WEBVTT NOTE Inflation in Colonial America 1 00:00:00.000 --> 00:00:04.600 Today's lecture is called Inflation in Colonial America. 2 00:00:04.600 --> 00:00:10.160 Now, as you've seen through the lecture process so far, 3 00:00:10.160 --> 00:00:17.680 this history class is very topical in that each lecture basically is looking at 4 00:00:17.680 --> 00:00:24.240 a specific high point or point of importance in American history 5 00:00:24.240 --> 00:00:27.120 and applying economic tools to understanding those things. 6 00:00:27.120 --> 00:00:39.120 It's not a history in the sense of a stringing of events, one after the other, into a long detailed tale of America. 7 00:00:39.120 --> 00:00:45.120 Now that is unfortunate, but we have a limited amount of time in here. 8 00:00:45.120 --> 00:00:53.120 If you are interested in the real history of colonial America, 9 00:00:53.120 --> 00:00:55.560 Murray Rothbard, 10 00:00:55.560 --> 00:00:58.120 the author of one of our textbooks, 11 00:00:58.120 --> 00:01:01.220 has written a real history 12 00:01:01.220 --> 00:01:03.480 of colonial America. 13 00:01:03.480 --> 00:01:07.680 It's called Conceived in Liberty 14 00:01:07.680 --> 00:01:09.120 and 15 00:01:09.120 --> 00:01:10.440 it's an excellent 16 00:01:10.440 --> 00:01:11.440 history 17 00:01:11.440 --> 00:01:13.160 of the period. 18 00:01:13.160 --> 00:01:17.980 And it's also written by someone who's an economist as well as an historian 19 00:01:17.980 --> 00:01:21.420 so that a lot of the points that I bring up 20 00:01:21.420 --> 00:01:26.300 in class are better illustrated or illustrated in greater detail 21 00:01:26.300 --> 00:01:30.300 in that four volume set. So if you really wanted to 22 00:01:30.300 --> 00:01:33.940 endeavor to know your American history and you wanted to start with the colonial 23 00:01:33.940 --> 00:01:34.820 period, 24 00:01:34.820 --> 00:01:39.620 that's the set of books that I would recommend. 25 00:01:39.620 --> 00:01:42.860 And I'll try to do that as we go through American history so that 26 00:01:42.860 --> 00:01:49.860 by the end of this course you'll have a reading list 27 00:01:49.860 --> 00:01:57.860 for Your Private Consumption. May have to wait until you retire, but you'll have it. 28 00:01:57.860 --> 00:02:01.300 Okay, in the last class, before 29 00:02:01.300 --> 00:02:03.740 this class about inflation, 30 00:02:03.740 --> 00:02:09.820 what we were looking at is how well the colonists adapted to British mercantilist 31 00:02:09.820 --> 00:02:12.460 monetary policy. 32 00:02:12.460 --> 00:02:14.060 The British imposed 33 00:02:14.060 --> 00:02:18.100 this mercantilist monetary policy 34 00:02:18.100 --> 00:02:20.100 Colonies 35 00:02:20.100 --> 00:02:23.120 which restricted their access to 36 00:02:23.120 --> 00:02:24.600 British money 37 00:02:24.600 --> 00:02:28.000 but we saw that the colonists adopted 38 00:02:28.000 --> 00:02:31.400 or adapted, I should say, adapted to that 39 00:02:31.400 --> 00:02:33.780 by 40 00:02:33.780 --> 00:02:35.080 using 41 00:02:35.080 --> 00:02:37.920 commodity-based monies 42 00:02:37.920 --> 00:02:40.740 which the British couldn't control 43 00:02:40.740 --> 00:02:42.780 and the use of the Spanish peso 44 00:02:42.780 --> 00:02:49.380 which the British really couldn't control. 45 00:02:49.380 --> 00:02:52.780 So these were sort of natural adaptive 46 00:02:52.780 --> 00:02:57.780 techniques to the problems imposed by the British. 47 00:02:57.780 --> 00:03:02.700 Today we're looking at monetary manipulation by the colonies. 48 00:03:02.700 --> 00:03:07.080 Not the colonists, but the colonies, the colonial governments themselves. 49 00:03:07.080 --> 00:03:11.580 So this is more of an artificial or political 50 00:03:11.580 --> 00:03:17.180 response 51 00:03:17.180 --> 00:03:22.060 Okay, one of the first things they did was try to manipulate 52 00:03:22.060 --> 00:03:29.060 the Spanish peso. 53 00:03:31.860 --> 00:03:35.140 Okay, that's what they had. They couldn't figure out a way to 54 00:03:35.140 --> 00:03:40.140 manipulate the commodity monies, which were 55 00:03:40.140 --> 00:03:44.860 way too market oriented, too flexible 56 00:03:44.860 --> 00:03:48.460 and so what the colonists did was they said well we've got the Spanish peso or 57 00:03:48.460 --> 00:03:50.340 dollar in circulation 58 00:03:50.340 --> 00:03:53.900 and the Spanish peso 59 00:03:53.900 --> 00:04:00.780 was equal to four shillings and six pence 60 00:04:00.780 --> 00:04:06.740 so if you looked at the amount of silver in a Spanish peso 61 00:04:06.740 --> 00:04:09.580 in order to get that same amount of silver 62 00:04:09.580 --> 00:04:23.980 In British money, you'd have to have four shillings and six pence. 