dinsdag 27 december 2011

China drukt zijn eigen geld en de welvaart stijgt enorm.

Chapter 27
WAKING THE SLEEPING GIANT:
LINCOLN’S GREENBACK SYSTEM
COMES TO CHINA
The flowers had been too strong for the huge beast and he had given
up at last, falling only a short distance from the end of the poppy bed
. . . . “We can do nothing for him,” said the Tin Woodman sadly. “He
is much too heavy to lift. We must leave him here to sleep . . . .”
– The Wonderful Wizard of Oz,
“The Deadly Poppy Field”
Napoleon called China a sleeping giant. “Let him sleep,”
Napoleon said. “If he wakes, he will shake the world.”
China has now awakened and is indeed shaking the world. The
Dragon has become so strong economically that it has been called the
greatest threat to national security the United States faces, accounting
for the greatest imbalance of any country in the U.S. trade budget
deficit ($150 billion of $500 billion by 2004).1
This balance-of-trade problem is not new. The British were already
complaining of it in the early nineteenth century. Then they
discovered that exporting opium from India to China could offset their
negative trade balance and give them control of China’s financial system
at the same time. The Chinese Emperor responded by banning
the opium trade, after China started losing huge amounts of money to
England. England then declared war, initiating the Opium War of
1840. The Chinese people wound up with two sets of imperial rulers,
the British as well as their own.2
The leader of the revolution that finally overthrew 2,000 years of
Chinese imperial rule was Dr. Sun Yat-sen, now revered as the father
of modern China by Nationalists and Communists alike. Like the
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leaders of the Japanese Meiji revolution of the 1860s, he was a protegé
of a group of American nationalists of the Lincoln/Carey faction. Sun’s
fundamental principles, known as the “Three Principles of the People,”
were based on the concept presented by Lincoln in the Gettysburg
Address: “government of the people, by the people, and for the people.”
Sun was educated in Hawaii, where he built up his revolutionary
organization at the house of Frank Damon, the son of Reverand Samuel
Damon, who had run the Hawaii delegation to the American
Centennial in Philadelphia in 1876. Frank Damon provided money,
support and military training to Sun’s organization; and Hawaii
became its base for making a revolutionary movement in China.3
The Chinese Republic was proclaimed just before World War I.
After Sun’s death, the Nationalists lost control of mainland China to
the Chinese Communists, who founded the People’s Republic of China
in 1949; but the Communists retained much of the “American system”
in creating their monetary scheme, which was a Chinese variation
of Lincoln’s Greenback program. Before that, banknotes had been
issued by a variety of private banks. After 1949, these banknotes were
recalled and the renminbi (or “people’s currency”) became the sole
legal currency, issued by the People’s Bank of China, a wholly government-
owned bank. The United States and other Western countries
imposed an embargo against China in the 1950s, blocking trade between
it and most of the rest of the world except the Soviet bloc. China
then adopted a Soviet-style centrally-planned economy; but after 1978,
it pursued an open-door policy and was transformed from a centrallyplanned
economy back into a market economy.4 Private industry is
now flourishing in China, and privatization has been creeping into its
banking system as well; but it still has government-owned banks that
can issue national credit for domestic development.5
By 2004, China was leading the world in economic productivity,
growing at 9 percent annually. In the first quarter of 2007, its economic
growth was up to a remarkable 11.1 percent, with retail sales climbing
15.3 percent. The commonly-held explanation for this impressive
growth is that the Chinese are willing to work for what amounts to
slave wages; but the starving poor of Africa, Indonesia, and Latin
America are equally willing, yet their economies are languishing.
Something else distinguishes China, and one key difference is its
banking system. China has a government-issued currency and a
system of national banks that are actually owned by the nation.6
According to Wikipedia, the People’s Bank of China is “unusual in
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acting as a national bank, focused on the country not on the currency.”
The notion of “national banking,” as opposed to private “central
banking,” goes back to Lincoln, Carey and the American nationalists.
