Blogs: Ralph J. Benko
James Narron and David Skeie, two of the most erudite monetary officials of our era, write at the NY Fed's Liberty Street Economics about the currency crisis of 1779.
Some choice excerpts:
April 11, 2014
Crisis Chronicles: Not Worth a Continental—The Currency Crisis of 1779 and Today’s European Debt Crisis
During the late 1770s, a newly founded United States began to run up significant debts to finance the American Revolution. With limited access to credit and little to no tax base, the Continental Congress issued the Continental to finance the war. But by the end of the decade, inflation was nearly 50 percent, a suit cost a million Continentals, and the phrase “not worth a Continental” had entered the national lexicon. With the help of our fourth U.S. president, James Madison, we review why the Continental experiment ended so badly.
Not Worth a Continental
While we’ve noted in previous posts that lessons often last only a lifetime, so deep was the public distrust of government money that it wasn’t until the Civil War that paper money was again issued in any substantial quantity.
As elsewhere noted on this site, yet bears repeating:
During the Revolution, in April 1779, Washington wrote to John Jay, president of the Continental Congress,
Some lessons do linger longer than others.
The trauma of the Great Depression was mis-attributed to a gold standard that had been effectively suspended with the commencement of the Great War. The classical gold standard had been replaced with its "evil twin," the gold-exchange standard, in Genoa in 1922.The pastiche of a mixed gold-paper standard led to an inexorable misalignment of the definition of the reserve currency with prevailing commodity prices.
As Liaquat Ahamed astutely points out in Lords of Finance, the Great Depression began to lift promptly as President Roosevelt, under the direction of agricultural economist (and commodity price expert) George Warren revalued the dollar at its appropriate post-war rate, $35/oz as opposed to the pre-war $20.67.
During the following three months, wholesale prices jumped by 45 percent and stock prices doubled. With prices rising, the real cost of borrowing money plummeted. New orders for heavy machinery soared by 100 percent, auto sales doubled, and overall industrial production shot up 50 percent.
Unfortunately, this success was taken to be "going off the gold standard" rather than a restoration of its integrity.
This collapsed distinction has lingered for three-quarters of a century after the lifting of the Great Depression. The distinction between the classical gold and gold-exchange standards, missed by Prof. Eichengreen, gradually is becoming appreciated by other monetary scholars, savants and officials.
As that distinction becomes appreciated, the unfounded animus begins notably to soften toward the classical gold standard. The classical gold standard once again becomes a respectable subject for discussion as a policy option.
GreatSeal.com (not affiliated with the U.S. government) provides an excellent summary history of the formulation of the reverse of the Great Seal of the United States. The Great Seal is, of course, depicted, front and back, on the back of every dollar bill.
The eye in the triangle at the top of the pyramid motif has evoked recurrent speculation down the years as to Masonic, or even "Illuminati," symbolism. The reality is much simpler. The original dsign suggestion "was made by Pierre Du Simitière, the consultant and artist on the first Great Seal committee ..."
Simitière's design ...
This design was not approved by Congress, but six years later, William Barton of the third Great Seal committee suggested the eye for the reverse side of the Great Seal: "A Pyramid of thirteen Strata... In the Zenith, an Eye, surrounded with a Glory." ("Glory" is the heraldic term for rays of light.)
Secretary of Congress Charles Thomson liked Barton's idea, but added a triangle around the eye and created two new mottoes. Congress approved Thomson's design for the reverse side of the Great Seal, which specified:
"In the Zenith an Eye in a triangle surrounded with a glory"
The Declaration of Independence appealed for authority, in part, to "the Laws of Nature and of Nature's God"
The gold standard works, technically, by virtue of a law of nature called distributed (or group) intelligence.
As previously cited here, but bears repeating,
New Yorker columnist James Surowiecki wrote a best seller about this, summarizing a lot of the best research, titled The Wisdom of Crowds. It's a populist classic--not in the "torch and pitchfork" sense, simply in demonstrating the truth of the old maxim "All of us are smarter than any of us." ...
A classic demonstration of group intelligence is the jelly-beans-in-the-jar experiment, in which invariably the group's estimate is superior to the vast majority of the individual guesses. When finance professor Jack Treynor ran the experiment in his class with a jar that held 850 beans, the group estimate was 871. Only one of the fifty-six people in the class made a better guess. ...
[T]he group's guess will not be better than that of every single person in the group each time. In many (perhaps most) cases, there will be a few people who do better than the group. ... But there is no evidence in these studies that certain people consistently outperform the group.
The market is by far the best judge of its desired liquidity balances. The iconography on the back of the dollar bill, our most fundamental unit of account, in alluding to Providence suggests that our welfare is best served by following "the Laws of Nature" and not delegating such a crucial and delicate matter to the discretion of a committee of experts.
The Federal Open Market committee indeed resembles, however superficially, the mythical "Illuminati." The current system of fiduciary management neither is consistent with our national character or charter, nor has it proved beneficial to the people of America or the world.