63 00:04:23.980 --> 00:04:32.600 So in 1642, Massachusetts came up with the idea of just saying, well, instead of that, 64 00:04:32.600 --> 00:04:44.640 The Spanish peso in Massachusetts is going to be equal to five shillings. 65 00:04:44.640 --> 00:04:57.480 That wasn't just a simple rounding issue, or it wasn't a little error on their part. 66 00:04:57.480 --> 00:05:01.580 It wasn't that they didn't understand the British monetary system, they had all grown 67 00:05:01.580 --> 00:05:18.580 What the idea was, was to get people who had Spanish pesos to spend them in Massachusetts. 68 00:05:31.580 --> 00:05:42.700 So, for example, if you were a trader, and you were trading in the West Indies, and you 69 00:05:42.700 --> 00:05:50.060 acquired Spanish pesos, everywhere else in the world, including all of the other colonies, 70 00:05:50.060 --> 00:05:58.220 those pesos you could spend were equal to four shillings and six pence. But if you went 71 00:05:58.220 --> 00:06:10.220 If you went to Massachusetts, the Massachusetts Bay Colony, you could spend those Spanish pesos and get five shillings worth of goods. 72 00:06:10.220 --> 00:06:20.220 So the idea here was to encourage all these ships and traders who were passing through the colonies to stop in Massachusetts 73 00:06:20.220 --> 00:06:38.700 rather than New York or Rhode Island and spend their spend their money there. 74 00:06:38.700 --> 00:06:58.180 Okay, so the idea is here increase the supply of pesos in Massachusetts and encourage exports. 75 00:06:58.180 --> 00:07:02.940 So these traders will be coming through and they would be encouraged to buy up things 76 00:07:02.940 --> 00:07:21.100 and Export them. 77 00:07:21.100 --> 00:07:28.060 Initially this policy apparently had some beneficial effects, it sort of stimulated 78 00:07:28.060 --> 00:07:33.060 and the Artificial Stimulation of the Economy. 79 00:07:33.060 --> 00:07:44.060 But problems were just around the corner 80 00:07:44.060 --> 00:07:50.060 because other colonies, specifically colonies like Rhode Island and Connecticut, 81 00:07:50.060 --> 00:07:57.060 followed suit saying that pesos were now worth five shillings in their colonies. 82 00:07:57.060 --> 00:08:12.060 In fact, they even went beyond five shillings. So they were upping the ante. 83 00:08:12.060 --> 00:08:18.060 And so people from around the world could spend their pesos and get more and more goods 84 00:08:18.060 --> 00:08:24.060 for the same amount of money in these colonies. 85 00:08:24.060 --> 00:08:53.560 This caused prices to increase, or price inflation, and the practice was ultimately banned in 1707 by Great Britain. 86 00:08:54.060 --> 00:09:10.980 So that was the first step, the first episode of monetary manipulation, inflation of manipulating 87 00:09:10.980 --> 00:09:22.040 currencies. And this is something that various kings in Europe had tried as well, where they 88 00:09:22.040 --> 00:09:32.640 changed the exchange ratios of their currencies, manipulating the accounting values of their 89 00:09:32.640 --> 00:09:46.080 currencies to try to get an inflationary advantage. 90 00:09:46.080 --> 00:10:08.200 The second and more notable form of monetary manipulation was fiat paper money. 91 00:10:08.200 --> 00:10:27.200 It starts out in 1690 in Massachusetts, where Massachusetts is said to have invented paper money. 92 00:10:27.200 --> 00:10:30.200 That's actually not true. 93 00:10:30.200 --> 00:10:42.200 have been tried in other places at other times, specifically in China, and it's kind of interesting 94 00:10:42.200 --> 00:10:49.960 in something that's either not discussed or not discussed a lot at great length, but Massachusetts 95 00:10:49.960 --> 00:10:59.360 and some of the other colonies had this little nasty habit of periodic expeditions to Canada. 96 00:10:59.360 --> 00:11:06.160 They call them expeditions, but they were really plunder invasions where the colony 97 00:11:06.160 --> 00:11:12.720 would gather an army together and send it up into Canada to Quebec or some other place 98 00:11:12.720 --> 00:11:21.720 up in Canada and steal a bunch of their stuff and come back and the idea was they'd sell 99 00:11:21.720 --> 00:11:27.320 all of the plunder that they got their hands on and pay the soldiers with that money and 100 00:11:27.320 --> 00:11:33.080 and keep the rest for the colonial government. So it was kind of a mercantilist adventure 101 00:11:33.080 --> 00:11:44.120 between soldiers for hire and the colonial government. And this worked pretty well as 102 00:11:44.120 --> 00:11:53.200 long as the colonial army won. But in 1690, an expedition went to French Canada and lost 103 00:11:53.200 --> 00:11:59.400 and was turned back and didn't actually acquire plunder. 