Henry C K Liu distinguishes the two systems like this: a national bank
serves the interests of the nation and its people. A central bank serves
the interests of private international finance. He writes:
A national bank does not seek independence from the
government. The independence of central banks is a euphemism
for a shift from institutional loyalty to national economic wellbeing
toward institutional loyalty to the smooth functioning of
a global financial architecture . . . [Today that means] the sacrifice
of local economies in a financial food chain that feeds the issuer
of US dollars. It is the monetary aspect of the predatory effects
of globalization.
Historically, the term “central bank” has been interchangeable
with the term “national bank.” . . . However, with the
globalization of financial markets in recent decades, a central
bank has become fundamentally different from a national bank.
The mandate of a national bank is to finance the sustainable
development of the national economy . . . . [T]he mandate of a modernday
central bank is to safeguard the value of a nation’s currency in a
globalized financial market . . . through economic recession and
negative growth if necessary. . . . [T]he best monetary policy in the
context of central banking is . . . set by universal rules of price
stability, unaffected by the economic needs or political
considerations of individual nations.7
In 1995, a Central Bank Law was passed in China granting central
bank status to the People’s Bank of China (PBoC), shifting the
PBoC away from its previous role as a national bank. But Liu says the
shift was in name more than in form:
It is safe to say that the PBoC still follows the policy directives of
the Chinese government . . . . Unlike the Fed which has an armslength
relationship with the US Treasury, the PBoC manages
the State treasury as its fiscal agent. . . . Recent Chinese policy
has shifted back in populist directions to provide affirmative
financial assistance to the poor and the undeveloped rural and
interior regions and to reverse blatant income disparity and
economic and regional imbalances. It can be anticipated that
this policy shift will raise questions in the capitalist West of the
political independence of the PBoC. Western neo-liberals will
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be predictably critical of the PBoC for directing money to where
the country needs it most, rather than to that part of the economy
where bank profit would be highest.8
Besides its “populist” banking system, China is distinguished by
keeping itself free of the debt web of the IMF and the international
banking cartel; and by refusing to let its currency float, a policy that
has fended off the currency manipulations of international speculators.
The value of the renminbi is kept pegged to the dollar; and unlike
Mexico in the 1990s, China has such a huge store of dollar reserves
that it is impervious to the assaults of speculators. In 2005,
China succumbed to Western pressure and raised its dollar peg slightly;
but the renminbi continued to be pegged to its dollar counterpart, and
the government retained control of its value.
As in Hitler’s Germany, the repression of human rights in China
deserves serious censure; but something in its economy is clearly working,
and to the extent that this is its self-contained monetary policy,
the Chinese may have the nineteenth century American Nationalists
to thank, through their student Dr. Sun Yat-Sen.
The Mystery of Chinese Productivity
In the eighteenth century, Benjamin Franklin surprised his British
listeners with tales of the booming economy in the American colonies,
something he credited to the new paper fiat money issued debt-free by
provincial governments. In a May 2005 article titled “The Mystery of
Mr. Wu,” Greg Grillot gave a modern-day variant of this story involving
a recent visit to China. He said he and a companion named Karim
had interviewed a retired architect named Mr. Wu on his standard of
living. Mr. Wu was asked through an interpreter, “How has your
standard of living changed in the last two decades?” The interpreter
responded, “Thirteen years ago, his pension was 250 yuan a month.
Now it is 2,500 yuan. He recently had a cash offer to buy his home for
US$300,000, which he’s lived in for 50 years.” Karim remarked to his
companion, “Greg, something doesn’t add up here. His pension shot
up 900% in 13 years while inflation snoozed at 2-5% per annum. How
could the government pay him that much more in such a short period
of time?” Grillot commented:
[T]he more you look around, the more you notice that no one
seems to know, or care, how so many people can produce so
much so cheaply . . . and sell it below production cost. How
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does the Chinese miracle work? Are the Chinese playing with
economic fire? All over Beijing, you find people selling things
for less than they must have cost to make.
. . . Karim and I looked over the books of a Chinese steel
company. Its year-over-year gross sales increased at a fine, steady
clip . . . but despite these increasing sales, its debt ascended a bit
faster than its sales. So its net profits slowly dwindled over time.
