquering money, "allowed them to fight each other on a scale and with a ferocity never equalled before or since."33
In short, Van Creveld's thesis in regards to the evolution of money may be labelled as a 'vicious circle' theory. That is, wars fed the State, which gained more capacity to create money based on credit or faith, which fed the wars, which fed the
State again, which gained even more power on money creation, which fed the weapons of mass destruction, and so on. As for the evolution of the US monetary system, Van
Creveld explains its uneven progress toward the central banking with "particularly
30 Van Creveld (1999) at 229. 31 Id. at 224 & 231. 32 Mat 238 & 259. 33 Id. at 241. 21 tortuous" road toward the establishment of the federal monopoly on its money due its strong tradition of individualism.34
Since no vicious circle can continue forever, the mutually corroborating cycle between war, the State, and money cannot last forever, either. Then where would the decoupling take place? Just like the whole cycle started from war, the decoupling is going to occur from the war's end, too.
According to Van Creveld, from Hobbes' time up to the present, one of the most important functions of the States was to wage war against other States. The centralization of power came about for the need of the State to mobilize its resources and wage war.35 However, upon the introduction of nuclear weapons, an all-out war between States became out of the question, and status quo ante became the norm.36
This does not necessarily mean that wars do not occur any more, but wars between
States largely lost the power to justify centralization.
That is why the States turned its considerable energies inward, especially after the Second World War. They kept pushing centralization by taking over the spheres of civil society. As a bureaucracy is, by its nature, an entity that is living off people, its enlargement naturally means that "the majority of modern States are demanding more and more while offering less and less."37 Thus, individuals and private industry have been looking after themselves on a constantly increasing scale. The States are now even
id. at 231. Id. at 336. Id. at 337 & 352. 22 showing a sign of abandoning the responsibility for the provision of security, the most important function of the corporation known as the State. As a result, "The days when
... it [the State] could set itself up as a god on earth are clearly over."38
Then how does this fallen State affect the evolution of money? Its effect comes in two ways: (a) the fragmentation of the State, and (b) the bankruptcy of the State.
According to Van Creveld, the world will be much more fragmented and less democratic. The lives of ordinary people will be much less safe than today. Not only will terrorists and guerrillas continue to make their presence felt in many countries, but their resorting to chemical, biological, and even nuclear weapons is more likely.
Another World War is highly unlikely, but if it does happen, then the result will be a return to the Stone Age.39
Van Creveld also foresees bankruptcies of many States. He says,
It is not so much a question of the state deciding to integrate or retreat as the slow erosion of the quality of the benefits which it can and does provide. The obverse side of this coin is the feeling ... that when the time for delivery comes the State just does not keep its promises, that it pays, if at all, in false coin.40
In sum, Van Creveld appears to think that the Western monetary system has developed in four stages: (a) commodity money (1300-1700), (b) State guaranteed
Id. at 410. Id. at 414. 23 convertible banknotes (1700-1800), (c) inconvertible legal tender State token money
(1800-1945), and (d) finally to today's purely false money. He seems to envision a return to the first or second stage in many parts of the globe in the post-State world.
Even though Van Creveld's thesis cannot explain the seemingly chaotic developments of the US monetary system specifically, which it did not intend, its explanation of monetary evolution in the tripartite relationship between war, State, and money is very interesting. This comes from his consistent thesis that wars are human nature, which drives human history.
1.5.4. Evans & Schmalensee
David S. Evans and Richard Schmalensee's 2005 book, Paying with Plastic, is primarily about credit cards, covering from its operations to the specific players in the industry, the state of competition amongst them, and policy issues. Nevertheless, the first two chapters and Chapter 6, that is, about a little more than a quarter of the book, deal with the evolution of money and the economics of monetary system, which is worth a review in this inquiry.
According to Evans and Schmalensee, four major innovations have marked the history of money: (a) metallic coins, (b) cheques, (c) paper money, and (d) electronic money, whose typical manifestations are credit cards and debit cards.41 The first
™ld. at 418-19. 40 Id. at 417. 41 Evans & Schmalensee (2005) at 27. innovation, metallic coins, occurred more than 2,500 years ago, while the second innovation, cheques, occurred about 150 years ago, the third, paper money, about 100 years ago, and the fourth, credit cards, about 40 years ago.42 Each successive form of money replaced the previous one as the dominant method of payments of the times.
The thesis of Evans and Schmalensee is that the driving force of this changing landscape of the dominant forms of money is the cost involved in using a particular form of money. That is, if less costly way (or technology) of carrying out transactions is invented by any reason, such a method will eventually win out the more expensive money to use for the whole society. Evans and Schmalensee says,
Money, unlike air, is not a free good for society. It requires resources: producing physical money, processing checks, or keeping the books for electronic money. One way or another, people have always paid for the money they use. That is obvious for private payment systems such as checks and cards. It is less obvious, but nonetheless true, for government payment systems based on coin or paper ... History shows what it takes to have a successful medium of exchange. A large number of buyers and sellers must agree to use the same medium. To become a standard, the medium must be an efficient for of exchange - seashells worked better than oxen. Reliability is key as well - there may be episodes where, as Sir Thomas Gresham described, bad money drives good money out of circulation and into people's rainy-day stashes, but in the long run only reliable media of exchange survive.43
These are roughly based on general acceptance, not based on the firstappearance . Evans & Schmalensee (2005) at 26-27. 25 It seems like that this kind of reasoning of Evans and Schmalensee has the greatest appeal to modern people in explaining the evolution of monetary system, because it reflects the so-called productivity (or profit) maximization paradigm or cost- efficiency paradigm, which dominates the souls of the people living in today's capitalist market economy, or in the acquisitive economy in the terminology of Spengler. Indeed,
Evans and Schmalensee's thesis is one that is firmly based upon what Spengler said the dealer, trader, or middleman's perspective, in which what matters is only the exchange turnover and the profit margin realized in the exchange process. Cost-saving or profit is surely an important force that shapes modem social arrangements. There is no doubt about that. It can be a very valid explanation for, for example, the transition from check to electronic money, which allegedly saved people's time in checkout counters in the amount of $5.1 billion a year in the US when the time is translated in monetary terms at the average hourly wage.44
However, extending such reasoning even to the case of seashells and oxen or metallic money seems to be a little too much a stretch. As Spengler said, "All economic life is the expression of a soul-life," and it was only since the mid-18th century that the
Western economic thought stopped starting from the Soul and started to flow from materials, which would have made the earlier generations ashamed because business in itself was considered sinful, whether one obtains profit from it or not.45 It is simply
44 Id. at 94. 43 Spengler (1918 & 1922) at 399-401. Such sentiment was indeed still alive and well in Korea in this writer's boyhood in the 1960s. 26 wrong to assume that every human aggregate of all ages would have lived under the same modern urban Western mentality.
Nonetheless, Evans and Schmalensee's thesis supposedly should have no problem in explaining the evolution of the US monetary system, in that the starting point is the late-18th century, which falls within the domain of the modern frame of mind. But it does not seem to be able to do so, apparently because the thesis of Evans and
Schmalensee does not discern the dimension of power. When one closely examines
Figure 1.1, he/she will notice that the changes from one regime to another are fundamentally about power over money supply. The question of what kind of payment medium or technology is to be used seems to be only a secondary issue, which arises only after the appropriate regime is chosen. Thus, in spite of its many attractions, a fresh theory needs to be constructed to solve the problem of this inquiry.
1.5.5. Niall Ferguson
One of the most recent academic examinations of the evolution of 'money' is
The Ascent of Money: A Financial History of the World by Niall Ferguson (1964- present) of Harvard University. The word in the title, 'Ascent', is Ferguson's way of expressing 'evolution'. Thus, the title of the book, The Ascent of Money is equivalent to
The Evolution of Money.
However, The Ascent of Money is neither about evolution nor about money.
First, it is not about evolution. This is because Ferguson's 'evolution' means the 27 multiplication or proliferation of various financial products from simpler bonds to stocks, pension products, mortgage-backed securities, and to derivatives. This is like saying the proliferation of various life forms on earth in its early years as The Evolution of Earth.
In this case, a more precise expression should the Evolution of Plants and Animals on
Earth, not the Earth itself, even though we often say so figuratively.
Second, Ferguson's book is not about money. It is really about the emergence of various financial instruments such as bonds, stocks, insurance products, pension products, residential mortgages, etc. This confusion comes from his indiscreet use of the word, 'money'. Ferguson rejects the long-held notion that money is store of value.
It means that he rejects the notion that money must be the stable money of account as much as possible. He then defines money as any token expressing "the underlying credibility of a borrower's promise to repay," or simply, debt or credits.46 Ferguson does not stop there. He goes much further to include every kind of financial instruments in the domain of 'money'. He talks as if every kind of financial instruments from bonds to stocks, insurance and pension products, futures, options, and mortgages is money.
This is how he got this title, The Ascent of Money, whose real meaning is, say, The
Increasing Array of Financial Products. When one compares these two different titles, he/she would appreciate how wrong an impression the title conveys as to the real content of the book to the potential readers.
Ferguson (2008) at 29-30 & 52. 28 When one accepts that The Increasing Array of Financial Products is a more appropriate title for the content of the book, he/she would scarcely expect to find any theories in the book. He/she would rather expect to find many stories about the origins of a variety of financial products. Actually this is indeed the true nature of Ferguson's book, even though Ferguson equates the proliferation of financial products with the evolution of "financial species"47 or the evolution of "financial intermediation."48
The Ascent of Money is a good financial history book telling us many untold stories about the financialcircl e of the West. But it would have been a much better book if it did not pretend to be talking about evolution and/or about money. From its main content, i.e., various financial stories, to its title The Ascent of Money is so big a jump that it goes so dangerously close to misrepresentation.
Nevertheless, the point here is that The Ascent of Money does not offer any theory or frame of thought that might be borrowed and applied in this inquiry to explain the evolution of the US monetary system, contrary to what the title suggests.
1.6. THE PROPOSED THEORY
This study identifies, in theory, five different monetary regimes: (1) Free
Banking, (2) Higher Money, (3) Private Central Banking, (4) Public Central Banking, and (5) Social Credit.
47Ibid. 29 Here the word, 'Higher', means a higher-level polity than the incumbent one that currently exercises monetary power. For instance, a federal government's money is said to be higher, by definition, than those of state governments. Here the word 'Higher' does not connote 'better' at all. Its meaning is purely literal. It solely means a thing of a higher-level polity.
Each regime arises when a certain favourable environment is made out. Rather, it would be more precise to say, considering the general tendency of human history, that people are forced to adapt themselves to increasingly more totalitarian49 monetary regimes as their living conditions are increasingly getting worse.
1.6.1. The Six Different Living Conditions
This study envisages that human living conditions, from an individual's point of view, are determined by three variables: (a) natural gifts (or natural resources or natural endowments) (b) individual mastery of technology, and (c) peace.
When we think in terms of these three variables, the best living condition for an individual would be the one where he/she lives in peace while the nature provides plenty that he/she can exploit with the technology that is largely in his own ambit. This is the best living condition that one can possibly enjoy, because this condition best fits a wild animal, i.e., what humans are, as already pointed out in Section 1.1. In this situation an
48 Ferguson (2008) at 342. 49 Here in this inquiry the word 'totalitarian' means one's trying to reduce variety and choice, as defined by Lewis Mumford. See Mumford (1970) at 210. 30 individual can be a truly free man, who is not subservient to any other persons of power, because he/she does not need anything from the persons of power.50 In other words, he/she is self-reliant, even though he/she may not be self-sufficient.
On the other hand, the worst living condition would be the one where there are serious conflicts, internal or external, while the natural gifts for him/her to live on are very scarce, and even if he/she happens to obtain some, he/she cannot possibly exploit it with the technology he/she has. In this situation, an individual is utterly dependent on others in all the three dimensions. He/she needs others' help in his/her bodily safety, in his/her getting access to the scarce resources, and in his/her technological capability to exploit the resources. In such a situation, virtually no one, even the most powerful, can be said to be a free man in its true sense, because no human being is omnipotent, even though the degree of acceptance of such a life would be starkly different from person to person. In this situation, human beings must become a tame (or domesticated) animal to a very large extent under the name of 'Great Civilization' or any other justifications, against its nature.
Between these two extremes, there will be a continuum of living conditions, whose variety is infinite in theory. But this study chooses to distinguish four more distinct living conditions between them to make the total number of them six. They are as the following Figure 1.2 in the decreasing order of goodness.
Here 'power' is defined as the ability to provide whatever the other wants. Figure 1.2. The Six Living Conditions
Here the word, 'Nafts', is the abbreviation of 'Natural Gifts'. It will be used hereinafter throughout this inquiry in the place of 'natural gifts', 'natural resources', or
'natural endowments', etc. The phrase, 'Human-Scale', is the kind of technology that an average individual or a family can afford, master and employ in exploiting the Nafts of the times. When the Nafts are getting scarce, the question of whether the technology is of human-scale or not is usually irrelevant. This is because the existing human-scale technology usually cannot produce enough for the entire population. For example, when top soil is plentiful for the population, traditional, human-scale agriculture is good enough. However, when top soil becomes insufficient either by erosion or by increased population, more sophisticated agriculture is needed, which is beyond an average farmer's capacity. This is why the right-hand side of the first diamond yields only two different living conditions instead of four. 32 1.6.2. The Matching Monetary Regimes
This study proposes that each of the five monetary regimes that were mentioned at the beginning of this Section matches each of the six living conditions that have just been identified. This can be expressed as the following Figure 1.3.
Higher Money Social Credit Public Central Banking Private Central Banking
Higher Money Free Banking
Figure 1.3. Living Conditions and the Corresponding Monetary Regimes
The higher up a regime is located in this figure, the more centralized it is. Many people who believe in the progressivism tend to think that the progression from left to right (or from the least centralized monetary regime to the most centralized) as a sign of 33 advancement of civilization, and tend to consider it as a good thing. But again, in this study, no value judgment of such a kind is attached to such a progression. The proposed theory is simply stating, as a matter of fact, that such a progression is happening because it is the way for a human aggregate to adapt itself to the ever worsening living conditions.
1.6.3. The Three Protagonist Regimes
Even though the proposed theory identifies five different monetary regimes in
Figure 1.3, the three main regimes are Free Banking, Private Central Banking, and
Social Credit regimes for the living conditions 1,3, and 5, respectively. These are the protagonists, so to speak. Compared to these, the Higher Money and the Public Central
Banking regimes are co-stars, which cannot prevail for long. This is because whenever the emergency measures that are adopted during the times of insecurity, e.g., civil strife, civil wars, and wars with foreign powers, lose their legitimacy as soon as the emergency situation is over. Thus, the basic pattern of progression in monetary regimes is moving from 1 to 3, and then to 5, as the following Figure 1.4 depicts.
Private Free Banking 3>- Central Banking «======£>- Social Credit
Figure 1.4. The Basic Pattern of Monetary Evolution 34 From Free Banking to Private Central Banking:
Here the phrase, 'Private Central Banking' does not necessarily mean the central banking as we know it today. In this regime, banks are not necessarily subsumed under one single central bank. Rather, there may be several different banking networks, each of which exists in the form of an informal 'community of interest' under the umbrella of a banking institution, which plays the role of central bank, as was the case during the J.
P. Morgan's years.51
The Private Central Banking would prevail over the Free Banking when the living conditions get worse. One axiomatic truth that applies to all the lives on earth is that easier pickings are continuously being exhausted. Things are continuously getting scarcer, unless another bonanza is found. Thus, previously independent individuals need to be coordinated sooner or later, and the coordination gets increasingly intensified.
Coordination consists of specialization (in individual level), stratification (in group level), and centralization (in the level of entire polity). When these three phenomena take place in the monetary sphere, it is what we call 'central banking'.
From Private Central Banking to Social Credit;
A detailed discussion of the Social Credit regime will be provided in Chapter 7.
In this introductory chapter, let us merely understand it as a monetary system that has an
51 To see how J. P. Morgan played the function of central bank informally, see for example Bruner & Carr (2007) or Sinclair (1981). 35 additional channel through which the polity's credit is allocated and distributed directly to its members without going through the ordinary production system. In an ordinary market economy, money and credit flows through production system to reach individuals. That is, when we ignore the reflux flow, money and credit flows from the central bank, the money creator, to its member banks, then to producers, and then to employees and contractors. Thus, in an ordinary market economy, those who do not get jobs, i.e., the chances to participate in production activities, cannot obtain money and credit. On the other hand, in the Social Credit economy, money and credit flows to everyone.
Such being the basic concept of the Social Credit regime, why is the Social
Credit regime to arise when the Nafts are insufficient? It is because it is the most expedient way in maintaining the integrity of the polity without disturbing its base, and merely by partly correcting the injustice that is inherent in the central banking regime, which was discussed in Section 1.3.
1.6.4. The Two Co-Star Regimes
To repeat, the basic pattern of monetary evolution is from the Free Banking regime to the Private Central Banking, and to the Social Credit regime, as depicted in
Figure 1.4. However, this basic evolutionary pattern rarely occurs in real world. Rather, transitions are usually made via the two co-star regimes. That is, the transition from 1
(Free Banking) to 3 (Private Central Banking) is usually accomplished by first going 36 through 2 (Higher Money); and the transition from 3 (Private Central Banking) to 5
(Social Credit) is usually made out by first going through 4 (Public Central Banking) and/or through 6 (Higher Money). This is because such great transitions require certain momentums that can shake things up so that the necessary concessions from the vested interests can be obtained. Such momentums include wars, civil wars or some serious internal social conflicts, financial crises, and/or deadly competition with some foreign civilizations.
From Free Banking to Higher Money;
The biggest resistance in the transition from the Free Banking to the Private
Central Banking regime usually comes from individual bankers, because for them central banking means stratification of banks, loss of independence, and obeying higher authorities. Although such a humiliating transition can also happen theoretically in the process of free competition in the market, historically it seems to have been more associated with a war with foreign powers or a civil war. This is because it is easier to consolidate monetary power in the hand of a higher polity with its war-time emergency power. Throughout the US history this kind of actions took place twice, when the nation revolted against its colonial master, and when the Civil War was waged. The outcome was the Hamiltonian Regime and the first phase of the Chase Regime, respectively. However, the Higher Money regime in this particular transition cannot last long, because when the Nafts are plentiful and the members of the polity are self-reliant 37 thanks to the human-scale technology, its legitimacy is to be lost as soon as the
emergency situation is over. Thus, we may call it more specifically "Extemporary
Higher Money," to distinguish the Higher Money regime that appears in the far right-
hand side of Figure 1.3.
From Private Central Banking to Public Central Banking/Higher Money;
Banking, whether it is free banking or central banking, cannot but be private
affairs. This is because the essence of the business of banking (and the consequential
money creation) is giving loans. No matter how much governments try to intervene in
the process of giving loans, the effect is always limited unless governments install a
supervisor for each and every loan officer. Even in such a situation, the effect cannot be
total, as many public supervisors would be captured by their private counterparts. Even
if governments go so far as to replace all the loan officers with their own, the result is
more likely to be the privatization of public power, i.e., corruption. Or, it would be
"business" of banking no more. It would be something else.
Therefore, once the Private Central Banking regime is established, it is almost
impossible to dismantle it, until the entire banking network falls into the state of
bankruptcy. Even in such a situation, the system does not get easily switched into the
Social Credit regime, because there are less radical alternatives to be tested before jumping into the more radical. They are the Public Central Banking regime and/or the
Higher Money regime. 38 The Public Central Banking regime is one that has a commanding superstructure on top of the Private Central Banking regime. This usually occurs when the government bails out the private banks with its untapped credit in return for the government's regulatory power over the banks. The Higher Money regime is one that several Private
Central Banking regimes bring themselves together under one unified central bank for mutual, economic and political, benefits.
In the US history, the Public Central Banking was practiced for about 34 years between 1917 and 1951. It all began from the 'Panic of 1907'. In this financial crisis many of the wealthiest people, including J. P. Morgan, were pushed to the verge of collective bankruptcy.52 The outcome was the Federal Reserve Regime of 1913, in which the government acquired the rightt o supervise private banks through the government superstructure over them, i.e., the Federal Reserve Board, in return for the government's guarantee on banks' liabilities.
However, the public power had not been exercised until the US entry into the
First World War in 1917. Since then, the Federal Reserve System was subordinate to the Treasury, primarily because of the wartime conditions. Such a state of affairs continued until the Federal Reserve was liberated from the Treasury upon the 'Treasury-
Federal Reserve Accord' of March 3,1951.
For the significance of the Panic of 1907, see for example Bruner & Carr (2007). 53 For the relationship between the US government and the Federal Reserve System, see Stein (1996) from the beginning to 280, especially 244-77. 39 1.6.5. Prima Facie Theory
When the historical locus of the US monetary regimes was first traced on a two- dimensional plane in Figure 1.1 in Section 1.4, it looked chaotic. There did not seem to be any pattern of evolution. But now the proposed theory seems to be & prima facie theory that can explain them as an orderly process. It can be expressed as Figure 1.5:
Higher Money Social Credit Public Central Banking Private Central Banking Extemporary Higher Money Free Banking
Figure 1.5. The Proposed Theory Applied to US History 40 First, the proposed theory predicts that the Extemporary Higher Money regime
would be installed when peace is broken while the Nafts are plentiful and the technology
is of Human-Scale. Indeed, the Hamiltonian Regime was adopted during the insecure,
early years of the US. Again, here the word "Extemporary" is only for giving it a name.
In substance, the Extemporary Higher Money is the same as the Higher Money.
Second, the proposed theory predicts that the Free Banking regime would be
restored as soon as peace returns ceteris paribus. Indeed it did. The Jacksonian Regime
was exactly that.
Third, the proposed theory predicts that Free Banking regime would be replaced
by Extemporary Higher Money when peace is broken. Indeed, upon the Civil War, the
Free Banking of the Jacksonian period was abandoned and the federal government
seized the monetary power. It was the first phase of the Chase Regime.
Fourth, the proposed theory further predicts that the Extemporary Higher Money
regime would yield to the Private Central Banking regime when peace returns under the
super-Human-Scale technology. Indeed the Chase Regime soon moved to its second
phase, a Private Central Banking regime, amidst the industrialization of the US.
Fifth, the proposed theory predicts that the Private Central Banking regime
would be replaced, when peace is disturbed, by the Public Central Banking ceteris paribus. Indeed, upon the Progressive Movement from within and the two World Wars
from without, the Chase Regime was replaced by the first phase of the Federal Reserve
Regime, a Public Central Banking regime. 41 Sixth, the proposed theory further predicts that the Private Central Banking regime would be restored when peace returns ceteris paribus. Indeed, the Federal
Reserve Regime that had been subservient to the Treasury became independent in the early 1950s, when the wartime conditions were over.
1.7. THE METHODOLOGY
As was shown in the previous Section, the proposed theory is a, prima facie theory that explains the seemingly chaotic historical events in a consistent and a self- contained manner. Now what needs to be done is to make the prima facie theory a verifiably valid theory; and in order to achieve this end, two things must be shown with the data available, i.e., the sample case of the US.
One is that the actual living conditions of the times in the US history were indeed the same as the supposed living conditions from which each and every monetary regime is said to arise by the theory. This will be achieved by examining the US history of the relevant periods.
The other is that the H, J, C(l), C(2), F(l), and F(2) were indeed the
Extemporary Higher Money, the Free Banking, the Extemporary Higher Money, the
Private Central Banking, the Public Central Banking, and the Private Central Banking regimes, respectively. This will be carried out by looking at the US money laws.54
54 The definition of money laws' will be given in the next chapter. 42 Thus, the methodology of this inquiry consists of two tests. One is to examine the mass's living conditions in the relevant periods by relying on the stories of historians and see whether they match the supposed living conditions. The other is to examine the
US money laws and see whether the money law of each of the historical monetary regime was indeed the monetary regime that the theory identifies.
1.8. THE IMPLICATIONS OF A SUCCESSFUL TESTING
Any good, plausible theory must be able to explain each and every observation, that is, in our case, all the six monetary regimes in the US history. Therefore, none of the theories or the frames of thoughts that were introduced in Section 1.5, i.e., the
Civilization theory of Oswald Spengler, the Political Anomaly theory of Bray Hammond, the War and State theory of Martin van Creveld, the Cost-Saving theory of Evans &
Schmalensee, and the Propagation of Financial Species theory of Niall Ferguson, can be a theory for the evolution of monetary system. This is because, again, they cannot explain all the monetary regimes of the past.
As any student of science would admit, however, a successful testing of the two points mentioned in the previous section does not necessarily prove that the proposed theory is the right theory. It only proves that it is merely one of many potentially good, plausible theories. 43 The corollary of this proposition is that even if another theory that employs a different set of variables can explain all the past US monetary regimes, the existence of such a theory does not necessarily disprove the theory that this study is proposing. In other words, one cannot dismiss the proposed theory as invalid by the reason that it did not take some other variables, which he/she believes to be relevant, into consideration.
For example, one cannot dismiss this theory by saying that this theory did not consider, for example, religion or the changed average span of human life.
Constructing a theory is fundamentally an act of simplification and stratification of data in terms of the relevance and importance, because we cannot possible deal with all the raw data that are there. Thus, every theory is supposed to be an endogenously complete system, or a self-contained construction. As long as the construction is complete by itself, its validity cannot be challenged merely by some unconsidered elements. Admittedly, if a theory cannot explain all the observations to be explained, then and only then the theorist would consider introducing further variables into his/her construction so that the unexplained part can be accommodated. But it is the case when the theory is incomplete.
One way to reject an apparently complete and self-contained theory is to spot some implicit assumptions underneath the theory that are unrealistic or contradictory with one another. Another way to reject it is to show that the theory could not explain the events that happened subsequently even though all the premises of the theory held. 44 1.9. THE PLAN OF THIS STUDY
As stated in Section 1.7, two tests need to be performed to make this study complete. The first test, i.e., checking on the living conditions of the masses of the US, will be done in Chapter 4. The second test, i.e., checking on the identity of the six historical US monetary regimes, will be done in Chapter 5.
As stated in Section 1.8, any apparently complete theory can fail in two ways: (a) by its defective assumptions, and/or (b) by its inability to predict the future course of events correctly. Against these potential problems, Chapter 6 will check on the plausibility or the reasonableness of the implicit assumptions underlying the proposed theory; and Chapter 7 will check on the plausibility or the reasonableness of the future course of the US monetary system that the proposed theory predicts: the Social Credit and/or the Higher Money regimes.
But before these four sets of checks are launched, some basic terms and concepts of money and banking will be explained in Chapter 2. And in Chapter 3, relevant literature will be reviewed. Finally in Chapter 8, the entire inquiry will be summarized and a caution for readers about the limitation of this study will be offered. 45 2. SOME BASICS ON MONEY AND BANKING
Some understandings on money and banking are required to continue this inquiry. This chapter provides such knowledge along with the definitions of some basic terms such as money, credit, money supply, and money law.
2.1. THE GREAT CONFUSION
Even though there is virtually no one who is not familiar with money, the concept of money seems to be incredibly difficult to grasp even for learned people, as can be noticed from many scholarly publications still struggling with the question of what money is.55 This difficulty seems to be especially acute among the students of economics.
The confusion appears to be partly due to their disuse of the word. As an unused organ atrophies, unused word atrophies. That is, in the circle of economists, whenever there is a need to talk about money and credit, the word 'liquidity'56 seems to be used instead. This is probably because their predominant concern is the general price level of an economy, which is more linked with liquidity than the quantum of money alone or that of credit alone. But then since the colloquial expression for liquidity is simply
'money', the meaning of money became liquidity. Furthermore, since liquidity consists
55 See for example Kocherlakota (1998), Simthin (2000), and Kahn, McAndrews & Roberds (2005). 46 of mostly credit nowadays, many people seem to believe that liquidity is nothing but credit (or debt, depending upon the point of view). As a result, in the minds of many economists, the equation, 'money = credit (= debt) = liquidity', seems to have been quite firmly established. Thus, whenever those people whose training was from the economics happen to come across with a situation where money is clearly distinguished from credit, some of them even doubt their ears that they are hearing something that can only be spoken in the Stone Age. Such a distinction upsets their unconsciously held belief that money is an abstract entity and nothing but credit.57
For instance, some economists go as far as to refer to Henry Thornton's 1802 book to erroneously argue that it was settled more than 200 years ago that money is nothing but "paper credit." This is erroneous because in Thornton's time, 'money' meant only gold and silver coins, and he knew it. That is why he used such an expression, "paper 'credit'" to begin with. All the payment media made of paper were paper 'credit', and not paper 'money'. It is like we actually ought to call 'electronic money' 'electronic credit' to be precise. Also in Thornton's time, when one said 'credit', it meant either merchant's credit in the form of book-debt or banks' credit in the form of banknotes. Shapeless credits such as bank deposits or credit cards were either in their infancy or non-existent at that time. Thus, the prefix 'paper' in the phrase 'paper credit' was to distinguish banks' credit frommerchants ' credit.
'Liquidity' is a word that refers to the combined sum of money and credit. See for example the economists' arguments compiled by John Simthin as recently as 2000. 47 In sum, in Thornton's phrase 'paper credit', the first word 'paper' was a delimiter to pick bankers out of general merchants, and the second word 'credit' was a delimiter to pick banknotes from precious coins. The point is that, contrary to the interpretation of some economists mentioned above, Thornton never intended with his phrase, 'paper credit', to express that 'money' is nothing but 'paper credit' in substance.
Indeed, the whole concept of money and credit is in a great mess nowadays.
When we think about it, we realize that the confusion is not merely because of disuse of the words. More fundamentally it can be attributed to the death of money or, to be more precise, the obliteration of money. Oswald Spengler (1880-1936) sensed this almost a hundred years ago when he said that money had become merely a category of thought, something that is mentally devised, and something that is generated by mere thinking in money. Martin van Creveld (1946-present) knew this, too, when he said that money had become simply so much paper.58
2.2. THE TWO FUNCTIONS OF MONEY
Money ought never to be "mere thought", or "simply so much paper", or credit embodied in paper, or an abstract entity. Even if that may be the fact and reality nowadays, normatively speaking, it ought not. This is because money is supposed to serve two important functions: anchoring function and discharging function.
See Subsections 1.5.1 and 1.5.3. 48 2.2.1. The Anchoring Function
The first important function of money is to uphold the standard of value by being an anchor for credit. When a market economy is operated without money,59 As Hawtrey pointed out, the economy is bound to suffer runaway inflation or runaway deflation.60
This is because, once the purchasing power in the hands of people is increased by an injection of credit, the sale of all kinds of goods increase, which stimulates the demand for more credit. Since the demand for more credit is credibly based on increased sales, credit is further supplied, which would prompt another round of sales increase, followed by further demand for more credit. This spiral, which we call inflation, goes on without stopping, when there is no money.
However, we know from our experiences, that this process does not go on forever. At a certain point, it stops and quite often the exactly opposite process starts.
That is, one day people realize that the whole process cannot be sustained as it is based on monetary illusion. Upon this realization, the previously buoyant mood turned gloomy, and people stop buying. Sales go down, the demand for credit decreases, and accordingly the supply of credit decreases. Decreased credit reduces the purchasing power in the hands of people and consequently further depresses sales. This time the society gets into the spiral of deflation. But again, this spiral does not last forever, either, because at a certain point, people realize that things seem to too cheap to refuse to buy.
Our current world has almost arrived at such money-less world. Hawtrey (1930) at 13-15. 49 These pendulum-like swings between inflation and deflation tell us that there is a force that maintains the prices in equilibrium. Then what is the source of such force? It is stable money, or a stable money of account, to be more precise. In the world where stable money or a stable money of account does not exist, it would never occur to people that things are unsustainably getting more expensive or cheaper, because every day their sense of the standard of value would be changed and be completely accustomed to it.
But of course money-less market economy itself is a fantasy. The reason is not only because human beings are not so much forgetful, but also because they cannot think money entirely in abstract terms. As a born Homo Faber, man keeps translating money in terms of some solid 'things' such as food, land, gold, etc. When the relationship between money and these solid things is getting ever more strained, what are eventually abandoned are not the solid things, but money, because man must eat.
Nevertheless, people's sense of money seems to be greatly affected by how it is defined. The more tightly defined in terms of solid things money is, the keener people' sense of equilibrium would be. Money defined in 'things' is an anchor that keeps people from being carried away with credit. To better serve the function of an anchor, therefore, money had better a 'thing', whose supply is limited so that its value can be stable. The more stable money is, the more quickly people would react to restore equilibrium by adjusting the amount of credit. On the other hand, when money is purely an abstract entity, its value cannot be definite, and people's sense of equilibrium shall be very weak. When people's sense of equilibrium is weak, prices can spiral up (or down) 50 without any restraints for a very long time by the operation of incessant credit expansion
(or incessant credit contraction) until people realize it, upon which the pain of correction could be catastrophic. The pain would have been scarcely felt if the runaway credit problem had been corrected in its incipience.
2.2.2. The Discharging Function
The other important function of money is to make it easier to convert a debt (or a credit) into a promise to pay, and thereby facilitate people's making contracts with one another and/or prevent any potential disputes from arising. Again, as Hawtrey pointed out, a debt (or a credit) is not a promise to pay, contrary to the unshakably entrenched maxim saying, "A debt (a credit) is a promise to pay money."
According to Hawtrey, "A debt is fundamentally an obligation to give not money but wealth."61 Even though this may sound perplexing to modern ears, we need to bring ourselves back to the period when money did not exist. Only then we can see for what purpose money was brought about.
We must realize that there is no human society where there are no debts, even though there are many societies that have no money. Upon this realization, we can understand that a debt is the debtor's obligation to give 'some wealth' back to the creditor, which is equivalent to what the debtor received from the creditor. In the absence of money, the only way for the debtor to give that 'some wealth' to the creditor
61 Hawtrey (1930) at 15. The emphasis is Hawtrey's. 51 is to earn and procure a credit and set it off against the debt. This obviously raises the usual problem of barter: it is hard to match one quantum with another precisely. Thus, the transaction tends to prolong going back and forth between the two without a definite closing. Out of this difficulty of closing transactions, people started to want something that can legally bring the transaction to a close. That something was money.
2.2.3. Money in Law
Even though most lawyers of today do not seem to know these two fundamental functions of money by heart, the relevant law still maintains the wisdom. This is probably not only because of the relatively conservative nature of lawyers compared to economists, but also because lawyers tend to think in terms of individuals whereas economists tend to think more in terms of human aggregates.
In law, 'money' means something that satisfies two conditions. The first condition is embodiment. The second condition is finality.
Firstly, money must be a chattel, i.e., a tangible 'thing'.62 Usually it takes the form of coins and/or bills made of paper or nylon. Thus, for example, the so-called
'electronic money' ought to be called 'electronic credit'. The so-called "my money in the bank" is not money, either. It is also credit. When someone deposits money in a bank, he/she is actually buying the right to use the bank's credit. From the depositor's point of view, the bank is a debtor, and not a trustee.
62Geva(1987)atll6. 52 Secondly, money is, by the operation of law, the absolute payment and satisfaction of a debt. Money brings a transaction to a closing. Such quality is called
'finality'. That is, money is whatever that something is which a debtor can compel a creditor to accept in payment of debt which has been incurred. Since the finality is affirmed by the operation of law, usually the relevant polity's law defines which payment media are money. But money does not need to be issued directly by the polity.
What is necessary is only the law's acknowledgement of the medium as money.
The word 'money' hereinafter will denote only this legal meaning of money.
That is, hereinafter, 'money' only means solid money and nothing else.
2.3. THE RETATIONSHIP BETWEEN DEBT/CREDIT AND MONEY
Once money is created and accepted by the population, a debt (credit) is reduced to "a promise to pay money," by the operation of law. But of course a debt (credit) can be continued to be set off by a countervailing debt (credit), which had been the normal way of paying off from time immemorial. Thus, a debt needs not always be paid in money. As a matter fact, in today's developed countries, debts are rarely paid in money.
Therefore, as long as people feel comfortable for being paid in credit, there does not need to be any particular proportion or ratio that is to be maintained between money and debt (credit). The appropriate ratio is totally up to the collective choice of the people. 53 2.3.1. The Pros and Cons of Credit-based Society
As Evans & Schmalensee pointed out, money is not free. It costs resources.
People have to pay for the solid materials that are to be used as money. It means that the more credit people use for their transactions, the more resources they can allocate for their wellbeing, and therefore, the more prosperous they tend to become.
There is a downside of that prosperity, however. The trouble of a credit-based society is that once the people's confidence on the credit system is shaken, it cannot avoid sudden and drastic impoverishment. There are at least three reasons for this.
The first reason is that the people find themselves suddenly in need of much greater amount of money than before to fill the gap of the collapsed credit. But, as already said, procuring money takes resources. If a society, which used to use, say, less costly online transfer for all the payment needs, lose faith in that system and decides to use, say, gold coins instead, the people have to divert so much resources from, say, heating their schools (in case their resources were natural gas), frombuildin g their houses (in case their resources were lumber), and/or from feeding their family (in case their resources were grain) to the importation or mining of gold. As a result, the society as a whole is to become so much poorer.64
The second reason is that people in a credit-based society are usually very interdependent with one another. They also tend to have only a minimum reserve. Thus,
63 See Subsection 1.5.4. 64 In mercantilist Europe, people believed that the more monetary gold the nation has, the richer it is. The person who made people aware of its fallacy was Adam Smith. 54 if one defaults, his/her creditors) is (are) highly likely to default on his/her (their) debts, which would cause his/her (their) creditors to default, and so on like a domino. This is called the 'systemic risk'. As a result, the society tends to get mired in a paralysis, or a prolonged period of unemployment. Unemployment means idleness, lack of productive activities, or waste of vital energy, which makes the society so much poorer.
The third reason for the impoverishment is that, unlike money, a credit (debt) is precarious. That is, since a debt is a promise to pay money, as being a promise, a credit is only the right to demand a particular payment or a particular action from a particular person, who might die or become bankrupt. Hence credit is both particular and precarious.65 It means that when something goes wrong with a debt (credit), creditors must take legal actions against the debtors to obtain remedies. Such legal actions consume time and other precious resources, which would otherwise have been used for productive purposes. As a result, the society as a whole is to become so much poorer, even though individuals working in the legal procedures may get enriched by the flurry of suits and arbitration works.