104 00:11:59.400 --> 00:12:07.680 As a matter of fact, they were kind of in a bad way in terms of just provisioning themselves 105 00:12:07.680 --> 00:12:10.400 on the return trip. 106 00:12:10.400 --> 00:12:14.040 But in any case, the soldiers wanted to get paid when they returned. 107 00:12:14.040 --> 00:12:19.320 Even though there was no plunder, the colony of Massachusetts could not borrow money because 108 00:12:19.320 --> 00:12:27.320 because their credit rating wasn't high enough amongst the local merchants and so they were in a bit of a pickle 109 00:12:27.320 --> 00:12:33.320 and they feared an uprising or mutiny on the part of the soldiers because the soldiers weren't going to wait around 110 00:12:33.320 --> 00:12:38.320 they had to go back to their farms and start the next crop 111 00:12:38.320 --> 00:13:07.320 And so, the colony of Massachusetts printed up 7,000 pounds, another, of course, monetary designation of Great Britain, 7,000 pounds of paper notes to pay for the expedition. 112 00:13:07.320 --> 00:13:13.000 they were told that these notes would be redeemable in gold and silver in a few 113 00:13:13.000 --> 00:13:24.920 years and that the colony would never issue any more notes so that's 1690 114 00:13:24.920 --> 00:13:44.400 1690, 1691, they decided and said that that wasn't enough, and that they had to issue 115 00:13:44.400 --> 00:14:01.160 Another 40,000 pounds of notes, and this time they said, we'll never issue any more. 116 00:14:01.160 --> 00:14:08.800 Those notes quickly achieved a depreciation of about 40%, indicating that people were 117 00:14:08.800 --> 00:14:21.360 We're already not really believing in the colonial government. 118 00:14:21.360 --> 00:14:28.580 The following year, the colonial government passes a legal tender law that requires individuals 119 00:14:28.580 --> 00:14:38.240 to accept the colonial paper money at par. 120 00:14:38.240 --> 00:14:43.980 Now it's worth knowing what legal tender laws are. 121 00:14:43.980 --> 00:14:52.220 The money in your billfold will actually tell you, I think, used to at least, that those 122 00:14:52.220 --> 00:15:02.160 Federal Reserve notes are subject to our own legal tender law, which requires every individual 123 00:15:02.160 --> 00:15:11.200 in the United States to accept those paper notes for all debts, public and private. 124 00:15:11.200 --> 00:15:16.880 So you can use those notes to pay your taxes or to pay your private debts and the other 125 00:15:16.880 --> 00:15:20.680 people, including the government, have to accept them. 126 00:15:20.680 --> 00:15:27.180 You have to pay your taxes in these notes and they have to be acceptable on the part 127 00:15:27.180 --> 00:15:30.500 of everyone else. 128 00:15:30.500 --> 00:15:36.780 This is designed to increase the marketability of these paper notes because you're being 129 00:15:36.780 --> 00:15:39.220 forced to do it. 130 00:15:39.220 --> 00:15:49.580 You can't decide not to take these notes even if they've depreciated 40% in one year 131 00:15:49.580 --> 00:15:51.540 versus gold and silver. 132 00:15:51.540 --> 00:16:00.740 So you might have lent some money at the beginning of the year. 133 00:16:00.740 --> 00:16:12.720 You might have lent somebody, say, 100 Spanish pesos, and you're supposed to get paid back 134 00:16:12.720 --> 00:16:18.160 at the end of the year 110 Spanish pesos. 135 00:16:18.160 --> 00:16:25.440 But if in the meantime your colonial government issues these paper notes and a legal tender 136 00:16:25.440 --> 00:16:33.480 law and they fall by 40 percent, then at the end of the year the person you lent that money 137 00:16:33.480 --> 00:16:45.280 to can pay you 110 of these depreciated paper notes, which are only worth 60 percent. 138 00:16:45.280 --> 00:16:55.280 So instead of getting back 110 ounces of silver, you're really only getting, what? 139 00:16:55.280 --> 00:17:00.280 66, the equivalent of 66 ounces of silver. 140 00:17:00.280 --> 00:17:07.280 So you've really lost not only your interest, but you've lost 34% of your principal. 