. . . But it also looked like the company never pays down its debt.
. . . If the Chinese aren’t paying their debts. . . is there any limit
to the amount of money the banks can lend? Just who are these
banks, anyway?
Could this be the key? . . . In the land of the world’s greatest
capitalists [meaning China], there’s one business that isn’t even
remotely governed by free markets: the banks. In the simplest terms,
the banks and the government are one and the same. Like modern
American banks, the Chinese banks (read: the Chinese
government) freely loan money to fledgling and huge established
businesses alike. But unlike modern American banks (most of them,
anyway), the Chinese banks don’t expect businesses to pay back the
money lent to them.
Evidently the secret of Chinese national banking is that the government
banks are not balancing their books! Grillot concluded that it
was a dangerous game:
[E]ven if it’s a deliberate policy, an economy can’t be deliberately
inefficient in allocating capital. Things cost money. They cannot,
typically, cost less than the value of the raw materials to make
them. The whole cannot be worth less than the sum of the parts.
. . Some laws of economics . . . can be bent, but not broken . . . at
least not without consequences.”9
Benjamin Franklin’s English listeners would no doubt have said
the same thing about the innovative monetary scheme of the American
colonies. Or could Professor Liu be right? Our entire economic world
view may need to be reordered, “just as physics was reordered when
we realized that the earth is not stationary and is not the center of the
universe.”10
How the Chinese economy can function on credit that never gets
repaid may actually be no more mysterious than the workings of the
U.S. economy, which carries $9 trillion in federal debt that nobody
ever expects to see repaid. The Chinese government can print its own
money and doesn’t need to go into debt. Before 1981, it had no federal
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debt at all; but when it opened to Western trade, it made a show of
conforming to Western practices. Advances of credit intended for
national development were re-characterized as “non-performing
loans,” rather like the English tallies that were re-characterized as
“unfunded debt” at the end of the seventeenth century. As a result,
today China does have a federal debt; but it remains substantially
smaller than that of the United States.11 China can therefore afford to
let some struggling businesses carry perpetual debt on their books
instead.
In both China and the United States, the money supply is
continually being inflated; but the Chinese mechanism may be more
efficient, because it does a better job of recycling the money. The new
money from Chinese loans that may or may not get repaid goes into
the pockets of laborers, increasing their wages and their pensions,
giving them more money for producing and purchasing goods. Like
in the early American colonies, China’s newly-created money is
increasing the overall productivity of its economy and the standard of
living of its people, promoting the general welfare by leavening the
whole loaf at once. In twenty-first century America, by contrast, the
economy keeps growing mainly from “money making money.” The
proceeds go into the pockets of investors who already have more than
they can spend on consumer goods. American tax relief also tends to
go to these non-producing investors, while American workers are
heavily taxed. Meanwhile, the Chinese government is cutting the taxes
paid by workers and raising their salaries, in an effort to encourage
more spending on cars and household appliances. The Chinese
government recently eliminated rural taxes altogether.12
Another Blow to the Quantity Theory of Money
In March 2006, the People’s Bank of China reported that its M2
money supply had increased by a whopping 18.8 percent from a year
earlier. Under classical economic theory, this explosive growth should
have crippled the economy with out-of-control price inflation; but it
didn’t. By early 2007, price inflation in China was running at only 2
to 3 percent. In 2006, China pushed past France and Great Britain to
become the world’s fourth largest economy, with domestic retail sales
boosted by 13 percent and industrial production by 16.6 percent.13 As
noted earlier, China has managed to keep the prices of its products
low for thousands of years, although its money supply has continually
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been flooded with new currency that has poured in to pay for those
cheap products.14 The “economic mystery” of China may be explained
by the Keynesian observation that when workers and raw materials
are available to increase productivity, adding money (“demand”) does
not increase prices; it increases goods and services. Supply keeps up
with demand, leaving prices unaffected.
