Ladies and gentlemen, very happy to be here in New York City where I lived for about five years, 1994 to 1999.
I'm also happy to be at a Mises Circle event. I love the idea.
I think it's an excellent idea to take the show on the road, so to speak.
And unfortunately, I was not able to attend one earlier this year.
I was invited to take part, but it was taking place right at the time that my wife was expecting.
and so I thought not it would not be a good time to be away from her so I
didn't attend that one it turned out that she ended up delivering the baby
almost exactly at the time of the event so I would have had to cancel wouldn't
have worked anyway so I'm very glad to be here and and you know Burt mentioned
that I've been sort of prolific in terms of having children and just the last
One of the times I saw Hans Hoppe last year, he was saying to me,
oh, I see that you have a new book.
And this was after we had just had our second child.
And I said, well, not only do I have a new book, but even happier, we have a new baby.
And he said, oh, isn't it? Congratulations.
And I said, so it sort of seems as if we're doing one book per baby or one baby per book or something.
And he said, well, I don't think you can keep up that pace.
And I never tracked him down to ask him if he was talking about books or babies.
Well, we've denounced a lot of living people today, so now I'm going to go after the dead
by talking about the 18th century.
And Joe mentioned that it was colonial Massachusetts
that in the modern period in the West initiated the use of paper money
in order to pay for what we might politely describe as foraging expeditions against Quebec but actually government paper money not in the West originated in 9th century China where it was redeemable in gold eventually it was transformed into irredeemable fiat paper isn't that a surprise I mean who could have seen that coming right and then all the consequences that we've come to expect so I've sometimes asked myself what would be the most
I'm a historian. I think maybe an economist has a more depressing job in that he has to deal with the same fallacies over and over and over again.
I mean, you turn 21, you've got your freshly minted economics degree, and you're ready to go out there and explain to people why rent control doesn't work, and this will do it.
and this will do it and then you find it you know there you are retiring you know
you're in your 60s and you're still saying the same darn thing over and over
just to different people what is going on here and then you find out that in
ninth century China already the seeds are being sown I mean where do you even
begin really well the history of the the colonial experience with paper money is
is not a particularly edifying one and, in fact, this history has really been written very well by Murray Rothbard, of course.
In fact, almost anything has been written very well by Murray Rothbard, but in particular, in his books on his four-volume series
Conceived in Liberty on the Colonial Period, he deals with the monetary history very nicely.
And also in the book that Joe edited, wrote an introduction for on the history of money and banking in the United States that came out several years ago,
He also deals with the subject in the course of an overall history
of pretty much a history of the gold standard,
really a history of money in the US from a pro-gold standard perspective.
He deals with this very well.
But other than Murray and a few other of our people in our day,
really the best work that's been written
in the history of money and banking in the US was written a long time ago.
In the 1830s, in the Jacksonian period,
There is tremendous work that you can still profit from today by economists or political economists and historians.
And even all the way up to the turn of the century, the 19th and into the 20th,
you see some very, very good work being done by mainstream people in the first years of the 20th century.
And then it really begins to deteriorate because oftentimes history is tied up and bound so tightly to current events
that when people begin to believe in the idea of a government-managed currency in the popular media,
that's the way the historians interpret the past through that lens.
And so the history became pretty rotten after that.
So that's why I've sort of come to the conclusion that in the area of the history of money and banking,
Really, the only good historian is a dead historian, unfortunately.
Now, certain historical cases of inflation have become sufficiently notorious
to become textbook examples of what happens when the government printing press spins out of control.
And, of course, what's already been mentioned today, the textbook example from the 20th century
involves the famous German hyperinflation of 1923.
The 18th century affords us the cases of the American and French revolutions.
and the monetary debasement for which those countries' governments were responsible.
In the American case, it's well known that the continental currency lost so much of its value
that it became common to describe something as worthless by saying that it was not worth a continental.
Now, it's very common to hear it said that, yes, inflation is a bad thing,
but that in emergencies, it may have to be used as a last resort.
Governments always is a very, very last resort.
They just have to resort to inflation.
Just the way war is always a last resort after they've tried painstakingly
every possible alternative, they just have to resort to it.
Well, in The Theory of Money and Credit,
Mises addressed the emergency argument for inflation,
which he summed up as follows, that some people he said believe
that there are emergencies which peremptorily require
A nation, they say, can be menaced by evils which are incomparably more disastrous than the effects of inflation.
If it is possible to avoid the total annihilation of a nation's freedom and culture by a temporary abandonment of sound money,
no reasonable objection can be raised against such a procedure.
It would simply mean preferring a smaller evil to a greater one.