2.3.2. The Fundamental Nature of Financial Crises (Panics)
Such an event when people's confidence in their credit system is shaken is called a financial crisis. People used to call it unequivocally financial 'panic'. By the
New Deal years, however, it was largely replaced by the phrase, financial 'crisis', in the
65 MacLeod (1893) at 81. 55 concerted effort of political, economic, and mass-media leaders to reduce the graveness that the expression connotes.66 Nowadays, 'financial panic', has almost become a taboo phrase even in academic circles. Nonetheless, 'financial panic' seems to be a more precise name for the phenomenon than 'financial crisis', in that it correctly conveys the message that the phenomenon arises from internal panic rather than external threat that
'crisis' seems to imply. The phrase 'financial panic' tends to point the finger at ourselves, whereas the phrase 'financial crisis' tends to point the finger at some aliens or foreigners. While 'financial panic' is a more honest phrase, 'financial crisis' is a rather cowardly expression.
The point is that, even though the causes of financial panics are usually explained by a variety of political, social, technological, and/or demographic factors, the fundamental nature of financial panics is dramatic reduction of people's preference of using (or accepting) credits for transactions. That is, when people start to doubt the solvency of their counterparties and/or the solvency of banks, they start to refuse to accept the counterparties' credit instruments and start to withdraw their money from banks and hoard money. The effect of this public's increased wish to hold money instead of credit is the reduction of currency.67 The result is deflation. Once deflation sets in, people tend to hoard money and wait in order to profit from further drop in
This writer learned of this fact from one of the history books he read, which he could not recall which it was. 67 The definition of 'currency' is forthcoming shortly. 56 prices. All of a sudden, asset prices drop precipitously, and the number of bankruptcy soars.
This is exactly what happened during the recent financial crisis, which started in
2008. And this is the very reason why the US economy suffered deflation in spite of its central bank's all-out effort to increase the money in the economy to more than twice as before in a matter of months, as can be seen in the following Figure 2.1. The increased portion of money was probably hoarded.
i,W©r
1,600
1,400
1,200
1,000
woh S* / 600 ^ y 400 h ,y 200
1950 1960 1970 1980 1990 2000 2010
Figure 2.1 The Explosion of Base-Money068 in the US since September 2008 - Doyle (2009)
68 'Base-Money' is the sum of paper money, coins, and commercial banks' reserves with the central bank (or with the Federal Reserve Banks in the case of the US). In this inquiry, base-money is simply called 'money'. 57 This point may be better explained by using graphs. First, the following Figure
2.2 distinguishes between money and credit. This graph clearly shows that money and credit are two distinct, mutually exclusive entities.
Money Credit
Figure 2.2. Money and Credit
This graph is given only for illustration. It does not reflect the reality. In reality, the proportion of 'money' in the graph is so small that it can hardly be demarcated on a graph. For example, as can be noticed in the following Table 2.1, the portion of money in the total sum of money and credit in the US as of the end of June 2008 is between only a little more than one thousandth (80+54,498) and less than one hundredth
( (80+423)-54,498).69
The reason why the portion of money is given here in a ranger rather than an exact figure is that it is not clear what the item, 'checkable deposits and currency', includes in it. 58 Table 2.1. Liabilities and Reserves of Various Financial Sectors (in Billion $)70
Checkable Total Liabilities Vault Cash & Deposits and Treasury Reserves at Fed Currency Securities US-Chartered Com. Banks 9,131 76 0 50 Foreign Bank Offices 1,162 1 0 37 Bank Holding Companies 966 0 0 12 Savings Institutions 1,761 3 22 5
Credit Unions 734 0 49 11
Bank Total 13,754 80 71 115
GSEs 3,280 0 58 16
Issuers of ABS 4,365 0 0 82
Mutual Funds 7,395 0 0 177 Money Market Mutual Funds 3,343 0 2 267 Private Pension Funds 5,712 0 12 127 Federal, State, Local Pension 4,081 0 16 266
Life Insurance 4,614 0 69 69 Property- Casualty Ins. 892 0 41 55
Security Dealers 2,875 0 110 -84
Funding Corp. 2,269 0 0 0 Finance Companies 1,918 0 44 0
Non-Bank Total 40,744 0 352 975
Grand Total 54,498 80 423 1,090
This table is made based on the data extracted from Federal Reserve (2008) at 70-81. 59 Second, the following Figure 2.3 shows the money and credit that are activated from those that that are not activated. The activated part is called 'Circulating Medium', which is capable of achieving a sale. The word 'circulation' came from the habit of early economists, who called the total sum of the sales circulation. The term
71 'Circulating Medium' seems to have come into use only in the 1790s. It is to be noticed that money and credit represent only latent power, and not actual power.
Money lying locked up in a box or credit unused does not exert any effects on economic activities and/or prices until it is actually used.
Circulating Medium
Unused Money and Credit
Figure 2.3. Circulating Medium
Third, the following Figure 2.4 shows that circulating medium consists of three components: money in circulation, current credit, and non-current credit. Here the term
'Current' describes the attribute of a class of property whose possession cannot be
MacLeod (1893) at 97-100. 60 separated from the title. That is, for a current thing, the so-called Nemo dot rule does not apply; Once this class of property has been acquired by a purchaser honestly in the way of business, the property in it passes by delivery, and the original owner, even if he parted with it by fraud, cannot claim his property in it, or his right to recover against the purchaser.
Money in Current Credit Non-Current Credit (Paper Currency, Circulation (Cheque, Book Debts, Debit Cards, Credit Cards) Verbal Debts)
Unused Money and Credit
Figure 2.4. Current Credit and Non-Current Credit
Fourth, the following Figure 2.5 shows that the money in circulation and the current credit make up currency. The term 'Currency' means something that embodies the attribute of 'current'. Currency, therefore, must take a form in a transferable piece of paper or any other material. For example, simple debts of all sorts, such as deposits, book debts of traders, and private verbal debts between persons, are not currency, because they cannot be lost, mislaid, stolen, and passed away in commerce by manual 61 delivery. On the other hand, money, postage stamps, and all written securities for money made transferable by delivery are currency. 72
Non-Current Credit Currency (Cheque, Book Debts, Verbal Debts)
Unused Money and Credit
Figure 2.5. Currency
Money in Circulation Current Credit Non-Current Credit
Unused Money and Credit
Figure 2.6. Public's Increased Wish Not to Use Credit and to Hoard Money
MacLeod (1893) at 870. 62 Finally, the Figure 2.6 above shows public's increased preference for less credit use and/or for hoarding money. As a consequence, the amount of currency - the shaded part - is reduced. Figures 2.5 and 2.6 are drawn in such a way to dramatize the change, and this is the fundamental nature of financial panics.
We can peek at this phenomenon in the following Figure 2.7, which shows the steep decline of the use of consumer credit in the US. From this graph, we can infer the magnitude of the public's wish not to use credit from this graph.
V) 225 -i c o
150 H c c c (0
3 o
01
c o o T T 1 1— , 1 • 1 f- 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Figure 2.7. Precipitous Decline of Consumer Credit Outstanding in the US 63 2.4. THE OBLITERATION OF MONEY
In the beginning of Section 2.2, it was said that money ought not to be "mere thought", credit embodied in paper, or an abstract entity, even if the fact and reality may tell us a different story. As a matter of fact, however, the distinction between money and credit is not that clear-cut in practice.
For instance, formerly, only commodity money was considered as money; and all the paper forms of money as we know them today were mere instruments of credit.
For example, when the US was first founded, as the Constitution expressly stated,
'money' was meant to be species74 and never in paper form. There were banknotes, but they were not money, but a mere instrument of credit, which was issued by private banks based on their own private credit. They merely represented a promise to pay money, i.e., species, on demand.
However, it was merely a theory. In practice, courts were not enthusiastic in enforcing the relevant laws even if the note holder's right to be redeemed their banknotes in specie could not be any simpler in law from the beginning. A note holder could scarcely get her/his money in practice. If anyone demanded money, she/he was looked on as traitor of the whole community. For example, in 1838, a Pennsylvania court dismissed a suit against the United States Bank of Pennsylvania, when it refused to redeem its notes.75 In 1857, a New York court refused to put the Bank of New York,
73 "No More Easy Money" MacLean 's (26 October 2009) 49. 74 The word, 'species', is a word that refers to gold and silver coins collectively. 75Hammond (1957) at 691-93. 64 which refused to pay money, in receivership.76 The situation was not any different in
England. For example, in 1758, Lord Mansfield decided that the Bank of England's
notes were "not goods, not securities, nor documents for debts ... but... money."77
Such lax attitude of the relevant authority with respect to the distinction of
money and credit is not necessarily a thing of the past. Nonetheless, in the height of the
current financial crisis, Ireland, Greece and Germany took unilateral measures of
guaranteeing all bank deposits in September 2008.78 Inferring from these cases, it would
not be too wrong to believe that the distinction between money and credit has been
practically obliterated no matter what the black letter law says.
It is not too difficult to see why. As we saw in Table 2.1, out of the total liability
of more than $54 trillion of the financial sector of the US, only about one thousandth of the total can be converted to money. All the rest, i.e., 99.85%, is disputable sum. Thus,
one can easily expect that the US government, or any other governments in a similar
situation, would do the same - guaranteeing all the credit - as Ireland, Greece, and
Germany did, if there is a financial crisis.
What is much more significant, however, than the government's guarantee, is that today's nation-State can easily "produce" money as much as it wants, because
today's money, virtually everywhere, is made of paper and there is no legal limit to it.
In Figure 2.1, we already saw that the first line of response of the US government in the
Livingston v. Bank of New York (1857), 26 Barbour 304. Miller v. Race (1758), 1 Burr 452 at 457, 97 E.R. 398 at 401. Marsh (2009) at 233. 65 face of the recent financial crisis was to print more money. As Van Creveld said, indeed, today's money is only so much paper. Indeed, we are living in a world where money is dead, finished, and obliterated.79
2.5. MONEY SUPPLY AND PRICES
One fundamental rule about the relationship between money and prices is that the more money there is, the higher the prices would be. This is the so-called 'the
Quantity Theory of Money'. This theory is based on the axiom that the scarcity of anything enhances its value. The underlying notion is often graphically expressed as
"all that money chasing the limited number of goods."
The Quantity Theory of Money provides that money supply has a direct, positive relationship with the price level. Its modern, and a little bit more sophisticated form is expressed in MV = PQ.80 Based on this formula, economists tend to assert, among other things, three things:
(a) When the money supply is increased, it prompts increased production, i.e., an increase in Q at first, but when the production capacity is reached, prices start to go up;
79 The precise legal state of affairs will be discussed in later chapters. 80 Here M stands for the total amount of money in circulation on average: V, the velocity of money, i.e., the average frequencywit h which a unit of money changes hand; P, a set of prices for various goods and services; and Q, the corresponding set of quantities of such goods and services that are traded. 66 (b) Even if the prices have gone up too high for the magnitude of MV due to
inflationary expectations, prices do not go down as they are "sticky" and, instead, the
velocity of money tends to go up to make up the discrepancy between the left and right-
hand sides of the equation; and
(c) Overall, national income and price level can be controlled by various
monetary policies.
If these assertions were correct, then the economy of the US would be booming by now and the price level in the US would highly likely be skyrocketing as the base-
money was so much explosively increased since September 2008, as we have seen in the Figure 2.1.
The reality, however, is far from it. This is because those assertions by
Keynesians were not correct as James Angell demonstrated through painstaking
empirical studies and other analytical methods.81 Among many important findings that
Angell discovered, the most relevant ones for this inquiry are three:
(a) The velocity of money, V, is very stable and rarely changes over time, unless there is a financial panic;82
81 See among others Angell (1925, February 1933, April 1933, Nov. 1933, 1936, February 1937, and June 1937). 82 Some economists tend to reject this finding on the basis that more recent data reveals otherwise, but it cannot disprove Angell, because as many other economists point out, the world since the early 1970s has entered the so-called Casino Capitalism mode. This means that the world is in a constant threat of financial crisis. 67 (b) The total quantity of money, M, is extremely hard to measure with a reasonable precision because both individuals and businesses constantly change then- idle balances, or the amount of hoarded (or save) money, which does not affect prices at all; and
(c) Because of that, general economic objectives can hardly be achieved by any attempts to change the quantity of money.83
It may not be too much an exaggeration to say that AngelPs biggest contribution to monetary economics is his finding of the importance of hoarding, or the "idle balances" according to his expression through empirical studies. This finding, however, was never a new discovery. Rather, his finding was merely a recovery of an old wisdom, which had been lost by the armchair reasoning of Alfred Marshall (1842-1924) at Cambridge University and his two students, Arthur Cecil Pigou (1877-1959) and
John Maynard Keynes (1883-1946).84 In this regard, James Angell was the US's John
Fullarton, a British economist who ninety years before strongly criticized a series of legislations including Sir Robert Peel's new Bank Act of 1844, which embodied the then prevalent Currency Principle.
Both the Currency Principle and the modern Quantity Theory of Money share the same belief that monetary engineering is possible and necessary. However, both of
For a summary of these points, see Angell (1936) at 160-61. On Angell's criticism on these economists, see Angell (1925 & 1937). 68 them failed to achieve what they set out to achieve85; and as a result the modern
monetary engineering opted to target inflation rates instead of fine-tuning the money
supply for the purpose of maintaining the purchasing power of a unit of money.86
2.6. THE FUNDAMENTAL NATURE OF DEPRESSION
Financial crises or deflations do not necessarily lead to depression. Deflation is
a monetary phenomenon. It is a phenomenon in which the purchasing power of money
increases, or in the alternative, prices drop.
On the other hand, depression is a phenomenon that occurs in real economy. It
is a phenomenon in which production activities and consumption drop significantly, and
so are employments, incomes, and the standard of living.
Thus, it is possible to have a severe deflation, and yet to avoid a depression, "if prices could change by large amounts without upsetting production.'' To illustrate this
point, Peter Temin (1937-present) compared the Crisis of 1839-1843 with the Great
Depression of 1929-1933 in the US as the following Table 2.2.
As can be seen in this table, even thought the deflation was much more severe in
the case of the Crisis of 1839, there was no depression. In spite of the 42% drop of
prices, real production increased by 16% and real consumption increased 21%. On the
85 On this point, see for example James (2009) at 240. 86 On how to do this, see for example Bernanke et al. (1999) and Woodford (2003). 87 Temin (1969) at 157. 69 other hand, the deflation in the early 1930s, albeit severe by itself, was not as much severe as the Crisis of 1839; and yet it was led to a disastrous depression. Production decreased by 30%, real consumption by 19%, and investment decreased by 91%.
Table 2.2. Comparison of the Crisis of 1839 with that of 1929'
1839-1843 1929-1933
Monetary Change in money stock -34 -27 Parameters Change in prices -42 -31
Change in real gross investment - 23 -91 Real Parameters Change in real consumption + 21 -19 Change in real production + 16 -30
Temin analyzed the differences in four different dimensions: agriculture, industry, trade, and investment as the following:
First, in the 1840s about half of the consumption goods were agricultural, and farmers had no alternative to farming, and thus, they had to produce even more to preserve their former income amid falling prices.
Second, the prices of manufactured goods tend not to fall as much as agricultural products since industry usually restricts production in response to reduced demand; but 70 somehow this did not happen in the 1840s, and the drop in prices of manufactured goods was not much different.
Third, while in the 1840s the real volume of exports did not decline, in the early
1930s the world was mired with protectionism.
Fourth, while in the 1840s the proportion of mega-sized investments such as railroad and canal in the total investment was small compared to that of the same in the
1930s.
This analysis may be summarized as the following Table 2.3.
Table 2.3. The Differences between the Crisis of 1839 and that of 1929
Crisis of 1839 The Great Depression
Agriculture More vigorous production Mass Bankruptcies
Industry Production in Full Capacity Restriction of Production
Trade Same Volume of Exports Global Protectionism
Predominantly Small Scale Predominantly Mega-Sized Investment investments, which did not investments, which came to succumb a screeching halt
Temin (1969) at 157. 71 A more in-depth analysis may be possible from this table on the more fundamental reasons for the different outcomes of these two periods. First, we can easily infer from the table that the unequal fall of prices of manufactured goods in the early 1930s must have aggravated the difficulties of the farms; and the consequential mass bankruptcies of farms must have caused a blowback in the industry and banking sectors. Second, we can also infer that the mega-sized, concentrated investment activities of the early 1930s must have drastically reduced the national income when whopping 91% of them were suddenly abandoned. Lastly, the global protectionism of the early 1930s must have aggravated the whole situation.
Then why did the industrialists in the early 1930s respond by restriction of production, whereas the industrialists in the early 1840s did not? Also, why were the investments of the early 1930s predominantly mega-sized, whereas those of the early
1840s were not? In addition, why did the world rush to protectionism in the early 1930s, whereas that of the 1840s did not?
There might be many different answers to these questions, but one factor seems to be common for all those three: the concentration of wealth.
First, in regards to the restriction of production, the industrialists in the early
1840s could not control the market, and thus, had no alternative but to produce to the limit in spite of the very narrow margin, while the monopoly industrialists in the early
1930s could simply restrict production and maintain their former prices. In the meantime, a large number of workers were laid off, which aggravated the depression. 72 Second, in regards to the impact of reduced investment, most investments of the early 1840s were composed of farm construction, residential construction, and small scale industrial investments, while the investments of the early 1930s were predominantly mega-sized ones by a small number of large industrialists, who were backed by even fewer number of large finance capitalists. Thus, the reduction of investments in the early 1930s was swift, drastic, and synchronous.
Third, in regards to the protectionism, while in the early 1840 s there were no predominant exporters that could make a big difference in the economy, in the early
1930s politicians could easily identify themselves with some large companies that wanted protection. Thus, there was no escape hatch for the economy in the early 1930s.
Overall, it may be said that the more concentrated a nation's economy is, the more myopic the important decision-making becomes. That is, when the national economy is dominated by a handful of Croesus, decisions are more likely to be made for their immediate short-term benefits rather than for the whole nation in the long-run, whose consequence is suicidal. In short, depression is the terminus of the concentration of wealth.
2.7. THE CAUSE OF THE CONCENTRATION OF WEALTH
If the fundamental cause of depression is the concentration of wealth, then the question becomes, "What brings about the concentration of wealth?" The answer to this 73 question is the world's becoming footloose. That is, had the world been split into
numerous small city-States, those who accumulated large surplus in their own city-
States need to be increasingly more creative in utilizing the surplus to accumulate even
more rather than merely doing the same thing over and over again around the borderless
world, crushing all the local people in the similar profession in the process. This is
simply because becoming the best in every direction is a lot more difficult thing to do
for anyone than doing one thing best. The footloose world made it possible for those who are doing one thing best to take all the other fellows' foods out of their mouths in the nationalized world, and then in the globalized world.
Then the next logical question is, "Why did people become footloose?"
Summing up many authors on this question, the short answer seems to be the cheap oil and all kinds of machines that run on the cheap oil. Here, when we say 'cheap', we are not comparing the really cheap oil with the less cheap oil in such times as the Oil Shock of 1973, the Oil Shock of 1979, or the Oil Shock of 2008, as can be demonstrated in the following Figure 2.8.89 We are talking in terms of its cheapness compared to human manual labour. It is cheap because one litre of petrol is equivalent to more than 36 days of human manual labour. It is cheap because a tankful of petrol in a car represents four years of human manual labour.90 It was this enormously increased invisible and subservient labour that made modern human beings footloose.
89 Here the lighter coloured line shows the inflation-adjusted real prices in 2008 dollars, while the darker coloured line shows the same in the nominal price of the day. 90 Hopkins (2008) at 19. 74
Figure 2.8. Oil Prices from 1861 through 2008 - David (2009)
2.8. THE ROLE OF BANKS IN THE CONCENTRATION OF WEALTH
To summarize the reasoning so far, it is this: The cheap oil made the modern world footloose; The footlooseness of modern world obliterated borders and distance; In this so-called "flat"91 small world, the winner in each industry takes all; The consequence of this winner-take-all world is the concentration of wealth; and The consequence of the concentration of wealth is depression, as explained in Section 2.6.
Coming back to our main subject, then the question is, "What is the role of banks in the concentration of wealth?"
91 This is the expression of Thomas L. Friedman. His 2005 book is titled, The World Is Flat, whose main theme is that the world is now a single community. 75 2.8.1. Various Theories
There seem to be at least three different theories on this question. They are what this writer may call the 'Unfair Competition theory', the 'Bureaucratization theory', and the 'By Nature theory', respectively.
The Unfair Competition Theory
The theme of this theory is, "Banks, especially in the central banking system, make risk no risk for the winners." This point was well elaborated by C. Wright Mills
(1916-1962), whose view was that the central banking regime was the machinery that what he called 'the Power Elite' secured their position impregnably. He said:
To parlay considerable money into the truly big money, he must be in a position to benefit from the accumulation advantages. The more he has, and the more strategic his economic position, the greater and the surer are his chances to gain more. The more he has, the greater his credit - his opportunities to use other people's money - and hence the less risk he need take in order to accumulate more. There comes a point in the accumulation of advantages, in fact, when the risk is no risk, but as sure as the tax yield of the government itself.92
Basically what Mills is saying here is that banking is power more than anything else. It is the power that can give unfair advantage to the winners. This power is extremely beneficial, because the Power Elite or the winners can be free from virtually 76 all kinds of riskssuc h as market risk93, credit risk94, and liquidity risk,95 which all the others are subject to.
Ellen Hodgson Brown expresses the same point in a more straightforward language. She says:
Because they [bankers] controlled the money spigots, they could fund their own affiliated business with easy credit, squeezing out competitors and perpetuating the same class divisions that the "American system" was supposed to have circumvented.96
The Bureaucratization Theory
The theme of this theory is that banks are the main culprit of the society's petrifaction. For instance, Jane Jacobs said:
As a rule ... Banks ... tend ... to become bureaucratized ... They extend astounding amounts of money to tired old enterprises ... But old, well- established, generalized banks tend to dismiss out of hand ideas for genuinely new and unproved goods and services.97
92 Mills (1956) at 111. The emphasis is this writer's. 93 Market risk is the risk of loss resulting from changes in interest rates, foreign exchange rates, stock prices, etc. This risk was abolished for the very richa s they control these prices. 4 Credit risk is the risktha t a party could default. This risk is nil for the very richa s they control the banks, which will give a special consideration to the very rich's party at the cost of others. 95 Liquidity risk is the risk that a courter-party will not settle an obligation for full value when due even though he/she can settle when the due date is extended. This risk is the least problem for the very rich under the Federal Reserve regime because the liquidity that the regime can create is limitless. 96 Brown (2008) at 55. 97 Jacobs (1969) at 211. 77 By Nature Theory
However, ironically, the most plausible answer comes from Niall Ferguson, an enthusiastic advocate of financial intermediaries of all kinds. He says that growing big and powerful is the inherent nature of banks and other financial intermediaries. In other words, the concentration of wealth is genetically engrained in the banks, themselves.
Ferguson says:
The fundamental difficulty with being a loan shark is that the business is too small-scale and riskyt o allow low interest rates. But the high rates make defaults so much more likely that only intimidation ensures that people keep paying. So how did moneylenders learn to overcome the fundamental conflict: if they were too generous, they made no money; if they were too hard-nosed, like Gerard Law, people eventually called in the police? The answer is by growing-big - growing powerful.98
2.8.2. The True Evil of Modern Banking
Recently, the number of people who think that banks and bankers are inherently evil and they must be purged seems to be growing. It is perhaps due to the on-going financial turmoil. According to these people, the primary evils that banks commit seem to be two:
(a) Using other people's money for their narrow, private interests, and
Ferguson (2008) at 40-41. 78 (b) Creating money by way of the fractional reserve banking" and thereby cause inflation, speculations, and concentration of power.
These people typically argue (a) that money must be issued by the government, and not by banks, and (b) that banks ought to be required to have 100% reserve for their deposits.
In defence, those who advocate banks argue that, the ultimate users of the "other people's money" are not bankers but the public. Moreover, without fractional reserve banking, only usury would be possible, and it would make the price of money - the interest - be much higher than what ordinary people can afford to. That is, the beneficiaries of the fractional reserve banking are primarily the general public who can borrow money cheaply. Furthermore, the advocates argue that the easy credit that is possible under the fractional reserve banking along with the central banking system can support the nation's commercial network and its military so much better that the nation can defeat its enemies with so much force and ease, as was the case of the Great Britain in the 18th century.100
Indeed, the true evil of banking, however, is neither the banks' intermediation activities, nor their creation of money by way of fractional banking practice. The reasons are as the following:
Fractional reserve banking is having only a fraction of the total deposits as a reserve for payment. 100 On this military advantage extended fromth e fractional reserve banking and central banking, see McNeil (1982) at 178-83. 79 First, it can be good for the society as a whole for banks to intermediate
someone's idle metallic money for some others' productive investment. This is because,
as already explained earlier, procuring precious metals to use them for money is costly
for the whole society by itself. Thus, as far as the intermediation cost is less than the
cost the society pays for monetary metals, intermediation contributes to the wellbeing of
the society, with, of course, the reservations regarding all the disadvantages of credit-
based society that were discussed earlier.
Admittedly, there is no more hard money nowadays, while the cost of creating
money and credit is extremely low. Thus, the benefit of intermediation nowadays has become so much doubtful. If the nation needs more money as people tend to hoard money increasingly more as their wealth and income grow, it can simply print more
money with no great cost. Hence, the benefit of intermediation nowadays is primarily
for assisting monetary control and tax collection by collecting relevant data and tracing taxable transactions. Nonetheless, it is hard to blame the intermediation activities.
Second, fractional reserve banking is a natural phenomenon that arises from the
fundamental nature of human behaviour. This practice is based on the depositors'
preference to leave their money in the bank, and to use instead more convenient payment services provided by the bank for their daily businesses. This practice is also based on the people's economic imperative to preserve some purchasing power for later days against various kinds of uncertainties and vicissitudes of life. Since the 80 uncertainties and vicissitudes of life tend to strike people pretty much randomly, it is extremely unlikely that many people will withdraw their deposits simultaneously.
Therefore, even if the entire nation's money is issued by the government alone, the business of banking and the fractional reserve banking practices would not disappear, unless they are purged by force with constant vigilance. But obviously, this state of affairs would not be natural.
Having said all that, the true evil of modern banking in this writer's view is the externality that is involved in banking. Simply put, banks are not doing their banking business solely on their own credit and not entirely on their own responsibility. They are very much subsidized by the government both in their source of credit and their responsibility for their liabilities.
For example, the subsection 16(1) of the Federal Reserve Act of the US provides,
"the said [Federal Reserve] notes shall be obligations of the United States." In other words, the credit that makes the Federal Reserve notes possible is primarily that of the
US government, and not that of the banks. Furthermore, through a variety of mechanisms such as chartering system, deposit insurance, specialized bankruptcy procedure for banks, which is much different from ordinary business concerns, and the
'too big to fail' doctrine, the responsibility of the banks are pretty much socialized.
As a result, apparently, the profits that banks are reaping are not due to their own sowing. Indeed, as some critics charge, it is nonsensical for the government to lend its credit for the benefit of private banks and yet obtain loans from them and continuously be indebted while it can issue its own notes directly without incurring interest charges.101
Against this charge, opponents argue that Federal Reserve is creating money only upon some collateral, which is primarily the government bonds, and that the
Federal Reserve banks are returning a portion of its profits to the Treasury. As the increased money is primarily being used by the government for presumably public purposes while some of the interest income is returned to the government, too, they counter that the whole scheme of things are not necessarily for the sole benefits of banks.
Furthermore, they also argue that the interest charges on those loans to the government are actually a good thing, because they give the government a strong incentive to pay back its debts sooner than later, and therefore, they are acting as a safety device that checks on inflation and government's excessive indebtedness. Moreover, they also argue that thanks to the government's offering its credit to private banks, banks could lower the interest rate to their customers, and therefore, the benefit is also socialized.
However, it is still true that a much larger portion of the total profit falls to banks, and not to the government. Furthermore, the modern central banking system makes government borrowing so easy that in spite of the interest charges, governments are borrowing and spending indiscriminately and in a corrupt way. Moreover, the lower interest rates are not benefiting everyone equally, but predominantly privileged class.
That is, the primary beneficiaries of such lowered interests are not ordinary, prudent
This is typically argued by the Social Credit School, among others. 82 citizens, but rather big businesses, speculators, and other privileged borrowers. Far from benefiting from cheap money, ordinary, prudent citizens have much more to lose from all that creation of money by the banks in the form of raised prices for everything from the house prices to food and energy. The pernicious effect of cheap money is especially punishing for marginal working class and younger generations, who have to cough up ever larger sum for their houses, in spite of all that self-praise of home-owning democracy.102 In spite of ever lower interest rate, for underprivileged class and younger generation, owing a house is getting ever more remote, as the following Figure 2.9 demonstrates for the case of Canada but applies to almost everywhere.