We’ve seen that the usual trigger of hyperinflation is not a freely
flowing money supply but is the sudden devaluation of the currency
induced by speculation in the currency market. China has so far managed
to resist opening its currency to speculation; but Professor Liu
warns that it has been engaged in a dangerous flirtation with foreign
investors, who are continually leaning on it to bring its policies in line
with the West’s. China is “hoping to reap the euphoria of market
fundamentalism without succumbing to this narcotic addiction,” Liu
writes, but “every addict begins with the confidence that he/she can
handle the drug without falling into addiction.”15 He observes:
After two and a half decades of economic reform toward neoliberal
market economy, China is still unable to accomplish in
economic reconstruction what Nazi Germany managed in four
years after coming to power, i.e., full employment with a vibrant
economy financed with sovereign credit without the need to
export, which would challenge that of Britain, the then
superpower. This is because China made the mistake of relying on
foreign investment instead of using its own sovereign credit. The
penalty for China is that it has to export the resultant wealth to pay
for the foreign capital it did not need in the first place. The result
after more than two decades is that while China has become a
creditor to the US to the tune of nearing China’s own gross
domestic product (GDP), it continues to have to beg the US for
investment capital.16
Liu’s proposed solution to the international debt crisis is what he
calls “sovereign credit” and what Henry Carey called “national credit”:
sovereign nations should pay their debts in their own currencies, issued
by their own governments. Liu writes:
Sovereign debts in local currency usually do not carry any default
risk since the issuing government has the authority to issue
money in domestic currency to repay its domestic debts. . . .
[S]overeign debts’ default risks are exclusively linked to foreigncurrency
debts and their impact on currency exchange rates.
For this reason, any government that takes on foreign debt is recklessly
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exposing its economy to unnecessary risk from external sources.17
Although Liu says “the issuing government has the authority to
issue money in domestic currency to repay its domestic debts,” in the
United States today, newly-created dollars are not issued by the U.S.
Treasury. They originate with the privately-owned Federal Reserve
or private commercial banks, which create the money in the form of
loans. Like those governments that “take on foreign debt,” the U.S.
government will therefore never be able to cure its mounting debt crisis
under the current system. The only way out may be the sort of
Copernican revolution envisioned by Professor Liu, a Chinese
American economist with his feet in two worlds.
The Dragon and the Eagle
Although China has been flirting with foreign capital investment,
it has so far managed to retain the power to issue its own national
currency. It has reportedly been using that sovereign power to print
up renminbi and exchange them with Chinese companies for U.S.
dollars, which are then used to buy U.S. securities, U.S. technology,
and oil.18 Washington can hardly complain, because the Chinese have
been instrumental in helping the U.S. government bankroll its debt.
The Japanese have also engaged in these maneuvers, evidently with
U.S. encouragement. (See Chapter 40.) The problem with funding
U.S. deficit spending with fiat money issued by foreign central banks
is the leverage this affords America’s competitors. According to a
January 2005 Asia Times article, “All Beijing has to do is to mention
the possibility of a sell order going down the wires. It would devastate
the U.S. economy more than a nuclear strike.”19 If someone is going to be
buying U.S. securities with money created with accounting entries, it
should be the U.S. government itself. Why this would actually be less
inflationary than what is going on now is discussed in Chapter 39.
Ironically, the Dragon has risen to challenge the Eagle’s hegemony
by adopting a monetary scheme that was made in America. For the
United States to get back the chips it has lost in the global casino, it
may need to return to its roots and adopt the financial cornerstone the
builders rejected. It may need to do this for another reason: its debtridden
economy could be on the brink of collapse. Like for Lincoln in
the 1860s, the only way out may be the Greenback solution. We’ll
look at that challenge in Section IV, after considering one more
interesting Asian phenomenon . . . .

Lincoln drukt het geld en leent het niet van de bankiers: welvaart !

Chapter 8
SCARECROW WITH A BRAIN:
LINCOLN FOILS THE BANKERS
“With the thoughts you’d be thinkin’,
“You could be another Lincoln,
“If you only had a brain . . . .”