141 00:17:15.280 --> 00:17:29.280 An important effect, of course, immediately goes into effect and that's what Gresham's law tells us. 142 00:17:29.280 --> 00:17:36.280 Bad money drives out good. In this case, the good money is gold and silver coins. 143 00:17:36.280 --> 00:17:42.280 The bad money is the paper notes. So the bad money is in circulation. 144 00:17:42.280 --> 00:17:49.340 everybody's using it quickly to make exchanges because it's falling in value 145 00:17:49.340 --> 00:17:55.580 and the gold and silver stay out of circulation so you no longer see gold and silver coins 146 00:17:55.580 --> 00:17:58.280 those are things that people hold on to 147 00:17:58.280 --> 00:18:09.080 because they're not depreciating, they're really appreciating versus the paper money 148 00:18:09.080 --> 00:18:24.080 You're also going to get price inflation 149 00:18:24.080 --> 00:18:31.480 as with the monetary manipulation of the peso. Other colonies jump in on this process. 150 00:18:31.480 --> 00:18:42.480 Initially it's Massachusetts neighboring colonies, Rhode Island and Connecticut. 151 00:18:42.480 --> 00:18:54.480 Silver is disappearing from circulation, and the paper money that's issued by Massachusetts is not redeemed in a few years, unless you consider 40 years to be a few years. 152 00:18:54.480 --> 00:19:02.480 in 40 years is of course longer than the life expectancy of the colonists. 153 00:19:02.480 --> 00:19:08.480 So it's more than a lifetime before these notes are redeemed. 154 00:19:08.480 --> 00:19:14.480 Again, people now are living in that life expectancy is still only in the 20s. 155 00:19:14.480 --> 00:19:44.480 in the 20s. So looking back at this episode, you have to wonder, is it a stupid policy where you issue this money because you think money is scarce and you're issuing more and more, it's depreciating in value and it's actually driving out the gold and silver money and ultimately 156 00:19:44.480 --> 00:19:55.480 Obviously it's hurting the economy. 157 00:19:55.480 --> 00:20:03.100 Well, you could say it's not really a stupid policy, in the sense that we can understand 158 00:20:03.100 --> 00:20:08.480 why they did it. 159 00:20:08.480 --> 00:20:22.400 In the breakdown of this policy, we can see that certain groups are harmed by the policy 160 00:20:22.400 --> 00:20:30.180 and other groups are helped by the policy. 161 00:20:30.180 --> 00:20:40.900 The primary group that it helps is government. 162 00:20:40.900 --> 00:20:47.780 They print the money up and then they spend it. 163 00:20:47.780 --> 00:20:53.780 This is obviously something that would help the government. 164 00:20:53.780 --> 00:21:00.100 Every time they issue money, that's money that they're actually spending. 165 00:21:00.100 --> 00:21:04.100 And they're not like giving everybody a little bit in piece of it. 166 00:21:04.100 --> 00:21:09.260 It's not getting an equitable distribution or any kind of equal distribution. 167 00:21:09.260 --> 00:21:18.620 It's being spent directly by the government. 168 00:21:18.620 --> 00:21:27.960 And people who are in debt, as I just explained, you lent your friend 100 ounces of silver. 169 00:21:27.960 --> 00:21:29.740 He got a great deal out of it. 170 00:21:29.740 --> 00:21:42.740 He got to use the money for a year and only had to pay you back the equivalent of two-thirds of what he borrowed. 171 00:21:50.740 --> 00:21:56.740 You on the other hand as a creditor, as a saver and a lender, are harmed. 172 00:21:59.740 --> 00:22:09.740 Economy is also harmed in the process, and I mean that in two different senses. 173 00:22:09.740 --> 00:22:12.740 The first sense is just the overall economy. 174 00:22:12.740 --> 00:22:22.740 This is going to have kind of an initial stimulative effect on the economy, but ultimately it's going to have a depressing effect on the economy. 175 00:22:22.740 --> 00:22:29.380 like if you took a stimulant or some kind of stimulating drug initially you'd be 176 00:22:29.380 --> 00:22:36.260 very active but then you would have the after effects of whatever it was you 177 00:22:36.260 --> 00:22:46.460 ingested caffeine alcohol whatever and also hurts economy in the more general 178 00:22:46.460 --> 00:22:52.620 sense of being economical because once you get into an inflationary process of 179 00:22:52.620 --> 00:22:58.740 of course, people don't do things the way they typically do things. And in this 180 00:22:58.740 --> 00:23:03.060 instance, when you've got all this money pouring into the economy and depreciating 181 00:23:03.060 --> 00:23:08.300 very quickly, it's very much the case that you want to spend your money as 182 00:23:08.300 --> 00:23:11.660 quickly as possible. And it doesn't matter what it's on, you just got to 183 00:23:11.660 --> 00:23:16.620 spend it before it goes down in value. And so people might buy things that they 184 00:23:16.620 --> 00:23:21.500 don't need, buy luxury goods that they otherwise couldn't afford, and find 185 00:23:21.500 --> 00:23:27.340 find themselves stuck after the process runs its course. 186 00:23:27.340 --> 00:23:28.340 This continues. 187 00:23:28.340 --> 00:23:29.820 This episode continues. 188 00:23:29.820 --> 00:23:39.180 In 1711, Massachusetts issues a half a million pounds worth of notes after another failed 189 00:23:39.180 --> 00:23:41.900 military expedition to Quebec. 190 00:23:41.900 --> 00:23:57.900 Naturally, the depreciation of these notes follows, so 1711, you get a half a million pounds. 191 00:23:57.900 --> 00:24:20.860 1716, a land bank is founded that issues a hundred thousand pounds of notes and a land 192 00:24:20.860 --> 00:24:27.620 Land Bank is basically where you take land holdings and you use it as collateral for 193 00:24:27.620 --> 00:24:29.820 the notes. 194 00:24:29.820 --> 00:24:38.060 So you've got this ownership of land and they say, well, we're going to capitalize this value 195 00:24:38.060 --> 00:24:41.020 of this land in terms of notes. 196 00:24:41.020 --> 00:24:46.220 So we're going to back up the notes with the value of the land and ultimately we'll sell 197 00:24:46.220 --> 00:24:49.920 And sell this land in order to redeem those notes. 198 00:24:49.940 --> 00:24:55.440 But, of course, people didn't buy that so the notes depreciated. 199 00:24:57.020 --> 00:25:00.620 1744-48 200 00:25:00.620 --> 00:25:30.620 1744, 300,000 pounds are issued, 300,000 pounds, excuse me, and ultimately by 1748 the issue increases to two and a half million pounds of 201 00:25:30.620 --> 00:25:43.940 of Notes. So the peso, which traditionally had been equal to 4 shillings 6 pence, was 202 00:25:43.940 --> 00:25:57.020 now worth 60 shillings in some of the counties, in some of the colonies. By 1740, every colony 203 00:25:57.020 --> 00:26:05.060 except Virginia had resorted to inflation, and even during the 1750s Virginia succumbed 204 00:26:05.060 --> 00:26:15.420 to issue paper to cover the expenses of their involvement in the French and Indian wars. 205 00:26:15.420 --> 00:26:26.100 Now notice that a lot of these issuing of paper money is justified by one of the things 206 00:26:26.100 --> 00:26:33.380 is the general supposed scarcity of money in the colonies, and the other is war. These 207 00:26:33.380 --> 00:26:43.420 military expeditions are sort of junior wars. They're not really declared wars, but they're 208 00:26:43.420 --> 00:26:48.220 certainly military expeditions, and then the French and Indian War finally gets Virginia 209 00:26:48.220 --> 00:27:00.740 to Issue Money. In addition to all of the problems caused by this money, it also causes 210 00:27:00.740 --> 00:27:07.740 A Boom-Bust Cycle 211 00:27:19.660 --> 00:27:23.540 Economist Donald Kemmerer 212 00:27:23.540 --> 00:27:28.260 specifically shows that in the case of New Jersey how this money, 213 00:27:28.260 --> 00:27:32.140 this issuing of fiat money caused a boom bust cycle and this is 214 00:27:32.140 --> 00:27:39.140 just the old-fashioned way of saying the business cycle 215 00:27:42.580 --> 00:27:45.220 except back then it was a little more obvious that you know one period was a 216 00:27:45.220 --> 00:27:46.300 booming 217 00:27:46.300 --> 00:27:51.460 part in the economy, the other was a bust in the economy where everything went sour 218 00:27:51.460 --> 00:27:55.940 and basically what you have here 219 00:27:55.940 --> 00:28:06.260 is a multi-step process where you print money 220 00:28:06.260 --> 00:28:15.660 which stimulates the economy artificially 221 00:28:15.660 --> 00:28:22.060 and that's followed by a crash. 222 00:28:22.060 --> 00:28:29.060 not a stock market crash but just a depression on the economy. 223 00:28:32.700 --> 00:28:36.060 Now as we get further along 224 00:28:36.060 --> 00:28:37.700 in the colonial period, 225 00:28:37.700 --> 00:28:41.860 Great Britain prohibits the New England colonies who had been the worst 226 00:28:41.860 --> 00:28:43.060 offenders 227 00:28:43.060 --> 00:28:47.260 from issuing any more paper notes in 1751 228 00:28:47.260 --> 00:28:50.440 and they also encourage those colonies to redeem 229 00:28:50.440 --> 00:28:58.800 themselves or redeem their paper notes for gold and silver. In 1764 Great Britain prohibits 230 00:28:58.800 --> 00:29:04.480 all of the colonies from issuing any more paper notes and again encourages redemption. 