History of Money in the United States [HOMIUS] - 1.1
In this installment of the book club we finally get to discuss Rothbard's book
In this case the author does not need introduction. If you do not know who Murray Rothbard was then UTFG. For our purposes let's just say that he was the arch-enemy of almost any government intervention into the economy (or almost any other human activity, for that matter) and by extension one of the staunchest proponents of hard money.
HOMIUS is a historical review, not an in-depth study. A book covering approximately 200 years of history of money in the US in depth would span multiple volumes. Rothbard does not go deep, but he leaves ample references and citations for those interested in going down the rabbit hole.
I will quote directly the passages I found especially interesting, including my takes here and there. The emphasis is always mine, unless stated otherwise.
I wanted this this first installment to cover the text up to The Jacksonian Movement and the Bank War section. However, it has been taking me so long that I will go only until Government Paper Money section here. You are more than welcome to discuss anything else pertaining to the book in the comments, though.
17th-18th century Britain was on a bimetallic silver/gold standard. Unfortunately, by establishing bimetallism, Britain became perpetually subject to the evil known as Gresham’s Law.
On Gresham’s Law see my previous post:
In seventeenth- and eighteenth-century Britain, the government maintained a mint ratio between gold and silver that consistently overvalued gold and undervalued silver in relation to world market prices, with the resultant disappearance and outflow of full-bodied silver coins, and an influx of gold, and the maintenance in circulation of only eroded and “lightweight” silver coins. Attempts to rectify the fixed bimetallic ratios were always too little and too late.
In the sparsely settled American colonies, money, as it always does, arose in the market as a useful and scarce commodity and began to serve as a general medium of exchange. Thus, beaver fur and wampum were used as money in the north for exchanges with the Indians, and fish and corn also served as money. Rice was used as money in South Carolina, and the most widespread use of commodity money was tobacco, which served as money in Virginia. The pound-of-tobacco was the currency unit in Virginia, with warehouse receipts in tobacco circulating as money backed 100 percent by the tobacco in the warehouse.
While commodity money continued to serve satisfactorily in rural areas, as the colonial economy grew, Americans imported gold and silver coins to serve as monetary media in urban centers and in foreign trade. English coins were imported, but so too were gold and silver coins from other European countries.
It is important to realize that gold and silver are international commodities, and that therefore, when not prohibited by government decree, foreign coins are perfectly capable of serving as standard moneys. There is no need to have a national government monopolize the coinage, and indeed foreign gold and silver coins constituted much of the coinage in the United States until Congress outlawed the use of foreign coins in 1857. Thus, if a free market is allowed to prevail in a country, foreign coins will circulate naturally. Silver and gold coins will tend to be valued in proportion to their respective weights, and the ratio between silver and gold will be set by the market in accordance with their relative supply and demand.
By far the leading specie coin circulating in America was the Spanish silver dollar, defined as consisting of 387 grains of pure silver ... the Spanish dollar, from the sixteenth to the nineteenth century, was relatively the most stable and least debased coin in the Western world.
From a footnote:
The name “dollar” came from “thaler,” the name given to the coin of similar weight
Early example of the American colonies trying to inflate their currency and starting a monetary war:
Since the Spanish silver dollar consisted of 387 grains, and the English shilling consisted of 86 grains of silver, this meant the natural, free-market ratio between the two coins would be 4 shillings 6 pence per dollar.
In their own mercantilism, the colonial governments early tried to hoard their own specie by debasing their shilling standards in terms of Spanish dollars. Whereas their natural weights dictated a ratio of 4 shillings 6 pence to the dollar, Massachusetts, in 1642, began a general colonial process of competitive debasement of shillings. Massachusetts arbitrarily decreed that the Spanish dollar be valued at 5 shillings; the idea was to attract an inflow of Spanish silver dollars into that colony, and to subsidize Massachusetts exports by making their prices cheaper in terms of dollars. Soon, Connecticut and other colonies followed suit, each persistently upping the ante of debasement. The result was to increase the supply of nominal units of account by debasing the shilling, inflating domestic prices and thereby bringing the temporary export stimulus to a rapid end. Finally, the English government brought a halt to this futile and inflationary practice in 1707.
Let's try to unpack that. Mercantilism is a political and economic system that encourages exports (and the accompanying tariffs and other trade restrictions), accumulation of bullion by the state, strong navy and military to protect own merchants, maximum utilization of land and natural resources, and the nation's population growth. It was fashionable in advanced European (and some other) countries between the 16th and 19th centuries.
Mercantilism was criticized by Adam Smith (among others) and is thought by mainstream economists to be thoroughly discredited. It's hard to find a steel-manned argument for it, but it played not a small role in turning many Western European states into economic powerhouses. If one is to view the state or a nation as a conceptual whole extended in time (whereas the nation a 100 years from now is viewed as the same nation, although none of the people comprising it will be alive) then implementing policies strengthening your military and industry at the expense of general welfare now to achieve economic advantages later might make sense. Note, for example, that the free trade theories based on comparative advantage did not get a hold in Britain until after it had already become an economic behemoth.
With respect to Gresham's law in the scenario above the shilling was "good" (undervalued) money, while the Spanish dollar was "bad" (overvalued) money. Bad money drives out good money - people start hoarding and ultimately exporting shillings, while transacting in and importing Spanish dollars. That what Rothbard means by "the idea was to attract an inflow of Spanish silver dollars".
How would it subsidize exports, though? I have been thinking about this for a while and could not quite figure it out (which was one of the main reasons for a long break after the previous post.) I believe I finally got it. Please let me know if you disagree with me or have a more lucid explanation.
Imagine an importer/exporter merchant who buys widgets in MA to sell in CT and sells gadgets in MA that he buys in CT. After the MA government has fixed the exchange rate, widget producers in MA are willing to accept lower prices when payed in Spanish dollars and demand higher prices when payed in shillings [higher/lower here is relative to the natural exchange rate. And the reason is because they'd rather have overvalued than undervalued money, see above.]
Our merchant is happy to pay the lower price in Spanish dollars. Similarly, MA buyers of gadgets are willing to pay higher prices in shillings than in Spanish dollars. Our merchant will increase the price he quotes in Spanish dollars for gadgets as well, because for him the two currencies are (almost) equivalent since he can readily convert them in CT. Back in CT he passes the lower prices for widgets to the CT buyers. Not from the goodness of his heart, but because it allows him to undercut the competition and/or speed up the turnaround without sacrificing his margin. He then converts his shillings into Spanish dollars in CT at the more advantageous natural rate to be able to buy widgets with them at a lower price back in MA.
Thus we see that in terms of Spanish dollars the prices of MA exports (widgets) decrease, while the prices of imports (gadgets) increase. Which means an increase in the balance of trade.
> the Spanish dollar, from the sixteenth to the nineteenth century, was relatively the most stable and least debased coin in the Western world.
And yet during that period Spain went from being The World Power to a decidedly second rate player. Also the Spanish government had to declare bankruptcy several times.