Dorothy to the Scarecrow (1939 film)
Like the Scarecrow who wound up ruling Oz, Abraham
Lincoln went from hayseed to the top of his class by sheer
native wit and determination, epitomizing the American dream. Following
in the footsteps of Andrew Jackson, he rose from the backwoods
to the Presidency without ever going to college. Lincoln’s
mother could barely read. Like Jackson, Lincoln risked life and limb
battling the Money Power; but the two Presidents had quite different
ideas about how it should be done. Jackson had captured the popular
imagination by playing on the distrust of big banks and foreign bankers;
but in throwing out the national bank and its foreign controllers,
he had thrown out Hamilton’s baby with the bath water, leaving the
banks in unregulated chaos. There was now no national currency.
Banks printed their own notes and simply had to be trusted to redeem
them in specie (or gold bullion). When trust faltered, there would be a
run on the bank and the bank would generally wind up closing its
doors. Bank-fed speculation had collapsed much of the factory system;
and federal support for road, canal and railway construction
was halted, halting the pioneer settlement of the West along with it.
Lincoln was only 24 when he joined the fight as an Illinois state
legislator to continue the pioneering internal improvements begun by
Henry Clay and the National Republicans. The National Republicans
were now called “Whigs” after the British Whigs, the party in opposition
to the King. Jackson had taken such unprecedented powers to
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himself that he had come to be called “King Andrew,” making the
American opposition party Whigs by extension. The “Illinois Improvement
Program” of Lincoln’s home state centered on construction of
the Illinois-Michigan canal and a 3,000-mile railroad system. The result
was an unbroken transportation line from the Hudson River to
the Great Lakes and the Mississippi River. Lincoln also joined the
movement to restore the country’s financial, industrial and political
independence by restoring a national bank and a national currency.1
When the Whig Party disintegrated over the question of slavery,
Lincoln joined the Republican Party, which was created in 1854 to
oppose the expansion of slavery into Kansas. It opposed the political
control exerted by southern slave owners over the national government;
maintained that free-market labor was superior to slavery; promised
free homesteads to farmers; and advanced a progressive vision
emphasizing higher education, banking, railroads, industry and cities.2
Lincoln became the first Republican candidate to be elected President.
Both Jackson and Lincoln were targets of assassination attempts,
but for Lincoln they started before he was even inaugurated. He had
to deal with treason, insurrection, and national bankruptcy within
the first days of taking office. Considering the powerful forces arrayed
against him, his achievements in the next four years were nothing
short of phenomenal. His government built and equipped the largest
army in the world, smashed the British-financed insurrection, abolished
slavery, and freed four million slaves. Along the way, the country
managed to become the greatest industrial giant the world had ever
seen. The steel industry was launched, a continental railroad system
was created, the Department of Agriculture was established, a new
era of farm machinery and cheap tools was promoted, a system of
free higher education was established through the Land Grant College
System, land development was encouraged by passage of a Homestead
Act granting ownership privileges to settlers, major government
support was provided to all branches of science, the Bureau of Mines
was organized, governments in the Western territories were established,
the judicial system was reorganized, labor productivity increased by
50 to 75 percent, and standardization and mass production was
promoted worldwide.
How was all this accomplished, with a Treasury that was
completely broke and a Congress that hadn’t been paid themselves?
As Benjamin Franklin might have said, “That is simple.” Lincoln
tapped into the same cornerstone that had gotten the impoverished
colonists through the American Revolution and a long period of
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internal development before that: he authorized the government to
issue its own paper fiat money. National control was reestablished
over banking, and the economy was jump-started with a 600 percent
increase in government spending and cheap credit directed at
production.3 A century later, Franklin Roosevelt would use the same
techniques to pull the country through the Great Depression; but
Roosevelt’s New Deal would be financed with borrowed money.
Lincoln’s government used a system of payment that was closer to the
medieval tally. Officially called United States Notes, these nineteenth
century tallies were popularly called “Greenbacks” because they were
printed on the back with green ink (a feature the dollar retains today).
They were basically just receipts acknowledging work done or goods
delivered, which could be traded in the community for an equivalent
value of goods or services. The Greenbacks represented man-hours
rather than borrowed gold. Lincoln is quoted as saying, “The wages of
men should be recognized as more important than the wages of money.”