11- Record Home price-to-income ratio 10- £2 £* 7} (0 9 0) P 8- « c u<" o£ a.E 7- is. X nj 6- 5 T I I I 1985 1990 1980 1995 2000 2005 Figure 2.9. Home Price-to-income Ratio in Canada 103 102 See Niall Ferguson (2008) for the home-owning democracy argument, which praises the American government's push for greater home-ownership as an antidote against socialism. r°3 "Out of Balance" Maclean's (7 December 2009) 39. 83 Overall, the current banking system is a system in which lower middle class, who are primarily savers, and the general tax payers are subsidizing big businesses, speculators, and upper, older middle class who are making capital gains fromthei r properties on borrowed funds. It is a system of sacrificing unprivileged and younger segment of population for the benefit of privileged and older class. In spite of all the arguments and counterarguments presented so far, many people would not be quite sure which side is right, as human beings tend to think in their own, unique circumstances. Nevertheless one thing that anyone would accept is the simple truth that when two things are mixed together and make one compound output, it is difficult to distinguish their respective contribution and their respective share in the total. In other words, it is difficult to achieve justice. If we do not like this kind of confusing state of affairs, the key to the justice in banking would be, first, to withdraw the extension of government's credit on the banks' liabilities, and second, to abolish all the special privileges given to the banks for their insolvency and make their shareholders entirely, and solely responsible for the banks' liabilities. In short, the essence of upholding justice in banking is to eliminate all the positive externalities that are extended by the government to the banks and their privileged customers, who are unfairly enjoying the benefits without due payment. Nonetheless, some people would still argue that the modern banking is a necessary evil that we cannot possibly give up. They would argue that fractional reserve banking that is nationally integrated by central banking is essential in a modern State, as 84 its easy credit makes the State possible to expand the scale of the nation's military might and the relevant commercial and industrial activities quite rapidly whenever a war emergency requires such action. The argument claims that this capability, i.e., the capability of levying inflation tax onto its people so surreptitiously and so effectively through the banking system, was the definite advantage that the Great Britain had against France throughout the 18th and the early 19th century. Indeed, when one finally arrives at this point, it becomes utterly difficult for him/her to insist upon the obvious justice. Of course, anybody would know that, in the long-term, the evil of the modern banking will undermine the nation from within through its pernicious effect of enlarging the gulf between the privileged and the unprivileged, which would make the discussion of national security pointless, eventually. This is because the modern banking regime is supported by the credit of State under the name of the public interest and national security; while the privileged class, in turn, is supported by the credit of the banking institution under the pretense of affordable money for everybody. Nevertheless, knowing all these, we also understand that aliens' fists are close, while the internal dissolution can wait a little longer. And at this point of realization, many people may make up their minds that the modern banking is a necessary evil. The more such people there are, the more likely modern nations would tread in Roman Empire's steps. 85 2.9. THE MONEY LAWS Laws that are related to money may be grouped into three broad categories: money laws, payment laws, and banking laws (or financial regulations). The money laws are the laws that affect the supply of money. More specifically, money laws are concerned with the money-creation power, in the Hohfeld (1919)'s sense, of the monetary authorities and banks. The purpose of the money laws has never been publicly debated, and therefore, it is hard to tell what it is. An inference from what has been done so far around the world, however, seems to indicate that the major purpose of the money laws has been to facilitate flexible adjustments of money supply by concentrating the monetary power into ever more consolidated group of decision makers that are made up of so-called experts, who are insulated from popular political influences. On the other hand, the payment laws are more concerned with the rights of the holders of the credit instruments, or in the alternative, the duties of the issuers or endorsers of the same, in the Hohfeld's sense. It may be said to be specialized consumer protection laws in the area of negotiable instruments. The primary purpose of payment laws is to facilitate financial intermediation by lowering the transaction costs of monetary transactions. In the meantime, the banking laws are more concerned with the privileges and immunities of individual banks, as opposed to other, competing banks or against non- bank financial institutions. Their function may be compared to the competition law. Its 86 aim is to allocate and protect a particular niche for each and every financial business domain. This is why the great bulk of the case laws in the area of banking laws are about judicial verification of the legitimacy of certain banking business activities of a particular bank and/or of a particular non-bank financial institution. Therefore, the money laws may be said to be 'political laws', whereas the payment laws are 'economic laws', and the banking laws are the rules of the game'. The biggest challenge that the money laws need to overcome is to balance the conflicting interests of various segments of the economy, various classes of the population, various generations of the nation, and the various regions of the national territories. There are no clear right or wrong decisions in this area. The decisions are fundamentally balancing acts and choosing sides. Thus, they are fundamentally political. On the other hand, the biggest challenge that the payments laws face seems to be to accommodate new payment technologies without disturbing the civil liberties and privacy, while that of the banking laws seems to be to equitably allocate the business opportunities in finance to as many diverse groups of people as possible. 87 3. LITERATURE REVIEW The literature that touched upon the evolution of monetary system has already been discussed in Section 1.5. As noted there, none of the five theories was capable of explaining the evolution of the US monetary systems, even though Spengler's and Van Creveld's theories give us great insights about modern times, while Evans & Schmalensee's theory gives a partial answer to the question of this inquiry. Hammond tried to explain the changes in monetary regimes by anecdotal historic events, particularly with politics and class struggles, while Ferguson tries to equate proliferation of financial products throughout the history of modern Europe with the evolution of money and higher standard of living. Both Hammond and Ferguson seem to believe in progressivism or socio-Darwinism, whose validity is doubtful. When we broaden our scope from the topic of the evolutionary process of monetary systems to some other topic areas that are relevant to monetary power, we tend to find three broad groupings of debates: (a) whether the emergence of central banking was a natural course of events or a political event; (b) whether the legal tender is legitimate economically, morally, and/or legally; and (c) which monetary regime among the four regimes in the history of the US would be the most desirable regime, and which one would be the worst. This chapter will discuss the literature that deals with these three, adjacent topic areas. 88 3.1. WAS CENTRAL BANKING SPONTANEOUS? One debate in relation to the developments in money laws is concerned with whether the emergence of central banking was a spontaneous event or a politically imposed event. This debate seems to have been brought up to a point of dispute in the US in the early 1980s when Lawrence H. White, then a young professor at New York University, who was affected by Hayek, published a book about free banking and aroused people's attention to free-banking as a possible solution to the hyper-inflation of the 1970s. It was then responded to by Charles Goodhart, a former Chief Advisor for the Bank of England. In this debate, one group argues that emergence of a central banking was a politically imposed event, where the State intervened the otherwise satisfactory working of a free-market system in the business of banking under the pretense of protecting the general public from fraudulent banking practices and thereby obtained a sizable tribute from the banks. On the other hand, the opposing group argues that the emergence of a central bank was a natural course of event that was bound to happen whether the State intervened or not, because of the absolute necessity of resolving two problems that are inherent in the business of banking: (a) the information asymmetry problem between the banks and their clients, and (b) the perpetual danger of the bank-run problem due to the fractional banking practice. 89 A succinct overview of the whole scene of the debate in this area can be found in Bordo & Redish (1987). For the details of the arguments of each side, Smith (1936) and Goodhart (1988) seem to cover most of the arguments that each camp has advanced. They also provide comprehensive literature-surveys. This writer's view on this subject has already been stated in Subsection 1.6.3, under the Segment title, "From Free Banking to Private Central Banking." To recap it, the Private Central Banking would prevail over the Free Banking when the living conditions get worse. This is because as easier pickings are continuously being exhausted, previously independent individuals need to be coordinated sooner or later, where 'coordination' means specialization, stratification, and centralization. It is the central banking when these three phenomena occur in the monetary sphere. This can be explained more realistically as the following: In order for a human aggregate to be able to extract more from the nature while easier pickings are being exhausted, it must achieve technological advancement, which requires increasingly larger capital accumulation. This cannot be accommodated by the small-scale banks under the free banking regime. Naturally, capitalists tend to form the so-called 'community of interest' to overcome the market risk, which in effect functions like a central bank, i.e., a lender of the last resort, even though it does not call itself as such. Once such a 'community of interest' is formed, the emergence of the formal, public central banking regime would be merely a matter of time in a democratic State, because the consolidation of capital and wealth into fewer hands would naturally 90 accelerate economic inequality. As a result, eventually there would come a point where the State has to intervene in banking affairs as the guardian of the public interest. When we view the matter in this light, the whole debate in this subject area seems to have only academic significance. 3.2. IS LEGAL TENDER LEGITIMATE? Another debate in relation to the developments in money laws is concerned with whether legal tender104 is economically wise, morally right, and/or legally correct. Thus, the relevant literature may be reviewed in there three different branches. 3.2.1. Is Legal Tender Economically Wise? Upon this question, the "Yes" side seems to be thoroughly outnumbered by the "No" side. The most prominent group that is against legal tender is the so-called libertarians. Among them are Charles Warren (1868-1954), Albert Jay Nock (1873- 1945), Ludwig von Mises (1881-1973), Friedrich August von Hayek (1899-1992), Ayn Rand (1905-1982), Percy L. Greaves, Jr. (1906-1984), Murray Newton Rothbard (1926- 1995), Irwin A. Schiff (1928-present), Henry Mark Holzer (1933-present), F. Tupper Saussy (1936-2007), and Gary North (1942-present). Legal tender (or forced tender) is a currency that became money by legal compulsion. 91 These people all advocate the free-banking system. The rationale is that the manipulation of money is economically disastrous because it distorts the price signal, the single most important feedback mechanism by which the market system is being operated, and thereby hinders the naturally occurring economic metabolism. When the naturally occurring economic metabolism is stunted by the manipulation, the accumulated distortion eventually breaks out into calamitous event such as the Great Depression of the 1930s, according to the Austrian School economists. Obviously they do not recognize that under certain inappropriate circumstances, free banking is not feasible. Especially they may not recognize that under the current age of big corporations, big banks, big labour unions, and big governments, the so- called free, competitive "markets" do not exist anymore anywhere. They may not recognize the fact that the so-called "price" of modern economy is not the same "price" of the olden days.105 Or they may insist their position, even if they recognize these facts, out of their utter hatred for bureaucracy. It seems that since the launching of the New Deal programs of the 1930s until the opening of the new era of Globalization of the 1990s, bureaucracy was the most hated phenomenon of the modern age for very many people. According to Martin van Creveld, a world-renowned military historian and theorist, and One of the early pieces of literature that advocated legal tender based on this reality was Blackett (1932). 92 professor at the Hebrew University of Jerusalem, calling someone a "bureaucrat" has now become the worst name-calling. He said, Whereas, in 1830, Hegel praised bureaucracy as the "objective class" which put the public good above its own ... today there is probably not an individual left in the world who believes that such are its attributes. In fact, the opposite is the case. ... "Red tape" has come to stand for anything that is evil, and one of the worst names that any person can be called is "bureaucrat."106 The trouble with legal tender is that it is legally compelled. It is legally compelled because not many people would accept it otherwise. Compelling something against the wish of people by itself would be bad enough. As many historians, philosophers, economists, and legal scholars point out, quondam money arises spontaneously in the process of human interactions.107 It does not need to be compelled or imposed on people by some political authority. Coins made of precious metals, among many other commodity monies, are a case in point. Although quite often these coins were declared as legal tender by relevant political authorities, such an act was merely a belated ratification of the society's prevalent practice along with specific weights and measures for the convenience of trades and tax collection. In this case of quondam money, the function of the political authority is not creating money, but simply safeguarding the correctness of the relevant weights and measures, 106 Van Creveld (1999) at 408. 107 See for example Temin (1969), Frankel (1977), Jerome (1935), Geva (1987). 93 even though it very often tries to force people to accept debased coins for the same nominal sums. The reason why legal tender is compelled is only one: the monetary authority's wish to control and shape value. The often advanced excuse for a legal tender, the flourishing of commerce and manufacturing, cannot be a justification of legal tender, because, as Fullarton explained 165 years ago, all the extra demand for circulating medium that exceeds the quondam money available can be provided in various forms of banking credit without disturbing the price stability as long as the Reflux Principle108 is strictly observed. Hence, the only reason why a legal tender is compelled is to confer the power to control the money supply at will to some decision-makers. The desire to control money supply arises basically from two necessities. One is the need to raise money quickly without relying on taxes; and the other is the need to maintain the purchasing power of money constant. The former method of raising fund is widely known as 'inflation tax', and this is the predominant reason why the opponents of legal tender hate it so much. On the other hand, the second reason - the need to maintain the purchasing power of money as stable as possible - is rarely given attention. Most people who condemn legal tender and monetary engineering seem to assume that if we return to metallic money system, the value of money would be not 108 The Reflux Principle is basically making sure that all the credit created by banks must be extinguished within a reasonably short period of time after it is created through the mechanism of interests. However, this principle was proved to be hard to implement in practice, especially in a central banking system, because banks tend not to observe this principle amid intense competition, and also because central banks tend to disturb it in their frequent attempts to lower the market interest rates by offering lower discount rate than ordinary commercial banks' going rates. 94 only fair for all, but also stable. It may well have been the case indeed in those days of metallic money, because the economy was pretty much static and most investment was relatively small and short-term. In the industrial age, however, making long-term contracts in terms of metallic money became impossible because it was always a losing proposition for the debtors, as the faster economic growth than the increase of precious metals available for monetary use always made the metals appreciate over time. In other words, the righteousness of legal tender depends on the circumstance of the times. It cannot be judged by ideology alone. For example, during the first half of the 19th century, when the majority of the population of the US were engaged in farming, even the bank notes, which were not legal tender, were disliked by most because they tended to cause inflation. Most people preferred metallic money then. On the other hand, by the late 19th century the gold standard became the public's enemy, and the retirement of greenbacks, legal tender, was strongly opposed, because it meant inequitable increase of burden of debtors, or in the alternative, inequitable windfall gains of creditors. Thus, as times change, the legitimacy of legal tender will, and should change, too. It is entirely dependent upon the appropriateness of monetary operations under the circumstances. 3.2.2. Is Legal Tender Morally Right? Again, in the debate in the moral front, too, the opponents of legal tender seem to utterly outnumber those who advocate it. They condemn it on the basis of its effect in 95 altering the moral structure of the relations between various groups of society "arbitrarily, capriciously, or lightly ... in favour of particular groups, individuals, or interests."109 They argue that the consequence is replacement of trust, mutual guarantees and protection by suspicion, hostility, and resentment amongst the members of society, which leads to the dissolution of society. They argue that even if the legal tender is for a good cause, such as welfare of the needy, it is morally wrong because it corrupts the whole society and makes people eventually inhumane. Ayn Rand describes the change of people's character, when the State meddles with the people's lives by arbitrarily transferring wealth from one group of population to another, in the following graphic, fictional narrative: In the old days, we use to celebrate if somebody had a baby, we used to chip in and help him out with the hospital bills ... Now, if a baby was born we didn't speak to the parents for weeks. Babies, to us, had become what locusts were to farmers. In the old days, we used to help a man if he had a bad illness in the family. Now - well, I'll tell you about just one case ... She was a kindly old lady, cheerful and wise, she knew us all by our first names and we all liked her ... One day, she slipped ... and broke her hip ... she'd have to be sent to a hospital in town, for expensive treatments ... The old lady died the night before she was to leave for town ... I don't know whether she was murdered ... Nobody would talk about it at all. All I know is that I -... -1, too, had caught myself wishing that she would die. This -... - was the brotherhood, the security, the abundance that the plan was supposed to achieve for us!no Frankel (1977) at 4. Rand (1957) at 612. 96 Karl Helfferich (1903) also believed monetary engineering to be morally harmful for the society, as the society would be split into two classes: one class who prefers appreciation of money and the other who prefers depreciation. He predicted that the feud between these two would completely demoralize the economic and social life of the nation. John Taylor, too, expressed the same sentiment by saying, "Even brothers, whom nature makes friends, are converted into enemies by parental partialities. Will the partialities of a government between different classes promote harmony and happiness of society? Is not their discord the universal consequence of the fraudulent power assumed by governments, of allotting to classes and individuals indigence or wealth, according to their own pleasure?"111 He further expressed that those who manipulate money are the worst and most treacherous beings of all by saying, The disciples of the capacity of currency for transferring property, are more ardent and skilful than those who are contended with its utility in exchanging it, because ... mankind have ever thought it very pleasant to get rich without industry. Hence a school appears in every country for teaching nations that taxation, stocks, and exclusive privileges, are the best guardians of their prosperity. ... Yet in every instance ... evils in no degree dubious have been identified with it. The abundance of paper currency in England, far from being a dispenser of individual happiness, is a severe oppressor, because it is chiefly employed in transferring property.! n 111 Taylor (1821) at 14. 97 3.2.3. Is Legal Tender Legally Correct? Dispute over the legality of legal tender is probably unique in the US. As for the rest of the world the issue of legal tender is recognized as one of the prerogatives of a sovereign State, simple and straight, as Knapp's powerful theory, the State Theory of Money asserted. On the other hand, when it comes to the case of the US, such an assertion is not so easy, because her Constitution clearly rejects paper money of any kind both in the letter and in spirit. The legality of legal tender was eventually asserted by the Supreme Court of the United States most definitely, among other things, in the absence of clear, express provision in the Constitution that prohibits the issue of paper money by the federal government. The controversy, however, seems to have never been completely settled as can be evidenced from the hundreds of websites that argue that the current predominant US currency, the Federal Reserve note, is not legal tender, based on a variety of arguments. A survey on the dispute on the legality of legal tender in the US is a big subject for itself that may require another dissertation. Suffice it to say here that the dispute over the legality of legal tender in the US can be said to be in a state of armistice rather than in peace. The legal opinions about the constitutionality of legal tender in the US seem to be more on the side of approving of it. For example, among the relevant literature that this writer had a chance to muster, Nussbaum (1950 & 1957), Dunne (1960) and Hurst 112 Wat 31-32. 98 (1973) were on the side of approving of it, while only Wilson (1992) tends to be on the opposite side. Wilson's position may be succinctly represented by this single sentence of his own: "The legitimacy of the current exercise of monetary powers by the Congress cannot be found in the express language of the Constitution; that legitimacy is simply a recognition of years of practice under Congress as representative of the people."113 Simply put, the current monetary arrangement has no legal basis and is merely a habitual practice. On the other hand, Nussbaum and Hurst tend to acknowledge the legitimacy of legal tender in the US based more on the economic necessity than on any legal philosophy. Dunne's position is that monetary power is a political issue, rather than a legal one, and thus, it is more appropriate for courts to resign themselves from getting involved in it. This position is, actually, the current position of the US courts,114 as well as this writer's. 3.3. WHICH MONETARY REGIME IS THE BEST? The third area of debate with respect to monetary systems is concerned with the merits and demerits of the four major US monetary regimes, ignoring the subcategories. But as a matter of fact, it can hardly be said to be a "debate" as there are very few such pieces of literature. So far this writer could find only three authors: Edward Jerome 113 Wilson (1992) at 235. 99 (1892?-?), James Willard Hurst (1910-1997), and Ellen Hodgson Brown. Admittedly, there were some others such as McCulloch (1888), Nussbaum (1950), Hammond (1957), Timberlake (1978) and Lovett (1992), who also reviewed the US money laws. However, they were either expository in nature without the author discussing the relative merits of them (Nussbaum, Timberlake, and Lovett) or limited in its coverage (McCulloch and Hammond). Obviously, discussing the relative merits of the four different major monetary regimes that occurred in four different socioeconomic and political circumstances is a hazardous venture. Some people might dismiss such attempts outright without even taking a look at it by pointing out that such an attempt is like comparing apples and oranges. Indeed, many comparative studies actually turn out to be just that. However, the reason why we are interested in such comparative studies and keep looking for them even after many disappointments is to gain the wisdom of judgment, that is, to learn what the author took as the criteria of comparison. And quite often such criteria of comparison give us the penetrating insight about the whole area of study that we are dealing with. That is also the hope of this section. To present the three authors' opinions of the four major US monetary regimes in its history, it may be summarized as the following Figure 3.1. While Jerome thought the Hamiltonian regime was the best, Hurst thought the Federal Reserve regime was the best, and Brown thinks the Chase regime is the best. Interestingly, both Jerome and Brown 114 For a detail, see Hurst (1973). 100 consider the current Federal Reserve regime as the worst. Whereas both Jerome and Brown share, again, in holding the Jacksonian regime in high regard, Hurst assessed the same as the worst. Hamilton Jackson Chase F.R.S. "Jerome mmmm Hurst ' Brown Figure 3.1. Different Assessments of the Four Major US Monetary Regimes 3.3.1. Jerome; The Hamiltonian Regime Edward Jerome assessed that the US monetary system has continually degenerated after it achieved its best in its first regime, that of Alexander Hamilton, the first Secretary of the Treasury of the US. He said, 101 Since the Hamiltonian System, the first and best one, was abandoned, each succeeding system has been worse than its predecessor. The Jacksonian System, the second best... was as far superior to its successor, which may be called the Chase System ... and then it was followed by one still worse, the Federal Reserve System.U5 The basis of such an assessment is that the subsequent regimes moved further and further away from the so-called the "Principle of a Fiduciary Issue of notes."116 This principle consists of two elements: (a) When it comes to issuing fiduciary money, not commodity money, the ultimate basis of the issue is the public's faith in the government of a nation, and therefore, the issue of notes, paper money, is a function of the Government; and (b) The best guard against inflation and/or deflation is to link the supply of paper money with taxes, and to sever its relationship with precious metals, because the supply of precious metals have much less to do with the economic activities, or the total goods and services that are being produced by the nation. Jerome argued that the fiduciary issue of paper money for a nation must be done by the government of the nation, and not by banks, because the fundamental credit underlying the paper money is the citizens' capacity to pay taxes to their governments. Banks may issue their own notes, but such notes would not be paper 'money', but 115 Jerome (1935) at 145. U6Id. at 101. 102 merely instruments of credit, which would be issued solely based on the banks' own credits. Jerome also argued that the paper money supply must be linked to the taxes, because the public's demand for paper money is eventually determined by their need to pay taxes. According to him, in the past, common people's relationship with government was a limited and loose one. But now it has become a direct and tight one, and the tax has become the single biggest item on which citizens collectively spend their collective income. Furthermore, Jerome emphatically argued that the fiduciary money supply must be severed from precious metals. This is because at the end of the day the actual share in our hands is determined by the share of money given to us of the total money in the society, while the total money in the society then ought to be the total sum of the contributions to the society, which is the total actual production of the society, and not precious metals. The wage, rent, dividend, interest, or whatever that constitutes our income is proportionately made upon its share of input to the total output, or production. Such being the case, the practice of linking money supply to precious metals causes not only economic disturbances, but also mental disturbances in individuals. The so-called gold standard system is also perverse in that the State let its tax rate be effectively determined by the supply of precious metals, not by the Congress's decision. That is, when the supply of precious metal decreases, the amount of paper money decreases proportionately, and so it becomes more difficult for people to pay taxes, while when the 103 precious metal supply increases, it becomes easier to pay taxes, as if the tax rates actually went up or down. As a matter of fact, the Hamiltonian regime, among the four, fitted best in this ideal fiduciary note issuing format. The only deviation from this format was that the notes were not issued by the government, but by a private bank, where the government participated as a minor shareholder. Jerome, however, justified this by these words: As matters are viewed to-day, the issue of notes, paper money, is a function of the Government. In those days, however, the privilege of issuing notes was considered an indispensable part of the business of banking ... Furthermore, Government bills of credit, or notes, were in bad repute, and had Hamilton attempted to use them [banks] he would not have been regarded as establishing a sound financial system.ni In other words, the federal government had no alternative but to rely on private banks, because it has the original sin of having ruined its own credit by the abusive issue of the so-called Continentals,118 which had been issued during the War of Independence. 111 Id. at 103-104. 118 'Continental' is the name of the paper currency issued by the Continental Congress between 1775 and 1779 to carry out the Revolutionary War (1775-1783) against the British Empire. The Continental Congress was the congregation of the thirteen colonies, each of which had established a Provincial Congress by 1774. The thirteen colonies gathered in the Continental Congress in 1775 and decided to issue the Continentals. The value of the Continental dropped to between 1/5 and 1/7 of its alleged value in terms of coins in three years, and it eventually dropped to 1/25* by the end of 1779, when the Continentals stopped being issued. Thereafter, the word 'Continental' was used by people to refer to something that is valueless. 104 Hamiltonian vs. Jacksonian The reason why Jerome assessed the Jacksonian regime to be inferior to the Hamiltonian is that there was no federal-level money that was linked to federal tax in the Jacksonian regime. The key feature of the Jacksonian regime was it did not have any national money. It collected taxes in species made of gold and silver. Thus, it was subject to the wax and wane of the precious metals, which had little to do with the condition of the domestic economy. Nonetheless, Jerome ranked the Jacksonian regime as the second best among the four, because it was fair and just to the majority of the people, who were then farmers, because the hard-money-only system prevented any great amount of inflation from 1837 to 1861.119 Jacksonian vs. Chase The primary reason why Jerome assessed the Chase regime to be inferior to the Jacksonian is that it was an unstable pyramid. In the Jacksonian hard-money system, there was no superstructure that inflated money supply. Thus, even if inflation or deflation occurred by some external factors, such as sudden trade surplus (or deficit) and inflow (or outflow) of precious metals, the country recovered with remarkable speed.120 On the other hand, under the Chase regime, the federal government borrowed precious metals from private banks with promise to return the principal and interests in precious 119 Jerome (1935) at 169. 120 This is because there was no layers of credit expansion, which should be adjusted to the change in a series of chain reactions. See Jerome (1935) at 170. 105 metals, and then it issued the greenback and made it legal tender. This was a measure to save the private banks, who lent their precious metals to the government, fromth e depositors who wanted their deposits back in species. Instead of species, however, banks paid them in greenbacks, the legal tender. In addition, the government created nationally chartered banks and granted them the right to issue its own bank notes on the basis of their holdings of government bonds. As a result, two different superstructures of inflation were created: one based on the greenbacks, and the other based on the government bonds. Thus, the Chase regime can be called the government-debt standard system, because when the government increased its debt, money supply was increased in its multiples. Chase vs. Federal Reserve The reasons why Jerome assessed the Federal Reserve regime of 1913 to be worse than the Chase regime are three: (a) its manipulative nature, (b) its formalized connection to gold, and (c) its increased ability to expand currency even more. The Manipulative Nature: First, Jerome believed that the Federal Reserve regime is wrong, because the Federal Reserve Act gave the authority to the Reserve Banks to engage in open-market buying and selling of government bonds so that the Federal Reserve regime can control the size of the lending by banks. According to Jerome, the idea of controlling banks' loans and thereby controlling the level of economic activities and employment is an erroneous idea, just like putting a cart before the horse. He believed that the amount of money in a society ought to follow the production, and not the other way round. What determines the production of a society is making of contracts, and not money. When the money is manipulated to stimulate the production activities, what would come as a result is merely confusion and disruption of making contracts.m Such philosophy of Jerome is the same as Fullarton's Reflux Principle mentioned earlier. The Connection to Gold: Second, Jerome was very critical of the Federal Reserve regime as it formally linked the issuance of fiduciary currency to gold by requiring a gold reserve worth in dollars 40% of the Federal Reserve notes outstanding. In other words, Federal Reserve Banks now could issue 2.5 dollars for each dollar's worth of gold. Thus, more gold meant more money and more profits. So the Federal Reserve Banks amassed gold as much as they could and issued as much money as they could. The result was a tremendous stock of gold being sucked into the US banking system and the consequential inflation.122 The problem, however, was not confined to the inflation in the US. According to Jerome, this was the fundamental root of the Great Depression. The reason is this. After the First World War, European countries wanted to return to the gold-standard, but were unable to do so for lack of gold. Feeling uncertain, owners of gold did not sell 121 Jerome (1935) at 203. 122 Id. at 221. 107 their gold to European governments, but instead, brought it into the US, causing inflation. The inflation eventually stopped when the inflow of foreign gold stopped, and in 1921 deflation started.123 The American policy makers and bankers were so myopic that they could not see the big picture. They frantically searched the ways to absorb more gold from foreign sources and the outcome of such search was urging prompt war debt payments in gold and raising tariff.124 Thanks to the consequential inflation, the American stock market rose again and it induced more gold into the US stock market. But it was not sustainable. In the fall of 1929 finally the stock market crashed. The US policy makers gave the same old trick a second try. However, there was no more room for other countries to retreat. Upon the Smoot-Hawley Tariff Act of 1930 of the US, Great Britain abandoned in 1931 selling gold at a fixedpric e or maintaining free trade. Each nation counteracted by higher tariff barrier and banning gold export. The freedom of contract was obliterated and naturally unemployment soared as there were no contracts to perform.125 As a result, other countries could not buy American agricultural products. American farmers could not pay their debts to banks, and a wave of bank failures went over the agricultural regions.126 Soon afterwards, manufacturers' bankruptcies followed as farmers and foreigners could not buy American manufactured goods. Had the money not been linked to gold, such myopic and disastrous policies would have not been so doggedly pursued, according to Jerome. 123 Id. at 233-34. 124 Id. at 235. The tariff concerned was the Fordney-McCumber Tariff of 1922. 125 Wat 241-43. 108 Too Easy to Expand Money Supply: Third, under the Chase System, the issuance of greenbacks needed to be approved each and every time by the Congress in the form of legislation. The extension of national bank notes was also restrained by then prevalent real-bills doctrine and states' check on their operations in their territories. But under the Federal Reserve Act, there was no limitation upon the amount of Federal Reserve notes as long as the 40% gold reserve requirement was met. Furthermore, in the process of issuing Federal Reserve notes, there was no retirement of existing government notes. They were simply added on top of the existing currency and thereby doubled the total quantity of money. Furthermore, non-members of the System were also left to continue issue their own bank notes.127 The Collapse of the Federal Reserve Reeime: Jerome's view was that the Roosevelt's New Deal meant actually the collapse of the Federal Reserve regime. Furthermore, he viewed the New Deal programs as the clear signal that policy makers had not learned any better from the catastrophic experiences. According to Jerome, the lesson of the whole sequence of events was that economic activities and employment are created by contracts, not by money; but few people understood this point. If increased money supply can create prosperity, which nation would not be able to enjoy prosperity? According to Jerome, the root cause of the Great Depression was the restrictions placed on the making of contracts, i.e, all the 'Id. at 246. 'Id. at 206-10. newly introduced regulations and restrictions, such as the Securities Exchange Act, licensing on gold export, the Agricultural Adjustment Act, and the National Industrial Recovery Act.128 3.3.2. Hurst: The Federal Reserve Regime The assessment of James Hurst on the four US money laws is almost the completely opposite of the Jerome's. Hurst gave his top mark to the Federal Reserve regime, which was ranked as the lowest in Jerome's assessment, while he gave his lowest mark to the Jacksonian Regime, which was ranked as the second best in Jerome's. Clearly Hurst believed that the evolution of the monetary systems in the US was a continual progress, which finally reached its perfection by 1970, when the independence of the Federal Reserve Board was firmly established within the federal government.129 However, the theoretical basis of Hurst's assessment is not entirely clear, because he did not make himself clear on this point. Thus, we can only infer. One thing that is certain is that he did not believe in any monetary theory. Actually, he tends to deny the existence of one single right monetary theory. He seems to belong to the school of relativism in that regards. For instance, he said, To begin with, money was not a stable, sharply defined idea. What men thought of as money changed with shifts in business practice and invention and with changed expectations or demands laid upon the general economy; uses of Id. at 256-74. 110 law affecting the money supply changed with changed ideas of arrangements which served monetary functions. Uncertain definitions of money reflected ... a considerable confusion of ideas about cause and effect in the currents of affairs in which money played a part. Poor theory was confusing itself.130 Nonetheless, one thing that Hurst firmly believed was that the money stock in a society must be continually adjusted according to economic activity, which was Jerome's and Fullarton's idea, too. However, such a concurrence is only superficial, because Hurst was not clear on what he meant by "economic activity." He said, in regards to the initial restriction on the Federal Reserve regime that it could expand its credit and note issues only on short-term self-liquidating commercial papers, Ignorance, wrongheaded economic theory, and clashes of short-sighted special interest all entered into the failure to embody in law a properly systematic adjustment of money supply to economic needs.131 In other words, he believed that the Federal Reserve regime should be able to expand money supply much more; but he was not specific what the limit should be. At numerous points, he just kept stressing the "needs of economy" (p.47), the maintenance of "going money system" (p.56), "the going operations of the economy" (p.68), "the 129 Hurst (1973) at 248. 130 Id. at 4. The emphasis on 'money' is Hurst's own. 131 Id. at 69. Ill whole flow of transactions" (p.68), "the volume and timing of the business" (p.68), "general economic growth or adjustments and the level of prices" (p. 83), and "controlling money for major adjustments in the economy," etc. So we can only guess what he meant by 'economic needs', and it seems to be two things that he specifically mentioned: (a) prevention of liquidity crisis and (b) economic growth. That is, Hurst seems to have believed that the ideal monetary system is one that facilitates economic growth to its greatest possible potential without incurring panics. Such being the goals, even though he himself did not know how it can be done in the operational level, he was sure that that one prerequisite in doing so is to centralize the power on money supply into a single monetary authority. This is because the two qualities of a good monetary system - (a) the potential contribution to economic growth, and (b) the capacity to cope with financial panics - can be improved by centralization of monetary power into fewer hands, who can act decisively in a timely manner. In other words, his criterion of assessing a monetary system seems to be the degree of centralization and consolidation of the monetary power into a very small circle of decision-makers who can act quickly and decisively. Reviewing the four US monetary regimes upon this criterion, Hurst's preference ought to be the Federal Reserve regime, the Hamiltonian regime, the Chase regime, and the Jacksonian regime, in that order. XM, ax ~/ i • Id. at 79. 112 3.3.3. Brown: The Spaulding (Chase-1) Regime Brown's best pick among the four US monetary regimes is the Chase regime, which was born under the supervision of Lincoln's Secretary of Treasury, Salmon P. Chase.m The biggest reason for Brown's choice is that under the Chase, the paper money was issued directly by the government, not by private banks. Brown's criterion in assessing a monetary system is State ownership. If money is created and controlled by the government, it is good; if not, it is bad. What is important is "not what money consisted of but who created it."135 According to Brown, money is a thing that must be created and controlled solely by the government. It is none of the private bankers' business whatsoever. No fractional banking should be allowed. Thus, Brown's understanding of the Chase regime is actually only the first phase of the Chase Regime of this inquiry. Brown thinks that the issue of government paper money, the greenbacks, is the centerpiece of the Chase regime. However, there were two distinct phases in the Chase Regime, and the greenbacks were the centerpiece only in the first phase. The greenbacks were issued only for three years and then vigorously retired thereafter. A more significant element of the Chase regime is its establishment of National Banks and the issuance of national bank notes based on their purchase of government bonds. That is why the title of this subsection was labelled, 134 Ironically, however, Chase accepted the issue of government notes only reluctantly; and he vigorously condemned the issue after he resigned from the office of the Treasury Secretary in three years until his death nine years later. The government note, the greenbacks, was not Chase's idea at all. Rather, he pursued creation of national banks, which did not exist then. Brown (2008) at 102. The emphasis is Brown's. 113 "Spauling Regime", following the name of the initiator of the greenbacks, Elbridge G. Spaulding(1809-1897).136 As for other regimes, Brown seems to think that the Jacksonian regime was a kind of transitory, cleanup period in-between the stained Hamiltonian regime and the righteous Chase regime. She compares Jackson to Jesus, who cleansed the temple by throwing the moneychangers out of the Temple as described in the Matthew 21:12. And based on the cleansed foundation, Brown believes that Lincoln built the nation of human freedom and potential. She says, "America had narrowly escaped the fate of the Irish, Indians and Chinese only because President Lincoln had stood up to the bankers, rejecting their usurious loans in favour of government-issued Greenbacks."137 It is not entirely clear, however, what the essential principles of fiduciary issue that Brown advocates are, other than the one that the issue of paper money is the function of government, and not banks. In the early part of her book, she approvingly talks about the English tally system, which used the receipt in the form of wooden pieces for the payment of taxes as money. This English tally system was said to be maintained between 1100 C.E. and the mid-17th century and to have contributed to the long period of prosperity of the British economy.138 However, at another point, Brown argues that all the income taxes must be abolished.139 In addition, she endorses "a Elbridge G. Spaulding was a member of the US House of Representatives from New York's 32nd district. He was the one who not only first proposed to issue government notes but also drafted the Legal Tender Acts. 137 Brown (2008) at 224. 138 Mat 62-63. 139 Mat 426. 114 number of economists' proposal" that the government pay "a basic income guarantee, a sum of money sufficient to assure that no citizen's income falls below some minimum level"140 to every citizen. The government-issued money then "would make up for the shortfall between GDP and purchasing power," so that "unemployed and under employed people [will have] acquired incomes they could live on."141 From these statements and others, Brown seems to picture to herself the Jacksonian period when there was no income taxes, the land was relatively cheap, and the government was frugal. As to other monetary regimes, Brown condemns the Hamiltonian regime and the Federal Reserve regime equally harshly. Brown thinks both regimes as humbuggery - frauds, shams and con.142 As for the Hamiltonian regime, Brown endorses Jefferson's assessment of Alexander Hamilton as a corrupt, dangerous traitor.143 She quotes Jefferson: If the American people ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property, until their children will wake up homeless on the continent their fathers occupied.144 140 Mat 429. 141 Ibid 142 Id. at 97. 143 Id. at 54. 144 Id. at 76. 115 Brown attributes perpetuating the same class divisions of Europe in America to Hamilton's scheme of the federal bank, the first Bank of the United States, which was modeled on the Bank of England. She describes Hamilton and the bank he created in these words: Lurking behind the curtain in his new national bank, a privileged class of financial middlemen were now legally entitled to siphon off a perpetual tribute in the form of interest; and because they controlled the money spigots, they could fund their own affiliated business with easy credit, squeezing out competitors and perpetuating the same class divisions that the "American system" was supposed to have circumvented.145 Brown also quotes Andrew Jackson saying about the second Bank of the United States and its president, Nicholas Biddle, during the 1832 election: You are a den of vipers and thieves ... I intend to rout you out, and by the eternal God, I will rout you out... a hydra-headed monster eating the flesh of the common man."146 Brown extends this Jackson's characterization of the second Bank of the United States and Biddle as vipers and thieves into bankers in general based on several documents, such as the Hazard Circular of 1862, the Bankers Manifesto of 1892, and the Bankers Manifesto of 1934, which were commonly made during the period of great 145 Id. st 55. 116 economic hardship when bankruptcies and unemployment were occurring in record numbers. These documents were said to be made by some bankers with a view to foster concerted action across the board against common people. A part of them reads: We must proceed with caution and guard every move made, for the lower order of people are already showing signs of restless commotion ... Capital must protect itself in every possible manner ... debts must be collected, bonds and mortgages foreclosed as rapidly as possible. When through the process of the law, the common people have lost their homes, they will be more tractable and easily governed ... People without homes will not quarrel with their leaders.14? Brown is equally critical of the Federal Reserve regime. She quotes Representative Louis T. McFadden, who in 1934 condemned the Federal Reserve Banks and the people behind them as pirates and criminals. However, a more significant point that is implied in that condemnation and Brown's quotation of it seems to be that it was addressed to a certain allegedly alien group of people, who do not belong to America but were accepted by generosity of American people and yet betrayed them, as can be perceived from the following statement: Id. at 80. Id. at 107-108. The emphasis is Brown's. 117 These twelve private credit monopolies were deceitfully and disloyally foisted upon this Country by the bankers who came herefrom Europe and repaid us our hospitality by undermining our American Institutions.148 Brown seems to endorse Murray Rothbard's idea on what to do with banks and bankers, who was quoted to have said: "By rights, said Rothbard, the whole banking system should be put into receivership and the bankers should be jailed as embezzlers."149 At this point, it seems to be quite evident that Brown and her likeminded people are really angry not only at the Federal Reserve Banks and their controllers, but also at banks and bankers in general. 148 Id. at 127. The emphasis is Brown's. 149 Id. at 419. 118 4. CHECKING ON THE LIVING CONDITIONS As pointed out in Subsection 1.6.5, the proposed theory of this study provides prima facie explanation for all the six US monetary regimes. In order to make this prima facie theory stick, two tests are necessary, as stated in Section 1.7. One is to check on the living conditions of the six relevant periods and see on which theoretical living condition each of the actual conditions fall. The other is to check on the six historical monetary regimes and see whether each of them indeed corresponds with one of the five distinct monetary regimes as the proposed theory identifies (the Free Banking, the High Money, the Private Central Banking, the Public Central Banking, and the Social Credit regimes) and suggests that it would. The task of this chapter is doing the first kind of test. One precaution in conducting the first kind of test is that we have to look at the living conditions of the masses in the eve of'th e installation of the relevant monetary regimes, and not the living conditions during the relevant periods. This is because, as stated in the very first page of this inquiry, the assumptions here are (a) that the masses will choose such a monetary regime that suit them best, and (b) that the masses will eventually prevail. That is, the installation of a particular monetary regime is the consequence of the mass's choice based on their lives that immediately precede the event. 119 4.1. IN THE EVE OF THE HAMILTONIAN REGIME The Hamiltonian Regime was installed in 1791. Thus, when we say 'the eve', it roughly means the 1780s. And during the 1780s, the Nafts at that time - farmland - were plentiful and the relevant technology was of human-scale, while the nation was still struggling politically. Even though ten years had passed since the Yorktown battle, which effectively secured the independence of the US, the nation was clamouring for another war against the British Empire. The Nafts One of the biggest causes of the American War of Independence was the British Edict of 1763, which forbade the colonists to take up lands lying westward of the source of any river flowing through the Atlantic seaboard. This meant that the west of about half of Pennsylvania and half of Virginia could not be taken by the colonists.150 Considering that the biggest Nafts for the human species at that time was land - farmland and the land for speculation - this edict was far more damaging, not only to the leaders of the colonial America but also to ordinary people, than any other British measures that bothered the colonists.151 Therefore, it can be said that the biggest goal of the American Independence War was securing more land. Indeed, the Treaty of Paris of 150 Nock (1935) at 92. 151 See Nock (1935) at 91-99 for his assessment of the relative significance of the various British measures against the colonists. 120 1783 recognized the sovereignty of the US over the territory bound by what is now Canada to the north, Florida to the south, and the Mississippi River to the west.152 The war was worth fighting because the land mass more than doubled as a result.153 Thus, there would not be any hesitation to say that the status of the Nafts in the eve of the Hamiltonian System was plentiful. The Technology The prevalent technology at that time was of unequivocally human-scale. There were no tractors, trucks, or combines, which could make the farming a corporate venture. Farming was family business whether the family employed slaves or not. The Security The American society in the eve of the Hamiltonian Regime was not secure enough as can be seen from, among others, the fact that the Articles of Confederation, ratified in 1781, had to be abandoned only after six years. In addition, the benefit of independence was scarcely felt by ordinary people, as was revealed in the Shays' Rebellion in Massachusetts, which lasted as long as nine months. Furthermore, the nation's leaders were deeply divided until the so-called Revolution of 1800, i.e., Jefferson's becoming president, upon which the Federalists started to crumble.154 In the 152 The Wikipedia, s.v. "American Revolutionary War". 153 See Watson (1998) at 3 for the map. 154 Watson (1998) at 16 & 32. 121 meantime, European countries were still as war and each side pressured the US to stop trading with its adversaries. Especially British harassment of US trading vessels was so serious that many Americans clamoured for another war.155 A Summary Considering all these facts, the living condition of the mass of the US in the eve of the Hamiltonian Regime can be summarized as 'Yes' (on the Nafts), 'Yes' (on the Human-Scale), and 'No' (on the Security) as shown in the following Figure 4.1. That is, it was No. 2 situation, as the following Figure 4.1 summarily shows. Figure 4.1. The Living Condition in the eve of the Hamiltonian Regime 155 Id. at 33. 122 4.2. IN THE EVE OF THE JACKSONIAN REGIME Although Andrew Jackson maintained his presidency between 1829 and 1837, the Jacksonian Monetary Regime was achieved only in 1836, when the second Bank of the United States lost its federal bank charter. Since Jacksonian Regime arose by default by undoing the Hamiltonian Regime, it is not appropriate to say, "It was installed in 1836." It would be more appropriate to say, "It emerged" Anyway, when we say 'the eve', it may mean the 1820s and the early 1830s. During the 1820s and the early 1830s, the Nafts in the US - farmland - were still plentiful, the relevant technology was still of human-scale, and the nation was secure and peaceful. The Nafts Thanks to the Louisiana Purchase of 1803 during the Jefferson's presidency, the size of the nation was doubled. The Florida was added on top of that by 1819 thanks to General Jackson's aggressive military campaign against Indians.156 Land was given away practically free. Although the first Secretary of the Treasury, Alexander Hamilton, established the practice of selling public lands for federal revenue, his plan to sell never worked successfully. According to Walter Prescott Webb, the government sold the land all right, but could not collect the payment. The government tried both cash and credit, reduced the selling unit from 640 acres to 40 acres, and gave a discount when paid in cash. Many other methods were tried to boost the revenue from the public land sale. 156 Watson (1998) at 32-36. 123 But none worked, and "finally, in 1862, [the government] abandoned the whole scheme of selling land for the simpler one of giving it away."151 The Technology Although industrialization has already started in the Jackson period, the prevalent technology in the eve of the Jacksonian Regime that is relevant to vast majority of people was still of human-scale. The Security The only enemy to speak of in the eve of the Jacksonian Regime was Indians, and they were cleared ruthlessly from their lands, i.e., Georgia, Florida, Alabama, Mississippi, and Oklahoma, before and after the Indian Removal Act of 1830.158 Even the British harassment of US trading vessels during the Napoleonic War period came to an end in 1814 when Napoleon's empire was practically defeated.159 The morale and character of the people of the US was believed to be at its highest in the entire US history during the period between 1815 and 1845, when Jackson emerged as the people's hero as an army general and as the president.160 For instance, after the beginning of the 19th century, state governments began to abolish property requirements for the right to vote and hold office, began to expand the number of elected Webb (1937) at 171. The emphasis is Webb's. Watson (1998) at 74-75. Watson (1998) at 49-51. 124 offices, and began to adopt public policies designed to increase the independence of ordinary white men. The democratic equality became a distinctive feature of American culture all during the years of the so-called Jacksonian Democracy (1829-1853).161 A Summary Considering all these facts, the living condition of the mass of the US in the eve of the Jacksonian Regime can be summarized as 'Yes' (on the Nafts), 'Yes' (on the Human-Scale), and 'Yes' (on the Security). That is, it was No. 1 situation, as shown in the following Figure 4.2. Figure 4.2. The Living Condition in the eve of the Jacksonian Regime 160 Ward (1955) at 169. 161 Mat 15. 125 4.3. IN THE EVE OF THE CHASE-1 REGIME As noted in Section 1.4 and in Subsection 3.3.3, the Chase Regime can be further divided into two distinct phases: the Chase-1 or the Spaulding regime and the Chase-2 regime. One is the regime that was centered on the greenbacks, while the other is the regime that was centered on the National Banks. This section is concerned with the first regime that lasted merely three years between 1862 and 1865. Thus, we may consider the 1850s as the 'eve' of the Chase-1 Regime. One of the most prominent features of the 1850s of the US was that the people were feeling ever more frustrated. The Nafts The Chase Regime as a whole was an unequivocal declaration that the primary Nafts of the US society had been shifted from land to coal, the first kind of fossil fuels, from farming to manufacturing, or from farmland to factories. Since the early 1850s, land did not seem to be that much potent means of livelihood anymore. According to Hammond, since 1851, "the easy-money craze of the enterprisers and speculators began finally to supersede the conservatism of the western agrarians."162 When the frontier land started to be given away upon the Homestead Act of 1862, the frontier line was only about halfway across the country163, apparently meaning that there was still plenty of land, the traditional detritus. However, the remaining land, the so-called 'West' was not like the mid-West. It was treeless grassland, where it is Hammond (1957) at 617. 126 scorching hot in the summer but icy cold in the winter and it pours in the spring, but the rivers become parched gullies in the summer.164 Furthermore, the western range was pretty much all occupied by aristocratic Cattlemen mostly fromEngland , who were backed by international financiers.165 Moreover, the 160 acre land that young men thought to have obtained for free in the West, paradoxically, put him on the bondage of debt as they needed capital to till the land.166 The Technology The economic system based on fossil fuels (or the livelihood-upon-factories) started in earnest, ironically, during the early years of the Jacksonian Democracy. It reached its puberty in the 1850s, and exploded in the second half of the 19th century upon the discovery of oil in August 1859. It means that factories, which are beyond any individual mastery and acquisition, started to make its presence felt from the early 1850s. The shift of the technology from human-scale to super-human-scale was also clearly visible in the California Gold Rush (1848-1855). Although many people hoped to make a fortune out of the Gold Rush, by 1850 most of the easily accessible gold had been collected and no more gold could be obtained by human-scale technology. Webb (1937) at 171. Riflein (1992) at 72. On this point, see Rifkin (1992), especially from Chapter 12 through Chapter 16. Chamberlain (1932) at 26. The Security The higher the hill is, the deeper the vale is. If the morale and character of the US people was at its highest between 1815 and 1845, then the next period might have been the deepest vale for the US people. This should be especially so when we consider that human lives then were increasingly formed around pollution-ridden factories. Indeed, by the time when the Homestead Act was legislated in 1862, the frontier was effectively finished even though its official recognition came thirty years later. It means that people started to be forced to live in cities, even if that meant living in slums. According to Lewis Mumford, The first multi-family tenement building was erected in New York, for the lowest income group, on Cherry Street in 1835: it covered ninety per cent of the lot and standardized airless and insanitary conditions. Within a generation this new kind of dwelling was offered to the well-to-do groups, as the smartest product of fashion, the Paris flat. ... The upper-class quarters were, more often than not, intolerable super-slums. ... In New York City ... the mortality rate for infants in 1810 was between 120 and 145 per thousand live births; it rose to 180 per thousand by 1850, and 240 in 1870. This was accompanied by a steady depression in living conditions: for after 1835, the overcrowding was standardized in the newly built tenement houses. ... Dark, colorless, acrid, evil- smelling, this new environment was. ... Take one item alone from a typical paleotechnic survival: Pittsburgh. Its smoke pollution began early, for a print in 1849 shows it in full blast.167 Mumford (1961) 472. 128 People, especially the working class people, were becoming atomized and dispirited even under the honourable years of the Jacksonian Democracy. Again, Mumford says, How build a coherent city out of the efforts of a thousand competing individuals who knew no law but their own sweet wills? ... The very age that boasted its mechanical conquests and its scientific prescience left its social processes to chance, as if the scientific habit of mind had exhausted itself upon machines, and was not capable of coping with human realities. The torrent of energy that was tapped from the coal beds ran downhill with the least possible improvement of the environment; the mill-villages, the factory agglomerations, were socially more crude than the feudal villages of the Middle Ages. More than anything else, however, the biggest social problem in the US in the eve of the Civil War (April 12,1861 - April 9,1865) was traditional elite stocks' massive dislocations. In a rapidly industrializing nation, these people could not find their right places in their own society. The frustration of these people was driving the nation into the Civil War mainly through the Abolitionist movement, the entirely irrelevant vent of their anger. David Donald described these people's situation in these words: Mumford (1961) at 469, 433 & 464-72. 129 Social and economic leadership was being transferred from the country to the city, from the farmer to the manufacturer, from the preacher to the corporation attorney. Too distinguished family, too gentle an education, too nice a morality were handicaps in a bustling world of business. Expecting to lead, these ... people found no followers. They were an elite without function, a displaced class in American society. ... In these plebeian days they could not be successful in politics; family tradition and education prohibited idleness; and agitation allowed the only chance for personal and social self-fulfillment. ... They did not support radical economic reforms because fundamentally these ... men and women had no serious quarrel with the capitalist system of private ownership and control of property. What they did question, and what they did rue, was the transfer of leadership to the wrong groups in society, and their appeal for reform was a strident call for their own class to re-exert its former social dominance. Some fought for prison reform; some for women's rights; some for world peace; but... an attack on slavery was their best, if quite unconscious, attack upon the new industrial system.169 That is, according to David Donald, the nature of the American Civil War was not really about the freedom of the black people, of whom the abolitionists did not truly care. It was about steam that needs to find its vent somewhere somehow. It was about another 'nervous generation' that came 60 years before the "nervous generation" of the 1920s that Roderick Nash is talking about. Donald (1959) at 33-34. 130 Overall, in the eve of the Chase-1 Regime, American people, especially the working class and the traditional elite stocks were deeply frustrated. This was clearly a period of insecurity. A Summary Considering all these facts, the eve of the Chase-1 Regime was a period of transition from the 'Yes (farmland) and Yes (human-scale)' state to 'Yes (fossil fuels) and No (super-human-scale)' state. In the meantime people were deeply frustrated. That is, it was No. 2 situation again on their way toward situation No. 3 or 4. Figure 4.3. The Living Condition in the eve of the Chase-1 Regime 131 4.4. IN THE EVE OF THE CHASE-2 REGIME The living condition of the mass in the eve of the Chase-2 Regime, which was launched in earnest in 1865, cannot be much different in theory from that of the Chase-1 Regime, as the Chase-1 Regime lasted only three years from 1862 to 1865. However, the Chase-2 Regime took about 15 years from 1863 to 1878 to be erected and fully operational.170 Thus it would be appropriate to take these 15 years as the 'eve' of the Chase-2 Regime. The Nafts During the late 1860s and in the 1870s, the prevalent Nafts of the American society was decisively shifted from farmland to oil. As can be noticed from Figure 2.8 on page 74, the oil price dropped precipitously. In 2008 dollars, the price of a barrel of oil in the mid-1860s was $110. It was reduced by half five years later, then it fell below $20 at the end of the 1870s. Considering the rapid industrialization during this period, this drastic fall of oil price within the span of 15 years indicates how freely the oil flowed throughout the economy. This condition of plentiful oil or plentiful Nafts continued for 90 years until the 1973 Oil Shock. Furthermore, this period, i.e., between 1863 and 1878, was the period when the American 'West' became the World's premier pastureland. As the pastureland of Scotland and Ireland was overgrazed by the mid-19th century, British bankers and 170 More detail on this point will follow in the next chapter. 132 businessmen turned their attention to the western plains of North America.171 If cotton was king before the Civil War, it was cattle that became king since the Civil War, because the new urban middle and working classes basked in the postwar prosperity created insatiable demand for beef. The country was afire with the so-called "Grass Rush" in the 1870s, which was another rush west that could be compared to the great gold rush of 1849.m Ever since, the price of beef has continuously been downhill until today. The grassland of the 'West' was certainly a new kind of Nafts for the Americans. In the meantime, farmland became an object of speculation rather than the basis of the 'producing kind of economy' in the terminology of Oswald Spengler, which was discussed in Subsection 1.5.1. According to Heaton, Even while there was still abundant cheap or free wild land, farmers did not look solely to the produce market for their income; it was in the land market that they hoped to get their greatest reward, in the form of earned and unearned increment. De Tocqueville, Caird, and other observers of the westward movement comment on the way a farmer would take a piece of land, improve it, and then sell a ready-made farm; but while he had been clearing and breaking prairie, roads or railroads had come, the stream of settlers had broadened, and the sale price therefore included much unimproved value as well as a return for the pioneer's labour.174 171 Riflcin (1992) at 63. mid.txn. 173 Id. at 86. 174 Heaton (1934) at 540. 133 The Technology It was not only Nafts that shifted in so short a time period. Technology, too, decisively shifted to super-human-scale almost overnight. The Pacific Railway Act was enacted in 1862 and the First Transcontinental Railroad of the US was completed in 1869. Once the railroad was built, whether it was cotton, grain, or dairy products, all the fruits of faming were increasingly dependent on the railroad to reach distant markets, and thus, even a slightest change in railroad fares or its tracks determined the farmers' life and death.175 The first skyscraper, i.e., New York's Equitable Life Assurance building, was built in 1870, which signalled the almost limitless growth of mega-cities. The successful commercialization of refrigeration technology in 1875 made not only cattle-raising but also all the downstream industries such as slaughtering and meat packing mega-sized and vertically integrated. The Security From the Civil War, "the North emerged ... triumphant, powerful, prosperous, and vindictive."176 Previously frustrating lives of the Northerners suddenly turned secure and comfortable. One of the reasons was the federal Civil War pension, which started to be put into effect in 1862. Whereas the high protective tariff, another form of bounty for the Northerners at the cost of the Southerners, flowed only through large For the importance of the railroad to farming, see for example Olien & Olien (2000) at 6-8. Webb (1937) at 11. manufacturers, this bounty flowed directly to individual ordinary Northerners. According to Webb, The pension payments to the North had a close relation to the rise of manufacturing and industry in that section. This pension money was flowing in at the time small manufacturing establishments, destined to supply the nation with goods, were getting a start. The father's monthly check freed the son from financial strain and enabled him to put all his resources into the business. Father might even help by lending a few dollars or scotching a loan at the bank. Young historians could have a world of fun hunting for the pensions in the industrial woodpiles of the North in the period between 1865 and 1890. Unfortunately, but perhaps fortunately for them, such investigations would be attended with difficulty of a law, passed when Civil War pensions were so scandalous, which does not permit the pension list to be made public. The only thing the historian would have to find out, however, is whether the founder of the Overshot Shoe Company helped save the Union. If he did, the pension may be taken for granted. No investigation is needed to prove that pensions gave money to near by customers who bought Overshot shoes and kept the factory going until it was over the rough spots. ... The total gifts from 1862 to 1936 amounted to a little less than $8 billion. ... Of the nearly $8 billion sent out of Washington about $7 billion went to the North and about $1 billion has been distributed to the South and West combined. ... In conclusion, we see that the government has conferred upon the North a subsidy for business, an annual bonus for patriotism, and a monopoly for ingenuity.1T7 Webb (1937) at 20-23. Webb meant tariffby 'a subsidy for business', and patents by 'a monopoly for ingenuity'. 135 A Summary Considering all these facts, the living condition of the mass of the US in the eve of the Chase-2 Regime can be summarized as 'Yes' (on the Nafts), 'No' (on the Human- Scale), and 'Yes' (on the Security). That is, it was No. 3 situation. Figure 4.4. The Living Condition in the eve of the Chase-2 Regime 4.5. IN THE EVE OF THE FEDERAL RESERVE-1 REGIME The Federal Reserve Regime was officially launched by the Federal Reserve Act of December 23,1913. However, it was not until the entrance of the US into the First World War in 1917 when the Federal Reserve System was started to be put into use 178 Moulton(1925)at600. 136 The origin of the Federal Reserve Regime was the so-called "Baltimore Plan" of 1894, modeled after the Canadian system of protecting note issues by a joint guaranty fund contributed by all banks.179 There were many attempts to make this happen, but it was the disastrous financial panic of 1907 that raised anew the agitation for banking reform, which finally gave rise to the Federal Reserve Act of 1913. Such being the case, we may consider the twenty-year period roughly between 1894 and 1913 as the 'eve' of the Federal Reserve-1 Regime. The Nafts The traditional Nafts, farmland, were exhausted by the early 1890s and, as a result, the US at last started to wage imperial wars starting fromth e Spanish-American War of 1898.180 Moreover, the importance of farmland to American people declined significantly, as can be noticed fromth e decreased proportion of non-urban population from 70% in 1880 to 60% in 1900, and to 49% in 1920. However, the new Nafts, oil, was flowing freely. Furthermore, another kind of new Nafts, the western range, started to provide new livelihoods to millions of Americans. The red meat industry became the nation's second-largest employer by 1857 and continued to play a dominant role in American economy until the first half of For the characterization of the Spanish-American War as the first US imperial war in the aftermath of the end of its own frontier, see Webb (1937) at 189-90. 137 the 20th century.181 Thus, in spite of the much reduced importance of farmland, the Nafts of the US were still plentiful. The Technology However, the two new Nafts - oil and the western range - were, unlike farmland, not something that ordinary people could get their hands on. They were quickly monopolized and flowed only through a fixed conduit that was built and owned by the richest of the superrich.182 In the meantime, by 1900, the balance of political power had shifted from the rural to the urban districts,183 which meant that farmland was no more the primary Nafts. The nation was not a "commodity" country any more, and was a manufacturing and exporting nation.184 There was no room any more in the economy in which human-scale technology can play any significant role. The Security In the beginning of the period of our concern, i.e., in the mid-1890s, the US was not yet the superpower, but there was no outside force that could get in its way to it. America was an outstanding, prosperous and powerful nation in every respect, thanks to the new Nafts and the industrialization based on them. However, the spirit of the US 181 Rifkin (1992) at 113-14 & 116. 182 See for example Olien & Olien (2000) on why the oil was inescapably monopolized. See Rifkin (1992) on how the western range was monopolized. 183 Chamberlain (1932) at 122. 184/rf.atll9. 138 people, "if... not the whole people ... a very large part of the whole"185 people could never be so broken and hollow. According to John Curtis Underwood, The typical American rises to the sound of a factory whistle or a fifty- cent alarm clock; gets into clothes that are to a greater or less extent shoddy, and produced by sweated labor; consumes a breakfast made by machinery and from the cold-storage warehouse whose staples are trust-made or controlled; rides to work in a conveyance owned or controlled by a ring of franchise robbers or profit parers at the community's expense; reads a yellow journal; goes to work for a trust or a concern dominated by one; eats a cold storage dinner; goes to see a machine-made drama, plays mechanical card games or reads mechanical literature; and so to bed.186 In other words, a very large part of the US people was living a proletariat life, i.e., propertyless, wage^slave life. In spite of its spectacular outward appearance, the US was suffering a regime-threat from its very core. Marxism, which arose in the late 1840s in Europe, finally arrived in America in 1872 in the form of the Social Democratic Workingman's Party, the first Marxist political party in the US. There was also a dying middle class to kick back in the form of Fascist movements.187 The American society was approaching the watershed point where the 'bifurcation' option was either Soviet style socialism or Nazi style fascism. The period of the relevant tumults and pains is often wrapped up in a single phrase, 'the Progressive Era'. 185 Id. at 281. lg6lbid. 139 Such a bifurcation, however, did not get materialized. First, Marxism started to fizzle out from around 1900, as labour chose to side with Big Businesses, because all labour wanted was a better compensation.188 Moreover, the proletarianization did not necessarily result pauperization as Marx predicted, due to the rise of white collar proletariats. The no-property group was split into two subgroups - the real proletariats and the white collar proletariats - and weakened. Second, the fascist inclination, too, could not reach the critical point due to the continuous waves of large number of immigrants, according to Mills. This is because the older immigrants always had newer immigrants that they could look down on while the newer immigrants were always busy in "the Americanization struggle rather than the class struggle."190 Due to the heterogeneity of the population in so many different dimensions - language, culture, religion, race, color, etc. - prevented the people from forming any homogeneous political group and become a force. Even if the class struggle did not reach the critical point, however, it is still true that the class struggle became the unequivocal fact of life of Americans in the early part of the period of our concern. Then, there came the age of total war in 1914. Prior to the First World War, all the wars were "cabinet" wars, i.e., short wars for some limited ends with clear, formal agreements with one's allies on the payoff for the assistance.191 Even the First World War was started as any other cabinet wars. Things, however, soon 187 Id. at 191. 188 Id at 40. 189 For a detail see Mills (1951) at 296-97. 140 changed and it became the first 'total' war in modern history. That is, prior to the First World War, all modern wars were Trinitarian. It means that the people were excluded from war as far as possible, while the army was the machinery of war directed by the government. However, in the First World War, the Trinitarian doctrine was no more valid. Wars were no more instruments, but became the end in itself because the destructive power of weaponry became so powerful that the entire country needed to become a gigantic army with all the people, economy, politics, government, and everything else in an integrated whole. Distinctions between army and civilians broke down. According to Van Creveld, Armed violence, far from being limited to combatants, escaped its bounds. Terrible atrocities, including even the planned starvation of tens of millions, were carried out against the inhabitants of occupied countries both in Europe and in Asia. ... Meanwhile the sky was filled with mighty fleets of heavy bombers ... They deliberately set out to kill civilians, women and children not excluded. Entire cities were destroyed by firestorms in a manner not seen in Europe for three centuries.192 Then why did wars suddenly become so total? What made people so vicious and cruel? The answers to these questions seem to lie in one common phenomenon: the globalization of the struggle for survival. Prior to this period of our concern, the Mills (1951) at 341. Van Creveld (1991) at 41 & 44. 141 struggle for survival was largely local, national, or regional at best. But by the early 20 th century, the world was so much tightly interconnected and the reach of the weapons became so much greater. Thus, any seemingly local problems in a part of the world did not remain local any more. This point is well explained by William McNeill, who says: The military convulsions of the twentieth century can be interpreted ... as responses to collisions between the population growth and limits set by traditional modes of rural life in central and eastern Europe in particular, and across wide areas of Asia ... Family duties and moral imperatives of village custom could not be fulfilled. The only question was what form of revolutionary ideal would attract the frustrated young people. ... Pressures on village custom and traditional social patterns intensified until 1914, when World War I diverted their expression into new channels and, by killing many millions of people in central and eastern Europe, did something to relieve the problem of rural overpopulation. But it was not until World War II brought much greater slaughters as well as massive flights and wholesale ethnic transfers that central and eastern European populations replicated the French response to the revolutionary upheavals at the beginning of the nineteenth century by regulating births to accord with perceived economic circumstances and expectations. As a result, after 1950 population growth ceased to put serious strain on European 193 society. McNeill also explains the softening of civil strife or class struggle that had seemed imminent within each of the leading countries of the West in the decade before the First World War with release in an orgy of patriotism and militarism in 1914. In 142 other words, the internal insecurity and external threat were two separate things no more. They came to align on a single continuum playing a trade-off with each other. When we view the situation of the US security in the eve of the Federal Reserve-1 Regime in this light, it was definitely an insecure period. A Summary Considering all these facts, the living condition of the mass of the US in the eve of the Federal Reserve-1 Regime can be summarized as 'Yes' (on the Nafts), 'No' (on the Human-Scale), and 'No' (on the Security). That is, it was No. 4 situation. Figure 4.5. The Living Condition in the eve of the Federal Reserve-1 Regime McNeill (1982) at 310-11. 143 4.6. IN THE EVE OF THE FEDERAL RESERVE-2 REGIME The Federal Reserve-2 Regime took place upon the Treasury-Federal Reserve Accord of March 3,1951. It was not something triggered by an act of Congress. It was something achieved by a very simple agreement between two organizations.194 It did not involve any changes in money laws. Upon this Accord, the Federal Reserve was released from its position as a junior partner or a subordinate of the Treasury and restored its original, legally entitled position as an independent agency. The fundamental reason for such a change was the end of the Second World War in 1945. With the end of wartime emergency, "it could no longer be maintained that the nation's security depended upon the assured ability of the Treasury to borrow on its own terms; neither could it be expected that inflation would be dammed up by price and wage controls, making monetary expansion irrelevant to the behaviour of the price level."195 Thus, it can be said that the period of a little more than five years prior to the Treasury- Federal Reserve Accord was the 'eve' of the Federal Reserve-2 Regime. The Nafts Immediately after the Second World War, the US emerged as the superpower of the world as the only industrialized nation whose facilities did not get destroyed by the War. Having set a bad example of protectionism in the 1920s, the US reversed its See Stein (1996) at 241-80 for a detail. Stein (1996) at 244. 144 course and turn to free trade,196 presumably knowing that it had no competitor. Ever since, until today, almost all the Nafts of the world has become freely available to the US. The primary Nafts of the times, oil, continued flow freely and cheaply. The Technology The prevalent technology became completely super human-scale. Especially with the acceleration of suburbanization in the post-War years, even a very simple thing became impossible without three things: automobile, gasoline, and electricity, all of which could only be made by mega machines. There was nothing left that a single individual or a family could do for a living. Even farming had become a corporate affair, as it began to require expensive farm machinery. The Security In spite of the ever more powerful weapons of mass destruction and the Cold War, the world became safer overall after the Second World War. This is ironically because humans' destructive power became so much more powerful as to commit a global suicide. The civil strife, which had threatened the integrity the Western nations, disappeared by this time, largely thanks to "the twin processes that constitute a James (2001) at 109. 145 distinctive hall mark of the twentieth century: the industrialization of war and the politicization of economics."197 A Summary Considering all these facts, the actual living condition in the eve of the Federal Reserve-2 Regime can be summarized as 'Yes' (on the Nafts), 'No' (on the Human- Scale), and 'Yes' (on the Security). That is, it was No. 3 situation. Figure 4.6. The Living Condition in the eve of the Federal Reserve-2 Regime McNeill (1982) at 294. The "politicization of economics" means the replacement of market economy with command economy, according to McNeill (1982) at 316. 146 4.7. CHAPTER SUMMARY As stated in the beginning, the task of this chapter was to check on the living conditions in the eve of the six monetary regimes of the US and see on which theoretically identified condition each of those six historical living conditions falls. It was found that the Hamiltonian Regimes falls on the living condition No. 2, the Jacksonian on No. 1, the Chase-1 on No. 2, the Chase-2 on No. 3, the Federal Reserve-1 on No. 4, and the Federal Reserve-2 on No. 3. If we trace the changing living conditions, it looks like the following Figure 4.7. 2 3 4 *(2) * ^r *'(1) < H Figure 4.7. The Locus of the Six Living Conditions 147 5. CHECKING ON THE IDENTITY OF EACH REGIME Now the next task to perform to confirm One prima facie theory's validity is to check on the identity of each monetary regime. In other words, it is to see whether each historical monetary regime indeed was each of the five theoretically identified regimes as the prima facie theory asserted. That is, we are asking such a question, for example, "Was the Hamiltonian Regime indeed the [Extemporary] Higher Money regime?" In an effort to correctly identify the nature of a monetary regime, we may ask four different questions first: (a) What was money?; (b) What purpose was it to serve?; (c) Who controlled the money supply?; and (d) How was the amount of money supply determined? Admittedly, we may not need to ask all these four different questions solely for the purpose of identification, but it helps us understand them fully. These four points are to be examined first against the four money laws without distinguishing Chase-1 and 2, or Federal Reserve-1 and 2. The identity of the six historical monetary regimes will then be sorted out afterwards. 5.1. THE HAMILTONIAN REGIME (1791-1836) The Hamiltonian monetary regime manifested itself in two "Bank of the United States," each of which had twenty years of life between 1791 and 1811 and between 148 1816 and 1836, respectively. The first Bank of the United States [hereinafter the Bank- 1] started its operation from 12 December 1791 in Philadelphia.198 It was incorporated on 25 February 1791 by 'An Act to incorporate the subscribers to the Bank of the United States'199 [hereinafter the BankAct-1]. Having failed to renew its charter, it closed on 4 March 1811, even though its New York office continued its business by the name of the Bank of America, chartered by the state of New York in June 1812.200 After about six years of absence of any national bank, the second Bank of the United States [hereinafter the Bank-2] started its operation in Philadelphia from 7 January 1817201 upon its incorporation on 10 April 1816 by 'An Act to incorporate the subscribers to the Bank of the United States'202 [hereinafter the Bank Act-2]. The charter of the Bank-2 also expired without renewal in February 1836, when it ceased to be the federal bank. However, the headquarter bank continued its business under a state charter by the name of the United States Bank of Pennsylvania203 until it went bankrupt in 1841.204 The combined tenure of the two banks was a little more than 38 years. 5.1.1. The Money In the Hamiltonian Regime, four different kinds of currencies were deemed to be money: species (gold and silver coins), state bank notes, Treasury notes, and federal 198 Hammond (1957) at 125. 199 1 Statutes at Large 191, Approved February 25, 1791. 200 Hammond (1957) at 162-64. 201 Id. at 246. 202 3 Statutes at Large 266, Approved April 10, 1816. 203 Hammond (1957) at 439. 149 bank notes. However, Treasury notes were only occasionally used in very small quantities. The state bank notes were not something that federal government intended to use as money at all, but could not help it205 as the states were sovereignties by themselves in the early period of the nation. From the federal government's point of view, however, the federal bank notes were intended to be the money in spite of the Constitution, which aspired to do away with paper money. Species; According to the Constitution of the United States, which went into effect on the first Wednesday in March 1789, the federal government has the power to coin money and regulate the value thereof206 while states (i.e., provinces) are prohibited from coining it, emitting paper money, making anything but gold and silver legal tender, or impairing contracts.207 Also there was (and still is) the provision that prohibit laws "impairing the obligation of contracts" in the same clause. The reason why this was included in the monetary provision in regards to the states was because "the violation of contracts had become familiar in the form of depreciated paper money made legal tender," according to James Madison.208 Although there is no express provision in the Constitution that prohibits the federal government from doing similar things, the same prohibition clearly applied to An explanation on this point will follow in a few pages. The fifth clause of the Article I Section 8. 150 the federal government, too, at least in terms of the intention of the delegates who framed the Constitution.209 This intention of doing away with paper money was also clearly reflected in the statute in regards to how federal tax was to be collected210, which said, "the duties and fees to be collected ... shall be received in gold and silver coin only ... that is to say, the gold coins of France, England, Spain and Portugal, and all other gold coin of equal fineness ... and the Mexican dollar ... the crown of France ... the crown of England ... and all silver coins of equal fineness."211 One thing to be noticed here is that virtually any gold and silver coin was accepted by the federal government as money regardless of its national origin. This position of accepting foreign species was confirmed repeatedly in the following years by various legislations, such as "An Act regulating the currency of foreign coins in the United States" of 10 April 1806, "An Act to incorporate the subscribers to the Bank of the United States" of 10 April 1816, "An Act making the gold coins of Great Britain, France, Portugal and Spain, receivable in payments on account of public lands" of 3 March 1823,212 "An Act regulating the value of certain foreign coins within the United States" of 25 June 1834, of 28 June 1834, and of 3 March 1843,213until it came to an end 207 The first clause of the Article I Section 10. 208 Hammond (1957) at 92. 209 Id. at 92-93 for a detail. 210 'An Act to regulate the Collection of the Duties imposed by law on the tonnage of ships or vessels, and on goods, wares, and merchandises imported into the United States', 1 Stat. 45 (31 July 1789). 211 211 Section 30. 212 3 Stat. 779(1823). 213 4 Stat. 681 (1834), 4 Stat. 700 (1834), & 5 Stat. 607 (1843). 151 by the statute of 21 February 1857,214 which repealed all former acts authorizing the currency of foreign gold and silver coins to be a legal tender in payment of debts, and, again, by the statute of 22 June 1874215, whose Section 3584 stated, "No foreign gold or silver coins shall be a legal tender in payment of debts." State Bank Notes; However, the laws were a product of idealism, which could not be realized in real life, because actually there was little gold and silver in the US at that time. Even though people had property and will to pay their debts, they could not raise hard money as there was none. Because of this impractical law, small farmers often suffered injustice of being forced to accept depreciated paper currency and yet required to discharge obligations in gold and silver.216 Thus, regardless of the prohibition in the Constitution, each state allowed a private bank to arise; and used the private bank' notes as their de facto money. Even though the banks were operated with a view to private profits, their notes were given governmental authority.217 Ordinary people, mostly farmers then, were in a fix as they could not refuse banknotes, which tended to be cheapened quickly over time, because the alternative - gold or silver coin - was not available. 11 Stat. 163(1857). 17 Stat. 712(1874). Hammond (1957) at 11. Id. at 67. 152 Even though the private banks issued their notes with the promise to pay species, but they rarely had any species. They simply issued notes out of nothing and commanded purchasing power. Thus, people of all walks of life continuously complained that much of the wealth possessed by bankers, merchants, stock-jobbers, and all the enterprising people were actually stolen wealth from farmers, miners, and fishermen.218 People suffered knowingly. All that they could do to defend themselves was to make everyone else suffer equally. People knew that banknotes were not money and merely promissory notes or evidences of debt. The note holder's rightt o be redeemed bank notes in specie money could not be any simpler both in principle and in law. However, a note holder could scarcely get his/her money in practice. If anyone demanded money, that person was looked on as traitor of the whole community.219 The State apparatuses also repeatedly legalized banks' unlawful acts and refused to protect the just right of creditors and note holders. Federal Bank Notes: The money that the federal government wished to establish as the sole money of the nation under the Hamiltonian regime was the federal bank notes. Its status of money was given by law such as the Bank Act-1 (Section 10)220, the Bank Act-2 (Section 14)221, 218 Mat 36-39. 219 Id. at 691. 220 Section 10, An Act to incorporate the subscribers to the Bank of the United States, 1 Stat. 191 (1791). 221 Section 14, An Act to incorporate the subscribers to the Bank of the United States, 3 Stat. 266 (1816). 153 and 'A Resolution relative to the more effectual collection of the public revenue' [hereinafter the Statute of 1816].222 But the federal government accepted not only the notes of the Bank-1 or the Bank-2 but also state bank notes. When the Bank-1 was established in 1791, there existed four state banks in four leading cities: Philadelphia, New York, Boston, and Baltimore.223 Actually the receipts of the federal government were mostly in the notes of these state banks.224 The government deposited them in the Bank-1, which requested redemption of those state bank notes in species upon its discretion.225 The legality of the federal government's accepting state bank notes was later recognized by the statute of 1816, which provided that "all duties, taxes, debts, or sums of money, accruing or becoming payable to the United States" may be "collected and paid in," among other things, "notes of banks which are payable and paid on demand in the said legal currency of the United States." as codified in the 'Resolution relative to the more effectual collection of the public revenue' of 1816. 5.1.2. The Cause According to Ralph George Hawtrey (1879-1975), the use or purpose of money is two-fold: it provides a medium of exchange and a measure of value. Between these two, the latter is much more important use or purpose of money, explains Hawtrey, 3 Stat. 343 (30 April 1816). Hammond (1957) at 66. Id. at 198. 154 because exchanges still occur in the absence of medium of exchange, by way of incurring a debt, while a debt cannot exist without some common measure, or the so- called "money of account," which is bound to have certain continuity. Hawtrey explains the importance of the continuity in these words: If the bargains of a day were completed within a day and every one could exactly balance his debts against his credits, the next day's business might start with an entirely new unit, as arbitrary as the other and having no relation to it. But in fact this balancing of debts and credits is impossible; each day's transactions will leave a residue of indebtedness to be carried forward to the next. The same will therefore necessarily be used from day to day. Each day's business starts with the record of the previous day's closing prices calculated in the unit... Therefore, arbitrary as the unit is, capricious variations in its purchasing power will not occur.226 However, the first federal money law of the US is surprisingly aloof from the ideal of the stable money of account. The enabling legislation of the Bank of the United States did not say a word about the provision of stable money of account. It only obscurely mentioned in a principle of operating the Bank, which said, "upon the principles which afford adequate security for an upright and prudent administration thereof."227 The stated purposes of the Bank of the United State were three: (a) the Id. at 301. Hawtrey (1930) at 3. See the preamble of the Bank Act-1. 