Well, Mises replied to this argument by reminding people of the fairly, what should be the fairly obvious point,
that printing up additional green paper tickets does not increase the available resources in society,
which of course remain at the same level as before.
And again, Mises, in order to appraise correctly the weight of this emergency argument in favor of inflation,
there is need to realize that inflation does not add anything to a nation's power of resistance,
or to its spiritual and moral strength.
Whether there is inflation or not,
the material equipment required by the armed forces
must be provided out of the available means
by restricting consumption for non-vital purposes,
by intensifying production in order to increase output
and by consuming a part of the capital previously accumulated.
All these things can be done if the majority of citizens
are firmly resolved to offer resistance
Americans are firmly resolved to offer resistance to the best of their abilities and are prepared
to make such sacrifices for the sake of preserving their independence and culture.
The great emergency can be dealt with without recourse to inflation.
Well how was the American war for independence paid for?
Well in a variety of ways.
For example, the French government provided the American government with loans and subsidies
and the Congress received modest sums as a result of its requisitions upon the states.
But it was paper money that was really at the center of revolutionary war finance.
Now when I was very young, my mother found it sort of endearing
that whenever the family was saying that we needed money for this or that purpose,
I would simply reply that they should go to the bank and get some.
Well, the thing is though that I was about four when I said that.
So, yet another depressing aspect of being an economist or, worst of all, an economic historian is to discover that something like that view is not far removed from the actual views of a great many people of influence over the years.
So, for example, a flabbergasted Pelletier-Webster in his history of continental money tells us that when the subject of increased taxation for the support of the war was under consideration by the Continental Congress,
One member arose and indignantly asked if he was expected to help tax people
when they could go to the printing office and get money by the cartload.
Well, there's the four-year-old Tom Woods argument right there on display.
So what exactly happened? Well, already in 1775,
Congress in effect turned on the printing press
and engaged in printing up what would be called bills of credit,
which really are just fiat paper money
that is receivable as payment for taxes.
So that's already been mentioned as an important factor
that gets the money accepted by people is the knowledge
that it will be received for payment of taxes.
Well, the Congress wasn't levying taxes at the time.
So the idea was that these bills of credit that you receive
will be payable for some taxes at some point in the future.
So the idea was that these bills of credit would be issued
and then the states individually would levy taxes for the purpose of collecting them
and then the Congress would at some point then collect them back from the states.
But that's not exactly how it happened.
The states never laid any of these taxes and in fact simply introduced
their own paper money,
one state at a time. So you've got the paper money being issued by the Congress at the
national level as it were
and then by the individual states and so all the bills stay in circulation and continue to accumulate
and more and more and more was printed and within about five years it was worth almost nothing.
Now how soon do we notice the depreciation of that currency?
This is a matter of dispute. Scott Trask has written on this that William Graham Sumner, who was a great,
I mean, a great figure intellectually for a great many reasons,
but in addition to being very sound on very important matters,
Sumner was also an excellent monetary historian.
And Sumner observed that the Massachusetts Provincial Congress,
June 28, 1775, declared that anyone who refused to accept these notes
or demanded a premium for them,
that if you're going to pay me in these notes,
you have to pay more nominally than you would in the precious medal,
Any such person was declared an enemy of the country.
He also noted that it's difficult to gauge the extent of the depreciation of this money
because from the beginning or from very early on, from late 1775,
even before the Declaration of Independence,
it was already becoming something dangerous even to say that the money is depreciating
In late 1775, the Congress resolved that if any person shall hereafter be so lost to all virtue and regard for his country as to refuse to accept this money, such person shall be deemed an enemy of his country.
Not surprisingly, people kept quiet about it.
Well, equally unsurprisingly, this paper money provoked all manner of economic chaos and dislocation.
According to John Witherspoon, the New Jersey clergyman who signed the Declaration of Independence,
for two or three years we constantly saw and were informed of creditors running away from their debtors.
and the debtors pursuing them in triumph, and here's my favorite part,
and paying them without mercy.
I just love that image.
The creditors saying, no, no, please, no.
In Rhode Island, sources tell us of creditors leaping from rear windows of their houses
or hiding themselves in their attics in order to avoid debtors,
Perhaps hoping for a better day someday when they would rather collect the debts.
As usual, the most vulnerable in society also felt the effects of this paper money inflation.
For example, an early 20th century historian tells us that
guardians of trust funds were able to acquit themselves of their obligations
by paying widows and orphans in paper that was worth only the smallest fraction of its nominal value.
Now, when you think about the 1923 German hyperinflation, you can actually recall, if you've seen any of the photographs,
examples of young children gluing the paper together and flying it as a kite, or people burning it to keep warm,
or using it for any reason like that.
And we have examples of this during the revolutionary period of American history as well.
as well. So one writer tells us that the annihilation, that is the annihilation of the value of the currency was so complete
that barber shops were papered in jest with the bills and the sailors on returning from their cruise
being paid off in bundles of this worthless money had suits of clothes made of it
and with characteristic light-heartedness turned their loss into a frolic by parading through the streets in decayed finery
and the refinery, which in its better days had passed for thousands of dollars.
Now some of you may know that Murray Rothbard had a series of what he called Rothbard's laws
that were not laws of a praxeological nature, but laws that he had derived through long and painful empirical observation.
And one of them was his famous law that everyone concentrates in the area in which he is the worst.
So that you have people who are perfectly sound on praxeology and this and that or whatever.
or whatever. They're unsound on money or something. So what do they concentrate their life's work
on? Money, naturally. Or another one is laws that nobody ever resigns. Now again, we know
this isn't apodictically true. We've all seen people resign, but most of the time people
don't resign. I think if Murray were alive today, I think he would take the Iraq War
fiasco as all the confirmation that his law needs. It's a complete fiasco. Nobody resigned.
Well, I think that another such law that we might add to the list would be that the state always blames actors other than itself for the unpleasant consequences of its own activities.
So in some situations, it even goes so far as to stigmatize people for not wanting to enter into transactions that would impoverish them,
as when, for instance, they are expected to accept payment for their goods and services in severely depreciated currency.
So, we have this testimony from an early 20th century historian.
Persons who refused to sell their lands, houses or merchandise for nearly worthless paper
were stigmatized as misers, traders, for-stallers and enemies of liberty.
But prices continued to rise as the inflation of the currency proceeded apace.
Stores were closed or pillaged and merchants were mobbed, fined or imprisoned.
George Washington condemned, quote, the monopolizers, four-stallers and engrossers, who he said should be hunted down as, quote, pests of society and hanged upon a gallows.
In May 1776, Virginia alleged that the depreciation was attributable to people's refusal to accept the notes or to the insistence on higher prices in terms of paper money than in cash.
and Coin, or by other devices, the following year the Virginia Assembly blamed the depreciation
on, quote, the pernicious artifices of the enemies of American liberty to impair the
credit of the said bills by raising the nominal value of coin. The Massachusetts General Court
spoke of, quote, the avaricious conduct of many persons by daily adding to the now exorbitant
price of every necessary and convenient article of life. The Connecticut government likewise
has blamed this phenomenon on, quote, monopolizers, the great pest of society.
I think we have another candidate for great pest of society.
It went on to note that, quote, some evil-minded persons, some, yeah, who's that?
The government?
Inimical to the liberties of the United States of America have endeavored to depreciate the bills of credit of this and the said United States.
and it noted that many of its citizens are so abandoned and lost
to all the feelings of humanity as to prey upon the bowels of their country.
According to the legislature of Pennsylvania, the prices of goods and merchandise
are greatly enhanced by the practices and combinations of evil and designing men.
Well, I have no doubt that that's true, but exactly the identity of those evil and designing men is what is in dispute.
As the Continental depreciated, the States came under pressure to make it legal, tender,
and thus force people to accept it in exchange for goods and services and in payment for debts.
The States complied with this request.
Rhode Island declared that anyone who would not accept the paper money would
incur the displeasure of the General Assembly
and ought to be held and esteemed as an enemy to its credit, reputation and happiness,
and totally destitute of that regard and obligation he is under to his country and the cause of liberty.
The good people of this colony and America ought to withdraw all communication from such person or persons.
Now, the law varied across the states, but in Virginia, for example,
it was understood that if you refused to accept the bills,
then any debt that you were owed is considered canceled and extinguished.
In North Carolina, if you so much as spoke disrespectfully of the paper,
you were treated as an enemy to your country.
Well, naturally, again, this is all predictable,
the depreciating continental also led to calls for economic controls
in order to contain the upward pressure
that the inflation was having on wages and prices.
Well, in December 1776, there was a conference of the New England states,
after which all of them began to adopt price control measures early the following year.
At least one or two had already started and then by 1777 they were all doing it.
Other states followed.
Even after the obvious failure of the New England price control regime should have been obvious to everyone.
Within a couple of years those experiments in price controls had been discontinued
partly at the behest of the very Congress that had at one time enthusiastically urged them upon the states.
The price controls had all the predictable effects, massive shortages, disruption of the division of labor and more government moralizing,
because it was bad people, you see, rather than stupid policy that was responsible for the economic chaos.