Once upon a time, lore has it, an engraver inscribed a tiny image of an owl nested into a curlicue on the back of the dollar bill.
Image courtesy of Wikipedia
Some claim it to be a spider. Others claim it is an artifact of the engraving. It has given rise to considerable speculation as to whether it might be a sign of a secret group called "the Illuminati."
Only the long-ago craftsman who produced the design for the Bureau of Engraving and Printing knows. And if he knew, he didn't tell.
This writer likes the idea of owl. An owl a symbol of wisdom. That association may well have derived from its status as a totem of Athena, Greek Goddess of wisdom. And the Athenian tetradrachm portrayed, and was called, an "owl."
Image courtesy of the Museum of Fine Arts, Lyon, France, via Wikipedia
The notional owl on the dollar bill is as small as a mustard seed. The "least of all seeds: but when it is grown, it is the greatest among herbs, and becometh a tree, so that the birds of the air come and lodge in the branches thereof."
Would that our monetary authorities find inspiration from this almost imperceptible embellishment to restore the integrity of the dollar by defining it by grains of gold.
On April 13, 2014, readers of the Sunday New York Times Book Review were treated to a cover theme under an adaptation of the reverse of the Great Seal of the United States -- the Eye of Providence over a pyramid -- with the pyramid, in this version, made up of a labyrinth centered around the dollar sign.
Labyrinth Image courtesy of Wikimedia
Money represents a unit of account, as well as a store of value and medium of exchange. Credit represents a financial transaction. Thus is the New York Times, one of our great institutions, lost in a labyrinth of its own making.
Many of the books reviewed, and reviewers, are predictably center-left thinkers out to indict bankers and their excesses. The Book Review converts itself into a latter day virtual Zuccotti Park, the epicenter of the Occupy Wall Street movement (where this writer spent a pleasant afternoon at its height, meeting Occupiers and enjoying the sound of drums. No bugles were heard).
The most interesting item, both for the authors of the book reviewed and the stature of the reviewer, was Liaquat Ahamed's review of Fragile By Design, by Charles W. Calomiris and Stephen H. Haber. Ahamed authored the Pulitzer Prize winning Lords of Finance, undoubtedly the finest narrative history of monetary affairs ever written. Prof. Calomiris widely is considered one of the most important academics working in the realm of money and finance.
"The game of bank bargains" is what Calomiris and Habe call the whole process by which the coalitions in power divvy up the spoils thrown off by banks and allocate the cost of a bank rescue. At the heart of their book is a history of how this amorphous game has played out in five countries: Britain, The United States, Canada, Mexico and Brazil. The authors seem to have read everything on the subject, and their accounts, brimming with fascinating details and vignettes, are testament to their scholarship and breadth of knowledge.
While they do try to extract some general lessons from their case studies, history turns out as always to be too messy, contingent and subject to the vagaries of human agency to be slotted into neat boxes.
The same observation about vagaries of human agency may be made as to monetary policy, as practiced by our central bankers. In 2002, then-governor of the Federal Reserve Board Ben Benanke, at a speech in honor of Milton Friedman's 90th birthday, said:
I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.
Of course, six years later, entirely unforeseen by our monetary authorities, came the panic of 2008, the Meltdown, and the Great Recession from which America and the world is only feebly recovering. At the core of all this was, and is, the instability of the dollar as a unit of account managed by elite civil servants as a matter of discretion.
The empirical data are unequivocal that the policy of defining a currency as a fixed weight of gold, convertible thereto by holders, while imperfect is a far better recipe for equitable prosperity than any other policy ever attempted. The foundation of the financial system is the nation's currency. By providing a currency defined, in gold, with greatest integrity, rather than one "subject to the vagaries of human agency," many of the problems currently besetting the world economy elegantly can be resolved.
The great economist Jacques Rueff once used, as the epigram to The Monetary Sins of the West, a quote from Henry de Montherlant: "There is tragedy in the world because men contrive, out of nothings, tragedies that are totally unnecessary—which means that men are frivolous."
The classical gold standard is a powerful antidote to frivolity and to unnecessary tragedy.
Scientists at the Los Alamos National Laboratory recently identified the world's largest single crystal gold nugget, worth an estimated $1.5M (for its rarity rather than its 217.78-gram weight).
Photo courtesy of Los Alamos National Laboratory
Los Alamos reports:
Revealing the inner structure of a crystal without destroying the sample—imperative, as this one is worth an estimated $1.5 million—would allow Rakovan and Lujan Center collaborators to prove that this exquisite nugget, which seemed almost too perfect and too big to be real, was a single crystal and hence a creation of nature. Its owner, who lives in the United States, provided the samples to Rakovan to assess the crystallinity of four specimens, all of which had been found decades ago in Venezuela.
Three of the four specimens assayed proved mono-crystalline.
Gold's aesthetic appeal -- inspiring even the scientific boffins at Los Alamos to rhapsodic words like "exquisite" -- is a feature, not a bug. Gold's beauty is one of the qualities that make gold optimal as the base of the world monetary system.
BY RALPH J. BENKO: