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the law perverted

A state assemblyman from California, Chuck DeVore (R-Irvine) has stated that current congressman and twice presidential candidate, Ron Paul, should be ashamed of himself for saying, “Six hundred thousand Americans died in a senseless civil war… [President Abraham Lincoln] did this just to enhance and get rid of the original intent of the republic.”

Here is a link to DeVore’s comments:

http://grandoldpartisan.typepad.com/blog/2010/08/ron-paul-is-wro.html

In my comments here, I will try to show that Congressman Paul is essentially correct and DeVore is not only wrong but also that much of what he considers to be factual is in fact quite simply not so. I will try to follow DeVore’s comments but that will not be consistently possible. I think it’s important to note that DeVore has not listed a single reference to support his position. He appears to be simply restating the Lincoln myths that are taught year after to year to American children in government run schools.

Congressman Paul uses the term “civil war” in a conventional sense. We have been taught that this was America’s Civil War. But the term is a mistake. In a civil war, two (or more) factions are vying for control of the government. This was not the case in the 1860s. The Southern states were seeking to leave the existing government and to form their own new government. It was not a matter of controlling the union from Washington, DC but rather of a people to express their will by separating from an existing government. It is therefor more appropriate to call this the War for Independence of the Southern States or something similar.

To begin, DeVore says, “seven states illegally declared their ‘independence’ from the United States before Lincoln was sworn in as President.” I question his use of the word, “illegally.” Consider the Declaration of Independence (DOI). From England’s perspective, the 13 colonies were also illegally declaring their independence. The DOI has come to be understood as one of the defining documents of American history; in fact, it is admired world wide for the sentiments expressed. Who among us does not agree that governments are instituted by the individuals who make up a society and that when a government no longer meets the needs of a people (society), that people have the right to separate themselves and establish a new [form of] government.  Quoting from the DOI:

That whenever any form of government becomes destructive to these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness. Prudence, indeed, will dictate that governments long established should not be changed for light and transient causes; and accordingly all experience hath shown that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed.

Also with regard to the illegality of secession, consider Article 3, Section III of the Constitution. It says,

Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort. No Person shall be convicted of Treason unless on the Testimony of two Witnesses to the same overt Act, or on Confession in open Court.

Clearly, read in context, this refers to the several states. In the second phrase above, “them” specifically means one or more of the states. If treason was committed, it was committed by the federal government when it waged war against those states which had decided that the union, under the Constitution, did not serve to meet the objectives of the citizens of those states.

That Lincoln wished to preserve the union as DeVore claims, there is hardly any doubt. In fact, it is likely that this was Lincoln’s over-riding concern. The slavery issue was one of several other ancillary issues. In a response to an editorial by Horace Greeley of the New York Tribune in 1862, Lincoln said:

I would save the Union. I would save it the shortest way under the Constitution. The sooner the national authority can be restored; the nearer the Union will be “the Union as it was.” If there be those who would not save the Union, unless they could at the same time save slavery, I do not agree with them. If there be those who would not save the Union unless they could at the same time destroy slavery, I do not agree with them. My paramount object in this struggle is to save the Union, and is not either to save or to destroy slavery. If I could save the Union without freeing any slave I would do it, and if I could save it by freeing all the slaves I would do it; and if I could save it by freeing some and leaving others alone I would also do that. What I do about slavery, and the colored race, I do because I believe it helps to save the Union; and what I forbear, I forbear because I do not believe it would help to save the Union. I shall do less whenever I shall believe what I am doing hurts the cause, and I shall do more whenever I shall believe doing more will help the cause. I shall try to correct errors when shown to be errors; and I shall adopt new views so fast as they shall appear to be true views.

Clearly, Lincoln cared not a wit about slavery for the sake of liberty. In fact, he did not seek real equality for slaves but rather it was his desire to simply send the slaves to another location where they could be free but separate from white America. His desire for the new territories to be free states was to preserve jobs in these areas for whites. Thomas DiLorenzo in his book, Lincoln Unmasked: What You’re Not Supposed to Know About Dishonest Abe, points out that Lincoln was actually the instigator of the Corwin Amendment that would have preserved slavery in all the Southern states in which it existed.

http://mises.org/misesreview_detail.aspx?control=312

Slavery was actually a third level issue among the states and conditions which caused friction. The first issue was that of state’s rights itself. The Southern states were in favor of the sovereign state concept. The original acceptance of the Constitution was by the states. In 1787/88 the states agreed to accept a federated form of government in which the states were sovereign and the central government had strictly limited functions which were specifically delineated in the Constitution. Proof that this is so is the Confederate Constitution which is essentially the same document as the original Constitution with certain changes to clarify the sovereignty of the individual states. You can read this document for yourself at this link:

http://avalon.law.yale.edu/19th_century/csa_csa.asp

DeVore states:

President Buchanan had attempted to resupply Fort Sumter by sea, but the Confederates fired upon the ship, the , and drove it away. Does this mean that Buchanan started the war? Or did the rebels in South Carolina who fired on the ship start it?