But John Witherspoon and at least several other commentators saw through this and he said,
Fixing the prices of commodities has been attempted by law in several states among us.
And it has increased the evil it was intended to remedy,
as the same practice has done since the beginning of the world.
Now, as a result of all these controls, we get testimonies like this.
Stores were closed or pillaged, and merchants were mobbed, fined or imprisoned.
But such action merely drove men out of business and tended to produce a real scarcity.
A June 1777 letter from Boston read,
We are all starving here. People will not bring in provision and we cannot procure the common necessaries of life.
Two years later, a letter from the same person read,
We are likely to be starved throughout Boston. Never such a scarcity of provisions.
Again, the great monetary commentator and scholar, Palletier-Webster, observed,
As experiment is the surest proof of the natural effects of all speculations of this kind,
it is strange, it is marvelous to me, that any person of common discernment
who has been acquainted with all the above-mentioned trials and effects
should entertain any idea of the expediency of trying any such methods again.
Trade, if left alone, will ever make its own way best,
and like an irresistible river, will ever run safest, do least mischief and do most good,
suffered to run without obstruction in its own natural channel.
On June 4th, 1778, the Continental Congress adopted a resolution calling for an end to price controls.
Whereas it hath been found by experience that limitations upon the prices of commodities
are not only ineffectual for the purposes proposed, but likewise productive of very evil consequences
Consequences to the Great Detriment of the Public Service and Grievous Oppression of Individuals
Resolve that it be recommended to the several states to repeal or suspend all laws or resolutions
within the said states, respectively limiting, regulating or restraining the price of any
article, manufacture or commodity.
Pause for a moment and consider what's just happened here.
Here we have an official government statement to the effect that its previous policy had
had been unwise, had produced only mischief and should therefore be repealed.
Now try to imagine a particular member of the executive branch of the United States today giving any such speech.
I made a mistake. I better do the opposite now. We better forget the whole thing. It just never happens.
So there is something sort of quaint about this. This is a bygone era when people were fallible and made mistakes.
Thankfully, we live in an era where apparently the last mistake maker must have died several years ago.
We don't have them anymore.
A couple of 20th century economists reviewing all this wreckage concluded this.
Public jawboning, private threats, ostracism, boycotts, fines,
all proved useless against the flood of paper money.
The price of common labor in Boston, which was fixed at three shillings a day in 1777,
had risen to 60 shillings by mid-1779.
In April 1779, George Washington complained that a wagonload of money will scarcely purchase a wagonload of provisions.
In 1779, when the Continental Congress again endorsed price controls, the request was for state laws limiting wage and price increases
quote, not to exceed twenty-fold the levels of 1774.
Not even that modest goal was attainable, however, and Congress allowed controls to expire when it met again in February 1780.
Meanwhile, all this time, the Continental Congress had repeatedly assured anyone who would listen
that the Continental currency would one day be redeemed at its face value
and that it was, quote, derogatory to the Congress's honor
that anyone would spread rumors to the contrary.
In March 1780, Congress announced a plan for redeeming the currency at one fortieth of its face value.
After 1780, the value of the remaining continentals plummeted still further.
By early the following year, it had reached a ratio of 100 to 1,
and in some areas even 1,000 to 1.
Now, during the war between the states or whatever,
we could have a whole conference on what you'd like to name it,
it's interesting to note that when both the governments of the Union and the Confederacy
were engaged in all kinds of monetary manipulations to fund,
Their war efforts. It's interesting that Scott Trask notes that when people at that time, in the 1860s,
reminded everybody that we've already done this, we did this during the Revolutionary War years,
and it was simply catastrophic. It hurt everybody. It created all kinds of dislocation and chaos.
If you raised that objection, the answer you got was that you're unpatriotic for raising it.
So history becomes unpatriotic.
William Graham Sumner wrote,
when the lessons of history were quoted,
they were answered by the flag and the eagle.
So our patriotism is no,
your facts are no match for our patriotism.
There was a Republican congressman who asked
why the government should have to lower itself
to the level of having to, quote,
go into the streets to borrow money.
Another said that he preferred to assert the power
Power and Dignity of the Government by the Issue of Its Own Notes
And finally we have the example of Thaddeus Stevens of Pennsylvania, the great radical
Republican who actually claimed that if you made the paper money legal tender, that would
prevent any depreciation.
So no lesson learned whatsoever.
In 1863, I came across an article in the New York Herald that I found in a collection that recounted this history.
So in the 1860s, again, people were interested in monetary issues, and the New York Herald had an article talking about the Revolutionary War experience.