155 successful conducting of the national finances, (b) facilitating the obtaining of loans for the use of the government in sudden emergences, and (c) facilitating trade and industry in general.228 It can be noticed that the first and second are for the benefit of the government and the third stated purpose is for the benefit of merchants and industrialists. That is, although it would be easy for one to assume that the first money law installed in the US would be one that aspired to have stable money as the Constitution demanded, the immediate cause of the Bank Act-1 and the Bank Act-2 was not providing stable money of account. It was to provide people with a means of paying taxes. The need to collect taxes was coming from the federal government's assumption of state debts. One of the first laws legislated by the first Congress was the statute of 4 August 1790, the purpose of which was to convert the debts of the states in the amount of $21.5 million into a debt of federal government.229 5.1.3. The Controller Although the federal government owned 20% of the stocks of the Bank-1 and 2, neither the Bank Act-1 nor the Bank Act-2 specified government's role in the operation of the Banks, except for the provision in the Bank Act-2 that five of the twenty five directors shall be annually appointed by the President of the United States.230 Thus, the Board of Directors had the sole power to control the money supply in the federal level. 228 See the preamble of the Bank Act-1. 229 Section 13, An Act making provision for the Debt of the United States, 1 Stat. 138 (1790). 230 Section 8, 3 Stat. 266 (1816). 156 Such a non-interventionist stance of the government toward the Bank was inescapable compromise for the government because each time when the Bank was needed to be established, the credit of the federal government was so low that it could not possibly obtain funds without relying on persons of private wealth.231 Because of this background, the management and the dominant shareholders of the Bank tended to believe the Bank was their personal property rather than a public institution. The Bank-1 was established out of government need, and it was forced to close by the rival businessmen group in spite of the government's wish to continue while the management was indifferent. On the other hand, the Bank-2 was established out of government need, too, but was closed down by a popular people's President, Andrew Jackson, against a wealthy class that included most Congressmen regardless of their affiliated political party, while the management offered a deadly resistance. In other words, it was the private gains rather than government gain that determined the enthusiasm and liveliness of the Bank. This dynamics may better be explained by looking at those people who controlled them. The Case of the Bank-1; In the case of the Bank-1, the controllers of the Bank were the so-called 'Federalists', an established, limited group of capitalists whose accumulation of capital was primarily based on foreign commerce, especially with England. Their centre of 231 See Hammond (1957) at 41 for the fiscalconditio n of the federal government in the eve of the Bank-1; 157 economic activities was Philadelphia. For the first six years of the Bank-l's existence, the relationship between the government and the Bank-1 was very friendly as the Federalists, its creators, were in power with President Washington at the head of the government and with Alexander Hamilton and Oliver Wolcott at the head of Treasury. But for the next four years, the relationship was not that friendly even under the Federalist government as President John Adams, who was a son of a farmer of modest means and a faithful puritan himself, personally abhorred all banks. As a matter of fact, other Federalists held a grudge against him as he was "too vain, opinionated, unpredictable, and stubborn to follow their directions." For the remaining ten years, the relationship was a cool but peaceful one even under the anti-centralism Presidents, Thomas Jefferson and James Madison, because over time, even the anti-centralists realized that banks were necessary evil that the nation could not do away with. Nonetheless, the charter renewal was defeated in 1811 by merely a margin of one vote both in the Senate and in the House by the opposition of two groups of people who were poles apart from each other: "unreconstructed agrarians" who could not abandon the ideal of hard-money only economy, and a new breed of businessmen who held control of the state banks and wanted to eliminate the Bank-1 that restrained the state banks' unfettered issuing of notes. What is interesting is that the Bank-1 's directors did not care much about renewing the charter as they could make and See Hammond (1957) at 230 in the eve of the Bank-2. 232 The Wikipedia, s.v. "John Adams". 158 more money other ways and live happier lives while the stockholders, being largely foreign, had little to say in the matter.233 The Case of the Bank-2: In the case of Bank-2, the controllers were opportunistic businessmen at first, who tried to use Bank-2 for their personal gains. This was nothing intended by the government, but because the government was so destitute after the War of 1812 that it levied too oppressive a tax on Bank-2, which drove Bank-2 to pursue profit vigorously, while allowing a considerable portion of its stock to find its way in the hands of speculators.234 In 1819 the monetary scene was that of the Revolutionary War all over again, in which every state issued paper money that was legal tender.235 The note issues of all state banks reached the sum of $100 million.236 The condition of the Bank-2 was so bad that "its survival damned it worse than failure would have done."237 Its operation was restored to what it supposed to be only after Langdon Cheeves was elected its president in 1819; and his conservative policy was continued for a time after Nicholas Biddle succeeded to the presidency of the Bank in January 1823.238 By the time when Nicholas Biddle was put in the helm of the Bank-2, the US society was drastically different from that of thirty years before. When the federal 233 Hammond (1957) at 222-23. 234 Id. at 252. 235 Id. at 236. 236 Jerome (1935) at 149. 237 Hammond (1957) at 259. 238 Jerome (1935) at 152-53. 159 government was launched, the US society was largely divided into two groups: the Federalists, a moneyed minority of the population vs. agrarians. Now in the place of a handful minority of aristocratic Federalists arose a new generation of businessmen, counting thousands, who "believed in America as a place to get rich."239 To the agrarian majority, 'business' was synonymous with 'corruption'.240 Nicholas Biddle, born to a rich and powerful family of Philadelphia and a man of affairs and letters combined in him241, did not seem to belong either side at first. Biddle superbly performed what he was expected of, that is, working as a fiscal agent of the federal government and restraining state banks' abusive note issue.242 Historians praised Biddle's performance by such words as "Probably never since 1789 had the United States had a dollar which was sounder or more stable" than the period of 1826-32. Even President Andrew Jackson agreed to this assessment.243 Probably Biddle could do so partly thanks to the auspices of the President John Quincy Adams, the son of the second President John Adams, who himself, like his father, did not belong to either side of the two major opposing forces of the American society at that time. However, Biddle's sagacity and good judgment started to be impaired when he got himself entangled in politics and sided with the Whig Party against the Andrew Jackson's Democratic Party.244 But Biddle's entanglement with politics seemed to have 239 Hammond (1957) at 273. 240 Id at 276. 241 Id. at 293. 242 Id. at 286-325. 243 Id. at 374-75. 244 Jerome (1935) at 153. 160 started all by his elitism more than anything else.245 Biddle, who himself voted for Jackson in 1828246, crossed Jackson by refusing to fill some of the directorship of the Bank-2 by those people endorsed by the President-elect Jackson.247 Apparently Biddle must have thought the Bank-2 was his own and private shareholders'. Having failed to secure the control of the Bank-2, Jackson, who must have thought the Bank as a part of the federal government, may have perceived the Bank-2 as nothing different from any other private banks and Biddle as nothing different from any other private banker. Facing stubborn Biddle, who held onto his position as the President of the Bank in spite of repeated signals from the Jackson government to resign, Jackson considered establishing a wholly new national bank in 1829.248 On the other hand, Van Buren and his New York constituents, who had been frustrated with the Bank-2's suppressing the growth of banking in New York249, preferred to abolish the Bank-2 altogether250 and planned to set up a new bank in New York on the scale of the Bank-2.251 And yet, the majority of the Jackson's Cabinet members opposed an attack on the Bank-2, and Biddle was reappointed government director by the President 245 On this point Hammond (1957) gives a very different assessment. It is full of calumny on Andrew Jackson, which is so severe that gives a suspicion whether Hammond himself or his family had a long history of personal or familial vendetta with Jackson or his associates. As far as the period of Jackson is concerned, Hammond (1957) gives so many contradictory and incoherent stories. It seems that Watson (1998) is much better and impartial account of the part of the history of the Jackson period. 246 Hammond (1957) at 366. 247 Mat 369. 248 Mat 370. 249/rf.at353. 250 Id. at 370-71. 251 Id at 385. 161 Jackson in 1830.252 But then the relationship turned sour in August 1831 when Biddle's brother was killed in a duel that was provoked by slurs of a Jacksonian on Biddle.253 Instead of reflecting on himself of his refusing to acknowledge the public nature of the Bank-2 and of his favouritism, Biddle "freely distributed loans and favours to its most powerful friends"254 to buy power of Congress in defiance of President Jackson. Indeed, thanks to such schmoozing, the bill renewing the charter of the Bank-2 was readily passed in Congress in July 1832, which Jackson vetoed. According to Watson (1998), the reason for Jackson's veto was the following: Unequal treatment of the citizens was more than simply unfair. If wealthy men could grow wealthier by political favouritism, then rival groups of greedy factions would soon be competing for government favour. In the ensuing scramble to control the government, enrich themselves, and deprive their competitors, tensions would arise that would undermine the Union and, with it, republican government itself255 Just like Jefferson's Party thirty years ago, Andrew Jackson's Democratic Party was a coalition between agrarians and the New York businessmen, the underdog in the business world at that time. Just like Thomas Jefferson and Aaron Burr were two completely different characters of persons and yet formed a coalition to win the presidential election of 1800, Andrew Jackson and a circle of New York businessmen, Id. at 378. Id. at 385. 162 which was represented by Martin Van Buren, formed a coalition to win the presidential election of 1828. Presumably Biddle might have not been able to discern the two distinct elements in a same pod, and lost the chance to cooperate with the core power, the Jacksonian agrarians. But more likely, he was too elite to get along with agrarians. Not knowing Jackson's real concern was banks' unfair and arbitrary use of its monetary power for the benefit of the rich and powerful at the cost of ordinary people, Biddle chose to stand in the side of "a corrupt aristocracy."256 In the meantime, even though Jackson's veto killed a bill, the old charter had not expired yet. It still had almost four more years to go. Naturally, Jackson feared that the Biddle's Bank might use its immense fund to bribe politicians to form a veto-proof majority in Congress and manipulate elections.257 And indeed, after Jackson was re elected to his second term of the presidency by a landslide victory258, which ratified his policy against the corrupt practice of the Bank-2, Biddle responded to Jackson's withdrawal of government deposits from the Bank-2 from September 1833 by almost immediate exaggerated contraction of credit in order to plunge the nation into deep 259 recession in vengeance. In sum, it can be said that the control of the money supply under the Hamiltonian regime was in the hands of the directors of the Bank-1 and the Bank-2 primarily for the 254 Watson (1998) at 81. 255 Mat 82. 236 In the expression of Watson (1998) at 86. 257 Watson (1998) at 93. 258 Mat 86. 259 Temin (1969) at 59-63, and Watson (1998) at 94-95. 163 benefits of a certain circle of businessmen, whether or not they happen to incur incidental benefits to the overall economy. 5.1.4. The Quantity As mentioned in Subsection 5.1.2, the real use, or the real value, of money comes from its function of being 'money of account', i.e., its continuity, or its stability. And in order for money to be the 'money of account', its supply must be linked to the total goods and services produced in the economy, and one best way to do so is to link money supply to the taxes so that the government can supply money upon people's faith and credit in the government. This is the essence of the principle of a Fiduciary Issue of notes of Jerome (1935). The reason why Jerome set the highest value on the Hamiltonian System among the four US monetary systems was because he was in the opinion that it was closest to this principle. Based on the papers written by Alexander Hamilton,260 Jerome finds that upon the Congress's mandate to devise a plan to raise national revenue, Hamilton, in his January 1790 report to Congress, took the position that the debts of the states should be assumed by the federal government, outlined a taxation program which would enable the federal government to pay the interest, and pointed out the absolute necessity to create some means with which taxes could be paid; Then in a later report of the same year, See for example McKee (1934). 164 Hamilton proposed to establish a bank and authorize it to issue bank notes, and to make those notes the means of paying taxes.261 According to Jerome, it would have been very easy then for the ordinary statesman to follow the prevailing condition of the English laws, which limited its note issues by a metallic reserve requirement, but "Hamilton was wise enough, however, to choose another method."262 Jerome further explains that the limit of the note issue set for the Bank-1 by Hamilton, $10 million dollars, may have looked excessive as of 1791 when the revenue of the federal government was $4.49 million, was a very sagacious one in that the government revenue had grown to $12.94 million in ten years hence.263 Nonetheless, Hamilton, according to Jerome, could not go all the way with the principle of a Fiduciary Issue of notes because of the fact that there was a national debt payable in coined money of another nation.264 In regards to the reason why such privilege of issuing money was not directly exercised by the government, Jerome explains that it was the prevalent idea then that the privilege of issuing money was an indispensable part of the business of banking and also that the government then had lost confidence of people due to its previous record of unsound money.265 261 Jerome (1935) at 94-96. 262 Id. at 99. 263 Id. at 99-101. 264«.atl02. 265 Jerome (1935) at 103-104. Contrary to this Jerome's praise of Hamilton being ahead of his times, however, Brown (2008) interprets Hamilton's scheme in a very different light. According to Brown, Hamilton monetized the national debt265 by allowing creditors to swap government bonds they were holding with the stocks of the Bank-1 so that they could own the bank and issue notes. Then the government borrowed $8.2 million within five years fromth e Bank-1, and thereby not only increased the money stock but also incurred public debt with interest, which the government could have done all by itself without incurring any debt or interest. See Brown (2008) at 49-50 & 53. 165 If it is admitted that the federal government at that time could not issue money all by its own credit, Jerome's interpretation should be correct. There are four reasons. First, Clause EX of the Section 7 of the Bank Act-1 expressly limited the total liability of the Bank to $10 million. The upper limit was $35 million for the Bank-2 per the Eighth clause of Section 11. These limits matched the average annual federal tax revenue of the relevant period (See Figure 5.1). r-t-~i>oooooooooooooooooooooooo •Total Revenue •""""""Limit to Bank Liability Figure 5.1. Federal Revenue and Upper Limit of Bank Money (in $Mil.) 266 The 'Total Revenue' data was fromth e 'US Government Revenue', online Bank shall not buy any public debt and shall observe the so-called 'real-bills doctrine'. This principle was equally applied to the Bank-2, too (the Ninth and the Tenth clauses of Section 11). This is a device for checking on the excessive issue of banknotes. Thirdly, the law stated that the maximum loan that the Bank-1 can lend to the federal government is $100,000, while the lending limit to a state is $50,000, and none can be lent to any foreign prince or state (clause XI of Section 7). This limit was raised to $500,000 for the case of the federal government in the Bank Act-2 (the Tenth clause of Section 11). These provisions clearly show that the federal government could not increase the money stock more than 1% or 1.4% by borrowing from the Bank. Lastly, indeed as Jerome pointed out, there was no provision anywhere in the Bank Act-1 or 2 or any other legislation that connected the note issue to Banks' reserve in gold or silver. The money that was to be issued by the Bank-1 or 2 had nothing to do with gold or silver and was completely independent of them. Other than the upper limit of money supply imposed by law, there was another mechanism that limited the federal bank's money creation. Ironically, it was state banks' checking on the federal bank. That is, it was not only true that the federal bank that checked the overissue of state banks, but it was also true that state banks checked on the overissue of the federal bank by countering the federal bank's redemption requests by presenting the federal bank's notes for redemption.267 267 Temin (1969) at 52. 167 5.2. THE JACKSONIAN REGIME (1836-1862) As explained in Subsection 5.1.1, the public's relying on paper money is a necessary evil. It would be best if nobody has power on money supply. Such a regime, i.e., nobody's having control on the money supply, may be called a non-regime and Jacksonian regime was one that aimed for it. But unfortunately, gold and silver, the usual money for such a non-regime cannot possibly keep up with the increase of population (See Figures 5.2 & 5.3), not to mention of production. 300 250 200 150 100 50 0 T 1 1 1 1 1 1 I 1 1 1 1 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Figure 5.2. The US Population between 1890 and 2000 (in millions) 6 5 4 ! I a 2 10.000 BC 8000 6000 4000 2000 AD 1 1000 2000 Figure 5.3. The Increase of World Population - Wikipedia Thus, artificial money became an inescapable alternative to humanity, and it meant that someone is bound to have the power of creating money out of nothing. It is precarious power. If it creates too much money, the existing money loses value and thereby people are robbed of their savings; if it creates too little, the existing debt gets heavier and thereby people are robbed of their future earnings; and if it creates too much at first and creates too little next, then massive disruption occurs in the economy and thereby the nation is ruined much more miserably than by a war. Even if the amount of money created is very well paced, still it is true that those who first obtain the newly created money always take advantage of others. Furthermore, since those who obtain the newly created money are usually the same people over and 169 over again, the society tends to fall into a de facto caste system over time, or even if it does not go that far, still the typical banking practice petrifies the society and leads it into stagnation, which ends up with spectacular bankruptcies. Considering this kind of abusive use of money creation power, anyone would agree that the best monetary regime is the regime where artificial money does not exist, i.e., the non-regime, if it is ever feasible. The aim of the Jacksonian regime was precisely this kind of non-regime, at least in the federal level, even though, as always, good intentions were not good enough. 5.2.1. The Money The spirit and principle of the Jacksonian regime was to use only hard-money and use Treasury notes as a supplement. All the banknotes - federal or state - were hoped to be banned. However, it fell short of abolishing federal bank notes. Thus, it was a half-baked regime. It was a regime that only the federal bank note was missing from the Hamiltonian System. Abolishing the Federal Bank Note; The task of abolishing the notes of the Bank-2 alone was an enormous challenge for Andrew Jackson. The charter of the Bank-2 was to run till 3 March 1836 per Section 7 of the Bank Act-2, "but nervous supporters hoped to obtain a new charter long before 170 the expiration of the old one, and Henry Clay268, the Jackson's archrival, anticipated that the question of the Bank could help him win"269 the 1832 presidential election. If the US had had the parliamentary system as in the England, Andrew Jackson would have had no chance of rejecting the 'The United States Bank Bill of 1832', which was to extend the charter of the Bank-2 for 15 more years from the expiration of the exiting charter.270 This is because even the Congressmen in Jackson's Democratic Party had mostly been bought off by the management of Bank-2.271 But in the US, president is elected by popular vote of the people, and such popularly elected president, Andrew Jackson vetoed the Bill on 10 July 1832 and succeeded in winning his second term by landslide because of that courage.272 But it was not the end of the story. As mentioned in Subsection 5.1.3, Jackson feared that Biddle would try to buy off Congressmen for a veto-proof charter renewal bill. Thus he had to remove government deposits from the Bank-2, so as to weaken its power. But two Secretaries of Treasury - Mr. Louis McLane and Mr. William J. Duane - refused to do so and needed to be replaced before it could be carried out by his third Secretary of Treasury Roger Taney starting from September 1833.273 After much wrangling, the charter of the Bank-2 was expired by the end of February 1836 and its note was finally deprived of its status of federal money. This was 268 Henry Clay (1777-1852), the presidential nominee of the National Republican Party 269 Watson (1998) at 81. 270 For the text of the bill, see Dunbar (1968) at 266-69. 271 See Hammond (1957) at 425, and Watson (1998) at 81. 272 For general public's response to the veto, see Watson (1998) at 83-86. 273 For more detail, see Hammond (1957) at 413-23. 171 done by the law of 15 July 1836 that repealed Section 14 of the Bank Act-2, which stated, "The bills or notes of the said corporation ... shall be receivable in all payments to the United States."274 Failed Attempt to Abolish State Banks' Notes: With the expiration of the federal charter, the Bank-2stopped being the federal bank, but its operation continued as a state bank. There were also about six hundred state banks as of 1836.275 In order to achieve the paperless non-regime, state banks notes also had to be abolished. Jackson's three key measures for that end were: (a) the law of 14 April 1836,276 which prohibited the federal government and the Post Office from receiving any bank notes of less denomination than 10 dollars forthwith and any bank notes of less denomination than 20 dollars from 3 March 1837, while at the same time declared that only gold or silver to be legal tender forthwith; (b) The so-called Deposit Act of 23 June 1836,277 which provided that the federal government's surplus in excess of $5 million would be deposited with the states starting from January 1837,278 and An Act repealing the fourteenth section of the "Act to incorporate the subscribers to the Bank of the United States," approved April tenth, eighteen hundred and sixteen; 5 Stat. 48. 275 Hammond (1957) at 453. 276 An Act making appropriations for the payment of the revolutionary and other pensioners of the United States, for the year one thousand eight hundred and thirty-six; 5 Stat. 9 (14 April 1836). 277 An Act to regulate the deposits of the public money; 5 Stat. 52 (23 June 1836). 278 For the social significance of this Act, see Temin (1969) at 128-32, and Hammond (1957) at 451-55. 172 (c) the Specie Circular of 11 July 1836,279 an executive order that directed land agents to accept only gold and silver payment for public lands. The purpose of the first measure is self-explanatory. It was intended to reduce the use of the state bank notes. The purpose of the second measure was not that clear. Hammond describes it as a "curious measure."280 But the rationale would not be too difficult to understand if one reminds herself/himself of the fact that state banks were very important source of revenue for most states at that time. Throughout the country then, banks were under specific requirements to lend to their state governments on special terms, and the practice of exacting bonuses for the enactment or renewal of charters had become established since 1820.281 For example, the second Bank of the United States had to pay in 1836 whopping $5 million to the state of Pennsylvania for the state charter282 and paid additional $13 million during the following five years.283 Some states satisfied most of their expenditures from the revenue or note issue of their state banks. Such being the case, the Deposit Act was probably designed to give away surplus species to state governments by the name of "deposit," which was legally loan, but actually grant-in-aid. So people called it a "distribution" rather than "deposit."284 Then it becomes obvious 279 For the full text, see Dunbar (1968) at 270-71. 280 Hammond (1957) at 451. 281 Id. at 188. 282 For a comparison, the total spending of the federal bank during the fiscal year 1836 was $33.7 million, and without counting the defence spending, the amount was $12.8 million. 283 Hammond (1957) at 441. 284 Temin (1969) at 128. 173 that Jackson wanted to reduce state governments' reliance on state banks for revenue, and thereby advance his agenda of abolishing state bank notes. Such a bold measure was possible because during his eight-year long presidency between 1829 and 1837, Jackson Administration realized $99.4 million dollars of surplus - annual average of $12.4 million- and fully paid off public debt in 1835, which made American people "saucy and confident."285 The purpose of the third measure - the Specie Circular - was an attempt to offset the great public excitement over the public revenue in general and over the federal "distribution" to states, which was believed to have aggravated the speculative boom that was raging at that time.286 In that respect, this third measure was not directly related to Jackson's pursuit of abolishing the state bank notes. However, these three key measures of Andrew Jackson were practically nullified as soon as he left office. It was not more than a week since Martin Van Buren's taking office on 4 March 1837 that an important firm in New Orleans failed287 and the banks around the country started to suspend payment.288 This was primarily because the cotton export, the single most important export item of the US then, came to a screeching halt. By the summer of 1837, there was probably not a cotton dealer in the South solvent and operating.289 The so-called Panic of 1837 broke out. 285 In the expression of Hammond (1957) at 467. 286 Temin (1969) at 125. 287 Hammond (1957) at 459. 288 Temin (1969) at 113. 289 Hammond (1957) at 528. 174 Due to the banks' suspension of payment in species, Jackson's first measure - ban on the use of banknotes of less denomination than 20 dollars from 3 March 1837 - could not have much practical importance. Furthermore, the government allowed merchants' deferred payment of duty so that they could tide over the Panic.290 In the meantime, due to the Panic, international trade and public land sale, the two pillars of the federal revenue, were arrested and the government revenue turned to $12.5 million deficit in 1837 from $20.5 million surplus. By the end of summer 1837, the federal government's funds exhausted and the current expenses had to be met by issuing of $10 million of Treasury notes.291 Accordingly the Deposit Act and the Specie Circular became meaningless, too. The Panic of 1837 was merely a prelude of what was to come. The economy recovered from the end of 1837 and continuously improved until the spring of 1839, but since then the US fell into a long depression, whose bottom was reached only in February 1843.292 As a consequence, the Republican Party seized power in the 1840 presidential election. Then they started to unwind what Jackson and Van Buren had installed. The law of 1840 mandating the use of hard-money only was repealed about a year later by the law of 13 August 1841293, even before it had a chance to go into effect. This law of 1841 also repealed the Act of 14 April 1836, which prohibited government 290 Temin (1969) at 165. 291 An Act to authorize the issuing of Treasury Notes; 5 Stat. 201 (12 Oct. 1837). 292 Temin (1969) at 148-55. 293 An Act to repeal the act entitled "An act to provide for the collection, safe-keeping, transfer and disbursement of the public revenue," and to provide for the punishment of embezzlers of public money, and for other purposes; 5 Stat. 439 (13 Aug. 1841). 175 offices and agents from receiving bank notes. Thus, the monetary scene of the US in 1841 was that of 1789 all over again. As Jackson worried, Congress also attempted to re-establish a third Bank of the United States. A bill of that nature was actually passed Congress in 1841, originated from the Senate. This time the name was the "Fiscal Bank of the United States," and the seat was now Washington DC.294 But it was vetoed by President John Tyler on 16 August 1841. Tyler was a person who succeeded, as Vice President, President William Harrison, who died of pneumonia only after a month of his inauguration. Tyler was born in Virginia and his father was a friend of Thomas Jefferson and he himself was a Jacksonian Democrat until the 1836 presidential election, when he turned Republican. And yet he firmly believed that the Constitution must be interpreted literally, and he vetoed the bill out of such a conviction. He also vetoed another bill of the same nature, this time originated from the House,295 on 9 September 1841. After the single term of Republican Administration of Harrison and Tyler, the presidency was re-occupied by Democrat presidents for 16 years until Abraham Lincoln came to power in 1861. 5.2.2. The Cause The purpose of the Jacksonian regime was three-fold: (a) It tried to realize the aspiration of the Founding Fathers; (b) It tried to defend the interests of the For the text of this bill, see Dunbar (1968) at 272-88. The Fiscal Corporation bill of September, 1841; For the text, see Dunbar (1968) at 288-93. 176 overwhelming majority of the population - the agrarians and the wage workers; and (c) It aimed at fulfilling a universal human value - honest money. The Aspiration of the Founding Fathers; The purpose of the Jacksonian System was to achieve the aspiration of the Founding Fathers unequivocally expressed in the Constitution. The hard-money only system was exactly what the Constitution had aspired to almost 50 years before Jackson tried to implement it in earnest. However, there had never been a time in American history until Jackson's time when species were available in such a large quantity thanks to the huge inflow of species to the US in the first half of 1830s, even though the tide turned against him just about the time when the Jacksonian regime was to be implemented. Defending the Interests of the People; The purpose of the Jacksonian System was also to achieve what more than 90% of the population then, the agrarians and the wage workers in cities, wanted.296 These people wanted no banks. Agrarians believed that note issue was bad and therefore banks had to be forbidden.297 In agrarian tradition, corporations were aggregates of the worst in man, and banks were the worst of corporations, the most aggressive and the most The city population as of 1837 was only 10% of the population. See Temin (1969) at 120. Hammond (1957) at 605-606. 177 vicious, the principal cause of social evil in the United States.298 Particularly, Iowan agrarians were convinced that banking was a beast, common enemy of mankind, blighting curse, and that nothing else ever devised by mortal man was so successful to swindle people.299 Wage workers in cities, who were represented by the Equal Rights Party or Loco Focos, also hated banks. They knew very well that bank credit augmented the money supply, diminished the value of money, and extorted their hard earned money from them. They cried, "As the currency expands, the loaf contracts."300 Legislators and learned people also shared the hatred against banks. A Pennsylvania legislative committee in 1821 had observed, were credit confined to legitimate demand, banking long since would have been abandoned as an unprofitable trade. The Pennsylvania legislative committee implied that in the cities, where loans were made by impersonal, incorporate banks, bankruptcies occurred regularly for the sheer benefit of banks. It praised the western states and its own olden times that did not know banks by saying, "In the interior, farmers who possessed credit and character had no difficulty in borrowing on their simple bond ... Embarrassments and failures, in those days, were scarcely known among our husbandmen, and society moved on by a regular, sure, and happy march."301 Andrew Jackson wished to steer the whole American society to such a direction of the western states and of the olden days, which enjoyed the regular, sure, and happy 298 Id. at 608. 299 Mat 614. 300 Mat 494. 178 march to prosperity. In return, people enthusiastically supported him in the 1832 presidential election. The overwhelming majority of the US simply wanted to eliminate all banks, and thereby eradicate the arbitrary power to create money by bankers and end the evil practice of those money manipulators' cheating of other countrymen.302 Jackson and the people pretty much succeeded, according to Jerome: Jackson's System of hard money only was well adapted to the conditions of the country. At that time, agriculture was the predominant industry, and one of its greatest enemies is inflation. Even a moderate use of Government credit in the creation of money causes some inflation, from which the farmers in a country that exports a large surplus of agricultural products cannot benefit... Without doubt the Jacksonian System, by preventing any great amount of inflation from 1837 to 1861 - during the period of its entire life in fact - conferred great benefits upon the farmers of the United States.303 Honest Money; The purpose of the Jacksonian regime was also to achieve what all human beings desire across the ages and countries of the world: honest money. Even Bray Hammond, who literally poured all kinds of slanders on Andrew Jackson and Jacksonians, praised the doctrine of honest money in these words: "It was the venerable complaint that credit and speculation artificially disturb the normal values of things, inflicting on the Id. at 622-23. Id. at 499. Jerome (1935) at 168-69. 179 economy alternate fever and prostration and undoing the sober efforts of steady and honest men."304 The same venerable complaint keeps being repeated even today through the mouths of the libertarians and the modern version of Loco Focos, such as Ellen Brown. Although Jackson could not achieve what he set out to achieve - the abolition of banknotes - he still achieved the best possible fairness in the circumstances of his time. This is why Jerome assessed the Jacksonian regime as the second best among the four US monetary regimes. As Jerome pointed out, the Hamiltonian and the Jacksonian regimes were two extremes in that the Hamiltonian regime was a regime where money was created wholly based upon government credit, whereas the Jacksonian regime was one that no government credit was used in the creation of money; and yet Jerome set an equally high value on the Jacksonian regime because it did not use government credit in the creation of money as it was not supposed to use it.305 In other words, it was honest. The government did nothing in aiding inflation, and it did nothing expedient in a pretension of helping people in times of depression. 5.2.3. The Controller Many traditional historians, including Bray Hammond whom this study frequently refers to, were of the opinion that Andrew Jackson's destruction of the Hammond (1957) at 499. Jerome (1935) at 169. 180 federal bank caused chaotic and lawless expansion of state bank notes.306 In other words, they believed that the state banks controlled the money supply during the years of the Jacksonian regime. For the question, "How could they do so?" Hammond offers this: Each bank could count the notes of other banks as reserves and expand its loans accordingly; with the general result that the more the banks lent the more they mutually augmented their reserves and the more they were able to lend. No legal requirements governed bank reserves before 1837 either in amount or in composition, or long thereafter save sporadically, and there was now no federal Bank maintaining systematic pressure on the banks to redeem their notes.307 In other words, according to Hammond, the whole banking sector could continually expand their note issue by colluding to continually lower their specie reserve ratios. It is not so, however, according to Temin (1969).308 Indeed, it looks as though Temin is right when all the evidence is carefully examined. Temin's explanation is simply that the money supply during the years of Jacksonian System was changed by inflows and outflows of species, while the banking system as a whole maintained their specie reserve ratios remarkably constant.309 306 For a survey of the views of the traditional historians, see Temin (1969). 307 Hammond (1957) at 452-53. 308 Temin also rejects the traditional argument that the federal banks played the role of central bank, although this story is not relevant to this inquiry. 309 Temin (1969) at 74-77. 181 5.2.4. The Quantity According to Temin, the Jacksonian Regime was based on specie reserves. 310 The stock of money was three to five times the stock of species, depending on the year.311 Thus, if the inflow of species got bigger than the outflow, the money stock increased, and if the outflow got bigger than the inflow, the money stock decreased. The following Figure 5.4 shows the total specie-stock in the US (blue line), the amount of specie in banks (green line) and the price index (the basis is January 1825). 1«+U 120- 100- 80- - - ' - • • 60- •"-- - ' 40- «^" 70- •uiir in U i 1 1 1 1 1 1 1 1 1 1 1 1 1 m \0 o-Hf^m^-m\ot~-ooo\o—i OO 00 OO 184 2 182 8 182 9 oooooooooooooooooooooooo 184 3 184 4 184 5 M C:L=_- Prices «™ Specie in Banks Total Specie Figure 5.4. The Relationship between Species and Prices31 2 310 Mat 78. 311 Id. at 86. 182 From this graph, it can be noticed that during the Jackson Administration (early 1829-early 1837) the total specie stock in the US increased by 46 million dollars' worth from $31 million to $77 million. About half of these species - $22 million - went into the banks and served for the creation of bank notes. In the meantime, the price level rose by 5.55% in terms of annual average, or 54% from the low of 1829 (85 points) to the high of the early 1837 (131 points). We also can notice from this graph that the price level (the red) is highly correlated to the specie in banks (the green). Especially take notice that the sudden increase of specie in banks in 1834 was the main culprit of the sharp price inflation in the following two years. The climax was February and March of 1837: In February workers in New York rioted to protest the high price of food and the high interest rate that recorded 24% per year; and banks suspended payment for their notes starting from 10 March 1837.313 Also take notice that the decrease of the specie in banks from 1839 is causing the price deflation from the next year. However, such a high correlation broke down from 1842, as people formed a greater preference of holding and using specie money rather than bank notes. Because of this changed preference of people's holding different kinds of money, the increased specie in banks in the 1840s did not lead to the increased money stock and the consequential price inflation. 312 The relevant data is fromTemi n (1969) at 69 &186-87. 313Temin(1969)atll3. 183 According to Temin, the sudden inflow of species during the Jackson Administration was primarily caused by external factors: First, the Chinese were increasing their consumption of opium in the 1830s, and abandoned their traditional desire for silver in favour of a demand for bills on London to buy opium from British India;314 and Second, as most South American countries had defaulted on their debts in the 1820s, the British turned to the US as their investment destination by as much as 3/5 of all capital exports from Britain.315 In the meantime, the cotton export from the US to the United Kingdom continuously increased during the 1830s from a little less than 300 million pounds in 1830 to a little less than 600 million pounds in 1838 and then to almost 750 million pounds in 1840 with a brief setback in 1839.316 On top of this strong demand, there was labour shortage. As a result, the price of cotton rose from 8.4 cents per pound in 1831 to more than 15 cents per pound in 1835 and 1836. Naturally, the price of land also rose dramatically in a very short period of time, which triggered wild speculation. Some people got suddenly rich, while most people suffered from price inflation. The relative deprivation on top of the suffering made these ordinary people angry. Angry suffering people tend to wish to have a quick answer to a complex problem so that they can vent out their angers quick. The most prominent target of such anger in the 1830s was the bankers, who had nothing to do with the vicissitudes of the i14 Id at SO. 315 Id. at 85-86. 316 Id. at 103, Table 3.6. 184 times. Nonetheless, banks deserved to be blamed to the extent that they contributed to amplifying the economic fluctuations by their sheer existence, regardless of their intentions. That would be the reason why people say that the western agrarian states, such as California, Oregon, Minnesota, Iowa, Illinois, Indiana and Wisconsin, where banking was minimal, produced some of the best banking in American history during the 1830s, 40s, and 50s.317 Actually what they are praising is not those states' skilful management of their banks, but the lack of them. 5..3. THE CHASE REGIME (1862-1913) The Jacksonian regime was abandoned at the outbreak of the Civil War. It was simply too honest a system to handle the task of inflating the money stock. The average federal government spending before the war was around $80 million. Upon the Civil War, it sextupled in a year, and grew to its 16 times in four years (The blue line in Figure 5.6). The debts from the Revolutionary War and the War of 1812, once looked daunting (The yellow line in Figure 5.5), became hardly recognizable in front of the debt from the Civil War. It grew to more than 40 times of the gross annual government revenue (Compare Figure 5.5 and Figure 5.6). It was simply impossible to pay off the debt from the tax revenue. Thus, the main task of the Chase regime was the 'dilution' of the purchasing power of money. 317 Hammond (1957) at 605 & 627-28. 185 •Total Spading' 3 Surplus/Deficit Federal Debt' •Total Revenue Figure 5.5. The State of US Finances: 1792-1860,31 8 3000 2500 2000 1500- 1000- 500- 0 trm w ww .¥flii«.i,r.i)WT-i. J -,. r. . r .h, i,,,'.; i".,"?, i'fw •,.'". 1 (N r- fS r» (N «-- rs r- fS r~ ^ O —« O t» 00 00 00 00 oo 90 oS <* 00 vo 0r-0 0o0o -500 00 oo oo oo -1000 -1500 J Figure 5.6. The State of US Finances: 1792-1890 186 5,3.1. The Money The Chase regime had the largest number of varieties of money among the four US monetary regimes. It was a regime of "various confusing kinds of money," according to Jerome. One of the biggest differences from the previous system was that specie, which was still a legal tender, disappeared from everyday use. Specie Withdrawn; Silver coins had long been disappeared by this time since the 1834 Amendment to the Mint Act, which set a silver coin's relationship with a gold coin in such a way that it would be beneficial for the holder to sell it by weight rather than to use it as money.320 Even the small, subsidiary silver coins that had been used for small payments such as food, transportation, etc., disappeared entirely from circulation by the middle of 1862 as the dollar depreciated to such an extent that the exportation of those coins was profitable.321 Then from December 1861 gold coins disappeared, too. Government contractors did not deposit their species paid out by government in fear of a suspension, and the banks in the West, too, withdrew their deposits in New York.322 Upon this double drain of species, the bankers in New York suspended specie payment from 30 December 318 The source of the data is Legal Tender; Notwithstanding the Constitutional prohibition of making anything but gold and silver a legal tender, paper-money legal tender reappeared in America without fail after 73 years of self-restraint. The introduction of legal tender money would be the most prominent feature of the Chase regime. There were four different kinds of Treasury notes that were declared to be legal tender. However, the most outstanding one was the 'United States notes', a kind of Treasury note that did not bear interest and payable to bearer, while all other kinds bore interests.328 The United States note was colloquially called the "greenbacks." 323 Id. at 45. 324Matl42. 325 Ai at 184-85. 326 13 Stat. 132 (17 June 1864). See Dunbar (1968) at 191-93. 327 Dunbar (1968) at 193; and Nussbaum (1957) at 104. 328 For the detail of the three other kinds of Treasury notes that were made a legal tender, see Mitchell (1903) at 174-210. 188 The greenbacks were not the first paper money of the US, though. When the 'paper money of the US' is defined as some paper form of evidence of debt issued by the US federal government bearing no interest and payable to bearer, the first such money was issued in 1815 in the aftermath of the War of 1812 based upon the statute of 24 February 1815.329 But after the Bank-2 was established, this was retired along with all the other forms of Treasury notes by the statute of 3 March 1817.330 The second paper money of the US was issued by the statute of 17July 1861.331 It was called "demand notes" or "old Treasury notes."332 They were not legal tenders at first, but so declared333 by the statute of 17 March 1862.334 The greenbacks were the third paper money of the US, while they were the first legal tender.335 They were called "greenbacks" because they were different in appearance from the Treasury notes of 1815, demand notes of 1861, or any other bank notes up to that time, which took the form of commercial instruments. On the other hand, both obverse and reverse of the greenbacks were fully covered by vignettes of black, white and green colors.336 329 An Act to authorize the issuing of treasury notes for the service of the year one thousand eight hundred and fifteen; 3 Stat. 213 (24 February 1815). 330 An Act to repeal so much of any acts now in force as authorize a loan of money, or an issue of Treasury notes; 3 Stat. 377 (3 Mar. 1817). 331 An Act to authorize a National Loan, and for other Purposes; 12 Stat. 259 (17 July 1861). 332 Mitchell (1903) at 157-58. For the story why the demand notes had to be belatedly declared a legal tender, see Mitchell (1903) at 149-56. 334 An Act to authorize the Purchase of Coin, and for other Purposes; 12 Stat. 370 (17 March 1862). 335 Greenbacks were not the only legal tender. There were three other sorts of Treasury notes that were made a legal tender, which bore interest. See Mitchell (1903) at 174. 336 Nussbaum (1957) at 106. 189 The greenbacks were issued thrice by three different acts that authorized their issue: (a) the first Legal Tender Act of February 1862337, (b) the second Legal Tender Act of July 1862338, and (c) the third Legal Tender Act of March 1863.339 However, they could not be used in importers' payment of duties on imports and in government's payment of interests to its creditors.340 Although the father of the law,341 Elbridge G. Spaulding (1809-1897), strongly opposed the idea of paying the interest on the public debt in specie, there was strong organized opposition by the banking and business community and their Congressmen.342 Such an opposition led to the compromise, which in turn necessitated a further revision of the bill that made import duties payable in specie for the procurement of specie for the interest payments in coins.343 National Bank Notes; On 9 December 1861, Mr. Chase proposed to reorganize the state banks into a national system requiring all banks to purchase federal government bonds as security for their circulating notes.344 The rationale of this idea was to compel banks to buy federal government bonds in large quantities. 337 An Act to authorize the Issue of United States Notes, and for the Redemption or Funding thereof, and for Funding the Floating Debt of the United States; 12 Stat. 345 (25 February 1862). 338 An Act to authorize an additional Issue of United States Notes, and for other Purposes; 12 Stat. 532 (11 July 1862). 