But the Battle for Ft. Sumter occurred in April 1861. Lincoln was inaugurated on March 4^th. DeVore has the dates wrong and therefore his facts are wrong.  Lincoln was president when the incident at Ft Sumter occurred and had been president for over a month.  But even more damning is the chicanery to which Lincoln resorted in order to encourage the South Carolina militia to fire the first shot. Major Anderson, the commanding union officer at Ft. Sumter had an effective working relationship with the locals. In fact, the personnel in the fort were short of many supplies but the locals were supplying him with the essentials needed for his men. The resupply was not necessary and in fact Anderson had provided this information to one or more intermediaries sent by union forces (Lincoln).  In his book mentioned previously, DiLorenzo outlines and documents the plans of Lincoln and his cohorts to fool the Confederate forces about the resupply attempt.

A most contentious issue for the Southern states was that of taxes, specifically tariffs on imported goods. The tariff was designed to encourage all of the states to purchase goods produced in the North. Because imported English goods could be purchased at lower prices, the Congress, dominated by Northern states imposed tariffs. This had been an issue among the states going back as far as Jefferson’s administration. Quoting from DiLorenzo’s book:

In his first inaugural address Lincoln shockingly threw down the gauntlet over the tariff issue, literally threatening the invasion of any state that failed to collect the newly doubled tariff … ‘[T]here needs to be no bloodshed or violence, and there shall be none unless it is forced upon the national authority.’ What was he [Lincoln] talking about? What might ignite bloodshed and violence? Failure to collect the tariff, that’s what … he further stated that it was his duty ‘to collect the duties and imposts; but beyond what may be necessary for these objects, there will be no invasion…’ In other words, Pay Up or Die.

What DeVore did not mention is that Lincoln was a self admitted Old Whig in the style of Henry Clay. He believed the central government was sovereign over the individual states, that the government had every right to use its power and influence to impose taxes for the purpose of building the roads, railroads, and all the other structures that were, in the country’s beginnings, private and based on private capital investment. Throughout his active political life and especially in his presidency, Lincoln advanced the causes of transportation, especially riverboats and railroads. His meddling in these affairs advanced the causes of his friends and associates while hindering the private investments of those not disposed to support him.  But this was the least of his aggressive actions.  Throughout the war he put in jail thousands of individuals who opposed his policies including many newspaper editors and even a congressman, he suspended Habeas corpus, he had squads of men deployed to destroy newspapers which dared to print articles opposing the war and he was one of the very first national leaders to institute total war–that is war on women, children and old men who lived in the South.

In a May 2008 article, Phil Duffy said:

Lincoln supporters will rush to claim that his suspension of habeas corpus was consistent with the Constitution because the South was “in rebellion.” They miss the point. Suspension of habeas corpus is NEVER within the authority of the executive branch of the federal government. Article I was intended to describe the powers and responsibilities of the legislative branch. Article II, on the other hand, describes powers and responsibilities of the executive branch. This is no minor technicality, but the essence of the Constitution which is based upon five themes (see Introduction by Garry Wills to The Federalist Papers) – (1) Federalism, (2) Checks and Balances, (3) Separated Powers, (4) Pluralism, and (5) Representation.

In short, Lincoln was no better than the political animals that dominate the Washington DC scene today and in many ways, he was much worse.  His fellow Republicans were fearful that Lincoln, as the very first president of the Republican party, would leave such a terrible record that no other Republican would get elected.  Lincoln’s death created an opportunity to change the reality of a widely hated and even despised individual.  That he is placed on a pedestal in one of the huge monuments that dominates the landscape in DC is a testimony to the PR job that his surviving political associates, especially Seward, created to make Lincoln appear as a martyr and saint.

I have been having an e-mail exchange with an individual whom I met through a closed site forum.  I think it has been an interesting exchange and I thought others might be interested.  Of course, you must assume that I am biased to my position but I will try to be objective in presenting my interpretation of the other person’s viewpoint.  And, I intend to keep even my limited knowledge of who this individual is beyond all ability of anyone to determine his identity.

The crux of of the exchange is that this person feels that he had been mislead, apparently in his youth, about the exaggerated [my description of how to interpret his comments] good qualities of Thomas Jefferson.  He feels that anyone who could pen the words of the Declaration of Independence should be held to a higher standard than others–and by others, I assume he meant other founders however one might describe who the other founders were.  As an adult and with the Internet, he has been exposed to material that suggests that Jefferson might not be the great man that many (including me) regard him to be.

He sent me two articles by Scott Trask that were posted on mises.org.  I had not seen these previously.  The first is titled “Was Thomas Jefferson a Great President?” and the second is “Jefferson as President: His Judicial Blunders.”  One should read these Trask articles for my comments to make the most sense.  [Since I first wrote this, we have had another exchange in which he said these two articles were not so much to prove his point but rather to expose more information in the interest of seeking the truth of the situation.]

http://blog.mises.org/13236/was-thomas-jefferson-a-great-president/

http://blog.mises.org/13333/jefferson-as-president-his-judicial-blunders/

My response follows with some minor editing.

I read the two references written by Scott Trask which you provided.  No I had not seen them previously.  Trask presents information of which I was both not aware and especially in the second one,  presents Jefferson in a negative position.  I have nothing similar upon which to hang my hat.  If Trask is completely accurate, it is difficult to understand why Jefferson did not take a more proactive view of his presidency to restore his republican views on the still new government.  No one can really know, I suppose, why he did not take the actions Trask says were within his power.  But I still take an alternative position in two ways: The words of the Declaration and the eventual convention in Philly resulting in a centralized government.

First, it is true that Jefferson actually penned most of the words in the Declaration but “The Committee of Five” as it became known was appointed by the Continental Congress to draft the declaration.  The 5 members were Jefferson, John Adams, Roger Sherman, Robert Livingston and the inimitable Franklin.  In later years both Jefferson and Adams provided written descriptions about how Jefferson came to be the author.  The two accounts have virtually no agreement whatsoever.

Resolved , that these United colonies are, and of a right ought to be, free and independent states, that they are absolved from all allegiance to the British Crown, and that all political connection between them and the state of Great Britain is, and ought to be, totally dissolved.

The words above were spoken by Richard Henry Lee on Friday, June 7, 1776 at the Statehouse in Philadelphia. They sound somewhat similar to words that are in the Declaration of Independence. However it happened that Jefferson was chosen to draft the declaration is perhaps immaterial. In later years he explained that it was not his objective to be original only “to place before mankind the common sense of the subject.”  Again in his words, Jefferson said, “Neither aiming at originality of principle or sentiment, nor yet copied from any particular and previous writing, it was intended to be an expression of the American mind, and to give to that expression the proper tone and spirit called for by the occasion.”

According to historian David McCullough [in his 2001 book titled, “John Adams”], Jefferson drew from his own previous writings, and from those of others such as George Mason who wrote in a declaration of rights for Virginia, “all men are born equally free and independent, and have certain inherent natural rights…among which are the enjoyment of life and liberty.”  Another example written by James Wilson of Pennsylvania, “All men are, by nature equal and free: no one has a right to any authority over another without his consent: all lawful government is founded on the consent of those who are subject to it.”

My point is that the Declaration, especially its highest points, are simply the ideas expressed by  thinkers of the past like Locke, Hume, etc and those of numerous 18th century individuals including Jefferson and his contemporaries.  In addition after writing it himself, the full committee reviewed it and made changes.  I believe the full congress also made some changes neither of which am I going to look up and document.  The changes were relatively small and inconsequential but they thus make the document belong to all of them.

My second point is the US Constitution itself which created a centralized government out of a more loosely governed confederation of states.  I believe the event was pretty much rigged by the group who became known as the Federalists–another coup on their part.  Madison, Jefferson’s friend, had difficulty deciding whether he was a republican or a federalist–he changed sides often enough but as you and others mention, he was involved in setting up the original convention which led to the Constitution.

Neither Jefferson nor Adams was at the convention, both serving as envoys in Europe.  It would be instructive to go through the list of delegates to the convention.  Ken Royce in “Hologram of Liberty” does the best job of doing that so far as I am aware.  The original appointments totaled 74 but only 55 ever actually attended.  Of the 55, only 43 remained at the end and 3 of them refused to sign the final document.  Rhode Island refused to send any delegates and only reluctantly accepted the Constitution in 1791 when it was threatened with tariffs by the now centralized government.

Hamilton, in late June 1787 presented his preferred view of how the new government should be organized.  It was basically a parallel to the English monarchy with the difference that the monarch was to be elected.  The monarch would appoint the leader of each state and any state law could be invalidated by the central government.  After giving his presentation, this idea was rather easily defeated.  Over the remaining days of the convention, Hamilton never again spoke in the open forum.  In fact, he was seldom in Philly for the rest of the convention.  When the basic compromise ideas of the new government were worked out and agreed upon, Hamilton again showed up.  He was appointed to be a member of the Committee on Style.  That is, this committee got to select the words which were actually used in the final document to express all the compromises that had been agreed upon.

We all remember from our government education that of all the delegates, only Madison kept a fairly complete set of notes for the convention. Two other delegates had some partial notes.  The delegates were all sworn to secrecy.  I wonder why?  They met on the 2nd floor of the building and there were guards posted outside the building while they met.  Gee, it almost seems as though they provided an outline on how to conduct a meeting of the G-8 or G-20 or other such modern entity.  Madison’s notes were not made public until after his death in 1840.  That means that Madison had plenty of time to revise anything he wanted.  Of course we have no way of knowing if anything at all like that happened.

But, even considering the circumstances in which the Constitution was rammed down the throats of all Americans (and it is established fact that the majority of Americans were disposed against it), there is another aspect that I wish to mention.  I simply cannot come up with a single example of a central, consolidated government that once having been established, did not eventually lead to serfdom for the vast majority of the population.  If you have an example here, I would surely like to know of it.  Once a central government is established, it always eventually leads to ever greater centralized power.

Thus, regardless of Jefferson’s failure to act definitively to re-establish republican principles during his presidency, there will always be and certainly were in our history, those who would work to reduce individual liberty and increase the central power.  I think the mistake lay in letting the so called Federalists open the door in 1785, 1786 and 1787.  It is true that each state could have become its own local central power but it would have been more decentralized than currently exists.  We have heard the statement, “All politics is local.”  Would that it were so.  This would or could have been our safeguard.  But unfortunately, we do not have it.  The greater the ability of a local electorate to remove individuals from office, the more secure is individual liberty.  It is nearly impossible to remove a member of the central government from office.  Jefferson was aware of this.  Just count how many have been removed in our history [I believe it is in the range of five or so] and also consider the reasons for removal.

In my opinion, especially considering Scott Trask’s two essays, I agree that Jefferson could have done more to preserve the republican ideas which he espoused so well on paper.  However, I also believe that anything he might have been able to accomplish would eventually have been undone by the cancer that we call our federal government.  It is simply the nature of centralized government to grow ever larger and more powerful.

The creation of western style, government established, central banking cartels was the key to gaining control of a nation’s monetary system.  But as long as a gold standard was in place, any central bank was limited in its ability to create debt money.  The US was the last major hold out.  The Federal Reserve Act was approved on December 23, 1913.  Most members of Congress had already left Washington for the Christmas recess but a cadre of select members remained.  These members were enough to form a quorum and were supporters of the central banking system.  So, in essence, it was one of those dark nights with no discussion to ever see the light of day that allowed the Federal Reserve to come into being.  However, not every one was sleeping at the time.  There were a few who did understand what was being done.

Here are three quotes on the Federal Reserve Act bill of 1913 from Congressman Charles A. Lindberg, father of the famous pilot.

“This Act establishes the most gigantic trust on earth.…When the President signs this Act, the invisible government by the Money Power, proven to exist by the Money Trust Investigation, will be legalized.…The money power overawes the legislative and executive forces of the Nation and of the States. I have seen these forces exerted during the different stages of this bill.…”

“The new law will create inflation whenever the trusts want inflation. From now on depressions will be scientifically created.”

“The new law will create inflation whenever the trusts want inflation. It may not do so immediately, but the trusts want a period of inflation, because all the stocks they hold have gone down… Now, if the trusts can get another period of inflation, they figure they can unload the stocks on the people at high prices during the excitement and then bring on a panic and buy them back at low prices.…The people may not know it immediately, but the day of reckoning is only a few years removed.”

The most significant event to occur in 1914, the year following passage of the federal reserve act, was the start of WW 1.  Almost immediately, the countries involved were short of funds to pay for their respective war machines.  As a consequence, one of the early acts by every involved European government was to authorize the central banks to suspend convertibility.  But just what does that mean?  Well, remember from our earlier essays on the topic that gold (and silver) became the most marketable commodity and therefor the free market choice of millions of individuals to serve as money, the medium of exchange.  But this medium of exchange or money in reality was owned by the individuals in an exchange.  One person gives up the product he has produced and in return he receives a certain amount of “money” which was gold (or silver).   He does not need that money right away so he takes it to the bank for safe keeping and is given a receipt.  The paper receipt requires that the holder be given the specified money or gold on demand when the receipt is presented at the bank.  That is convertibility.

Now the central banks had a much extended ability to create debt money.  They could create money from nothing and loan this money to the government at a specified rate of interest.  The government can now use the money to purchase those materials needed to conduct the war.  As this new debt money (fiduciary media) makes it way through the markets, it passes into the hands of millions of individuals who make exchanges in the market.  But now when an individual takes this money to the bank, the bank has no legal requirement of convertibility–that is, it does not have to redeem the paper notes for gold. Thus there is very little limitation on the bank’s ability to create money.  Most central banks did and still do establish limits on money creation.  For example, today in the US, the Fed requires its member banks to maintain a 10 percent cash reserve, but this reserve requirement is nothing but bank notes, not actual gold or silver specie.

Historically, when there had been a war, there was almost always a noted increase in prices due to inflation of the money supply followed by a return to close to prewar levels as the excess money creation stopped at war’s end.  But at the end of WW 1, for the first time there was a difference.  The governments never bothered to repeal the acts which authorized the suspension of convertibility.  In effect, what took place was that the privately owned (by millions of individuals) money (gold and silver) had been confiscated.  The central banks were simply allowed to keep this money.

In the US there was a different situation.  The US entered the war several years later.  Its debt requirements were not as severe as the European nations and there was a historical system of gold and money that the government knew would be quite difficult to overcome.  Americans had a history of much greater individualism and independence than the typical European citizen.  Convertibility was not suspended and gold continued to be used by individuals.  However, that did not prevent the Federal Reserve Bank from following a scheme of monetary inflation throughout the “Roaring Twenties.”  Murray Rothbard in his book “The Great Depression” documents precisely how and why the Fed continually inflated the money supply from 1921 until 1928.  The book discussion is much too long and complex to be summarized here but I recommend reading this book, especially the first half to gain an understanding of Fed and government activities during these years.

The money inflation led to malinvestment in capital stock and excessive speculation in the stock markets.  The crash followed in 1929 and the depression set its hooks with great help from the Hoover administration which tried to maintain high wages and high prices created by excess money by cajoling business owners and adding government subsidies.  This set the stage for FDR.

FDR campaigned against Hoover, claiming that Hoover was spending excessively trying to create growth by dumping money into the economy.  After winning in a landslide election, FDR declared a bank holiday–he ordered all the banks closed.  Upon reopening the banks he told the nation that too many Americans were hoarding their gold rather than using it in the markets.  This was actually true.  The average person recognized that gold was more valuable than paper money because as time progressed the paper was able to purchase fewer goods in the market.  It was a clear example of Gresham’s law–bad money chases good money out of the market.  That is, as the paper money came into an individual’s possession, that individual recognized that it was better to spend it immediately and purchase almost anything.  The almost anything purchased was more like to retain value into the future than the paper money.  But everyone realized that the gold would continue to purchase the same amount of goods today, tomorrow or even years into the future.

But individuals saving (hoarding as FDR called it) their own property, their money, their gold for a rainy day in the future was not the cause of the depression.  Creating too much credit money in the first place was the cause and creating more credit money from nothing and providing subsidies and government interference in the market to support high prices and high wages was not the solution.  But FDR seductively convinced most Americans with his fireside chat that they would all help relieve the depression by turning in their privately owned gold to the treasury.  They would all be reimbursed at the then government established rate of $20.67 per ounce.  Of course there was also a penalty of a $10,000 fine and/or a ten year prison sentence for those caught not turning in their privately owned gold like good little sheep.  You can be sure that there were some who were smart enough to recognize what the truth was and did not turn in their gold but the majority did as they were told.  Americans were given a number of months to turn in their gold.  A few days after the grace period ended, FDR  unilaterally had the Treasury devalue the dollar from $20.67 per ounce to $35.00 per ounce.  This amounted to an almost 70% devaluation of the dollar.  All those Americans who had obeyed the new law essentially had just been legally embezzled by their own government.  Actually, all Americans who held paper dollars or worked for paper dollars were affected, not just those who turned in their gold and were given paper dollars in exchange.

But now the stage had been set.  Remember that free markets are simply millions of people making voluntary exchanges using that commodity which most of them recognize as the most marketable or desirable commodity.  The actual money that free markets had been using for many centuries had now been taken away from the vast majority of individuals.  It is true that some individuals still had gold but gold was starting to function less and less as money simply because it was not available.  When FDR using the War Emergencies Act of 1917, confiscated all privately owned gold, he also issued directives that canceled all contracts which required payment in gold.  There were many intelligent people who recognized long before 1933, even before 1913 that banks sometimes issued bank notes in excess of the actual amount of gold stored in the vaults.  Thus some of these people were smart enough to require payment in gold specie at the end of a contract to insure that they would receive the full value of the payment expected and not some lesser or discounted value because some bank notes could not be trusted to maintain their full value throughout the lifetime of the contract in question.  So not only did FDR essentially steal privately owned property, he also broke the law by destroying legally valid contracts.

After 1933, while very few individuals world wide owned gold or had access to it, central banks and the governments behind the banks still used gold to settle international accounts.  This system was formalized in 1944 at Bretton Woods, NH.  WW 2 was winding down.  The allies on the winning side gathered at Bretton Woods to discuss how to conduct international economics when the war was over.  The US was the only major combatant to end the war relatively unscathed by its ravishes.  It had the strongest economy and was the mightiest military power in the world.  In addition, because of its mighty industrial economy, it had managed to collect the largest holding of precious metals of any country.  The allies agreed that the US dollar would be used to settle all international balance of payments.  That is, as nations trade with each other, very seldom does one nation have an exactly even exchange with another.  Under a gold standard, the nations would periodically use gold to settle the outstanding balance.  Under the Bretton Woods Agreement, the US dollar would be used to settle these balances and the US promised to redeem any excess dollars a nation might accumulate beyond their trading needs at the rate of $35 per ounce of gold.  This system is known as a gold exchange standard because gold is not used directly in international settlements but rather acts as a counter balance to the use of the paper currency.