231 00:29:04.480 --> 00:29:13.240 I have an interesting word there, redemption. Most of the time we hear that word, it's 232 00:29:13.240 --> 00:29:20.080 in some religious context. You get redemption or forgiveness or you do something to redeem 233 00:29:20.080 --> 00:29:44.080 In this case it's a banking context. The banks have issued the notes and they have to redeem them and the bad part is really the issuing of the paper and the redeeming or the good part is taking the paper in and giving out gold and silver coins. 234 00:29:44.080 --> 00:29:53.080 With redemption, we see the economy returning to normalcy and prosperity. 235 00:29:53.080 --> 00:30:04.080 The inflationists of the time, those people who promoted the idea of inflation and sponsored inflationist programs, 236 00:30:04.080 --> 00:30:11.080 predicted that this redemption would lead to gloom and doom in the economy. 237 00:30:11.080 --> 00:30:22.080 But what they actually saw, from what we can tell, was that the economy returned to normalcy and prosperity after a period of adjustment. 238 00:30:22.080 --> 00:30:37.080 And certainly the adjustment was not painless for the colonists. It would be similar to the drug experience where if you take a lot of drugs and you stimulate your body 239 00:30:37.080 --> 00:30:45.800 and then you have this withdrawal period before you actually return to normal and 240 00:30:45.800 --> 00:30:59.280 that withdrawal period can be very painful on this return to normal see I 241 00:30:59.280 --> 00:31:12.120 I want to quote to you from Rothbard's history on page 55 from one student of colonial Massachusetts 242 00:31:12.120 --> 00:31:19.720 who pointed out, the return to specie occasioned remarkably little dislocation, recession or 243 00:31:19.720 --> 00:31:25.840 price deflation. Indeed wheat prices fell by less in Boston than in Philadelphia which 244 00:31:25.840 --> 00:31:31.840 which saw no such return to species in the early 1750s. 245 00:31:31.840 --> 00:31:37.840 Foreign exchange rates after the resumption of species were highly stable and quote, 246 00:31:37.840 --> 00:31:45.840 the restored species system operated after 1750 with remarkable stability during the Seven Years War 247 00:31:45.840 --> 00:31:52.840 and during the dislocation of international payments in the last years before the revolution. 248 00:31:52.840 --> 00:32:01.840 So there was no, whether the economy was really falling apart or anything like that. 249 00:32:01.840 --> 00:32:19.840 The upshot here, and it's important to note that there were all these complaints about the scarcity of money. 250 00:32:19.840 --> 00:32:34.840 And with these inventions, these artificial inventions of manipulating the peso and the fiat monetary system, those types of attempts didn't really help at all. 251 00:32:34.840 --> 00:32:42.840 As a matter of fact they ended up hurting the economy and driving out all the species from circulation in the first place. 252 00:32:42.840 --> 00:32:59.840 So the real shortage of species money was actually caused by the attempt to introduce paper fiat money, unbacked really, or not really backed by gold and silver. 253 00:32:59.840 --> 00:33:09.840 And just in case you hadn't seen this, fiat money means money by law. 254 00:33:09.840 --> 00:33:28.840 Money by Government, and one of the key aspects of trying to back that paper money by law are legal tender laws, which add the element of force behind it. 255 00:33:39.840 --> 00:34:00.840 Okay? And some of these legal tender laws would actually, if you didn't accept the paper money for the debts that were owed to you, you could be fined or imprisoned as a result. So there was some real backing here. 256 00:34:00.840 --> 00:34:10.840 Now, in modern context, we've gotten so far away from gold and everybody is more or less used to accepting paper money. 257 00:34:10.840 --> 00:34:26.840 We've adapted to many of the worst aspects of paper money that the idea of not accepting Federal Reserve notes or the dollars that we have doesn't really occur to us. 258 00:34:30.840 --> 00:34:54.080 We have a little primer here on colonial banking. 259 00:34:54.080 --> 00:35:02.600 Banking. If we drive around Auburn, the city of Auburn, you're going to see a bank almost 260 00:35:02.600 --> 00:35:08.880 on any corner, any intersection, I should say, and in every shopping mall, including 261 00:35:08.880 --> 00:35:18.340 all the Walmarts and grocery stores. But banking was a relatively new and limited function back 262 00:35:18.340 --> 00:35:28.340 Back in Colonial America. 