WEBVTT

NOTE 1. The History of Money and Banking Before the Twentieth Century

1
00:00:00.000 --> 00:00:07.320
A HISTORY OF MONEY AND BANKING IN THE UNITED STATES, THE COLONIAL ERA TO WORLD WAR II

2
00:00:07.320 --> 00:00:10.320
By Murray N. Rothbard

3
00:00:10.320 --> 00:00:17.440
PART 1 A HISTORY OF MONEY AND BANKING IN THE UNITED STATES BEFORE THE 20TH CENTURY

4
00:00:17.440 --> 00:00:24.400
As an outpost of Great Britain, colonial America of course used British pounds, pence and shillings

5
00:00:24.400 --> 00:00:26.240
as its money.

6
00:00:26.240 --> 00:00:32.120
Great Britain was officially on a silver standard, with the shilling defined as equal to 86 pure

7
00:00:32.120 --> 00:00:39.360
troy grains of silver, and with silver as so defined legal tender for all debts, that

8
00:00:39.360 --> 00:00:44.320
is, creditors were compelled to accept silver at that rate.

9
00:00:44.320 --> 00:00:50.880
However, Britain also coined gold and maintained a bimetallic standard by fixing the gold

10
00:00:50.880 --> 00:00:59.340
Gold Guinea weighing 129.4 grains of gold as equal in value to a certain weight of silver.

11
00:00:59.340 --> 00:01:05.120
In that way, gold became, in effect, legal tender as well.

12
00:01:05.120 --> 00:01:11.080
Unfortunately, by establishing bi-metalism, Britain became perpetually subject to the

13
00:01:11.080 --> 00:01:16.960
evil known as Gresham's Law, which states that when government compulsorily overvalues

14
00:01:16.960 --> 00:01:35.160
Hence, the popular catchphrase of Gresham's law, bad money drives out good.

15
00:01:35.160 --> 00:01:41.020
But the important point to note is that the triumph of quote bad money is the result not

16
00:01:41.020 --> 00:01:46.600
Not of perverse free market competition, but of government, using the compulsory legal

17
00:01:46.600 --> 00:01:50.940
tender power to privilege one money above another.

18
00:01:50.940 --> 00:01:57.380
In 17th and 18th century Britain, the government maintained a mint ratio between gold and silver

19
00:01:57.380 --> 00:02:04.340
that consistently overvalued gold and undervalued silver in relation to world market prices,

20
00:02:04.340 --> 00:02:09.500
with the resultant disappearance and outflow of full-bodied silver coins and an influx

21
00:02:09.500 --> 00:02:24.060
Attempts to rectify the fixed bimetallic ratios were always too little and too late.

22
00:02:24.060 --> 00:02:29.880
In the sparsely settled American colonies, money, as it always does, arose in the market

23
00:02:29.880 --> 00:02:36.140
as a useful and scarce commodity and began to serve as a general medium of exchange.

24
00:02:36.140 --> 00:02:43.020
Thus, beaver fur and wampum were used as money in the North for exchanges with the Indians,

25
00:02:43.020 --> 00:02:46.700
and fish and corn also served as money.

26
00:02:46.700 --> 00:02:52.220
Rice was used as money in South Carolina, and the most widespread use of commodity money

27
00:02:52.220 --> 00:02:56.180
was tobacco, which served as money in Virginia.

28
00:02:56.180 --> 00:03:01.380
The pound of tobacco was the currency unit in Virginia, with warehouse receipts in tobacco

29
00:03:01.380 --> 00:03:07.860
Tobacco circulating his money back to 100% by the tobacco in the warehouse.

30
00:03:07.860 --> 00:03:15.180
While commodity money continued to serve satisfactorily in rural areas, as the colonial economy grew,

31
00:03:15.180 --> 00:03:20.740
Americans imported gold and silver coins to serve as monetary media in urban centers and

32
00:03:20.740 --> 00:03:22.660
in foreign trade.

33
00:03:22.660 --> 00:03:27.980
English coins were imported, but so too were gold and silver coins from other European

34
00:03:27.980 --> 00:03:34.300
in countries. Among the gold coins circulating in America were the French guinea, the Portuguese

35
00:03:34.300 --> 00:03:41.780
joe, the Spanish doubloon, and Brazilian coins, while silver coins included French crowns

36
00:03:41.780 --> 00:03:48.460
and livre. It is important to realize that gold and silver are international commodities

37
00:03:48.460 --> 00:03:54.300
and that therefore, when not prohibited by government decree, foreign coins are perfectly

38
00:03:54.300 --> 00:03:57.700
The Federal Reserve is only capable of serving as standard monies.

39
00:03:57.700 --> 00:04:03.260
There is no need to have a national government monopolize the coinage, and indeed foreign

40
00:04:03.260 --> 00:04:08.760
gold and silver coins constituted much of the coinage in the United States until Congress

41
00:04:08.760 --> 00:04:12.540
outlawed the use of foreign coins in 1857.

42
00:04:12.540 --> 00:04:18.860
Thus, if a free market is allowed to prevail in a country, foreign coins will circulate

43
00:04:18.860 --> 00:04:20.540
naturally.

44
00:04:20.540 --> 00:04:25.500
Silver and gold coins will tend to be valued in proportion to their respective weights,

45
00:04:25.500 --> 00:04:30.900
and the ratio between silver and gold will be set by the market in accordance with their

46
00:04:30.900 --> 00:04:33.140
relative supply and demand.