Remember that the definition of inflation is the creation of excess money beyond the ability of banks to redeem that currency with anything of real value.  Thus, while a nation can still inflate its own currency, the international settlements system kept a lid, of sorts, on a high rate of inflation.  This is (or rather was) true as long as the US continued to redeem US dollars for gold at $35 per ounce.

In the post WW2 economy, as the world began recovering from the war,all nations began rebuilding.  In the US, which had continued a depression like economy during the war, there was a tremendous burst of economic energy because so many families had large savings accounts.  The savings had been accumulated during the war simply because of rationing and the fact that the government had directed the nation’s industry to the war effort.  There were very few products available on the market for people to purchase, rather mostly just necessities were available.  Now the companies that during the war had produced tanks, airplanes, artillery pieces and guns could convert their machines back to producing cars, washers, dryers, refrigerators and stoves.  It was, especially in the United States, a period of confidence and great expectations.

Money did not seem to be a significant problem to the average individual.  Of course, each person always wanted more but the Federal Reserve Notes that were circulating throughout the country seemed to function just like the dollars (which used to be backed by gold or silver) that had always been used in the past.  It seemed that the only difference was that an individual could not take these notes to a bank and get them redeemed into gold.  But since they could be used to purchase anything one desired in the market place and prices were rising at a very slow, almost imperceptible pace, they even seemed to be retaining value over time.

This is how, at least in the US, the population was tricked into giving up their gold money and were converted into users of paper money.  Clearly, this is not the end of the story–more yet to come.

Just for the sake of clarity, while the central bank of England established in 1694 as a private banking cartel under a grant by the government became the model for central banks, the very first central bank was the Riksbank of Sweden, established in 1668.  The Riksbank was not a private cartel and operated instead under the auspices of the Swedish parliament.  On the other hand, the English bank was privately operated until 1946.  Most of the central banks of the western nations operated under the English model.  Of course, communist, socialist, fascist nations (governments) controlled all aspects of their economies, including the central banking functions.

A prime question to ask is “Are central banks necessary?”  In this modern world, it is difficult to find a single main stream economist who would reply in the negative.  Almost exclusively, either the monetarist school of economics or the Keynesian school are taught in all American colleges and universities.  A recent article in the Huffington Post explains that the Federal Reserve has essentially co-opted the main stream economics profession.  If one asked an Austrian economist the same question, he would reply not only no but hell, no.  It is the central banks that are causing the vast majority of economic problems that currently exist.  How could this be?

Back to some history again.

Central banks, as already indicated, got their start from their ability to create debt money that was backed by the “full faith and credit” of which ever government gave the bank its charter in the first place.  Let’s first define debt money.  Debt money is “money” (von Mises called debt money fiduciary media) that is created from nothing.  Fiduciary media is money that a bank issues to a debtor who eventually must repay all the funds created from nothing and in addition, the debtor must pay interest on this debt.  So this is one of those dirty little secrets.  The debt money comes from no where but when all is said and done, the bank makes a profit on the money from no where.

In the beginning, because gold was still considered money, central banks were limited in their ability to create money from nothing.  What central banking did was to tie together the assets of all the banks which joined the cartel.  The larger the cartel, the greater the power.  Since the cartel had an exclusive grant to issue money in the name of the government, banks which did not join the cartel had greater difficulty gaining clients and therefor profits.  Still, not all banks joined the cartel.  By pooling their assets, the cartel had greater control over “bank runs” when certain segments of the public became concerned about the balance sheets (liabilities) of specific banks.

However, as long as gold was still considered money and the paper receipts issued by the banks required the bank to redeem the notes in gold specie, the central banks were limited (the central bankers might use the term, frustrated) in the amount of debt money that could be issued.  The bank must always concern itself with redeeming issued notes with real gold.  This was the case around the world from 1694 until 1913.

The United States had toyed with the concept of a central bank from just after the Constitution was ratified in 1788 until 1913.  The First Bank of the United States was promulgated by the first Secretary of the Treasury, Alexander Hamilton in 1791 over the strenuous objection of the Secretary of State, Thomas Jefferson.  Hamilton proposed the bank and President Washington asked Jefferson, Hamilton and Attorney General Edmund Randolph for their opinions on constitutionality.  Jefferson provided an extensive response citing profusely from the Constitution to demonstrate that such a bank was not in any way authorized by the Constitution.  In “Hamilton’s Curse” Thomas Di Lorenzo states that in response,

The crux of his [Hamilton’s] opinion was that Jefferson did not understand the meaning of the word necessary.  Although Webster’s Dictionary defines the word as meaning “essential,” “inevitable,” and “required,” Hamilton argued that it is “a matter of opinion.”  The powers enumerated in the Constitution ought to be construed “on principles of liberal construction,” he said, “in advancement of the public good.”  This would require giving politicians like himself “great latitude of discretion” in dealing with the limits of federal government powers.  In other words, such powers should be made up, even fabricated, on the whims of politicians posing as guardians of “the public good.”