263 00:35:28.340 --> 00:35:38.340 Anybody heard of the Knights Templar? 264 00:35:38.340 --> 00:35:50.580 Skip that then. No, I'm just kidding. Skip that. If you read the Da Vinci Code or saw 265 00:35:50.580 --> 00:35:58.460 that on television, the Knights Templar play kind of a role in all that. They were a group 266 00:35:58.460 --> 00:36:17.460 A group of, in the middle ages, a group of military based and knighthood based denomination 267 00:36:17.460 --> 00:36:21.660 of the Catholic Church. 268 00:36:21.660 --> 00:36:32.020 They were the protectors of the Holy Land and for people who were visiting the Holy Land, 269 00:36:32.020 --> 00:36:37.020 the area now occupied by Israel. 270 00:36:37.020 --> 00:36:41.740 People going from Europe to the Holy Land, they were assigned to protect the Holy Land 271 00:36:41.740 --> 00:36:51.220 and all the shrines there as well as people who were visiting the Holy Land in transit. 272 00:36:51.220 --> 00:36:54.980 And it was not only one of the most powerful military organizations, but it was also one 273 00:36:54.980 --> 00:37:03.420 of the most powerful economic organizations in the world for several hundred years. 274 00:37:03.420 --> 00:37:11.140 And one of the aspects that they developed was banking, where they had their own money 275 00:37:11.140 --> 00:37:13.760 and they held deposits for other people. 276 00:37:13.760 --> 00:37:18.580 They lent money to the popes and kings and things of that nature. 277 00:37:18.580 --> 00:37:24.140 And they actually invented some financial services. 278 00:37:24.140 --> 00:37:31.060 It's kind of interesting in that people going from Europe to the Holy Land, they have to 279 00:37:31.060 --> 00:37:35.100 carry a lot of money with you because you can't carry all your provisions. 280 00:37:35.100 --> 00:37:40.700 And everybody knows that and so all of the routes between Europe and the Holy Land would 281 00:37:40.700 --> 00:37:47.440 be infested with thieves and robbers. 282 00:37:47.440 --> 00:37:55.240 And so the Knights Templar got sick and tired of ushering all of these essentially religious 283 00:37:55.240 --> 00:38:01.220 tourists back and forth from the Holy Land, you know, after a couple hundred years that 284 00:38:01.220 --> 00:38:08.200 gets old. So they came up with this financial intervention, financial innovation, similar 285 00:38:08.200 --> 00:38:15.880 to a credit card, whereby they would give, they would take the tourist money in Europe 286 00:38:15.880 --> 00:38:45.880 and give them this encrypted piece of paper, and the tourists would then take the piece of paper, not really knowing what it said, but it gave the tourists the ability to go to any night along the way and buy all of the provisions that they needed, stay overnight, eat in the restaurant, all this kind of thing, food for your 287 00:38:45.880 --> 00:38:53.880 and then the knight would re-encrypt the piece of paper, give it back to the tourist and they're on their way. 288 00:38:53.880 --> 00:39:00.880 The thieves couldn't take the piece of paper because the encryption included the identification of the person. 289 00:39:00.880 --> 00:39:09.880 So if a thief took one of these pieces of paper from one of the knight's tourists and they showed up at the knight's inn 290 00:39:09.880 --> 00:39:14.880 in order to buy some goods and services with this piece of paper, the knight would cut the guy's head off. 291 00:39:14.880 --> 00:39:35.160 So this is like an early American Express card. 292 00:39:35.160 --> 00:39:43.460 The bankers of Venice, the bankers of Italy really, become the first merchant bankers who 293 00:39:43.460 --> 00:39:47.220 who lend money for purposes of international trade. 294 00:39:47.220 --> 00:39:52.100 They say they're usually lending their own money 295 00:39:52.100 --> 00:39:59.100 to facilitate international trade. 