Friday, September 4, 2009

Father of Legal Tender - Elbridge Gerry Spaulding

Article in today's NY Times ( attempts to equate Bernanke to E.G. Spaulding, the man who financed the US government during the Civil War by firing up the printing presses. In funny part is, Spaulding didn't even support his own actions, except for the necessity of specifically WAR TIME funding, and to say he was a proponent of fiat paper money is completely false.

The Times article is basically a propaganda piece suggesting that money printing by government is not bad. Well, I guess it’s all relative, right? The article presents some of the doom and gloom statements of that debate that did not pan out, even flatly dismissing the inflation problem, which as predicted, did occur. By suggesting by extension that today’s naysayers are equally wrong, that Bernanke has a chance at historical vindication when this is all said and done, the Times produces a lame pro-Bernanke publicity piece. [As for Bernanke, it has been proven conclusively that he is an intellectual idiot who completely fails in every prediction he makes, demonstrating his lack of mastery of what is really going on with the economy. His only successful function is enriching the banking class at the public’s expense, so it is no surprise that the Times, the voice of that banking class, lauds him.]

The article pays homage to Spaulding, an important factor in the victory of the Union in the War for Southern Independence (what he called the Great Rebellion and we call the Civil War), while totally misleading us about what Spaulding really did and what he stood for. The article calls him the father of fiat currency, a man who was willing to throw out the economic orthodoxy of his day. He article falsely states: “Contrary to the expectations, paper money did not set off sharp inflation over time, and when the paper money eventually was made convertible into gold, there were no lines of people wanting to trade in paper for bullion.”

The facts of history debunk this. In fact, the greenbacks were indirectly backed by gold for the first half of the war. When its gold backing wavered in the first half of 1864, inflation spiked over 100%, and in the end, the dollar went back on gold, which was used to pay off all wartime debts including the redemption of the war time greenbacks! Such blatant and easily verified factual errors calls into question both the competence and honesty of the Times.

After it was all said and done, Spaulding wrote a book documenting it all for posterity, and God bless him for it. Spaulding’s book, History of the Legal Tender Paper Money Issued During the Great Rebellion, published in 1869, is an absolute treasure trove of speeches and letters, the very substance of the money argument at the time. It is full of weighty economic theorizing on matters of money, economics, and government finance. Some of the language is a bit archaic, as we no longer use some of their financial terms, but it is always elegant, and merely sampling the book pays off intellectual gold.

One thing that may surprise the average reader today is that the central terms of the debate were not whether the government should issue lots of paper money to pay for the war effort. That was generally granted by all, save the northern banking class of the day, which wanted the government to pay for the war through bonds sold on the open market (a scheme roundly denounced as most assuredly designed for the enrichment of the bankers, not for the good of the Union).

Rather, the most tendentious issue of the day was the establishment of the newly issued federal script as legal tender. At the time, there was no legal tender, no money that you had to accept in payment by force of law. Regional notes competed in an open market, and inferior notes would suffer discounting. Greenback advocates like Spaulding did not want their federal notes to suffer competition, while holders of solid regional notes did not want to have honor these obviously inflationary greenbacks at face value, which legal tender laws would require.

Another fascinating aspect of the war-time greenback effort was an ingenious bond conversion program they developed. For the first year of their issue, each newly issued federal note had the following statement engraved on it: “This note is a legal tender for all debts, public and private, except duties on imports and interest on public debt, and is exchangeable for US six percent bonds, redeemable at the pleasure of the United States after a period of five years.”

On the one hand, this bond conversion option was seen as a compensation for people forced to accept the notes. It was openly acknowledged that the legal tender issuance of federal notes was a loan to the federal government forced on the public. The bond conversion option was like a bonus to offset the rightful discounting that could have been taken in the absence of legal tender law.

The bond conversion option was also intended, in modern terms, to soak up liquidity. This convertibility would prevent any great inflation, as Spaulding wrote, “for the reason that as soon as this currency became redundant in the hands of the people, and not bearing interest, they would invest it in the six percent bonds” (pg 188).