339 An Act to provide Ways and Means for the Support of the Government; 12 Stat. 709 (3 March 1863). 340 See the preamble of the first Legal Tender Act. 341 Mr. Spaulding was the only person in official circles who had a definite plan of financing the war and was the real financial leader at that time. See Mitchell (1903) at 69-70. 342 See Mitchell (1903) at 47 & 74-81 for the detail. 343 See Mitchell (1903) at 78 for the detail of the relevant story. 344 Mitchell (1903) at 44-45. 190 Since the Panic of 1857, the federal government had been contracting debts for four years in a row to meet annually recurring deficits, and thus there was little public confidence in it.345 The one-year Treasury notes issued in December 1860 in the amount of $10 million were absorbed only upon 12% interest, which showed how low the national credit had sunk.346 When the Civil War broke out, Mr. Chase, who had little familiarity with fiscal matters, naively intended to finance the war by issuing interest bearing treasury notes in the amount of $150 million running one or two years in preference of long-term bonds.347 But the Treasury agencies had to be closed after only about $45 million of such Treasury notes were sold to the public.348 Fortunately Chase could borrow the rest of the fund from banks. However, by the early December 1861, Chase found that his expectations both on the revenue and on the expenditure were out of mark by wide margins and had to raise much more funds. Out of this desperation, the idea of compelling banks to buy government bonds occurred to him.349 However, whereas the need for funds was extremely urgent, Mr. Chase's plan would certainly meet strong resistance from the friends of state banks.350 Thus, Mr. Spaulding's legal tender bill was first enacted in 25 February 1862, while Chase's plan was put aside. But then in January 1863, worried with too much greenbacks were being issued, President Lincoln urged Congress to promptly enact Chase's plan for a national 345 Id. at 7; and The Wikipedia, s.v. "Panic of 1857" 346 Mitchell (1903) at 6-7. 3477rf.at4&15. 348 7rf. at 34. M9Id. at 37. 350 Mat 46. 191 banking system. Thus it was hastily made law with skeletal provisions on 25 February 1863,352 with more refinement a year later.353 The primary purpose of these laws was to provide the standard by which state banks could be converted into federally chartered national banks. But the standard was too high and too strict for state banks to feel tempted. Enticement having failed, coercion was necessary. Thereupon followed the so-called "death tax law" of March 1865, which imposed 10% tax on state bank notes.354 Quite a few state banks switched to federal charter upon this event: within two years about 1,000 state banks switched to national banks; but the majority of state banks gave up the issuance of notes355 and yet still survived because the prevalent payment method of the general public had been changing from notes to checks. Like Mr. Hamilton's Bank of the United States Act of 1791, this so-called National Bank Act also bestowed the status of money, equivalent to the greenbacks, on the national bank notes. However, national bank notes were not a legal tender. In sum, the two most constituents of money in the Chase regime were the United States note (the greenbacks) and the National Bank notes. Although there were also two 331 Id. at 109. 352 An Act to provide a National Currency, secured by a Pledge of United States Stocks, and to provide for the Circulation and Redemption thereof; 12 Stat. 665 (25 February 1863). 353 When one says the "National Bank Act," it usually refers to this refined version of law. An Act to provide a National Currency, secured by a Pledge of United States Bonds, and to provide for the Circulation and Redemption thereof; 13 Stat. 99 (3 June 1864); See also Nussbaum (1957) at 108-110. 354An Act to amend an Act entitled, "An Act to provide Internal Revenue to support the Government, to pay Interest on the Public Debt, and for other Purposes," approved June thirtieth, eighteen hundred and sixty-four; 13 Stat. 469 (3 March 1865); See also Nussbaum (1957) at 111-12. 355Nussbaum(1957)at 111. 192 kinds of "postage currency"356 and various kinds of minor coins357 that were issued by the government, they were indeed minor money that does not concern this inquiry. 5.3.2. The Cause The cause of the Chase regime was to make up the federal deficits. As the following Figure 5.7 shows, the federal deficits skyrocketed during the Civil War years. In 1862, the federal government spent more than eight times of its revenue. In principle, the shortfall had to be covered by some combinations of three possible avenues of action: raising taxes, borrowing, and issuing legal tender money. The US government did all three, but the last option was the most convenient and easiest. As human beings are prone to take the road offering least resistance, the leaders of the US then also relied heavily on the third avenue. The problem, however, is always the consequence. In the case of the Hamiltonian regime, the consequence was ever worsening social inequity that the banking system engendered regardless of the individual banker's intentions. In the case of the Jacksonian regime, the consequence was exposing the national economy to every unmitigated external shock. Now the consequence of the Chase regime was all the evils that 'dishonest' money creates. It was dishonest because, in spite of its seemingly innocent cause of filling the deficit gap, the effect of the Chase regime was to extract For a detail, see Mitchell (1903) at 156-65; and Nussbaum (1957) at 113-15. For a detail, see Mitchell (1903) at 165-73; and Nussbaum (1957) at 113 & 115-16. 193 taxes - the non-consented inflation taxes by stealth - from the public without relying on taxes - the consented taxes by law - by way of printing more money. -200 Figure 5.7. The Federal Deficits during the Civil War (in $Mil)35 8 This may sound pejorative, but it is the inescapable, true nature of the Chase regime. That was why Salmon P. Chase (1808-1873), Lincoln's first Secretary of the Treasury for the first three years (1861-1864) who put his own face on a variety of greenbacks in an effort to further his political career,359 became American people's The relevant data was fromth e 'US Government Revenue', online "with an excessive passion and ferocity" and inveighed against the legal tender laws even in his last days.361 Looking back the Lincoln's time with hindsight, it is obvious that neither the Hamiltonian Regime nor the Jacksonian Regime would have worked. Firstly, establishing a third Bank of the United States and using its note was out of the question. This is because the amount of issue would have had to be 10 times, 15 times, 18 times, and 26 times of the usual annual tax revenue. Certainly people would have needed only a small fraction of all those notes outstanding for their useful purpose, i.e., in paying the federal taxes. All the superfluous notes would have worked solely to lower its value. Consequently, the value of the federal bank note would have plummeted in comparison to other state bank notes or species. People would have been able to buy so much more amount of federal bank notes with about the same amount of specie or state bank notes as before, as the unit price of the federal bank note must have plummeted so much. Secondly, the Jacksonian Regime was out of the question, too, because it would have required repeated injections of species of so many amounts to the banking system. This would have been possible only by borrowing from domestic and foreign moneyed class, but it is an act of risking the nation's sovereignty. As long as the peaceful cessation of the Confederate States of America was nonnegotiable, what was needed by the United States of America was to extract more 360 According to Nussbaum (1957) at 119. 195 resources from the people; and neither Hamiltonian Regime nor the Jacksonian Regime could do so. In the meantime, the Lincoln government was not popular enough to claim a greater share of national wealth through collecting more taxes from people.362 Thus the only way to increase the government's share was to use money as a means of wealth redistribution rather than a means of exchange. For achieving that end, monopoly money, legal tender, was needed. Such reasoning, however, did not occur to most people at that time, including Chase. It is something that is possible only with the benefit of hindsight for most people. Only Elbridge G. Spaulding and some other handful people "saw a problem coming and had a solution ready."363 For all the others, it was too big a jump of paradigm shift to make. In addition, many others optimistically expected that the war would end quickly,364 and thus, they did not foresee the event of having their government indebted so enormously. Nonetheless, the force of logic was so strong, like gravity, that it overwhelmed all the inertia and unrealistic expectations, whether or not the major historical players at that time properly conceived their roles. 5.3.3. The Controller At first, the controller of money supply in the Chase regime was the federal government, the Secretary of the Treasury. As already mentioned in Subsection 5.3.1, 361 Nussbaum (1957) 119 & 123. 362 On the doubt on the readiness of the people to submit to heavy taxation within the government, see Mitchell (1903) at 16 & 72. 196 the issue of greenbacks and other legal tender Treasury notes were authorized by three different federal laws, which bestowed the power to issue them on the Secretary of the Treasury. The controller of national bank notes was also the federal government, especially the Comptroller of the Currency. The Comptroller of the Currency was given the power by the National Bank Act of 3 June 1864 not only to appoint the chief officer of a separate bureau that will be charged with the execution of the law but also to issue the federal charter366, to appoint a receiver to failing banks367, and to make an examination368 of the national banks. Since the national bank notes were to be issued based on the federal government bonds,369 while the issue and sales of those government bonds were within the jurisdiction of the Secretary of the Treasury, the issue of the national bank notes were definitely under the control of the federal government. It is to be noticed here that national banks had no discretion of issuing their notes based upon their specie holdings. While banks in general were relieved from having species as a reserve, thanks to the legal tender Treasury notes, including the greenbacks, the national banks at the same did not have the privilege of issuing notes or deposits beyond the prescribed amount by law The Wikipedia, s.v. "ElbridgeG. Spaulding". Mitchell (1903) at 72-73. See the preamble. See Section 5. See Section 46. See Section 54. See Section 21. 197 no matter how much species they might have. Simply, species stopped being the basis of money creation in the case of the national banks.370 However, as mentioned in Subsection 5.3.1, the prevalent payment method of the general public had been moving from banknotes to checks. In other words, banks were fast casting off the bridle of the government that had been put on their ability to create purchasing power. As long as the customers did not care for redeeming their deposits in species, banks could create as much 'money' as they wanted. Of course, there were still checks by other banks, but even this could be neutralized by forming a 'community of interest' that was connected by a complex array of interlocked directorships. 5.3.4. The Quantity Between 1862 and 1865; The first Legal Tender Law of 25 February 1862 allowed the issuance of the greenbacks up to $150 million; the second one of 11 July 1862 expanded the limit to $300 million; and third one of 3 March 1863 further expanded it to $450 million. Obviously, this amount was not enough to cover the deficits. The deficits were $426 million in 1862, $602 million in 1863, $601 million in 1864, and $963 million in 1865. In 1862, about half of the deficit (or $214.4 million) was covered by short-term loans, i.e., borrowing from banks and selling of short-term interest bearing Treasury 370 This was true until 1870, when the Act to provide for the Redemption of the three per cent. Temporary Loan Certificates, and for an Increase of National Bank Notes, 16 Stat. 251 (12 July 1870)) was enacted, which restored the specie reserve requirement. See Section 4 of this statute. 198 notes. About 23% of the deficit ($98.6 million) was filled up by the greenbacks and about 14% ($60 million) was filled up by the demand notes, the second paper money of the US. The rest of the deficit was financed by selling long-term bonds. In 1863, roughly half of the deficit ($290 million) was covered by the new issuance of greenbacks. Now more than 86% of the greenbacks that were available for the government expended. Once the paper money left the hands of the government it would never come back to the government with no reason other than for the remittance of taxes. But most taxes then - the duties for imports - were payable in specie. Thus, in order for the government to get its hands on the greenbacks again, and thereby to renew its purchasing power with it, the government had to sell bonds or Treasury notes. That was why President Lincoln urged in January 1863 Congress to promptly enact Chase's plan. The preliminary National Bank Act became law on 25 February 1863, and in order to pressure state banks to switch to national banks, a tax on the outstanding bank notes was imposed in the rate of one to two percent depending upon the amount.371 The government succeeded to sell $172.5 of bonds. This covered roughly 30% of the deficit. The rest of the deficit, i.e., about $140 million was covered by short-term loans. In 1864, a little less than $44 million of fresh greenbacks were left to be issued. On the other hand, the deficit was more than $600 million, even after the drastically increased tax revenue.372 Issuance of greenbacks beyond $450 million, however, was politically impossible. That was the maximum obtained in spite of the opposition of the 371 Section 7 of 12 Stat. 712 (3 March 1863). See Mitchell (1903) at 148. 199 opponents of paper money.373 In the first half of the year the sales of bonds stopped short on $73 million. At this point, Mr. Chase resigned from the Secretary of the Treasury. The reluctant successor, Mr. William P. Fessenden (1806-1869), could not do much better. He succeeded in selling only about $80 million of legal-tender compound- interest notes. The breakthrough came in the last quarter of 1864, when the prospect of the Union's winning the war was increasingly definite.374 Selling the government bonds became easier and almost $470 million was sold, which covered 78% of the 1864 deficit. The climax, however, came in 1865, when the deficit reached almost one billion dollars, even after the revenue was almost sextupled from that of 1862. Having exhausted greenbacks, the government had to fill the entire unprecedented deficit with borrowing. Two laws were enacted on the same day of 3 March 1865 for this purpose. One was the so-called "death tax" law that imposes 10% tax on state bank notes paid out by any bank and even by private persons. Following this coercion about 900 state banks switched to national banks. The other law was the law that allowed the Secretary of the Treasury to issue up to $600 million of bonds or Treasury notes whose principal, too, in addition to the interest, may be made payable in specie at the discretion of the Secretary of the Treasury.375 Thanks to this double push, all the $963 million of deficit in 1865 was made up by short and long-term borrowings. Figure 4.8 shows the composition of the sources of the fund for federal expenditure during the Civil War years. 372 See Mitchell (1903) at 120 for tax revenues during the Civil War years. 373 See Mitchell (1903) at 93-98 for the atmosphere of Congress during the passage of the second Legal Tender Law, and at 108-117 for the same during the passage of the third Legal Tender Law. 200 1861 1862 1863 1864 1865 1866 J M Internal Revenue • Customs, etc. D Bonds • Short-term Loans • Legal Tender Notes Figure 5.8. Financing the Federal Spending during the Civil War (in $Mil)376 Between 1866 and 1878; During the Civil War, the greenbacks were issued three times in the amount of $150 million each to the total of $450 million. Such issued greenbacks, however, could be redeemed for other interest-bearing Treasury notes or bonds upon the holder's Mitchell (1903) at 123-26. An Act to provide Ways and Means for the Support of the Government; 13 Stat. 468 (3 March 1865). The data is from Mitchell (1903) at 129. 201 wish.377 This was for two purposes: (a) so as for the government to regain the possession of the greenbacks for further spending; and (b) so as to entice people to take debt instruments rather than currency and thereby to mitigate the inflation. Due to this encouragement of redemption, the greenbacks started to be retired after the War even without the government's special separate efforts. The government could also afford to retire greenbacks because it had surpluses during the rest of the 19th century except for just one year, 1874. The amounts of the greenbacks retired from the circulation were, for example, more than $16 million in 1865 and more than $30 million in 1866.379 The retirement and cancellation of the greenbacks must have been very rapid, considering the fact that Congress went as far as to enact a law in 1868, "An Act to suspend further Reduction of the Currency," which deprived the Secretary of the Treasury of the power to retire the greenbacks.380 In the meantime, the 1860s was a new era of international law along with a "Utopian conception of world money,"381 which drove the world toward gold standard. Partly due to this international atmosphere and partly due to the corrupt Republican government under President Ulysses Grant, the statute of 18 March 1869382 was enacted. This law, which solemnly pledged the redemption of the greenbacks in specie as soon as 377 In the meantime, whether or not to retire the greenback was Treasury Secretary's discretion. 378 Throughout the twenty year period between 1869 and 1888, for example, the federal government realized an average of $66.4 million dollars of surplus, while the average annual spending was $308 million. 379 See the relevant data in Mitchell (1903) at 179, Table V. 380 An Act to suspend further Reduction of the Currency; 15 Stat. 34 (4 February 1868). 381 Nussbaum (1957) at 148-53. 382 An Act to strengthen the Public Debt; 16 Stat. 1 (18 March 1869). 202 possible, was a law that was completely inconsistent with the premise of the greenbacks, a fiat money. Considering that the general price level was twice as high as that of the pre-war era, redeeming the greenbacks in specie at par was to penalize the nation and the people with heavy taxes and/or deflation for the enrichment of moneyed class. Nonetheless, the "solemn pledge" turned into a law in 1875,384 which provided that the greenbacks would be redeemed in specie starting from 1 January 1879 until the outstanding greenbacks would remain only $300 million. This law was actually an official declaration that the US would embark the gold standard effectively from the beginning of 1879. Although the reduction of the greenbacks outstanding to $300 million was not fulfilled because of the social agitation and the consequential law of 1878385, which forbade any further retirement of the greenbacks,386 the US effectively launched the gold-standard system from 1879. After 1879: After the quantity of greenbacks in circulation being frozen, the quantity of money in the economy was largely controlled by the national bank notes. The ceiling for the national bank notes, which had been set to $300 million in the National Bank Act 383 For the detail of the prices in the aftermath of the War, see Mitchell (1903) at 239-279. 384 An Act to provide for the Resumption of Specie Payment; 18 Stat. 296(14 January 1875). 385 An Act to forbid the further retirement of United States legal-tender notes; 20 Stat. 87 (31 May 1878). 386 As a result of this law, the greenbacks outstanding were frozen in the amount of $347 million. The sum outstanding remained constant until 1982, when the law was changed to a ceiling (instead of the floor) amount of $300 million; but they have since largely been withdrawn as they have been paid to banks by the customers. See Woodward (1996) under the section, "Other Forms of Currency." 203 of 1863 (Section 17), was raised twice in 1870387 to $354 million and in 1874388 to $382 million. But, again, as mentioned earlier, the legal limit on national bank notes was becoming irrelevant as people's use of checks was fast becoming the norm. In other words, credit was becoming more important than money per se. 5.4. THE FEDERAL RESERVE REGIME (1913-Present) When one dwells on the black-letter laws, he/she may think that the Federal Reserve Regime was actually a collection of three different regimes: the classical gold standard regime (1913-1933), a quasi-gold standard regime (1935-1971), and a pure fiat standard regime (1973-present).389 The period between 1935 and 1971 is called "quasi"- gold standard period because the dollar's peg to gold was applied only to foreigners, especially to the central banks, and not to its own citizens. It was a transitional regime more than anything else. Thus, it would not be too wrong to say that the Federal Reserve Regime is a collection of two different regimes, one until 1933 and the other from then on. This is the reason why Jerome and Hurst were so different in assessing the Federal Reserve Regime. Jerome's assessment was based on the first, while Hurst's assessment was based on the second. 387 An Act to provide for the Redemption of the three per cent, temporary Loan Certificates, and for an Increase of National Bank Notes; 16 Stat. 251 (12 July 1870). 388 An Act fixingth e Amount of United States Notes, providing for a Redistribution of the National Bank Currency, and for other Purposes; 18 Stat. 123 (20 June 1874). 389 See for example Woodward (1996) under the section titled "Monetary Standard/Fractional Reserve/Central Banking." 204 However, as far as the Federal Reserve Regime is concerned, the money law itself has little significance. First of all, the Federal Reserve Act has been amended some 200 times so far.390 This means that the Federal Reserve Regime is not run by law. Rather, it is run by practice and the law is merely following the practice. Second, as noted in Section 4.5, the Federal Reserve System was little used in the beginning. Third, as noted in Section 4.6, the most significant event that changed the fundamental character of the Regime was the Treasury-Federal Reserve Accord of 1951, which never touched upon the relevant law. It was merely a change of the art of running the system. Thus, in this inquiry, we will look at only the current version of money law, which was largely put in place during the Great Depression years. 5.4.1. The Money Section 16 of the Federal Reserve Act provides that the Federal Reserve notes "shall be redeemed in lawful money on demand." This provision apparently indicates two things: (a) the Federal Reserve note itself is not lawful money; and (b) a lawful money could have existed, and/or still existing, or if it does not exist at the moment, it can be created by Congress in the future. In whatever way this provision is interpreted, it clearly indicates that the Federal Reserve note is not the sole money of the US, whether or not it is true at the moment. The Wikipedia, s.v. "Federal Reserve Act". 205 Nonetheless, the Federal Reserve regime itself has been striving to unify the nation's various moneys in its own, the Federal Reserve note. As already observed in the previous Section, specie and state bank notes disappeared during the Civil War. The remaining moneys were greenbacks, national bank notes, and Federal Reserve bank notes. The greenbacks were all retired; the national bank notes were exchanged to Federal Reserve notes; and The Federal Reserve bank notes were exchanged with interest-bearing non-circulating gold notes of the United States.391 As a result, the goal of single unified money was effectively achieved in 1965, when the Coinage Act was amended so as for the legal tender provision to include the Federal Reserve notes,392 while the greenbacks were completely out of circulation since January 21,1971.393 Thus, it can be said that the constituent of money in the Federal Reserve regime is the Federal Reserve note. 5.4.2. The Cause Unlike all the previous monetary regimes, there is a controversy on the cause of the Federal Reserve regime. Various opinions, however, can be largely classified into two groups. One is that the moneyed class succeeded in seizing the monetary power after twenty years of meticulous preparation by capturing the office of the President through See Moulton (1925) at 556-57. Section 31 U.S.C. 5103; 79 Stat. 5 (3 March 1965). 206 its Trojan horse, Woodrow Wilson. This is basically a conspiracy theory, which implies that both the people and legislators were deceived. Money and credit is such a complex subject that even President Woodrow Wilson did not know the implication of the new monetary system and approved the Federal Reserve Act, the theory suggests. This theory also suggests that the political circumstance of that time was that of the 1830s all over again, in which the Congressmen were all captured by the moneyed class regardless of their affiliation, with only one difference: Woodrow Wilson in the presidency instead of Andrew Jackson. The mainstream explanation, on the other hand, is that it was 1907 when the leaders of the nation were commonly convinced that the nation's monetary system needed to be completely renovated so that the money supply could be flexible or 'elastic' as much as possible. That is, upon the Panic of 1907, a bipartisan congressional body, the National Monetary Commission was formed in 1908, and this body produced the early draft of the Federal Reserve Act in such a way that money supply could be enlarged in a very short period of time so that the system could quell any kind of panic. This explanation suggests that the passage of the Federal Reserve Act in 1913 was merely a delayed action after a thorough study, as it ought to have happened, and therefore, was nothing unusual; it was merely the ordinary sequence of events starting from the realization of problem to deliberation of various alternatives and then to the See online: The US Department of the Treasury However, neither side of the story seem to be telling the whole truth. First, it seems ridiculous to believe that the State was deceived by bankers, reflecting the theses of Oswald Spengler or Van Creveld. As Van Creveld is saying, the State, the new God of the people, had been trying to "spread its wings over the most important commodity of all, i.e., money" since the last years of the 18th century.394 Given the chance to seize it upon the Panic of 1907, the rulers of the American State would have been more than happy to bargain with bankers even if it means extending the government's guarantee over the bankers. Second, the mainstream argument, saying as if everything was for the public good, seems ridiculous, too, in that it omits to say that bankers obtained enormous enrichment tool upon the launching of the Federal Reserve Regime. As far as the birth of the Federal Reserve Regime is concerned, Niall Ferguson's perspective, which was introduced on page 77, seems to be most appropriate. That is, moneylenders must grow big and powerful to overcome the conflict: if they are too generous, they make no money; if they are too hard-nosed, people call police. The Federal Reserve was bankers' way to grow big and powerful by piggybacking the government. In the meantime, the American State could put its hand on money spigot, too, in a much less provocative way in a nation where the libertarian sentiment is very strong. 394 Van Creveld (1999) at 258-59. 208 Nonetheless, it would not hurt to know the mainstream argument on the cause of the Federal Reserve Regime. According to the mainstream explanation, the purpose of the Federal Reserve regime was to achieve four things: (a) centralization of reserves for greater mobilization, (b) making money supply elastic, (c) reducing the cost of settlement, and (d) withdrawing government deposits from individual banks. Centralization and Mobilization of Reserves: According to Edwin Kemmerer, prior to the Federal Reserve regime, the 30,000 or so banks in the US held their reserves independently. There was no systematic mutual assistance mechanism in which a bank could overcome the occasional shortage of funds by borrowing from other banks. When a sudden bank run occurred, therefore, each bank, rather than helping one another, not only held tight its own reserves but also scrambled for more reserves, and thereby aggravated the panic. The situation was often compared to a scattered army in small units in each community that would be jealous of its' own squad of soldiers in front of the invaders who would be big enough to defeat each one of them, albeit insignificant for the consolidated army.395 Such being the case, the reasoning that arose was that by consolidating the scattered reserves into one or a few large reserves and providing emergency funds to banks in crisis the effectiveness of the reserve would be greatly increased. This purpose was achieved in simple, two steps: 395 Kemmerer (1932) at 6. 209 (a) Centralization - by requiring every member bank to maintain its entire legal reserve in the form of a deposit at the federal reserve bank of its district396; and (b) Mobilization - by providing required funds to member banks through (i) rediscounting member banks' bills, (ii) lending collateral loans, and (iii) open-market operation, i.e., buying and selling securities with member banks. Elastic Money: In the second phase of the Chase regime, the primary supplier of money was the national banks. The national banks could issue their notes within the par value of the government bonds they pledged and deposited with the federal government.397 Thus, the national money supply was proportional to national banks' ownership of government bonds. Such being the case, the money supply could not be elastic in three different dimensions - seasonally, cyclically, and in times of crisis - as it should be. That is, the national bank notes were (a) seasonally inflexible due to the red-tape involved in obtaining the necessary bonds; (b) they were cyclically inflexible due to the congruent movement of bond prices with the business cycle; and (c) they were inflexible in times of crisis due to the unfavourable terms in obtaining government bonds at such times.398 Kemmerer (1932) at 39. This is still true today. See Section 19(c)(1)(A). 397 If the market value of the bonds were below the par value, additional bonds were to be deposited so as to make the market value at least equal to the notes issued. But in the late 19* century and the early 20* century the market value of government bonds was usually above the par value. 398 Kemmerer (1932) at 11-19. 210 The goal of making money supply elastic was achieved in the Federal Reserve regime in two simple steps: (a) Expansion: (i) by continuously lowering the level of legal reserve of the Federal Reserve Bank; and (ii) by continuously expanding the eligible papers, both in terms of the nature and the maturity, that can be accepted as collateral for note issue; and (b) Contraction: (i) by raising the rediscount rate of the Federal Reserve Bank; and (ii) by open market operations. Cost Effective Settlement: Prior to the Federal Reserve regime, millions of checks drawn daily for out-of- town payments were continually in transit, and the processing of all those checks was expensive, including packing, shipping, abrasion, insurance and interest items.399 The Federal Reserve regime eliminated such costly physical movement of notes and checks by making itself a nationwide clearinghouse. Fair Market System: Prior to the Federal Reserve regime, the government held its funds not only in its nine sub-treasuries but also in 1,548 national banks.400 This practice was criticized by the advocates of the Federal Reserve regime as causing three problems: (a) placing too great power over the money market in the hands of a government official; (b) arousing 399 Kemmerer (1932) at 21-24. 211 jealousy among banks; and (c) making depository banks undisciplined from their habit of relying on the government in times of financial pressure.401 The Federal Reserve regime is said to have fixed these problems by Section 15 of the Federal Reserve Act, which states "No public funds ... of the postal savings, or any Government funds, shall be deposited ... in any bank not belonging to the system established by this Act." This provision effectively deprived the Secretary of the Treasury of his discretion of depositing public funds in any banking institution other than those that belong to the Federal Reserve regime. 5.4.3. The Controller There are largely three ways of controlling the money stock in the Federal Reserve regime: (a) by adjusting the discount rate, (b) by open market operations, and (b) by providing emergency advances to specific beneficiaries. The decision making bodies of these three matters are all different. The discount rate is determined by the Board of Governors402; the policy on open market operations are determined by the Federal Open Market Committee [hereinafter the FOMC] and it is implemented by the individual Federal Reserve Banks403; and the emergency advances are determined by the board of directors of each Federal Reserve Bank upon receiving the consent of not less Section 11(b), Federal Reserve Act. Section 12A(b), Federal Reserve Act. 212 than five members of the Board of Governors.404 Thus, although everyday mass media reports give an impression that the Board of Governors has a tight control on the money supply as like Nicholas Biddle did with the second Bank of the United States in the 1830s, the specific content of the money supply decision-making should be viewed as being determined by the Federal Reserve Banks. Although the twelve Federal Reserve Banks and the Board of Governors are often called just "Fed" as if they were a single, tightly integrated body, legally speaking, they are not. The Board of Governors is composed of seven members who are all appointed by the President of the US with the consent of the Senate for terms of fourteen years.405 It is an agency of the federal government with its employees being employees of the federal government. The mandate of the Board of Governors is "exercising general supervision over said Federal reserve banks."406 On the other hand, each of the twelve Federal Reserve Banks is a legally separate private business organization that is owned by the member banks in its district. In the meantime, the Federal Reserve banks are not equals, either. Although there are twelve of them, the US money market is practically dominated by two: the New York and Chicago Federal Reserve Banks. Between the "public" side of the Fed (the Board of Governors) and the "private" side of the Fed (the twelve Federal Reserve Banks) there is the FOMC. This FOMC is the primary official interface between the public and the private sectors of the Fed. The Section 10A(1), Federal Reserve Act. Section 10(1), Federal Reserve Act. Section 1 l(j), Federal Reserve Act. 213 FOMC consists of all seven members of the Board of Governors and five of the twelve Federal Reserve Bank presidents.407 The seven other Federal Reserve Bank presidents, who are not members of the FOMC, do not have votes but still attend the FOMC meetings and participate in the discussions. 5.4.4. The Quantity One of the most outstanding features of the Federal Reserve Regime is that there is no limit in its capacity to create money. In the Hamiltonian Regime, there was a legal ceiling to the issue of the Bank of United States notes. They were not a legal tender, either. There were also state banks, which checked on the issue of the Bank of the United State notes. In the Jacksonian Regime, money supply was limited by the quantity of the gold and silver available for use as money. There were state bank notes, but they were not a legal tender, and therefore, checked by people's propensity to hold species as opposed to bank notes. For instance, the people's propensity to hold specie was 13% in late 1836 but it shot up to 35% in late 1842 as the federal government started to keep its monetary assets in the form of specie alone starting from 10 May 1837.408 This change drained specie from the banks where it could be used as reserves for bank notes and deposits. Thus, it decreased the supply of money.409 In the Chase Regime, there was a legal ceiling to the greenbacks and three other legal tender Treasury Section 12A(a), Federal Reserve Act. Temin (1969) at 166. 214 notes. There were national bank notes, but these could be issued only upon a pledge of government bonds, whose issue, too, were limited by law. Moreover, the national bank notes were not a legal tender. Furthermore, throughout the whole period of the US history until 1927, the charter of all banks was given only in the terms of 20 years. Even if everything else failed, as in the case of the second Bank of the United States in the Jackson era, when the time was up, the bank had to be dissolved and the money it created had to be retired. On the other hand, in the current Federal Reserve Regime there is no legal provision that would automatically or semi-automatically limit the money creation. First, whereas the original Federal Reserve Act had provided the charter of the Federal Reserve Bank in the terms of twenty years,410 it was struck and dropped by the act of 25 February, 1927.411 Ever since, the Federal Reserve Bank can be dissolved only by an Act of Congress.412 Second, whereas the original Federal Reserve Act had provided that each Federal Reserve Bank should maintain 35% reserve against its deposits in gold or lawful money and 40% reserve against its Federal Reserve note in gold,413 but now there is no reserve requirement for the Federal Reserve Bank whatsoever. This was the result of the act of 18 March 1968, titled "An Act to Eliminate the reserve requirements for Federal Reserve notes and for United States notes and Treasury notes of 1890."414 410 Subparagraph "Second" in Section 4, 38 Stat. 251., the original Federal Reserve Act. 411 44 Stat. 1234. 412 Paragraph "Second" in Section 4(4), the Federal Reserve Act. 413 Section 16 of the original Federal Reserve Act. 414 Public Law 90-269, 82 Stat. 50. Third, even the reserve requirement for member banks is to be completely phased out. In the original Act, a member bank was required to maintain at least 7% of its demand deposits and 3% of its time deposits with the Federal Reserve Bank in its district.415 Now it is 3% for most accounts, but even this is to be lowered in effect to zero from 1 October 2011 by the amendment of 13 October 2006 (120 Stat. 1969).416 Fourth, it was initially assumed that the Federal Reserve Banks could extend credit to member institutions only through the process of rediscounting notes, drafts, bills of exchange, etc., bearing the endorsement of a member bank,417 although there was also a provision for open-market operations in the original Federal Reserve Act. This was because, before the First World War, it was generally assumed that changes in discount rates by central banks constituted the principal method of controlling the money supply. However, since 1922 open-market operations have become the primary method of controlling money supply because the effect was immediate and positive.418 In the meantime, in the original Act, the Federal Reserve Banks could buy and sell obligations of governments (of all levels) of a maturity from date of purchase of not exceeding six months.419 Now, there is no such restriction in terms of maturity. It can be any obligation without regard to maturities,420 and actually the Fed announced in March 2009 that it would purchase up to $300 billion of long-term Treasury 415 The requirement was higher for "reserve city banks" and "central reserve city banks." See Sections 19(a), 19(b), and 19(c) of the original Federal Reserve Act. 416 Footnotes to Section 19(b)(2)(A) of the current Federal Reserve Act. 417Moulton(1925)at569. 418 Kemmerer (1932) at 141-47 & 150. 419 Section 14(b) of the original Federal Reserve Act. 216 securities.421 That is, as long as there are some debt instruments from reasonably reputable public or private institutions, member banks can buy them and turn around to sell them to Federal Reserve Banks, which would in return provide Federal Reserve notes. This process is often called "monetizing debts." 5.5. A SUMMARY TABLE What has been said so far may be summarized as the following Table 5.1. Table 5.1. The Key Features of the Four Major US Monetary Regimes Hamiltonian Jacksonian Chase Fed. Reserve (1791-1836) (1836-1862) (1862-1913) (1913-present) New New Nat'l bank Federal The Money Bank of US Species Federal notes Reserve notes Greenbacks & Checks notes The Cause Tax Collection Honest money Deficits Deficits Elastic Money Private Private Treasury The Controller None National The "Fed' Bank of the US Secretary Banks International Federal Quantity the annual tax Flow of $450 mil. Debt& No limit Species Plus Section 14(b)(1) of the current Federal Reserve Act. The Microsoft Encarta Online Encyclopedia, s.v. "Federal Reserve System". 217 5.6. IDENTIFICATION OF EACH REGIME So far the four major US monetary regimes have been analyzed in four different dimensions: the constitution of money, the cause, the controller, and the quantity of the money they could create. Having grasped the content of each regime, we are now ready to identify the nature of each of the six historical monetary regimes in terms of the five theoretically identified monetary regimes. The Hamiltonian Regime; Considering that a new kind of money which did not exist before was created by a higher polity, i.e., the federal government, it must be Higher Money Regime. The Jacksonian Regime: Here, the Jacksonian Regime can be readily recognized as the Free Banking Regime. There was no central bank, no controller, and no higher money. The Chase-1 Regime: The essence of the Chase-1 Regime is the greenback, which was issued by the federal government. The federal government is a higher polity than the state governments, which had been chartering the state banks, the main issuer of money at that time. Therefore, the Chase-1 Regime was a Higher Money regime. 218 The Chase-2 Regime; During this period, the monetary revolution, in which the purchasing power in the form of money was replace by that of bank credit, took place. And the expanding credit was managed by some bankers who formed a 'community of interest', which played the role of a central bank in substance. Therefore, the Chase-2 Regime was the Private Central Banking regime. The Federal Reserve-1 Regime: On the face of the relevant money law, it is indistinguishable from the Federal Reserve-2 Regime. However, the actual operation of the system in practice revealed that it functioned as if it had been a subsidiary of the Treasury. Thus, it can be said to the Public Central Banking regime. The Federal Reserve-2 Regime; Lastly, what is the identity of the second phase of the Federal Reserve Regime? Even though the superstructure on top of the Federal Reserve Banks, the Federal Reserve Board, is a government agency, all the credit allocation works have been being carried out by the Federal Reserve Banks, which are private institutions, since 1951. Also, as noted on page 37, banking in peace time cannot but be private affairs. In many respects, the Federal Reserve-2 Regime is a Private Central Banking regime. 219 5.7. THE SYNTHESIS OF THE FINDINGS OF CHAPTERS 4 AND 5 In the previous chapter it was found that the actual living conditions in the eve of the six historical US monetary regimes were No. 2, No. 1, No. 2, No. 3, No. 4, and No. 3, respectively. Then this chapter found that the six historical regimes can be identified as [Extemporary] Higher Money, Free Banking, [Extemporary] Higher Money, Private Central Banking, Public Central Banking, and Private Central Banking regimes, respectively. This can be summarized as the following Table 5.2. Table 5.2. The Observed Facts of the Six US Monetary Regimes Hamilton. Jackson. Chase Fed. Reserve 1791-1836 1836-1862 1862-1913 1913-present The Living 2 1 2 3 4 3 Condition [Extemp.] [Extemp.] Private Public Private Free The Regime Higher Higher Central Central Central Banking Money Money Banking Banking Banking This confirms that the proposed theory, or the prima facie theory of this inquiry, which was presented in Subsection 1.6.5 in the form of Figure 1.5 is valid. Chapters 4 and 5 showed that the proposed theory explains not only the nature of each and every historical US monetary regime, but also the evolution of the US monetary system as a whole. 220 6. CHECKING ON THE IMPLICIT ASSUMPTIONS As declared in Section 5.7, the works of Chapters 4 and 5 successfully showed that the proposed theory is valid. This means that the proposed theory is good and powerful enough to explain not only the nature of the six historical US monetary regimes but also the evolution of the US monetary system as a whole. This also means that the proposed theory is very promising in explaining the evolutionary process of any other countries. However, as like the precaution given in Section 1.8, the validity of the proposed theory can still be injured by any defect in the implicit assumptions underlying the theory. Thus, in order to make sure that the proposed theory is indeed sturdy, we need to examine the validity of the implicit assumptions behind the theory, which is the task of this chapter. As far as the explicit assumptions are concerned, they were given at the outset on the very first page of this inquiry, by saying, "Even though the preference of individual members for or against certain monetary regimes may be all different... (a) the masses will choose such a monetary regime that suit them best, and (b) the masses will eventually prevail." These assumptions are something that neither be philosophically reasoned nor be tested by experiments. They can only be asserted from 221 historic experiences. And recounting numerous historic events, these assumptions seem to be quite plausible and reasonable. It is hard to add anything more to it. Hence, let us proceed immediately to the case of implicit assumptions. There are two implicit assumptions to the proposed theory. One is that the three most important variables that determine a human aggregate's living conditions are the Nafts, the prevalent technology, and the presence of security threat. The other is that whenever the living condition gets better, in other words, whenever the actual living condition moves from right to left in Figure 1.2, a human aggregate tends to revert back to the less centralized (or less civilized or less sophisticated) regime. Thus, the question in this chapter is, "Are these implicit assumptions plausible (or reasonable)?" 6.1. THE AXIOMS ON THE NATURE OF HUMAN EXISTENCE When one thinks about this question, he/she would realize that this is a question regarding the nature of human existence on earth as a living being, and not only as an individual, but also as a collective being. The nature of human existence as an individual or as a group is too controversial an issue for anyone to obtain a definite answer. This is because human is a unique animal that has self-awareness.422 This means that we must rely on the most axiomatic, or self-evident observations to show that the implicit assumptions are plausible and reasonable. 422 See for example Schumacher (1977) for the significance of self-awareness. 222 If one chooses just two axiomatic truths or self-evident truths about the nature of human existence, they would be (a) that the human lives as a detritovore, and (b) that the human lives as & prosthetic animal. The notion of the human as being a 'detritovore' and the 'prosthetic animal' seems to have been first elaborated by William Catton (1926-present) in 1980 in his book, Overshoot. Let us consider the meaning and the significance of these two aspects of the nature of human existence one by one. 6.1.1. A Detritovore Catton defines the human as a detritovore, an animal living on detritus, which is an accumulation of dead organic matter. It means basically the same thing as what this inquiry calls the 'Nafts'.423 He explains this aspect of human existence by comparing the human to algae: When nutrients from decaying autumn leaves ... are carried by runoff from melting snows into a pond, their consumption by algae in the pond may be checked until springtime ... When warm weather arrives, the inflow of nutrients may already be largely complete for the year. The algae population, unable to plan ahead, explodes in the halcyon days of spring ... This algal Age of Exuberance lasts only a few weeks. ... there is a massive die-off of these innocently incautious and exuberant organisms. ... When the fossil fuel legacy upon which Homo colossus was going to thrive for a time became seriously depleted, the human niches based on burning that legacy would collapse, just as detritovore niches collapse when the detritus is exhausted ... people welcomed 423 However, the word 'detritus' will be used throughout this chapter for the sake of consistency. 