296 00:40:01.220 --> 00:40:03.540 In England, 297 00:40:03.540 --> 00:40:05.280 we see 298 00:40:05.280 --> 00:40:07.160 the development of 299 00:40:07.160 --> 00:40:16.800 really the first multiple deposit type banking and what happened was that Charles I, the 300 00:40:16.800 --> 00:40:23.120 King of England, this is really not too important to the overall story but it tells us where 301 00:40:23.120 --> 00:40:30.480 the Genesis comes from, Charles I, King of England, confiscated all the gold that his 302 00:40:30.480 --> 00:40:36.040 These subjects had deposited at his mint. 303 00:40:36.040 --> 00:40:40.200 So all the wealthy merchants would go to the king and say, can you hold this for me, king, 304 00:40:40.200 --> 00:40:42.040 and I'll be loyal to you. 305 00:40:42.040 --> 00:40:46.080 The king would say, sure, we've got plenty of room, and we've got soldiers here to guard 306 00:40:46.080 --> 00:40:47.080 it. 307 00:40:47.080 --> 00:41:01.080 Well, in 1638, Charles confiscated all of the gold as a loan just before the Civil War. 308 00:41:01.080 --> 00:41:07.880 And when I say Civil War, I mean the English Civil War. 309 00:41:07.880 --> 00:41:14.440 Now the merchants weren't happy with that, so they began to deposit their gold with the 310 00:41:14.440 --> 00:41:26.080 and the gold smith. So individuals begin depositing their gold with a gold smith. And gold was 311 00:41:26.080 --> 00:41:32.120 after all not just a money, it was a commodity, it was used for a lot of different things 312 00:41:32.120 --> 00:41:35.120 goldsmiths including jewelry and religious ornaments. 313 00:41:45.120 --> 00:41:48.120 It wasn't too long after that that goldsmiths 314 00:41:51.120 --> 00:41:58.120 got the idea that, you know, people are not coming in for their gold on a regular basis. 315 00:41:58.120 --> 00:42:02.340 and people are actually starting to trade their warehouse receipts 316 00:42:02.340 --> 00:42:07.880 amongst each other. So Jimmy comes in with a hundred ounces of gold, leaves it here, 317 00:42:07.880 --> 00:42:09.400 I give him a piece of paper saying 318 00:42:09.400 --> 00:42:12.680 Jimmy has a hundred ounces of gold with me 319 00:42:12.680 --> 00:42:15.800 and then Jimmy trades 320 00:42:15.800 --> 00:42:18.960 his warehouse receipt with Fred 321 00:42:18.960 --> 00:42:22.640 for two horses and a mule. Well actually not a mule, they wouldn't 322 00:42:22.640 --> 00:42:26.040 wouldn't have those. And so the goldsmiths 323 00:42:26.040 --> 00:42:32.440 start getting the bright idea that hey people are accepting these pieces of 324 00:42:32.440 --> 00:42:38.240 paper I'm going to start I'm going to write up one marks hundred ounce of gold 325 00:42:38.240 --> 00:42:45.120 and go buy some beer with it. So Goldsmiths picked up the practice of 326 00:42:45.120 --> 00:42:58.120 fractional reserve banking, where the gold in the goldsmith's shop represented 327 00:42:58.120 --> 00:43:06.160 only a small fraction of all of the deposit receipts that were out there. 328 00:43:06.160 --> 00:43:27.280 Okay, now as we turn our attention back to New England, we have the Massachusetts Land 329 00:43:27.280 --> 00:43:41.000 Bank of 1740. Again, as I mentioned, those notes were irredeemable. They depreciated. 330 00:43:41.000 --> 00:43:50.240 People didn't like them. People didn't accept them. And they were ultimately outlawed. 331 00:43:50.240 --> 00:43:54.940 And now for the general question. And this is something that you could use for a term 332 00:43:54.940 --> 00:44:00.940 paper to look at who promoted this inflation during colonial America and 333 00:44:00.940 --> 00:44:06.620 in Rothbard's discussion he gives you a lot of footnotes for some older 334 00:44:06.620 --> 00:44:13.780 references and one idea for paper would just be to take that as a launching pad 335 00:44:13.780 --> 00:44:20.660 just explain what Rothbard says explain what the you know in detail what all of 336 00:44:20.660 --> 00:44:38.660 So who's behind the inflation? Well, we've already looked at who's helped and who's hurt by inflation and that tells you most of the story. 337 00:44:38.660 --> 00:44:49.660 Early historians thought it was poor agrarian farmers, poor people who were debtors. 338 00:44:49.660 --> 00:44:55.300 but newer historians have found that it was actually sponsored more by wealthy 339 00:44:55.300 --> 00:44:56.660 merchants 340 00:44:56.660 --> 00:45:00.940 and land speculators 341 00:45:00.940 --> 00:45:02.380 people 342 00:45:02.380 --> 00:45:05.580 not on the low end of the totem pole 343 00:45:05.580 --> 00:45:08.300 the poor agrarian farmers 344 00:45:08.300 --> 00:45:12.580 but on the top end of the totem pole the wealthy merchants 345 00:45:12.580 --> 00:45:13.540 and 346 00:45:13.540 --> 00:45:17.480 the large land speculators 347 00:45:17.480 --> 00:45:23.740 Rothbard intimates that it's really a scheme of both the rich and the poor 348 00:45:23.740 --> 00:45:26.360 against the middle class 349 00:45:26.360 --> 00:45:28.120 via the use 350 00:45:28.120 --> 00:45:30.040 of government power 351 00:45:30.040 --> 00:45:30.760 and fiat money.