Hamilton won the argument.  Washington asked his allies in Congress to introduce the legislation and the charter was granted in 1791 for 20 years.  Jefferson fought the bank tooth and nail throughout his years in office and in 1811, during Madison’s administration when the bank’s charter expired, it was not renewed.    The War of 1812 brought new demands for debt money because the government was funding yet another war (are you getting the picture yet) and even though Madison had, with Jefferson, opposed the first bank, he encouraged the charter of the second bank which was approved in early 1817 as he was getting ready to leave the presidential office.

I am not going into a complete history of this second bank.  It’s a long and complex story involving not just banking privileges but also the distinct personalities of Andrew Jackson, the president who oversaw its demise and Nicholas Biddle, the president of the Second Bank of the Untied States.  It was a bitterly fought battle and is easily available for your pursual with a google search.  From the death of the second bank in the 1830′s until the Federal Reserve Act of 1913, the US had no central bank.  Except during the War for Southern Independence, the US functioned with a relatively (but not completely) free banking system and essentially a gold standard.

Though Lincoln is far from my favorite president, he did prove one point that I posed at the start of this part.  He funded the war he started with debt money created by the United States government with no intermediary.  He recognized that banks create debt money that require repayment plus interest.  He reasoned that the US could issue its own debt money and avoid the interest.  Thus Lincoln’s famous “greenbacks” were issued.  And, most interestingly, these notes were all eventually (1879) fully paid off in gold specie.  It would seem that on this basis alone, central banks are not required.

During the period from the end of the war in 1865 until the beginning of WW 1, the US experienced the most magnificent growth rate that history has ever recorded for any society.  There were a number of factors involved including the fact that the US was expanding its economic might in the vast western territories with little real opposition.  But a major factor was also the existence of relatively free banking and sound money based on a gold standard.  Just to bing some attention to an often heard but little understood phrase that is frequently repeated, let’s come to grips with William Jennings Bryan famous speech to the Democrat convention in 1896 which ended with the line:

You shall not crucify mankind upon a cross of gold.

The cross of gold was the gold standard.  Bryan at the time was a little known populist politician who represented the interests of silver and silver miners.  The problem was that the gold supply was relatively limited, not withstanding the gold discoveries in California and in the Yukon.  In 1873, as silver was being discovered in ever greater quantities the federal government had declared a defacto gold standard, essentially demonetizing silver.  The purpose was to protect the nation against inflation.  (Boy, isn’t that amazing–the US government actually trying to prevent inflation of the money supply.  The concept that inflation can be caused by too much silver or even too much gold is an important one and will be discussed in the future.)  Bryan was not opposed to the gold standard but he wanted to reinstate a bi-metal standard with both gold and silver enjoying the protection of the US government in establishing a fixed value.   Bryan won the nomination of his party in 1896 but lost the election to McKinley.  He lost again four years later to TR and thus the gold standard continued to hold sway and continued to protect the nation from both inflation and from excessive control by bankers.  As long as bankers could not produce debt money (fiduciary media) at will, as long as they were subject to bank runs, the nation was safe from any significant financial problems.

I should point out that bankers were held personally liable for bank defaults.  You can imagine how careful bankers were with respect to investing since they could be held personally responsible for losses.  Knowing that losses could lead to their own personal bankruptcy, they tended to avoid risky, bubble like ventures.  Instead, they mostly maintained a conservative, well balanced approach.

It is also interesting to note that from about 1790 to 1913 the level of inflation (as indicated by prices of goods) was relatively level.  It is true that during times of war, 1812 to 1814, 1861 to 1865, etc there were inflationary spikes but shortly after each war time period, prices returned to close to those of the pre-war period.  Thus with no central bank in existence but only free banking and gold and silver as specie money, inflation was just about nonexistent.  And the US economy kept growing throughout this time.  Yes, there were bank panics from time to time and even a recession or two but nothing that was long lasting or particularly severe.

Another quite severe financial and banking crisis occurred in 1907.  There were runs on the banks as depositors rushed to take out their money before they ran out of specie. The stock market dropped to half its peak 1906 average.  The main cause of the crash was stock market and real estate speculation. Also contributing were attempted company takeovers and the San Francisco earthquake of 1906. Much of the real estate of San Francisco was insured by companies in London. Payouts to San Francisco drained money from the U.K., which raised interest rates there and in the U.S. But interest rates mostly rose due to borrowing for speculation, and the high rates and real estate prices then halted investment in capital goods. The U.S. stock market crashed on March 14, 1907 and then again after a failed attempt on October 16, 1907, of a scheme to corner the stock of the United Copper Company, which highlighted the close connections then among banks, trusts, and brokers. The panic began on October 18, 1907, following the collapse of United Copper share prices. On October 21, there was a run on the large Knickerbocker Trust Company, which then shut down.