The interest on those government bonds was to be paid in coin, meaning gold, every six months, while the bond’s principle would be paid in gold within 20 years. In other words, these greenabacks were not really debt-free fiat money, as Ellen Brown would have them. They were still on the gold standard!

Spaulding stated explicitly on this matter: “There was no very great danger that the currency would become excessively inflated so long as every person holding greenbacks, not bearing interest, could exchange them at his own will into gold-bearing bonds at six per cent interest per annum” (pg 192).

The bond conversion aspect of federal notes was, however, suspended after the first year of their issuance, in March 1863. Spaulding does not explain why, although presumably, the government simply no longer wanted to pay interest on their forced loan. After that time, it was up to the discretion of the Treasury Secretary how much interest he would pay, if any at all. After that change in the greenback, after it had been removed from the gold anchor, inflation kicked in. Spaulding was against giving that power to the Secretary, calling it a mistake, and blamed it for “the inflations, fluctuations, and changes now so apparent” (pg 194). An inflation spike of 100% took hold in the first six months of 1864. By mid July, these US notes were worth only 35 cents on the dollar.

After the war was over, Spaulding was an enthusiastic proponent of paying back the national debt in gold and silver. The way he saw it, abandonment of the gold standard during war was necessary because those war loans paid for destruction, meaning an unproductive purpose. As he put it, “Every dollar expended took out of existence a dollar of value for which the Government gave its promise to pay. Every dollar of property thus destroyed led us farther and farther away from the specie standard, and has to be produced again by labor before the value is restored” (211-2). Eventually, the debt was paid back in gold, as Spaulding called for.

To cite this man as anything but a gold-standard enthusiast is completely dishonest.


John Regan said...


Interesting that you should bring up the greenbacks just after I referred you to Timberlake's book.

Timberlake regards the whole greenback episode as the nub of the problem. He never cites Spaulding that I can recall, but he does relate the very significant "legal tender cases" which went before the Supreme Court a few years after the Civil War. It was a remarkable, almost singular, turn around in legal history. There were two cases. In the first the SCOTUS ruled by a narrow vote that the federal government had no authority to issue legal tender notes. A couple of years and one or two Supreme Court appointments later (via President Grant) the court flip-flopped and narrowly ruled the other way.

I don't think there's any other example in legal history of the Supreme Court flip-flopping over a couple of years. The reason is that the court feels bound by the previous decision under a doctrine known as "stare decisis". They have actually held to decisions they more or less admitted were wrong based on this doctrine.

Anyway, that was one of the big events in monetary history. It shows that law and money are pretty much related at the bottom of everything.

Justin said...

Thanks, John, I'll have to get to that book soon.

wraft said...

@John Regan

The flip-flop you are referring to turned on the issue of whether the federal government could print paper money.

The constitution does not authorize said printing. The SCOTUS fell back on the 'implied powers' which were created in the case McCulloch v Maryland.

The court said the federal govt had the implicit power to print paper money, I believe.

Justin said...

John, Wraft brings up a good point. While we would like to rely on the Constitution to guard our liberties and limit govt, it has been honored in the breach far too often. It seems like whenever it is inconvenient, the elites find a way to circumvent it.

wraft said...

I really don't see why you fellows want to poor mouth the greenbacks. Because of them, there was no war debt to pay off at the end of the War Between the States.

Do you want to say anything against silver as well?

After the Civil War, westward expansion created great demand in the real economy. The banks held all the gold. Should the banks enjoy a riskless real profit due to a gold mandate monopoly?

I think most of the objections against greenbacks and similar fiat could be ameliorated by removing the legal tender for private debts designation. The fact that the value of the greenbacks floated relative to gold-backed money contradicts the claim that greenbacks were inflationary. That greenbacks traded at a discount was due to bankster machinations preventing interest on public debt being paid in greenbacks. Ellen Hodgson Brown says that , on average, greenback dollars were worth $0.62

The greenbacks did much to prevent a crushing deflation that would have slowed westward expansion.