223 ways of becoming colossal, not recognizing as a kind of detritus the transformed organic remains called "fossil fuels," and not noticing that Homo colossus was in fact a detritovore, subject to the risk of crashing as a consequence of blooming.424 Describing the human as a 'detritovore' in a single word is certainly controversial, but it is also an innovation, which conveys an idea of what the human beings are in a strikingly clear and succinct way. It is indeed an impressively efficient choice of word. However, the concept that is contained in the word 'detritovore' and its accompanying implications do not seem to be necessarily new. Similar ideas have been elaborated by many other people such as Thomas Malthus (1766-1834), Charles Pearson (1830-1894), Henry Adams (1838-1918), William Sumner (1840-1910), Andrew Jackson Turner (1861-1932), E. Parmalee Prentice (1863-1955), Walter Prescott Webb (1888-1963), Ester Boserup (1910-1999), Amos H. Hawley, and Stephen Boyden, to cite a few. There must be many more. Maybe we can call them the School of Biosophy, the term 'biosophy' being coined by Stephen Boyden in the 1980s. This School represents the worldview or perspective that tries to understand human psychology, human organization, technology, or any other human situation, whether it is in individual level or in societal level, in a dynamic relationship with the changing conditions of the human habitation or ecology. They view the human as merely one of all the other species that consist of the fauna of the earth, and thus they believe that Catton (1980) at 168-69. 224 human behaviour in general, especially the collective behaviours, cannot violate the Law of Nature. Although their backgrounds and trainings are so diverse, their message is surprisingly similar. For example, Henry Adams said: From the physicist's point of view, Man, as a conscious and constant, single, natural force, seems to have no function except that of dissipating or degrading energy. Indeed, the evolutionist himself has complained, and is still complaining in accents which grow shriller every day, that man does more to dissipate and waste nature's economies than all the rest of animal or vegetable life has ever done to save them. "Already," - one may hear the physicists aver - "man dissipates every year all the heat stored in a thousand million tons of coal which nature herself cannot now replace, and he does this only in order to convert some ten or fifteen percent of it into mechanical energy immediately wasted on his transient and commonly purposeless objects. He draws great reservoirs of coal-oil and gas out of the earth, which he consumes like the coal. ... He has largely deforested the planet, and hastened its desiccation. ... His consumption of oxygen would be proportionate to his waste of heat, and, according to Kelvin, 'If we burn up our fuel supplies so fast, the oxygen of the air may become exhausted, and that exhaustion might come about in four or five centuries'. ... Worse than all, such is his instinct of destruction that he systematically exterminates or degrades all the larger forms of animal life in which nature stored her last creative efforts.425 H. Adams (1910) at 216-17. 225 This statement is another way of saying that human beings are living on mostly non-renewable energy sources. This very point seems to be the essence of the nature of the human as an animal species. That is, human beings are not satisfied with living within the confines of the food chain, which links all organisms to other organisms in a sustainable hierarchy of consumption. Henry Adams was practically saying that if there was a Demiurge of the human, the purpose of its creating human on earth was to terminate the earth. According to Adams, various animal species started to appear on earth when the exuberance of plants reached its climax as early as the Carboniferous Period and started to lose its vital energy; then at the end of the Miocene Period, when both plants and animal forms of life started to lose its previous vigour, in the midst of a wrecked solar system, man suddenly appeared. Since man appeared, no new species were added to the fauna of earth, and the great herbivorous mammals, already on their decline, started to disappear little by little from the scene of the world. That is, the human appeared when all hope that the process of solar system's dying can ever be reversed is lost.426 From this observation about the solar system, and from the observation of human behaviour on earth, Adams concluded that the function of the human in the universe is dissipation, degradation, and an accelerator of entropy. He said, H. Adams (1910) at 167-68. 226 The evolution of life on the earth had ceased to be progressive some millions of years ago, and had passed through its stationary period into regression before man ever appeared.427 Man is the last term of a series beyond which, following the plan on which the whole animal kingdom is built, no further progress is materially possible.428 Already the anthropologists have admitted man to be specialized beyond the hope of further variation, so that, as an energy, he must be treated as a weakened Will, - an enfeebled vitality, - a degraded potential.429 As an energy he has but one dominant function: - that of accelerating the operation of the second law of thermodynamics.430 Man refuses to be degraded in self-esteem ... He yearns for flattery, and he needs it... though science should prove twenty times over, by every method of demonstration known to it, that man is a thermodynamic mechanism, instinct would reject the proof, and whenever it should be convinced, it would have to die.431 For another example, William Sumner said that the democracy in American and Europe was almost exclusively thanks to a detritus bonanza, the vast expanse of land of North America. If Adams explained the general position of the human species as a detritus eating animal in the solar system, Sumner explains the impact of a newly found detritus, i.e., the North America, on the workings of the human aggregates. He said, 427 H. Adams (1910) at 178. 428 Id. at 177. 429 Id. at 195. 430 Id. at 230. 431 Id. at 230-31. 227 The very greatest, but... least noticed significance of the discovery of America was the winning of a new continent for the labour class ... as we have seen in our time, the movement of men one way and food the other developed to great proportions ... It is that when the pressure of population on land in western Europe was becoming great, the later improvements in the arts ... and the opening of the outlying continents have, in two ways at the same time, relieved that pressure. This combination has produced an industrial revolution. The philosophers and all the revolution-makers of every grade come running together and shouting paeans of victory ... and, therefore, they claim that they have made it all. It is totally false. They are themselves but the product of the forces ... Democracy itself, the pet superstition of the age, is only a phase of the all-compelling movement. If you have abundance of land and few men to share it, the men will all be equal... Social classes disappear ... No philosophy of politics or ethics makes them prosperous. Their prosperity makes their political philosophy and all the other creeds ... the wheat from America has had far more effect on ideas in Europe than the ideas from America ... the Old World aristocracies need care little for American notions if only American competition would not lower the rent of land ... it makes wages high, food cheap, and the rent of land low, all at once. That is what exalts the labourer and abases the landed aristocrat... For each man to have a wide area at his disposal... he has the conditions of existence within his control, that he is not ground down by property, that he is forced to seek no man's protection, that he is cowed by no fear, that he is independent and "free," that he can provide for his family without care and can accumulate capital too ... his faith in the [democratic] institutions is like that of a savage who thinks that he would not have had success in hunting but for the fetish around his neck ... With more land, the manual unskilled labourer is raised in comparison with the skilled and educated labourer ... Each man has plenty of the "rights of man" because he need only be, in order to be a valuable member of society; he does not need high training and education, as he would in an old and crowded society with a strict organization, high discipline, intense competition, and weighty sanctions upon success or failure.43 Admittedly, picturing human beings as living on one detritus after another and occasionally dying-off when they cannot find a new one is quite an unpleasant Sumner (1896) at 41-43. 228 description, but it is one axiomatic truth that is hard to deny about the nature of human existence. Since it is so axiomatic or self-evident, it is the idea of the proposed theory that we would certainly be able to explain the human history and its future by the status of detritus, or the Nafts, in the terminology of this inquiry. 6.1.2. The Prosthetic Animal Catton's description of the human as the prosthetic animal in a strikingly succinct word, 'prosthetic', is his yet another innovation. Catton explains the nature of human existence as the prosthetic animal in these words: The word, "prosthetics" refers to the branch of surgery that deals with replacement of missing parts. It may seem a rather remote and morbid subject, but all humans inhabiting other than tropical environments are users of essentially prosthetic devices - clothing. Homo sapiens can survive where he would otherwise perish by taking from another animal the protective cover normal to that animal as a product of natural selection. ... The evolutionary and ecological significance of such prosthetic devices has been to facilitate the spread of mankind over a more extensive range than we could have occupied with only the equipment of our own bodies. ... The ecological implications of prosthetics have not been clearly seen by either social scientists or biologists because the concept has seemed so narrowly medical. Yet nature's evolutionary breakthrough may best be understood by viewing it as a shift from (a) selective retention of organic traits on the basis of their adaptive utility to (b) selective retention of prosthetic tools on the basis of their adaptive utility. It was no 229 longer necessary to evolve eyes in the back of the head when a species needed rear vision; a tool could cope with the problem.433 That is, the human adapts itself to the highly varied environments not by changing its organic traits but by adopting appropriate tools. Depending on which tool and the associated knowledge one adopts, occupational specialties arise as the consequence. Thus, the members of a single species behave as if they were many different species.434 This, too, is one axiomatic truth that is very hard to deny about the nature of human existence. Jane Jacobs compares this human prosthetic specialization with a tropical rainforest. According to Jacobs, a civilization's expansion occurs when energy infused from outside is used increasingly more times before the system discharges it. She explains: It's an iron law of nature that every organism and every machine needs infusions of new energy from outside itself or it comes to a halt... Even a prize Jersey cow can't survive by merely drinking her own milk.435 Energy infusions are only the first half of the energy story; the second half is energy discharge; eventually, a system discharges all the energy it receives.436 So an ecosystem can be thought of as a conduit, through which energy passes, with many or few transformations of energy/matter during its trip Catton(1980)at 146. Id. at 148. Jacobs (2000) at 53. 230 through the conduit... In some ecosystems, not much happens; Sunlight falling on a desert... heats sands and rocks, but when night falls, even that quantity of temporarily retained energy radiates outward; In this case, the passage of energy is swift, simple, and vanishing, leaving no evidence of the passage ... Contrast that with energy flow through a well-developed forest ecosystem; In the forest, energy flow is anything but swift and simple, because of the diverse and roundabout ways that the system's web of teeming, interdependent organisms uses energy; Once sunlight is captured in the conduit, it's not only converted but repeatedly reconverted, combined and recombined, cycled and recycled, as energy/matter is passed around from organism to organism ... It leaves behind, in complex webs of life, ample evidence of its passage.437 The answer is the forest's multiple uses of energy ... Multiple energy use requires diverse, interdependent users. The principle can be stated like this: Expansion depends on capturing and using transient energy. The more different means a system possesses for recapturing, using, and passing around energy before its discharge from the system, the larger are the cumulative consequences of the energy it receives*™ Here the message is simply that expansion is like desert's becoming a tropical rain forest. That is, expansion is not adding more sand to a desert, but adding a variety of different things other than what is there already. Expansion is not doing the same thing more efficiently or accumulating larger quantity, but adding new kinds. Jacobs explained the same concept in her another book as the following: Id. at 46. Id. at 47. The emphasis is Jacobs'. 231 Our remote ancestors did not expand their economies much by simply doing more of what they had already been doing: piling up more wild seeds and nuts, slaughtering more wild cattle and geese, making more spearheads, necklaces, burins and fires. They expanded their economies by adding new kinds of work. So do we. Innovating economies expand and develop. Economies that do not add new kinds of goods and services, but continue only to repeat old work, do not expand much nor do they, by definition, develop.439 However, Jacobs' picturing human society as though it was a tropical rainforest may be the culmination of the eulogy about the prosthetic aspect of the nature of human existence. This is because modern men do not seem to be so much enthusiastic about specialization any more. They talk more about the alienation and job losses to machines The significance of the nature of human existence as being the prosthetic animal is two-edged sword: on the one hand, the human have achieved prosperity and plenty, but on the other hand, human societies are ever more getting organized in such a way to facilitate the use of the most efficient technology, alienating ever greater portion of the population. The acknowledgement of what it all implies to human lives has a long tradition: from Karl Marx (1818-1883), to John Dewey (1859-1952), Edward Morgan Forster (1879-1970), Lewis Mumford (1895-1990), Herbert Marcuse (1898-1979), Jacques Ellul (1912-1994), Langdon Winner, and to Jeremy Rifkin (1945-present). Many others described, analyzed, condemned, and lamented modern man's sad, Jacobs (1969) at 49. 232 alienated lives, which are fundamentally organized around mega-machines, and not the other way round as it supposed, and hoped to be. The more recent, sad side of the significance of our being prosthetic animal is well documented by Rifkin, who said, Global unemployment has now reached its highest level since the great depression of the 1930s. More than 800 million human beings are now unemployed or underemployed in the world. That figure is likely to rise sharply between now and the turn of the century as millions of new entrants into the workforce find themselves without jobs, many victims of a technology revolution that is fast replacing human beings with machines in virtually every sector and industry of the global economy. ... The information Age has arrived. In the years ahead, new, more sophisticated software technologies are going to bring civilizations ever closer to a near-workless world. In the agriculture, manufacturing, and service sectors, machines are quickly replacing human labor and promise an economy of near automated production by the mid-decades of the twenty-first century. The wholesale substitution of machines for workers is going to force every nation to rethink the role of human beings in the social process. Redefining opportunities and responsibilities for millions of people in a society absent of mass formal employment is likely to be the single most pressing social issue of the coming century.440 When Jacobs compared human society to a tropical rainforest, she apparently mistook the prosthetic nature of human adaptations for the permanent organic adaptations that are occurring in a variety of animal species. However, the human 233 occupational specialization is not real transformation of human organism or its nature, but merely a behavioural adaptation in the prosthetic dimension. That is, the specialization is not something that the human does willingly and happily. It is rather a reluctant compromise. What great many people really want is not such occupationally specialized life. This is especially so when the prevalent technology is not of human-scale, or something that one single individual or a family or a small group of community can master and handle. The bigger, the faster, and the more powerful the machine becomes, the less important the human beings become in general. It seems only natural that when machines grow beyond human-scale, it is the human that becomes a cog, not the machine. As Winner explains, technology has an inherent tendency to make autonomous progress. Since no human being is almighty and omniscient, technologies are being developed in myopic vision, without contemplating all the ramifications of the technology being developed. It is often only long afterwards that people realize that the new technologies bring unintended, regrettable consequences. Such belated regrets are also the sources of distress of modern life. One last point to make about technology is that the quality of detritus often determines whether the technology will be of human-scale or not. That is, the qualitative dimension of the detritus can be the dimension that frustrates individuals or Rifkin(1995)atxv. 234 small groups from using the detritus for reversion, no matter how plentiful the detritus is. In this case, the detritus can be used only in large, centralized organizations, and therefore does not offer any chance to individuals or small groups to use the detritus for their independent lives. Such frustration is often further aggravated by laws and regulations. For example, no matter how much oil the US enjoyed during the American oil boom period between 1860 and 1970, no individual or no small groups could use it at will. On the contrary, oil was the arch-villain that aggravated centralization of power and properties, independent lives, extremely specialized occupations, and crowded urban life.441 This was partly a consequence of technological imperative in processing oil, but the monopolistic banking power in the US at that time, which provided almost unlimited funds to Rockefeller, also played a part.442 6.1.3. A Summary To summarize what has been said, there are two axiomatic facts about the nature of human existence: (a) Humans are detritovore; and (b) They axe prosthetic animal. That is, the human is par excellence in drawing down energy for its reproduction and maintenance from detritus, which is the savings of the Earth that have been accumulated since its birth. The human levelled down the forests, has almost eroded the farming 441 To see why this is so, see for example Baer (2003), Kunstler (1993 & 2005), and Rubin (2009); especially Kunstler (2005). 442 To see a detailed story, see Olien & Olien (2000). 235 soil,443 and is now running through fossil fuels. In the meantime, the human adapts itself to highly varied environments not by changing its organic traits but by adopting appropriate prosthetic tools and the associated knowledge. 6.2. THE AXIOMS ON THE HUMAN NATURE Upon these two axiomatic facts about the nature of the human existence, there arise two equally self-evident facts about the human nature: the reversionary and the xenophobic natures. We all seem to believe from experiences that humans have certain common behavioral tendencies regardless of the culture, race, skin color, age, gender, and/or educational level, etc. Some people boldly call such common behavioral tendencies the human nature, while some others call them just common behavioral tendencies to be more modest. Whichever way we may call them, we all seem to agree that there are indeed some traits that are found in any human beings. Tyrrell called the collection of such traits, simply, Homo Faber, and such traits make human beings completely adapted to the world he is born. One is born to take everything in nature for granted. Such a state is only broken by the self-awareness or higher level of awareness, which is unique in human. According to Boyden, many soils in the US will last only another 35 years as of his writing. This situation is more serious in Australia. See Boyden (1987) at 184. 236 Table 6.1. Common Behavioural Tendencies (Boyden, p. 50) Physiological To eat when hungry, to drink when thirsty To copulate when appropriately stimulated To avoid pain, discomfort To seek comfort To rest or sleep periodically in response to the urge to do so To avoid unnecessary exertion; to take the easiest path to an objective To avoid prolonged periods of very low or very high levels of sensory stimulation Social-Approval Seeking To seek attention and companionship within the in-group To seek approval of members of the in-group, to seek their praise To avoid ridicule from and disapproval of members of in-group To show approval for forms of behaviour considered advantageous to the in-group To show disapproval for considered disadvantageous to the in-group To compete with peers for status, respect, and influence; and to aim to out-perform Social-General To make choices perceived to be of benefit to oneself or to those one loves the most To support, protect, to show trust in and loyalty to the in-group To co-operate with members of the in-group To exhibit care-giving behaviour towards immature members of the in-group To exhibit care-eliciting behaviour toward members of die in-group in times of anxiety To exhibit care-giving behaviour towards members of the in-group To establish hierarchies (not necessarily inflexible and lasting) To accept the beliefs and values of the society into which one is born and/or lives To defend perceived (culture-determined) rights (e.g., property, conjugal, territorial) To seek to acquire what others have To behave aggressively, on occasion, towards others, especially out of frustration To act with suspicion and distrust towards out-groups To seek sexual relationships To imitate (especially in the young) To play games (especially in the young, but including dancing, singing, etc.) To avoid prolonged solitude and loneliness, but to seek solitude on occasion To form pair bonds for mating and reproductive purposes Others To seek to modify the environment To exhibit interest in and to explore the unknown To seek novelty To seek new information To seek and accept reasonable short-term challenges and to seek to solve problems To seek explanations To follow habit 237 Stephen Boyden, an Australian human ecologist, defines 'common behavioral tendencies' (or human natures in terms of this inquiry) as the following: There are certain things that people tend to do in all societies the world over, and presumably always have done, and we strongly suspect that there is a phylogenetic basis for these aspects of behavior. I shall refer to these things that people tend to do as common behavioral tendenciesAAA He then compiled from other authors thirty seven different common behavioral tendencies into four different categories as Table 6.1. 6.2.1. The Reversionary Nature What It Is: However, what really attracts our attention is his argument that the human is reversionary, apart from those various human natures that he compiled from other authors. According to him, the most wanted way of life, or the most natural and the healthiest way of life for the human is its original state of existence, that is, the life of the primeval phase, or the hunter-gatherer lifestyle. According to Boyden, the lifestyle of the primeval phase is a lifestyle where there is no rigid hierarchical social structure, where there is no keen sense of personal ownership or occupational specialism of any kind, and where there are no negative 444 Boyden (1987) at 48. The emphasis is Boyden's. 238 feelings such as sense of alienation, sense of anomie, sense of loneliness, sense of boredom, or sense of resentment. It is an independent and self-reliant445 life, whose basic unit is nuclear family.446 This lifestyle consists of three parts: (a) independent and self-reliant life (autonomous life), (b) whose centre is nuclear family and/or some very close knit organization, which can be summarily called a compact group (in a compact group), and (c) there is equality amongst the adult members of a group and amongst groups both economically and politically (amid equality). When these three elements are all satisfied, the human life is most natural and healthiest. In today's vocabulary, it is so-called plenitudinous life, the life of self-realization, or the life of full enjoyment. According to Boyden, any deviations from this primeval lifestyle, namely 'evodeviation', cause phylogenetic maladjustments, which manifest themselves in various infectious, nutritional and organic diseases.447 In general, the greater the evodeviation gets, the greater the pathological phenomenon occurs, the less humane the society becomes, and the greater the desire for reversion grows. Why? One would ask, "Why is it so?" Boyden's answer to this question is that this is because such a lifestyle was prevalent in the natural habitat of the human species. This is his answer. There is no further evidence he offers, even though many readers would 445 Even if Boyden used the expression, 'self-sufficient', this writer believes that it had better be 'self- reliant' as there is rarely a human being who is truly self-sufficient. 446 Boyden (1987) at 59-82. 239 demand more evidence. One might defend the lack of evidence by pointing out that proving human nature is impossible because of the human's capability to act in self- awareness. That is, the human not only thinks, but also think while observing his/her own thinking. Thus, we must give up demanding empirical evidence when it comes to the issue of human nature. As Schumacher (1977) pointed out, scientific methods have inherent limit to be applicable to inanimate, life-less things. It is simply wrong to ask scientific evidence on animal behaviour, especially on human behaviour, because scientific methods are not designed to deal with such matters. A More Convincing Explanation: However, this writer believes that the reversionary nature can be better explained by the prosthetic nature of human existence. As we all know from experience, a prosthetic device, whether it is a pair of glasses, a hearing aid, or a wheel chair, is certainly convenient, and yet it is also true that it is alien to our bodies more or less. It gives advantages, and yet it is not natural. Thus, if it goes too far, the irritation or the feeling of alienation will exceed the benefit. Likewise, if a human aggregate goes too far in its utilization of occupational specialization and of machinery, more and more members of the aggregate will be alienated and irritated. These people will yearn for the less specialized, less interdependent, less intensive life of the olden days. They will want more "natural" Boyden(1987)at21&39. 240 ways of life. When we look at the reversionary nature in this light, it would not be a human 'nature' at all as a matter of fact, but would merely a logical feeling that flows from the circumstances. Some people, including Jane Jacobs, often dismiss such people's longing for a more natural way of life as "sentimental longings."448 But then it begs such questions as, "What is sentimentalism?" or "Where does the 'sentimentalism' come from?" That is, dismissing the reversionary nature (or feeling) by simply calling it 'sentimental' does not end the discussion. It merely postpones or puts aside. The Implication: When we accept the notion of the reversionary nature, this reversionary tendency to the human should work like gravity to matters. One significant implication of this human reversionary tendency is that human social aggregates, whether it is a business corporation, a State, or a church, have the inherent tendency to disintegrate or decentralize until it reaches the smallest human aggregate unit, the family. The only reason that this does not happen, or even the family itself is fissured into atomized individuals to the contrary, is that the opposing force of the integration into, say, the corporation, the State, or the Church, is so much stronger than the reversionary tendency. In other words, due to the reversionary nature, a human aggregate's monetary regime tends to revert back to Free Banking. 448 Jacobs (2000) at 112. 241 What It is Not: This recognition of human reversionary tendency must not be confused with what various Utopian schemes aspire to. Seemingly with no single exception, all the Utopian fantasies aspire to a totalitarian society where everyone is, or should be, equal in every aspect of life from wealth down to the physical endowments. One interesting common feature of these Utopian fantasies is that the institution of family is completely obliterated, presumably because it would be an unavoidable by-product of making everyone equal, even though it is an equally miserable state of existence, rather than equally happy. Igor Shafarevich assessed that the whole concept is coming from what he calls 'death instinct', even though this writer believes it is rather coming from one's fear of lonely death. Anyway, apart from the validity of death instinct, the idea of Utopia has nothing to do with the reversionary nature. Actually, it is the opposite. This is because the essence of the primeval lifestyle is individualism whereas that of the Utopia is strict collectivism. 6.2.2. The Xenophobic Nature What It Is: One prominent human nature that many authors assert as shown in Table 6.1 is people's tendency to distinguish in-group and out-group and to take quite different attitudes in dealing with them. Since the colloquial expression for such a tendency is 242 'xenophobic', we will simply call it 'xenophobic nature'. In Boyden's expression, it is a tendency for a human being to desire to obtain approval from the in-groups. More specifically, for any individual, there are always various in-groups and various out-groups. His/her attitude toward these two groupings is quite different. Whereas he/she desires to obtain approval from the in-groups and therefore takes care of other members of his/her in-group, the same person does not care about out-group members and rather tends to take advantage of them, if he/she can get away with it. At the least, he/she takes negative attitudes against the member of his/her out-groups with whatever pretenses that can allay his/her moral conscientiousness. One interesting aspect of this xenophobia, according to Eric Hoffer, is that it is this xenophobic sentiment that creates and strengthens the in-group feeling and solidarity, rather than the other way round. Self-identity arises only after a worthy enemy emerges. Xenophobia comes before self-identity. 'They' exist before 'We' exist.449 Another interesting aspect is that the change from one self-identity to another can be amazingly swift. For example, even before the wounds of the Second World War were healed, the belligerent States of the Western Europe and the US became one in- group against the Soviet communists. After all, the Germans, members of Western civilization, were much less out-group than the members of Orthodox Russian civilization. But then as soon as the Soviet Union stopped being a worthy enemy, the 449 Hoffer (1951) at 91-101. 243 US took the European Union as her new out-group and formed the North American Free Trade Area in December 1992, only ten months after the European Union was formed. Yet again, when the Islamic terrorists have become the most prominent enemy in the 2000s, the Europeans seem to have become the closer in-group to the Americans than Canadians or Mexicans. Why? Boyden does not provide the reason why such a desire exists, probably because it was not what he wanted to discuss in his book. He just collected it to show the readers what other authors say. A More Convincing Explanation; Whatever the explanations for the xenophobic nature by the original authors might have been, this writer believes that this xenophobic nature, too, can be better explained by one of the two natures of human existence that this inquiry takes as axiomatic: the detritovorous nature. One of the consequences of the human's being detritovorous is that the human species is perpetually overshooting and chronically in danger of die-off. Overshooting occurs when a species propagates itself beyond the carrying capacity. The carrying capacity is the maximum persistently feasible population that is supportable only by the flow of vital energy in the equilibrium state 244 (or by the stable food chain).450 The reason why the human species is perpetually overshooting is that it perpetually draws down detritus, which is the savings of the Earth that have been accumulated since the birth of the Earth. This perpetual state of overshooting means that that there are always potentially redundant people. People are unaware of the potential redundancy until the detritus is about to be depleted. When the potential redundancy is exposed by the depletion of the detritus, the 'die-off occurs. For most species, the order of die-off is usually from the weakest to the strongest. It is determined by the individual organism's strength. However, in the case of the human, it is not usually individual strength but social aggregate's strength that determines the order of die-off Before the weakest members' die-off is allowed, a social aggregate tries to maintain its integrity at the cost of other social aggregates. Even though this phenomenon manifests itself in many different forms, such as genocide, massacre, war, slavery, or discrimination, the fundamental nature of all these is the same: a declaration of redundancy of a social aggregate by another. The Implication: When we accept the notion of the xenophobic nature, this xenophobic tendency to the human should work like surface tension to liquid. One significant implication of this xenophobic tendency is that the humans who were previously living in 450 The concepts of overshooting' and 'carrying capacity' are adopted from Catton (1980). 245 individualism have the inherent tendency to form a social aggregate, and those who were previously living in a looser form of aggregate have the inherent tendency to form a tighter form of social aggregate. That is, the xenophobic nature tends to makes people become more tolerant to centralization, specialization, and consolidation than before. As a result, due to the xenophobic nature, a human aggregate's monetary regime tends to move farther away from Free Banking. What It is Not: Peter Kropotkin (1842-1921) observed this tendency in many different animal species, even though he believed that its cause is what he calls the nature of mutual aid or mutual support, which he believed to be the Law of Nature. Kropotkin observed the same phenomenon in human beings, too. According to him, people chose to abandon the system of individual ownership of land and adopted communal possession system in Chernigov in the 1850s, in the Middle Russia in the 1880s, in Tiraspol in the late 1870s and early 1880s, and in Berdyansk in the 1890s.451 This kind of commune movement was not limited to Russia in the late 19th century. The same phenomenon had occurred to Roman Empire in its declining years.452 Jack Hirshleifer, too, provides several compelling evidence on how remarkably people in disaster situations behave altruistically, forming a mutual aid network. Kropotkin (1902) at 209-10. See for example Mumford (1961) at 244-47. 246 However, as Hirshleifer pointed out, all such mutual aid of human beings seems to occur only in view of the material advantages of cooperation on a quid pro quo basis.453 When the situation changes in such a way that rational selfish calculation of the advantage of maintaining an alliance does not hold any more as the threat grows to a certain critical levels human behaviour suddenly turns to sauve qui pent (save who can)454 and the mutual aid system collapses all at once. Furthermore, even the rare mutual aid cases seem to occur only in very narrow circumstances, as the Bulgarians in Russia, the German Mennonites in Russia, the German Baptists in Russia, the newly freed serfs in an aristocratic Russian province, the Christians in the Roman woods, the Alaskans after an earthquake, the British, Germans, or Japanese under enemy's bombings testify. All these people were those who were, or could be, branded as redundant by their out-groups. They had to cooperate in order to survive. Thus, it would be much more appropriate to explain Kropotkin's evidence with the xenophobic nature, which logically flows from the detritovorous nature of human existence, rather than with the 'mutual aid' nature or altruism. Such an explanation seems to be more reasonable. That is, the humans cope with the die-off crisis in collectives, rather than letting the weaklings amongst our own kind die off as most animals do. Hirshleifer (1987) at 200. 247 6.3. A SYNTHESIS To sum, the nature of human existence as a detritovore makes the human perpetually overshoot, and thus, makes him/her perpetually vulnerable to massive die- offs. This tendency begets the xenophobic nature, which makes the human become more tolerant to centralization, or in our case, to more totalitarian monetary regimes. On the other hand, the nature of human existence as a prosthetic animal makes the human become increasingly alienated from his/her society as the degree of prosthetic application increases. This tendency begets the reversionary nature, which makes the human yearn for a simpler, more individualistic, decentralized, and freer lifestyle, or in our case, for a reversion toward the Free Banking monetary regime. But this reversion is only possible when the circumstances allow it. As a result, there is tension between what humans want and what they can accomplish. That is, even though humans have an inherent urge to move all the way back to the plenitudinous lifestyle of the olden days, they will find themselves not being able to do so because of the limited availability of detritus and the associated prosthetic tools (i.e., the prevalent technology) and the degree and the scope of the xenophobic sentiments, which are blocking such reversion. Hence, compromise of their wish with their reality is inevitable. That is, the harder the reversionary course is, the more collectivism the human must accept and tolerate. Hirshleifer(1987)atl40. 248 If such a situation of limited choice is rephrased as a math programming formula for a more succinct representation of the theme, it may look like the following: Maximize Reversion Subject To: (1) Detritus (2) Prosthetic Tools (Technology) (3) Xenophobia The first line, "Maximize OOO," is the so-called 'objective function', which describes some goal, "OOO," which the protagonist is striving to achieve. Here in our case, the goal is "Reversion." Thus, the meaning of the first line, "Maximize Reversion" is that each person is trying his/her best to achieve the reversion to the primeval lifestyle, the plenitudinous life, or the life of full enjoyment. The second line and further down, following the "Subject To" phrase, are the so-called 'restraining functions' or just simply 'restraints'. These restraints collectively form the feasible space from which the protagonist can achieve his/her goal, which is in this case, the goal of reversion. That is, this math programming model is saying that everyone is trying to live, not the occupationally specialized life, but the plenitudinous life as much as possible, but he/she can do only so much within the boundary of the allowed space. 249 There are three restraints: Detritus, Technology, and Xenophobia. Obviously, the more detritus are there, the more individualism the human would be able to enjoy. The more of human-sized the prevalent technology is, the more individualism the human would be able to enjoy. The less xenophobia is there, the less collective defence mechanism would be needed. On the other hand, the less detritus are there; the more super-sized the prevalent technology is; and the more xenophobic sentiments are there, the more collectivized a human aggregate would need to be. 6.4. CHAPTER CONCLUSION The task of this chapter was to show that the two implicit assumptions of this inquiry are plausible and reasonable. The two implicit assumptions were (a) that the three most important variables that determine a human aggregate's living conditions are the Nafts, the prevalent technology, and the presence of security threat, and (b) that whenever the living condition gets better, a human aggregate tends to revert back to the less centralized (or less civilized or less sophisticated) regime. The importance of the first two variables - the Nafts and the technology - was explained by the two natures of human existence (the detritovorous nature and the prosthetic nature). Since these two natures of human existence cannot be any more self- evident or axiomatic, we can say that the first two variables' importance was quite satisfactorily verified. The importance of the third variable - the presence of security 250 threat - was explained by the derived nature of human beings as being xenophobic, which logically flowsfro m the detritovorous nature of human existence. Thus, we can say that this one was equally satisfactorily verified. The reversionary nature, on the other hand, was explained by the process of the increasing alienation from the society when the prosthetic nature of human existence goes too far. Again, this explanation flows logically from the axiomatic fact that humans are tool-using animal, which cannot be denied. Thus, we can say that this implicit assumption was also satisfactorily verified. 251 7. CHECKING ON THE FUTURE REGIMES In general, a scientific method consists of three parts: (a) observing or gathering facts, (b) making a theory (or a hypothesis), and (c) testing the theory (or the hypothesis). The first part - the observation part - had been made throughout the five years of full- time study of this writer between January 2005 and January 2010. This dissertation is about the second and the third parts, i.e., presenting a theory that explains the observed facts and testing it. The presentation of the theory was made in Section 1.6; And, except for Chapters 2 and 3, all the rest of this dissertation so far have been about the testing of the proposed theory. Testing can be done in three ways: (a) by checking back, (b) by checking forward, and (c) by experimentation with controls. Among these three ways of testing, the third way of testing is definitely out of the question in our case, simply because we cannot experiment with human living conditions. Thus, only checking back and checking forward are the two available methods of testing for the proposed theory. Checking Back; Checking-back involves examination of all the facts used in formulating the theory to make sure that the theory can explain each and every observation. This has been done in Chapters 4 and 5. The facts that were used in formulating the proposed theory of this study were largely of two kinds: the living conditions and the monetary regimes. Chapter 4 checked whether the actual living conditions of the masses in the relevant times in the US history were indeed those that the theory supposes. The answer of the Chapter 4 was in the affirmative. Chapter 5 checked whether the six different, actual monetary regimes in the US history were indeed those monetary regimes that the theory hypothesized to occur under the respective living conditions. The answer of the Chapter 5 was in the affirmative, too. Therefore, Chapters 4 and 5, combined, successfully accomplished the checking-back testing. This checking-back testing was further reinforced by checking the reasonableness of the implicit assumptions underlying the proposed theory in Chapter 6. Checking Forward; Now the only task remaining is checking forward. This kind of test involves using the theory (or hypothesis) to foretell new observations. According to Carroll Quigley (1910-1977), this test is "much more convincing" than any other tests. He said, If a theory of the solar system allows us, as Newton did, to predict the exact time and place for a future eclipse of the sun, or if the theory makes it possible for us to calculate the size and position of an unknown planet that is subsequently found through the telescope, we may regard our hypotheses as greatly strengthened.455 Quigley (1961) at 42-43. 253 As shown in Figure 1.3, the proposed theory predicts that the US monetary regime would eventually move to, via the Public Central Banking regime, (a) the so- called Social Credit regime, if the living condition will become No. 5 (depleting Nafts under peace), or (b) to the Higher Money regime, if the living condition will become No. 6 (depleting Nafts under insecurity). Apparently, even though there are many signs that the living condition not only of the US but also of the whole world is moving toward No. 5 or No. 6, we are only at the early stage of it. We do not have as of yet any evidence against which we can conduct the checking-forward testing. Thus, unfortunately, checking forward cannot help but be left as a future work. What we can do at the moment, instead, is to provide an explanation on what the future regimes, i.e., the Social Credit and Higher Money regimes, would be like, so that the checking-forward in the future can be facilitated. 7.1. THE SOCIAL CREDIT REGIME The Social Credit regime may be defined here as any monetary regime that attempts to achieve the ideal of the Social Credit Doctrine. The Social Credit Doctrine is a creed or a worldview that emerged in the last quarter of the 19th century and was culminated by Clifford Hugh Douglas (1879-1952) in his 1920 book, Credit-Power and Democracy. 5e 456 For the various origins of the Social Credit Doctrine, see Finlay (1972). 254 7.1.1. The Social Credit Doctrine The Social Credit Doctrine starts from the awakening to two new phenomena of the late 19th century: (a) bank credit replacing money, and (b) machine displacing human beings. Nowadays, vast majority of people are so much accustomed to these two phenomena that they do not seem to be aware of them. But they must have been quite alarming, new phenomena to those who had higher awareness in the late 19th century. Bank Credit Replacing Money: The late 19th century was the period in which the central banking machinery was installed in many Western countries. As explained in Chapter 2, the significance of the central banking machinery is that it obliterates the dividing line between money and credit. That is, installation of central banking machinery signifies that all bank credit (or loan) becomes money not only in de facto but also in dejure. Thus, it signifies that the monetary power is seized by private bankers. Even though great many people even today do not recognize this fact, the Social Crediters were probably the first group of people who became aware of this important fact. One of the Social Crediters explained the significance of the private bankers' seizing the monetary power in these words: Finance is not a link between Production and Consumption: it is the only link. This is why Finance is so important to everyone ... I shall have to go without my [match] box unless I can back my wish, my cry, my prayer, with a coin ... A conception at once graphic and true is that of a bridge spanning a ravine; and let the ravine be wide and deep so that nothing can cross it except by the bridge without courting disaster. 255 Now, first,bridg e is simply and solely a device by which things can cross the ravine quickly, conveniently, and safely ... Second, a bridge is man- made ... Third, the only reason for the bridge's existence is the traffic that passes over it,... Fourth, the bridge belongs collectively to the people on the either side of the ravine, for it is they who need it, and use it, and were the cause of its being built, and who built it collectively generation after generation; ... Fifth, it is the business of the people on either side of the ravine to say how they wish the business of the bridge conducted,... Sixth, the officials should be ... appointed by the owners, paid by them, and responsible to them. Seventh, any benefits resulting from the administration of the bridge should naturally return to its real owners. Eighth, and lastly, though a bridge may become a necessity, essentially it is nothing but a convenience.... The two sides of the ravine are of course Production and Consumption; the bridge, Finance; the traffic, Goods; ... Now ... the curious and even alarming things ... are happening on the particular bridge of Finance. In the first place, it is treated by some as though it had been built for its own sake and was an end in itself- money having itself become a commodity. Then, the bridge officials have not been appointed by the people of Production and Consumption and, not being responsible to them, they can flout their wishes, and if it pays them, hold up the traffic - the Bank of England and its Five Big children being private institutions, responsible to none but their shareholders who in turn are a handful of private corporations and individuals. The result of this irresponsibility is that the officials administer the bridge for their own thrill and profit, and virtually own it.457 This same Social Crediter pointed out very precisely the fatal defect of the modern monetary system by citing another author as the following: As Mr. V. A. Demant puts it: "The inherent defect in the money system of the modern world is largely due to the fact that statesmen and economists have not revised their financial theories in consequence of the tremendous change which took place with the invention of 'loan credit' ... "458 Colboume (1928) at 132 & 124-29. Id. at 129. 