And it read, on the return of peace, no attempt was made to cancel the original obligation by redeeming the bills,
For as the depreciation had been slowly progressing while the paper money was gradually circulating,
it was obviously impossible to measure the exact loss each holder had suffered.
To pay the last holder in full would only have aggravated the injustice
by taxing the nation again to give him more than his due
while his predecessors, whose loss was greater than his own, were left without any compensation, whatever.
It was strongly urged that the depreciation of the paper money ought to be considered as a tax
and the tax, inasmuch as the issue was made only to relieve the people from the necessity of paying tax.
Each person through whose hands the money had passed parted with it again at a small loss,
according to the quantity he held and the time for which he held it.
As the currency circulated among the whole people, the rich and the poor holding it,
and suffering from its depreciation in proportion to the respective amounts of their cash purchases,
nearly in just proportion to their ability and liability to pay tax,
The payment of the whole value born on the face of the bill to one who had received it,
perhaps at the rate of 100 for one, could have been fairly and heavily taxed by its depreciation.
Well, ultimately, what this is getting at is that what finally happened to the continental currency,
in effect, it simply went out of existence.
It was either destroyed, people just gave up on it.
The New York Herald reported that in some places its value fell to 1,000 for one,
and then it expired without a groan.
People kept some of it as souvenirs, but people had more or less given up on it.
So it really is true, that description just there,
that it was viewed as having been a tax really became true.
It really just was treated as just a tax and you don't get reimbursed for taxes.
You're always going to get compensated for what they suffered from the paper money.
Well, let me close by bringing to your attention something I read not long ago
in arguably the most prestigious historical journal in the English speaking world.
Now, I realize I probably shouldn't be surprised at much of what I read
I read in the professional journals, but I was really quite shocked looking through the American Historical Review
to come across a 1929 article on revolutionary war finance by Ralph Harlow.
Harlow was anxious to show that wartime inflation really was not that bad
because he said that, sure, people under an inflated currency,
since they see their savings sometimes dramatically reduced in value,
they do suffer, and he acknowledges that.
finds us that after all quote, what the public might lose through depreciation would be counterbalanced
by the gain to the government of means to finance the war. Well, all right, well you
don't say. The government is enriched to the extent that the public is looted. These
are the insights for which the American Historical Review eagerly opens its pages. But Harlow
goes on and says, to be sure depreciated paper would inflict irreparable damage on some individuals
But what of it? So, too, would the war.
That's pretty convoluted, isn't it?
And as for the ethical principle involved in partial or complete repudiation,
that, judged by the accepted standards of wartime morality, is a small matter.
Well, that's true, but all the worse for wartime morality, I would say.
In every department of wartime activity except financial,
we have long accepted the maxim that the war justifies the means.
The public becomes resigned to extraordinary practices, the suppression of private privilege, compulsory military service, the most abandoned distortion of facts, to stimulate and maintain the necessary war spirit, in general the purposeful cultivation of a deep and far-reaching spiritual and intellectual dishonesty.
For ages all this has been taken for granted as a part of the necessary trappings of war."
So, really, what's a little inflation? You're being lied to, conscripted, killed?
You're complaining about inflation?
Well, ladies and gentlemen, as long as people can be led to believe that running the printing press
and issuing fiduciary media can substitute for saving and capital accumulation
as a way to achieve prosperity, create wealth or, yes, prosecute a war,
government will continue to get away with this particularly insidious and underhanded form of expropriation.
The situation we face today, which is not my topic, I want to add though, is much worse because at least in the 18th century people by and large understood the process.
The government's printing up these bills, they're becoming worth less and less over time, they're depreciating.
We understand who the culprit is and what the cause and effect relationship is.
But today, the process of money creation is much more obscure to most people.
Today, I mean, if one in twenty people could seriously explain how the Fed works, I would
be surprised.
And, of course, that's just the way the Fed likes it, all the better to get away with
it.
In addition, there is always a moral hazard involved in government activity because government
can socialize the cost of everything it does.
So if it goes to war and it can simply... people who constitute the government don't
have to pay the cost of the war out of their own pockets, well, obviously, there'll be
George Bush had to pay the whole war out of his savings account, so there's a moral hazard there.
There's more likely to be war than there would otherwise be.
But the moral hazard is much worse in a case like this, in which the war is being financed not through the taxation that everybody can see,
at least people can see the taxation, but when they can invisibly tax using methods that, as I say, are obscure and unknown to most people.
In the 18th century, people learned from their experience.
There was tremendous interest in and support for hard money after the war.
Tremendous support for that.
Today, given the situation we have now, where the process of inflation is so obscured,
people don't even know there is a lesson to be learned.
And it is under these circumstances that government is able to get away with its greatest mischief.