Over 400 million Greenback dollars were printed and used to pay
soldiers and government employees, and to buy supplies for the war.
The Greenback system was not actually Lincoln’s idea, but when
pressure grew in Congress for the plan, he was quick to endorse it.
The South had seceded from the Union soon after his election in 1860.
To fund the War between the States, the Eastern banks had offered a
loan package that was little short of extortion – $150 million advanced
at interest rates of 24 to 36 percent. Lincoln knew the loan would be
impossible to pay off.4 He took the revolutionary approach because
he had no other real choice. The government could either print its
own money or succumb to debt slavery to the bankers.
The Wizard Behind Lincoln’s Curtain
Lincoln’s economic advisor was Henry Carey, the son of Matthew
Carey, the printer and publisher mentioned earlier who was tutored
by Benjamin Franklin and tutored Henry Clay. Clay was the leader of
the Philadelphia-based political faction propounding the “American
system” of economics. In the 1920s, historian Vernon Parrington called
Henry Carey “our first professional economist.” Thomas DiLorenzo,
a modern libertarian writer, has called him “Lincoln’s (and the
Republican Party’s) economic guru.” Carey was known around the
world during the Civil War and its aftermath, and his writings were
translated into many European and Asian languages.
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According to Parrington, Carey began his career as a classical
laissez-faire economist of the British school; but he came to believe that
American industrial development was being held back by a false
financial policy imposed by foreign financiers. To recognize only gold
bullion as money gave the bankers who controlled the gold a lock on
the money supply and the economy. The price of gold was established
in a world market, and the flow of bullion was always toward the
great financial centers that were already glutted with it. To throw the
world’s money into a common pool that drained into these financial
capitals was to make poorer countries the servants of these hubs. Since
negative trade balances were settled in gold, gold followed the balance
of trade; and until America could build up an adequate domestic
economy, its gold would continue to drain off, leaving too little money
for its internal needs.
Carey came to consider “free trade” and the “gold standard” to
be twin financial weapons forged by England for its own economic
conquest. His solution to the gold drain was for the government to
create an independent national currency that was non-exportable,
one that would remain at home to do the country’s own work. He
advocated a currency founded on “national credit,” something he
defined as “a national system based entirely on the credit of the government
with the people, not liable to interference from abroad.” Like
the wooden tally, this paper money would simply be a unit of account
that tallied work performed and goods delivered. Carey also supported
expanding the monetary base with silver.5
Carey’s theories were an elaboration of the “American system”
propounded by Henry Clay and the National Republican Party. Their
platform was to nurture local growth and development using local
raw materials and local money, freeing the country from dependence
on foreign financing. Where Jackson’s Democratic Party endorsed
“free trade,” the National Republican Party sought another sort of
freedom, the right to be free from exploitation by powerful foreign
financiers and industrialists. Free traders wanted freedom from government.
Protectionists looked to the government to keep them free
from foreign marauders. Clay’s protectionist platform included:
Government regulation of banking and credit to deter speculation
and encourage economic development;
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Government support for the development of science, public
education, and national infrastructure;i
Regulation of privately-held infrastructure to ensure it met the
nation’s needs;
A program of government-sponsored railroads, and scientific and
other aid to small farmers;
Taxation and tariffs to protect and promote productive domestic
activity; and
Rejection of class wars, exploitation and slavery, physical or economic,
in favor of a “Harmony of Interests” between capital and
labor.6
Lincoln also endorsed these goals. He eliminated slavery, established
a national bank, and implemented and funded national education,
national transportation, and federal development of business and
farming. He also set very high tariffs. He made this common-sense
observation:
I don’t know much about the tariff, but I know this much: When
we buy manufactured goods abroad we get the goods and the
foreigner gets the money. When we buy the manufactured goods
at home, we get both the goods and the money.