256 That is, Social Crediters were among the first group of people who correctly recognized the fact that the money creation power was privatized without people's taking notice of it. As already explained in the early part of this inquiry, this privatization of money was made possible by making banks' credits become money, which were made possible by banks' erecting a central bank under the auspices of the State and then having the central bank guarantee them. Of course, it was not only the Social Crediters who recognized this new phenomenon. Free banking advocates, such as Vera Smith (1936), Friedrich Hayek (1978), and Lawrence White (1984), also recognized the same problem. Their difference is largely that of remedy: the strict regulation of banks (in case of the Social Crediters),459 and the dissolution of central banking (in the case of the Free Banking advocates). Nonetheless, neither group was assertive enough in pursuing their own remedies, perhaps because they were not ready to tolerate the consequences: the reinforced central bureaucracy (in the case of the Social Crediters), or the weakening of the State (in the case of the Free-Banking advocates). Especially, Clifford Douglas was always lukewarm in implementing the Social Credit doctrine in the real world. Although his teaching calls for de facto nationalization of banks, he always objected to any political actions in that direction, and he specifically distrusted and refused to support the Social Credit premier of Alberta, Mr. William Aberhart (1878-1943).460 See for example Finlay (1972) at 112. On this point, see for example Finlay (1972) at 113, 130, 134 & 140. 257 Machine Displacing Human Beings: The second phenomenon of the late 19th century that the Social Crediters spotted with alarm was humanity's entering the so-called Machine Age. Since machine started to be deployed from 1774, the so-called Age of Scarcity, which had been constantly tormenting the human from memorial, was replaced by the so-called Age of Plenty. However, not everyone is benefited by this Age of Plenty, because of the so-called Golden Rule of present economics of life hitherto, namely, "only in the sweat of his face should he eat bread."461 This Rule means that the only recognized claim to goods is work, even though the reality is that the machines are rapidly taking work away fromth e human. The dilemma that the Machine Age gives rise to is explained as the following: The Machine, in fact, is being pulled in two directions at once. On the one hand it tells man that it needs him as a worker less and less, and on the other, no sooner has it sent him packing on a holiday than it finds it needs him as a consumer with money in his pocket more and more. "I don't need your work; run away and play," says the Machine. "But you need my money," says Man. "I do," says the Machine. "Well, I can't get any unless I work," says the Man. "Work, then," says the Machine. "But your constant improvement leaves less and less work for me to do," says Man. "But this is horrible," says the Machine, "I'll improve as little as possible." "But it is your job to improve," says Man, "so that I can be freer and freer." "Can't have it both ways," says the Machine. "Agreed," says Man. "Hell!" say both and then probably somebody goes on strike.462 Colbourne(1928)at53. Id. at 65. 258 In the meantime, ever more control on wealth is being concentrated in the hands of bankers, who ultimately control the machines with industrialists as their front men. Social Crediters explain this phenomenon by the so-called 'A+B Theorem'. This theorem says that an industrialist uses money in the amount of A+B, where A is the amount that directly flows to consumers (employees, individual landlords, individual stockholders, individual creditors, etc.) and B is the amount that meanders for a time in the land of production.463 Since the society's purchasing power is in the amount of A only, whereas the price of the goods must be at least the cost, i.e., A+B, the purchasing power of A cannot claim goods priced at A+B. The industrialist is always unable to recoup his/her total costs, and therefore, is always destined to go broke. He can survive the gap ofB in two ways. One is to export his wares, and the other is obtaining fresh loans from banks, which create loans (or money) at will. The export option eventually gives rise to wars, and the fresh, greater loan option puts industry more and more into bankers' grip, meaning the increasing concentration of wealth in the hands of bankers. Furthermore, a third option is also employed in part, and that is wanton, deliberate waste, such as burning crops, terminating cows, and killing new inventions. Admittedly, the validity of the A+B Theorem is much in dispute.464 This writer, too, sees some defects in the Theorem. However, this inquiry is not a proper place to get involved in the dispute over the validity of the A+B Theorem. It is beyond the scope 463 Mat 180. 259 of this inquiry. Nonetheless, the essence of the A+B Theorem makes sense, which can be better explained in an alternative way of looking at the issue as the following Figure 7.1 illustrates. Price Quantity The Gap ofB Figure 7.1. The A+B Theorem Explained by Demand-Supply Curve46' 5 See for example Findlay (1972) at 193-202. This kind of explanation has never been done elsewhere. 260 Here D represents the demand curve for the aggregate goods that a society requires, while S represents the supply curve. In the initial condition, the price of the aggregate goods is P, and the quantity produced and consumed is Q. In the initial condition, most of the goods are produced by human labour. Now, machines are deployed, and as a result, the supply curve shifts to the right, which is denoted in S'. Shifting of the supply curve to the right is to signify the increased capacity of the machine in supplying the goods. Since machine is much more flexible in adjusting its output within its range of production capacity, S' is flatter than S within its production capacity. Furthermore, 5" is horizontal in its lower side, as there is certain minimum cost of operating the machine. The usual, mainstream economics would tell us that the new market equilibrium, where the demand and supply are balanced, is to occur at the point, (P*, Q*). This means that the people can enjoy more of the goods in lower price. This is certainly a win-win situation both for the consumers and the suppliers. The industrialists who deploy machines indeed aim at the (P*, Q*) point when they do so. Unfortunately, however, such a point will not be realized, according to the Social Crediters. This is because the machines will displace so many human beings, who, as a result, will have no or much less purchasing power. This phenomenon is expressed in Figure 7.1 by the shift of the demand curve to the left, i.e., D'. As a result, the new equilibrium is to be formed at (P\ Q'), which means less number of people who can enjoy the goods, in spite of the lower price. Of course, those who maintain jobs are 261 definitely benefiting from the lower price, but for those who lose jobs the lower-priced goods are only an unobtainable object. In the meantime, industrialists' expectation to accomplish Q* is to be dashed. This is because they are undersold by as much as Q* - Q\ This is the so-called the gap of B, which must be disposed of by such methods as export, fresh loan, and/or waste. As already mentioned, disposing of the surplus goods in foreign markets eventually leads to war, while filling the gap with fresh loans puts industrialists bounden to banks. Thus, Social Crediters call these three ways of disposing of the surplus goods the Trinity of Modern Economic System, whose three persons are war, tyranny, and waste.466 The Twin Foundation of the Social Credit Doctrine: Nobody would want any of the Trinity of Modern System, i.e., war, tyranny, and waste. Nevertheless, modern Machine Age cannot help the Trinity's coming into being, because they inescapably arise from the human's deploying machines, which make the Age of Plenty possible. Machines are too useful for us to forego. Such being the case, then, the task is to mitigate the evil consequences of deploying machines. Social Crediters' prescriptions for this task are the Just Price and the National Dividend, which are often called "the twin foundation" of the Social Credit Doctrine.467 These are not two separate programs, but two sides of a same coin, or they are like "Siamese twins."468 See for example Colbourae (1928) at 202-203. Colbourne (1928) at 283. Id. at 284. 262 Then what is the 'Just Price'? It is Q* on Figure 7.1, i.e., the intended price of the goods. How can it be achieved? It can be achieved, according to Social Crediters, by giving National Dividend in the amount of the deficiency, i.e., P*xQ* - P'xQ', either to the producers or to the consumers. However, the National Dividend is not to be given in money, but in goods, because if it is given in money, the producer may tempted to use the fund for other purposes, while the consumer, too, may be tempted to use the money for other purposes. Either way, the purpose of the whole Social Credit scheme will be defeated. This is why Social Crediters recommend to a State to establish banks, one for each major industry, e.g., a Food Bank, a Clothing Bank, a Housing Bank, a Transport Bank, an Engineering Bank, a Coal Bank, an Oil Bank, and an Electrical Bank, etc, which will clear the surplus goods in each industry to consumers in the Just Price in behalf of the producers in each industry. 7.1.2. The Personality of the Social Credit Doctrine Such being the basic scheme of the Social Credit, anybody can notice that it presupposes a highly developed centralized bureaucratic government, which will not only regulate prices but also control all the banking institutions. Anybody can picture it as something akin to the wartime system that was run by the US government during the Second World War. Therefore, depending upon how one looks at it, it can be viewed either as a fascist corporatist regime, or as a kind of socialism. 263 Nonetheless, Social Crediters claim that their scheme is the most harmonious and peaceful remedy for the modern ills. They say that it is not trying to put the clock back to the Feudal Ages, in that it does not oppose modern technology in spite of many ills it results. They are basically saying that we cannot throw the baby - the machines that produce plenty - out with the bath water - the Trinity of Modem System (War, Tyranny, and Waste). They say that it is not fascism, in that it refuses to make the whole nation as if it were a single corporation to compete with other countries over export market. They say that it is not socialism, in that it opposes nationalization of banks or any other confiscation of private properties. All that it requires is an independent monetary board that is run by a group of experts, which will control the flow of money and credit, with some added bureaucracy to regulate prices. Such being the case, the personality of the Social Credit regime may be understood as something that is more centrally organized than the Public Central Banking regime but not so much aggressive as fascism or Socialism. In fascism, the primary enemy is foreign competing powers, but in Social Credit, it is private bankers. In socialism, the enemy is bourgeoisie, but in Social Credit, industrialists are not the enemy. Only bankers are. Nonetheless, it is still true that Social Credit is a much more centrally controlled regime than what today's advanced countries presently are. It is also still true that it is a much less tolerant regime to private gains, as it fundamentally disallows profits. 264 7.1.3. The Case of Alberta In the abyss of the Great Depression, the province of Alberta tried to implement the Social Credit program between 1935 and 1943 under the rein of William Aberhart, the Social Credit Premier of Alberta. However, in spite of the Albertan Social Crediters' repeated attempts, none of the Social Credit programs was actually implemented either due to the federal government's disallowance or due to the Alberta Supreme Court's branding them unconstitutional. Between 1936 and 1939, the Alberta legislature enacted or tried to enact a score of statutes.469 Among these, however, the statutes that were directly related to the implementation of the Social Credit program were only three: the Alberta Social Credit Act of 1937, the Credit of Alberta Regulation Act of 1937, and the Alberta Marketing Act of 1939. The first was to set up the so-called Social Credit Board, which would control the money and credit in Alberta; the second was to put all the banks in Alberta under the control of a local director who was to be dispatched by the Social Credit Board; and third was to give the Alberta government the power to control prices of various manufactured goods and real estate. All of these, of course, were vetoed by the federal government promptly. Nonetheless, we can see that the first two statutes were for implementing the National Dividend scheme, while the third was for implementing the Just Price scheme. That is, they were for erecting the so-called "twin foundation" of the Social Credit Doctrine. For the details of these laws, see Mallory (1954) at 67-110. 265 Other than these three, almost all the other legislation efforts made by the Social Credit government was focused on two tasks: (a) adjusting debts for the provincial government and for the province's mortgage holders, and (b) installing a monetary control mechanism that was something equivalent to foreign exchange controls by trying to introduce Province's own paper money so that Canadian money is better utilized. None of the attempts to enact the relevant laws was successful, either, due to the resistance of the Alberta Supreme Court and the federal government. They, however, produced certain beneficial effects, nevertheless. That is, the provincial government's strong-willed stance brought the startled creditors of Montreal and Toronto, who had been neglecting the Province's polite request to renegotiate the debts previously, to the negotiation table for debt adjustment.470 We may derive three important lessons from the case of Alberta. First, when the national government's role is to solicit foreign investments for economic development of the nation, while provinces or localities are reliant on one or two specialized outputs, the national government tends to side with the foreign creditors in an effort to making them feel secure and provide ready flow of investment at lower interest rates.471 But in such a case, provinces or localities that lost income significantly are likely to defy the central government and to implement their own monetary policies. In other words, the more regionally specialized a nation is, the more likely that nation is to dissolve. 470 Mallory (1954) at 135-36. 471 According to Mallory, this was the role of the federal government of Canada fromth e beginning. See Mallory (1954) at 57-58. 266 Second, when the members of a nation, a province, or a community are predominantly debtors and the creditors are predominantly non-residents, such a nation, province, or community tends to tempted to adopt the Social Credit Doctrine, because the losers are predominantly outsiders. In the meantime, the internal economic order will tend to be pretty much preserved, rather than uprooted in the style of Marxist revolution. Third, the heavier the weight of the government and farming sector within the economy is, the likelier such a nation relies on Social Credit regime, "because governments and farms, unlike other undertakings, are not expected to go bankrupt."472 According to Malloy, governments and farms can rarely raise their capital by selling rights to participate in future income, there are rarely any nominal owners who have provided the shareholder capital, and thus, who can absorb the reduced earnings. Only way to deal with their problem is to adjust the payable interest to lower levels. Such being the case, then households should belong to the same category as governments and farms, because households, too, do not raise capital by selling rights on their future income. 7.1.4. Checking Forward So far, we have looked at the content of the Social Credit Doctrine (Subsection 7.1.1), its personality (Subsection 7.1.2), and the empirical case of Alberta (Subsection 472Mallory(1954)at92. 267 7.1.3). From these we can see that the Social Credit Doctrine is indeed a much less aggressive regime both in theory and in practice than fascism or socialism from the bourgeois' point of view. It means that, as the proposed theory predicts, the people of the US are very likely to adopt the Social Credit monetary regime as their next monetary system when the times get tough, simply because it will meet the least resistance from the vested interests. But of course, one condition of its coming into being in the US society is that the US will not suffer from insecurity from within or without. Apparently, it is quite improbable for the US to face a serious threat from outside in any near future, considering that it is the only superpower in the world. Insecurity from inside is also equally unlikely as things stand. This is because just like the Albertans of the 1930s, most of the US people nowadays share the same problem: indebtedness. As the proverb, "Grief is best pleased with grief s company," is saying, vast majority of US people seem to be likely to sympathize with one another rather than to feel enmity, when their lives become strained. This assertion is based on the current state of finances of the US government, households, and companies. First of all, the role of the US federal government seems to be becoming a solicitor of foreign capital. The US as a nation must borrow more than $5 billion a day to sustain its economy. It may not be an exaggeration to say that the biggest export item of the US nowadays is the US dollars and a variety of debt instruments. Although it is not yet clear as of yet whether the US government has become the protector of the 268 foreign creditors for the long-term flow of funds into the nation, as like the Canadian government in the early 20th century, once it starts to give such an impression, we may expect many Albertans will arise in the US, too. Secondly, in regards to the geographic separation of the creditors and debtors, today's US is very much like Alberta in its Social Credit years, as its financial establishments are concentrated in New York. This means that when a crisis hits, it is highly likely that many parts of the nation rush to the Social Credit regime to protect their provincial or local interests against the financial establishments in New York. Thirdly, in regards to the economic structure of the US, even though the US is one of the most advanced industrial countries, its single biggest industry is government. As can be seen in Figure 7.2, the spending of the federal government alone consists of almost 30% of the economy. The average tax rate, which does not include the various social insurance payments, has permanently exceeded the 20% of GDP, and the debt load is skyrocketing since the early 1980s even in peacetime. It looks like that the growing debt is now structural, rather than being caused by wars or any other one-time expenditure. The permanently high tax rate means that there might be no more room to have reserve in case of emergencies, as people may be contributing close to their maximum. Furthermore, households are also deeply in debt. As can be seen in Figure 7.3, the US households now collectively accumulated debt as much as 100.3% of GDP as of the end of 2007. This is more than three times as much as that of the early 1950s. 269 140 -i 120 100 80 60 nffmfnninniimhnnnnninmmimiHii^ oo o\ o oo oo 00 00 00 00 00 00 Os 00 00 Spending/GDP c--—Debt/GDP Figure 7.2. The US Federal Spending and Debt Level 1792-2009 Figure 7.3. US Household Debt as % of GDP 270 Such household debt load tends to signal that the ultimate resolution would be Social Credit kind of debt adjustment rather than business style debt restructuring or bankruptcy proceedings. What is more significant, however, is that even the businesses seem to be becoming hollow, i.e., having not much to reorganize or absorb the losses. While the debt level of all the US businesses (both corporate and non-corporate) is growing (Figure 7.4), equity capital of businesses is rapidly shrinking (Figure 7.5). 1974 79 84 89 94 99 4 •Business "•"Ccuporate Figure 7.4. Debt of US Businesses as % of GDP for 1974-2007 271 *ro ' ' ' W too fes ^90 Source: Haver Analytics Figure 7.5. Change in Equity Capital by US Corporations ($Bil) - Kasriel (2008), Chart 9 Figure 7.5 shows that US corporations started to buy back their own shares since the mid-1980s and have been reducing their equity capital in an accelerating speed. It can be noticed that between 1984 and 2007 more than $2.5 trillion of equity capital was retired. During the same period, the US nonfinancial corporate debt outstanding alone increased by more than $5.5 trillion, which is more than twice the amount of the money spent for share buybacks. This hollowing out of the US corporations is a result of the managers' loading the company with debt to the maximum to make a takeover less attractive and to keep control of the company.473 Medoff& Harless (1996) at 32. 272 In sum, governments, households, and businesses are all fast becoming hollow or property-less in the US. There is little owners' equity in their possessions. When someone has little equity on a property but have a possession of it, she/he is automatically tempted to live on the capital of the possession, just like the Albertans tried to do. Overall, all the pertinent parameters seem to indicate that the US is heading toward the Social Credit regime. 7.1.5. A Supporting Theory Even though he did not use the term 'Social Credit', Jack Lessinger (1922- present), Professor Emeritus of the University of Washington, also predicts the collapse of the current monetary regime. According to Jack Lessinger, every economy is perishable. While the economy is a never-ending interaction among markets, perishable economy is a unique and living interaction of a particular people responding to a particular socioeconomic environment with their own particular set of beliefs, theories, organizations, rituals, and values, which make a seamless circle of interactions. One entire perishable economy develops as a single integrated unit, reaches a peak, and declines thereafter. As it declines, another economy emerges. The motor of a perishable economy is a 'consensus'. That is, what animates or debilitates a perishable economy throughout the whole process is the consensus of the times. When the consensus cannot solve a unique problem an economy happens to come across, it perishes and a new consensus emerges. The new governing consensus is 273 always the solution to a problem that the previous economy could not solve. All the contrivances, plans, and manoeuvres that move an economy, all the trends, propensities, and preferences, all the institutions, land, capital, and other resources, everything that summarizes, characterizes, or describes the essence of what an economy is and what it is trying to become - all this is controlled by the economy's unique consensus. Based on the new consensus, the economy reshapes the world to its own special image. One of the consequences of a new consensus is people's mass migration to a new region of opportunity. According to Jack Lessinger, during the 250 years between 1735 and mid-1980s there have been four different consensuses in the US. The first period between 1735 and 1846 was the economy of the Mercantile Aristocrat under the name of 'Federalists', whose reigning consensus was that of centralization, big business, and inequality. They effectively pursued a monarchy in which the common man was trapped in meagre paying jobs in a society where the land price was artificially set high so that commoners had little chance to own their own land. During this first period immigration from the old world was encouraged but the immigrants' land ownership was suppressed. The second economy, which Lessinger labelled the Bantam Capitalist of 1789- 1900, was a reaction to the first, and its consensus aimed at a proliferation of very small capitalists drawn from the ranks of the common man. To weaken the seat of centralized power of the first economy, i.e., the federal government, states' rights were asserted in this period. The Mississippi Valley was the new region of opportunity, as the new 274 consensus was favourable to small towns and small markets, where Bantam capitalists could enjoy cheap, fertile, and abundant land along with efficient transportation via the Mississippi. However, the small-scale of the second economy brought layers of costly duplications and lack of standardization, which resulted variable and unduly high prices. Crime and corruption abounded, too. The reaction was the third economy, the Colossus (1846-1958), whose consensus included enormous factories, giant corporations, mighty cities, vast commercial farms. The common person did not want a small farm anymore. She/he wanted to be a corporate executive, and willingly took laborious or boring work for meagre pay only because the future in a big organization looked promising. In this third economy of the US, large industrial cities were the new regions of opportunity, and especially, Chicago was the fastest-growing and largest city. By the 1920s, however, the Colossus economy was producing way too much for demands. Chicago and other industrial cities became congested, noisy, and expensive places to live. An antidote consensus was needed. The result was the fourth economy, the economy of the Little King (1900-mid- 1980s), whose consensus was an unheard-of emphasis on consumption. "Save and invest" was out, "spend and consume" was in. Savers were taxed, and the users of credit were given tax breaks. Some suitable places to consume wave after wave of automatic appliances, fashionable gadgets, and big cars were needed, and the suburbia was invented. According to Lessinger, suburbia was an authentic invention that deserves an award of a patent, whose sole purpose was maximization of consumption. However, the 275 Little Kings' suburbia economy is going to have a devastating end pretty soon, according to Lessinger, because "Capital was being artificially produced by the banking system, while the economy was blowing away."474 Lessinger then observed that the US's fifth economy was arising since the mid- 1950s, whose consensus emphasizes conservation rather than consumption, and caring rather than career. He identified that the region of opportunity of this fifth period would be countryside, which he called 'penturbia', meaning the fifth living center. In a way, it can be said that he foresaw the coming of the current US banking crisis well over twenty years ago. Lessinger's thesis is, "Every new economy solves its key problem by opposing the preceding consensus."475 According to this thesis, the suburbanization was a result of a new consensus (spend and consume), which opposed the preceding consensus (save and invest) after the trauma of the Great Depression, which was believed to be caused by overproduction, rather than the aspiration of home-owing democracy or the neo- nomadic culture. Likewise, based on the same thesis, Lessinger predicted that suburbia would go down with the ship, along with the entire system of the Little King's consumption economy as the Americans were spending money that they did not have. To quote him, the spendthrift Little Kings' suburbia economy is going to have a devastating end at the end of its journey, because "Capital was being artificially produced by the banking 474 Lessinger (1986) at 71. 276 system, while the economy was blowing away." In short, Lessinger is telling us that the central banking regime is now artificially producing capital, and such a feat would not last long. 7.2. THE HIGHER MONEY REGIME The previous section explained why the Social Credit monetary regime is most likely the next monetary regime of the US when the Nafts are getting depleted. Yet, it is still possible that its adoption is postponed while the Higher Money regime is adopted instead. This is because the adoption of the Social Credit regime by the US people is in effect their admission of the fact that their nation is bankrupt, and therefore, they might try to avoid such a humiliating situation as much as possible. Why is the adoption of the Social Credit regime an admission of the nation's bankruptcy? The answer lies in the nature of the current Federal Reserve Regime. The Federal Reserve Regime of 1913 is an arrangement where the people acquired the right to supervise private banks through the government superstructure over them, i.e., the Federal Reserve Board, in return for the government's guarantee on banks' liabilities. However, such a quid-pro-quo arrangement is possible only when the government's guarantee (or its credit) on its banks is credible. Over time, the Nafts are to be depleted, and so is the credit of the government. Eventually even the central bank is to go Lessinger (1986) at 73. 277 bankrupt and thus, its money, the Federal Reserve Notes, will not be respected by the world community any more. Given such a situation, the US people will have two choices. One is the Social Credit regime, in which the people's representatives, not private banks, run the monetary system in an effort to give it a renewed credibility while negotiating with the outside creditors. The other is to build an entirely new "bridge" as stated in the analogy introduced in Subsection 7.1.1, which means issuing of entirely new money, which will replace the Federal Reserve notes. Whereas the first option is clearly humiliating, the second option can conceal, albeit only temporarily, the insolvency, if the new money will not only be that of the US, but also be that of some other countries. 7.2.1. The Legality of New Money Replacing the Federal Reserve notes with some other new money is not difficult at all as far as the relevant law is concerned. The current Federal Reserve Act provides in the third sentence of the first paragraph of Section 16, "They [Federal reserve notes] shall be redeemed in lawful money on demand at the Treasury Department of the United States ... or at any Federal Reserve bank." Originally, it said, "They shall be redeemed in gold on demand at the Treasury Department of the United States ... or in gold or lawful money at any Federal reserve bank."476 That is, the redemption in gold was 38 Stat. 251 (23 December 1913) at 265. 278 dropped.477 Thus, there is no impediment to replacing the current Federal Reserve notes with some other paper lawful money. In the meantime, the 'lawful money' is an undefined term. Congress could pass a law defining lawful money or it could replace the term 'lawful money' with a specific list of allowable items to make the meaning clear,478 but Congress could do neither and merely declare something as lawful money and substitute it in the place of the Federal Reserve notes. Legally, there is no difficulty at all, only if Congress will have decided to do so.479 7.2.2. Checking Forward Simple replacement of Federal Reserve notes with some other lawful money, which is not Higher Money, is likely to cause a great repercussion from within and without. Thus, if the leaders of the US ever decide to abandon the Federal Reserve notes, they will be more likely to choose to have a Higher Money, something akin to the Euro. But the proposed theory states that Higher Money can come into being only when the polity faces some insecurity that is serious enough to give the new money necessary legitimacy. When we look at the example of the Euro, it was indeed born in such a circumstance. The Euro was possible because three different layers of fears overlapped 477 This was done by the Gold Reserve Act of 1934. See 38 Stat. 337 (30 January 1934), Section 2(b)(1). 478 This was the recommendation of Professor Edward C. Simmons at the University of Michigan in 1938. See Simmons (1938) at 118. 279 all at the same time at a very opportune timing, i.e., when the Soviet Union was collapsing. The three overlapped fears were (a) the fear of revival of imperial Germany, (b) the fear of dollar collapse, and (c) the fear of Yellow Peril.480 Furthermore, such a move was generally beneficial to vested interests. They could expand their span of influence. They also could benefit from the newly obtained status of the Euro as an international reserve, which national money - even the German Mark - could not possibly enjoy. Then what kind of emergency situation would make some Higher Money, such as much-talked-about Amero,481 feasible? Or in the alternative, what kind of fears would make, for example, the American, Canadian, and Mexican people come together? When we make an analogy of the three overlapped fears of Europeans for the case of North Americans, it might be (a) the fear of revival of totalitarian Russia, (b) the fear of Saudi collapse, and (c) the fear of Yellow Peril. At the moment, the first fear, the fear of Russians, does not seem to that strong compared to two other fears. Nonetheless, such fear clearly exists, which is usually being expressed indirectly through bible prophecies such as David Jeremiah's 2008 book, What in the World is Going On?, or Mark Hitchcock's 2009 book, The Late Great United States. See Cross (1938) for how freely 'lawful money' is legally conceived. 480 For an elaboration of these three fears in the making of the Euro, see Marsh (2009). 481 'Amero' is the name of hypothetical money of the North American Currency Union, which was proposed by German Canadian economist, Hebert G. Grubel (1934-present), in 1999. This proposal was supported by Fraser Institute in Vancouver and by C. D. Howe Institute in Toronto. 280 Considering the fact that the current status of the US dollar as the international reserve is very much bolstered by the Saudi Arabia's alliance relationship with the US, the security of the current Saudi regime is critical to the interest of the US. The collapse of the current Saudi regime can mean the collapse of US dollar, too. Such a fear was expressed as early as 1976 by Paul E. Erdman in his novel, The Crash of '79. At that time, the fear was in regards to the safety of the Saudi regime. However, more recently, the fear seems to be that of the depletion of Saudi oil, as expressed in Matthew R. Simmons' 2005 non-fiction book, Twilight in the Desert. As for the third fear, the fear of Yellow Peril, it looks like to be getting ever greater as the Chinese economy will be growing. Such fear of modern China was expressed as early as 1997 by Samuel P. Huntington in his famous book, The Clash of Civilizations and the Remaking of World Order. Ten years later, such fear seems to be turning into disdain and direct indictment against it as can be seen in Peter Navarro's 2007 book, The Coming China Wars. All things considered, even though the feasibility of a Higher Money regime in North America in the form of Amero does not look great at the moment, it seems that it cannot be ruled out, either. 7.2.3. A Supporting Theory The likelihood of Higher Money can be supported by the theory of Joseph A. Tainter (1949-present), Professor in the Department of Environment and Society at 281 Utah State University. According to Tainter, when the Nafts are running out, the relevant human aggregate is to suffer from chronic danger of collapse. This starts from the recognition that a civilization is a process of a society's becoming ever more complex. In this process, the members of the society are getting more specialized, and thereby produce a lot more than before. Everybody benefits from this specialization process. But higher specialization requires greater amount of coordination efforts, which means more rules, more institutions, and more bureaucracy. So there is fee to pay. Furthermore, higher specialization implies greater damage to a potential shock, because every member of the society has become so much dependent on others' performances. This promotes centralization. Centralization increases the possibility of inequity amongst the sub-groups of the society. So there arises the greater sentiment in some sub-groups to withdraw from the society as centralization progresses. Thus, the more complex a society becomes, the greater these two different costs - the added cost of centralization and the resentment of the constituting members and the consequential centrifugal force - become, too. Eventually these costs exceed the benefit of higher complexity; and throughout the whole process, reserves, or slack resources, which can be quickly mobilized to quell any crisis, are fewer and less, simply because the relative profit from greater complexity is getting less compared to the continuously increasing costs. Eventually when a crisis hits, the society must reduce its complexity in a very short time. This, Tainter called a 'collapse'. 282 When such a Tainter's collapse occurs, one of the first things to collapse is the money and banking system, because the single pillar that supports the entire banking structure is faith, i.e., the faith on the solvency of the government and the banks, which exists only because people 'believe'. Thus, when the belief seems to be thinning, the leaders of the polity naturally tend to seek ways to prolong and reinforce the belief. The only way to accomplish that goal is to create an even bigger polity than the current one with even greater centralization. When that is translated in monetary system, it means Higher Money. 283 8. CONCLUSION 8.1 A SUMMARY This inquiry started with Figure 1.1, which showed the locus of the historical US monetary regimes. On the face of it, it looked random, chaotic, and disorderly. But taking it for granted did not seem to be right, because there must be some good reasons for the changes from one regime to another considering the importance of money in anyone's life. When we subscribe the premise that the mass eventually prevail, there got to be some good reasons behind the seemingly chaotic locus. After a considerable time studying it, this writer had an insight that seems to be powerful enough to explain each and every US monetary regime. This dissertation is a treatise of proposing the insight as a formulated theory and of showing that it meets all the scientific criteria. The theme of the theory is that a human aggregate's monetary regime is determined by the living condition that it finds itself in. In the most generous living condition, the monetary regime tends to converge to Free Banking, but it moves to Central Banking regime and then to Social Credit regime as the living condition increasingly gets worse. The validity of this theory was tested by checking backward against the six different historical US monetary regimes in Chapters 4 and 5. The validity of the implicit assumptions, the primary of which was that human beings are reversionary, was tested in Chapter 6. The validity of its prediction was evaluated in Chapter 7. In every respect, the proposed theory could be said to be sturdy and plausible. 284 8.2 TWO UNHAPPY IMPLICATIONS Unfortunately, however, the implications of the theory are nothing plausible. One is that the just monetary regime is beyond human capability. Even though legal relationships between specific parties may be made legally precise and exact, all that legal precisions become naught when it comes to the matter of monetary system as a whole. This is because monetary system is concerned with the collective phenomenon of money creation and collective consumption. There was a time when people passionately debated whether paper money was legal or not. There was a time when people hotly debated on whether legal tender was constitutional or not. There was a time when people quarrelled over whether it was wise for the State take the responsibility of banks' notes or not. However, this inquiry showed that such debates are all naught, because everything is determined by our living conditions. No matter how wonderful monetary regime there is, we are out of luck unless we are born at the right times. The other unhappy implication is that the humanity is heading toward a massive die-off. Such a grim vision, however, does not seem to be confined to this inquiry. There are many other authors who warn the forthcoming fate of the human. One such author is David Hackett Fischer (1935-present), Earl Warren Professor of History at Brandeis University. According to Fischer, there have been three complete Great Waves since 1200, and now we are in the brink of the fourth wave's collapse (Figure 8.1). 285 100000 Three Series, 1201-1993 Annual Price Index The 20th Century (1451-75=100) Price Revolution The 18th Century 10000 Price Revolution The 16th Century Price Revolution 1000 The Medieval Price Revolution 100 Renaissance Equilibrium 10 Logarithmic Scale 1200 1300 1400 1500 1600 1700 1800 1900 2000 Figure 8.1. The Price of Consumables in England - Fischer (1996) at 4. An interesting feature is that the magnitudes of the inflation and population growth get greater every time the wave repeats. Another interesting feature is that the credit system gets ever more sophisticated every time the wave repeats, and that in turn seemed to make inflation progressively worse in each wave. During the first wave, the average inflation rate was only about 0.5% per annum, while during the second wave, it 286 was above 1% per annum, and during the third, nearly 2%, and finally during the current wave, it is at least 4% per annum. According to Fischer, prices tend to go up over a very long period of time and then suddenly collapse in a relatively very short time, causing great calamity to humankind. He argues that the primary reason for the prolonged rise in prices is population growth. This theory predicts that whenever the increased population cannot be accommodated by the available means of subsistence, violent clashes erupt en masse and uproot the incumbent social structure, until a new equilibrium is struck. Here the new equilibrium means primarily more even distribution of wealth that people can start with again with some hope for a better future. Another author of grim future was M. King Hubbert (1903-1989), who is famous with his Peak Oil theory of 1956. His representation of the human predicament is more striking (Figure 8.2). FOSSIL FUELS IN HUMAN HISTORY 300 1 I I I I I I 1 I 1 >>200 sz x: ao 100 0 i-i ' i mfk i 1 1.— i -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 TIME BEFORE AND AFTER PRESENT (103 YEARS) Figure 8.2. Human Population in a Long View - Hubbert (1977) 287 Considering that the carrying capacity of the earth is said to be about the level of 1880, the population of which was 1.5 billion, the Hubbert curve tells us that more than 75% of the current world population is to perish in one way or another. Hubbert (1977) expressed such a tragic fate of human species in a simple, but strikingly explicit graph. 8.3 THE LIMITATIONS OF THIS STUDY The scope of this study is limited in two dimensions. First, this study is confined to what Blinder calls the "Quiet Revolution,"482 if we can call the transition of monetary system from one kind of regime to another a revolution. That is, it precludes the social setting that involves bloody revolution such as the Bolshevik Revolution or the French Revolution. Such situations are beyond the scope of this inquiry. Second, this study only deals with societies where the 'all-purpose money' has already been introduced, and thereby the barriers of the society's two or more mutually exclusive 'spheres of exchange', in the sense of Bohannan (1959), have been demolished. According to Bohannan, the Tiv people, who live in the Benue Valley in central Nigeria, maintained before they came into contact with Europeans three different spheres of exchange, which money was useless in converting wealth from one sphere into wealth in another. Their first sphere of exchange was the subsistence sphere, where commodities for subsistence were exchanged based on barter. Their second sphere was 482 This is the title of Blinder's 2004 book. 288 the prestige sphere that was associated with social titles, slaves, cattle, medicines, a special kind of white clothes and magic, which were traded in ceremonies and rituals along with their money, brass rods. However, the brass rods were never used for acquiring subsistence materials. One would be laughed at if he tried. Their third sphere involved rights in women and children, where the exchange occurred only between certain groups of families or between families who had similar, unresolved past transactions of its kind. In this third sphere, the price was to be paid in identical rights in other women or children, and never in subsistence commodities or brass rods. One prominent feature of this kind of multi-centric societies is that they have many moral and institutional restraints that prevent people from accumulating subsistence goods. These are actually their mechanism of systematically preserving their egalitarian society. For instance, amongst the Tiv people, a person who is merely rich in subsistence goods is disdained and even tricked by others so that the person who has accumulated the "lowly" rich cannot convert his low-level wealth into higher categories of wealth. On the other hand, in unicentric money economy, such mechanisms are no more there to block the moneyed persons to exert their influence. In this study we have only dealt with only 'unicentric' economies, in which a single means of exchange has entered all the economic spheres. In these unicentric economies, money literally talks, whereas in muticentric economies, the so-called 'cultural capital'483, what Harm calls, is much more important than money. 483 Hann (1996) at 44. 289 Hann used this expression in the process of explaining that in some villages in Eastern Europe, land is bought and sold only amongst locals. This is another form of restricting the sphere of exchange, where money cannot penetrate the barriers of the spheres of exchange. In short, we have dealt with human aggregates where the "monetary revolution" has already been occurred, if we understand that "Money is one of the shatteringly simplifying ideas of all time, and like any other new and compelling idea, it creates its own revolution," as Bohannan says. Jane Jacobs must have been aware of this fundamental nature of money economy when she wrote her 1992 book, 'Systems of Survival'. In this book she argued that human society is destined to swing back and force between the caste system and capitalism in a vain search for a more egalitarian system both economically and politically. She reasoned that in human societies there are two fundamentally different, incompatible sets of morals and values: the guardians' on the one hand, and the traders' on the other. Both systems are needed to achieve equitable as well as prosperous society, but they must not be intermingled because the virtues in the two different systems are not compatible. When they do intermingle, the society is bound to corrupt. Due to the frailty of human beings, however, they are so easy to intermingle. This is especially so in the capitalist system, and upon the collapse of a capitalist system, caste system is to be restored. 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Grubel Base Money (p.56): The sum of paper money, coins, and commercial banks' reserves with the central bank Checking Back (p.251): Examining all the facts that are used in formulating a theory to make sure that the theory can explain each and every observation Checking Forward (p.252): Foretelling new observations by using a theory and then examining whether all the actual subsequent observations are in agreement with the foretelling Circulating Medium (p.59): The portion of money and credit that are activated Collapse (p.281): A phenomenon in which a society reduces its complexity in a very short time Credit (p.50 & 52): A promise to pay money Currency (p. 60): A transferable piece of paper or any other material that the Nemo dat rule does not apply Deflation (p.68): A phenomenon in which the purchasing power of money increases Depression (p.68): A phenomenon in which production activities and consumption drop significantly, and so are employments, incomes, and the standard of living Detritovore (p.222): An animal living on detritus, which is an accumulation of dead organic matter Divergent Problem (p.4): A problem that can only be reconciled or transcended by higher forces so that opposites cease to be opposites; A problem that cannot be solved by applying ordinary logic or by establishing a correct formula 306 Externality (p. 6): A situation that arises when the people who are directly involved in a transaction do not either bear all the costs or reap all the benefits Finality (p. 52): The quality that brings a transaction to a closing Financial Crisis (p.54): An event when people's confidence in their credit system is shaken Fractional Reserve Banking (p.78): The business of banking practice in which only a fraction of the total deposits is maintained by banks as a reserve for payment Free Banking (p.7): A system in which bankers conduct their banking business solely based on their own credit and on their own responsibility Higher Money (p.29): Money that is newly issued by a higher-level polity than the incumbent one that currently exercises monetary power Homo Faber (p. 5): The human who has unquestioning frame of mind and who is immersed in the practical world Homo Sapiens (p. 5): The human who is able to rise to higher stages of awareness than Homo Faber Human-Scale Technology (p.31): The technology that an average individual or a family can afford, master, and employ in exploiting the Nafts of the times Justice (p. 6): A state of affairs that give everyone who they deserve, or that allows everyone to benefit/suffer from consequences that naturally derive from their actions or choices Lawful Money (p. 278): An undefined term; Money that is to be redeemed for the Federal Reserve notes Legal Tender (p.92): Money that is legally compelled Money (p.49 & 51): A chattel or a thing that functions as the money of account and that can legally bring a transaction to a close Money Laws (p. 85): The laws that affect the supply of money Nafts (p.31): The abbreviation of'Natural Gifts' 307 Progressivism (p.2 & 16): A creed that believes in increasingly good times with no limit, or a creed that asserts that human society is perpetually going forward and getting better Quondam Money (p.92): Money that arises spontaneously in the process of human interactions Reflux Principle (p.93): Making sure that all the credit created by banks must be extinguished within a reasonably short period of time after it is created through the mechanism of interest Trinity of Modern System (p.261): War, Tyranny, and Waste