The Legal Tender Acts and the Legal Tender Cases
The Greenback system undergirded Lincoln’s program of domestic
development by providing a much-needed national paper money
supply. After Jackson had closed the central bank, the only paper
money in circulation were the banknotes issued privately by individual
state banks; and they were basically just private promises to pay later
in hard currency (gold or silver). The Greenbacks, on the other hand,
were currency. They were “legal tender” in themselves, money that
did not have to be repaid later but was “as good as gold” in trade.
Like metal coins, the Greenbacks were permanent money that could
continue to circulate in their own right. The Legal Tender Acts of
i Infrastructure is defined as “the set of interconnected structural elements that
provide the framework for supporting the entire structure.” In a country, it consists
of the basic facilities needed for the country’s functioning, providing a
public framework under which private enterprise can operate safely and efficiently.
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1862 and 1863 made all the “coins and currency” issued by the U.S.
Government “legal tender for all debts, public and private.” Government-
issued paper notes were made a legal substitute for gold and
silver, even for the payment of pre-existing debts.
In the twentieth century, the Legal Tender Statute (31 U.S.C.
Section 5103) applied this definition of “legal tender” to Federal Reserve
Notes; but it was an evident distortion of the intent of the original
Acts, which made only currency issued by the United States Government
legal tender. Federal Reserve Notes are issued by the Federal Reserve,
a private banking corporation; but that rather obvious discrepancy
was slipped past the American people with the smoke-and-mirrors
illusion that the Federal Reserve was actually federal.
Did the Greenbacks Cause Price Inflation?
Lincoln’s Greenback program has been blamed for the price inflation
occurring during the Civil War, but according to Irwin Unger in
The Greenback Era (1964): “It is now clear that inflation would have
occurred even without the Greenback issue.”7 War is always an inflationary
venture. What forced prices up during the Civil War was
actually a severe shortage of goods. Zarlenga quotes historian J. G.
Randall, who observed in 1937:
The threat of inflation was more effectively curbed during the Civil
War than during the First World War. Indeed as John K. Galbraith
has observed, “it is remarkable that without rationing, price
controls, or central banking, [Treasury Secretary] Chase could
have managed the federal economy so well during the Civil
War.”8
Greenbacks were not the only source of funding for the Civil War.
Bonds (government I.O.U.s) were also issued, and these too increased
the money supply, since the banks that bought the bonds were also
short of gold and had no other way of paying for the bonds than with
their own newly-issued banknotes. The difference between the government-
issued Greenbacks and the bank-issued banknotes was that
the Greenbacks were debt-free legal tender that did not have to be
paid back. As Thomas Edison reasonably observed in an interview
reported in The New York Times in 1921:
If the Nation can issue a dollar bond it can issue a dollar bill.
The element that makes the bond good makes the bill good also.
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The difference between the bond and the bill is that the bond
lets the money broker collect twice the amount of the bond and
an additional 20%. Whereas the currency, the honest sort
provided by the Constitution pays nobody but those who
contribute in some useful way. It is absurd to say our Country
can issue bonds and cannot issue currency. Both are promises to
pay, but one fattens the usurer and the other helps the People.
The Greenbacks did lose value as against gold during the war, but
this was to be expected, since gold was a more established currency
that people naturally preferred. Again the problem for the Greenback
was that it had to compete with other forms of currency. People remained
suspicious of paper money, and the Greenback was not accepted
for everything. Particularly, it could not be used for the
government’s interest payments on its outstanding bonds. Zarlenga
notes that by December 1865, the Greenback was still worth 68 cents
to one gold dollar, not bad under the circumstances. Meanwhile, the
Confederates’ paper notes had become devalued so much that they
were worthless. The Confederacy had made the mistake of issuing
fiat money that was not legal tender but was only a bond or promise
to pay after the War. As the defeat of the Confederacy became more
and more certain, its currency’s value plummeted.9
In 1972, the United States Treasury Department was asked to
compute the amount of interest that would have been paid if the $400
million in Greenbacks had been borrowed from the banks instead.
According to the Treasury Department’s calculations, in his short tenure
Lincoln saved the government a total of $4 billion in interest, just
by avoiding this $400 million loan.10