To restore confidence, banker chief J. P. Morgan, working together with the Secretary of the Treasury, organized some bank executives and the U.S. Treasury to transfer money to troubled banks and buy stocks. That soon ended the panic.

The fundamental causes of the Panic of 1907 were the flawed monetary and fiscal systems of the United States. The federal government’s control of the money during and after the Civil War created a rigid money supply that did not respond to the demand for money. While the government allowed free banking, it was closely controlling the value (price might be a better word) of money (gold and silver).  In a completely free market, the “value” of money will fluctuate along with other goods. During that era, agriculture dominated the economy, and the inflexible money supply created a crunch and a spike up in interest rates whenever farmers and others needed to borrow funds.  Had the value of money been allowed to fluctuate to meet demands, there would have been no crisis, just a disturbance in the financial system that would have been self correcting.

The Panic of 1907 shook confidence in the U.S. financial system, but the people and the government officials learned the wrong lessons. The problem with the banking system was the federal control of the money supply, and the effective remedy would have been completely free market banking, where the banks and other private firms would issue private currency backed by gold with the ability to slowly change in value. With competitive banking, the private bank notes and deposited funds would expand flexibly in accord with the demand for money and borrowing, while the redemption into gold would prevent inflation. That is how the Scottish free banking system worked for many years.

Because the wrong lessons were learned, J.P. Morgan and others were able to influence the direction of government control over banking.  The crisis of 1907 led almost directly to the Federal Reserve Act which was passed in 1913 thus bringing the US into conformity with most other western nation/state governments.   There are some historical economists who suspect that Morgan helped to induce the panic by introducing the rumor that the Knickerbocker Trust might be in trouble.

Now the real fun–and trouble begin as we shall see in the next installment.

There are several aspects of the development of money which we need to grasp so we can apply them to our current situation.  First, note that money is both conceptual and physical.  It was the physical reality of being able to conduct barter arrangements that eventually led to the concept of money.  The physical part of the concept was that the commodity actually existed and was considered to be valuable to both parties in the exchange.

As a consequence of the development of money, individuals were able to specialize in the work they performed (officially called the division of labor).  People were freed from producing virtually all of their own needs and thus could concentrate of producing a constantly narrowing spectrum of products which could in turn be exchanged for other desired products.  This in turn improved both the quality and quantity of the various items needed by all.  Obviously, as the quantity of goods increased, it became possible to produce items that were not “necessary” for survival but rather were just desired or pleasing.  Art and music come to mind as do refinements to food, clothing and shelter.  The continuing developments led to ever larger groups or societies forming what could eventually be called a civilization.

Another important aspect of this development of money is that it occurred naturally.  That is, no person or no entity directed it.  It simply happened over many centuries and many generations as millions of people we able to make voluntary economic exchanges among themselves.  However, as the larger groups developed into civilizations, there were always steps backward for one reason or another.  The lack of a knowledge of the past (history) was one reason that some societies would go back and try goods or products that had been unsuccessful as a medium of exchange in the past.

Human beings have lived together for possibly as long as two million years. Money in its modern form, that is coin of fixed weight and denomination, came into use less than three thousand years ago. It took a long time to discover the physical good which best serves the purpose of a medium of exchange.

Whatever its complexity, a civilization and its economy depends upon a very basic foundation. First, Individuals must be free to think and act on their decisions; in addition, they must be able to reap the rewards of being right and must bear the cost of making foolish or wrong decisions. Second, they must be able to concentrate on what they do best, and what they most enjoy doing, instead of spending their time providing for their immediate wants. Third, they must be able to make provision for the future by preserving a portion of what they have produced. In short, they must think, they must produce, they must save. And to do that to the greatest and most efficient extent possible, they must trade with each other.

In an advanced economy, physical survival is seldom an issue but all the imperatives which confronted primitive societies still apply. The extent to which individuals can think, work, produce and trade freely determines the potential of the economy. The confidence with which individuals can save and invest long term determines the prosperity of the economy. To save, invest, and plan for the long term is a luxury not granted to very small and primitive groups. This is the domain only of those living in an advanced economy.

An economically advanced economy must, by its nature, be one in which there is indirect exchange, using money. In the place of the essentials needed for staying alive, there is money. Instead of working all day and part of the night to ensure one’s immediate needs for food and shelter, there is money. In the place of never being able to rest on past productivity, there is money. In lieu of being at the mercy of nature or dependent on the nature of mercy, there is money.

That is what money does. The evolution of any civilized society is dependent on the discovery of the idea of money, and on the discovery of something that can be used as money. The future of any civilized society is dependent on the quality of what is used as money.

Llet’s consider just a bit more history briefly.  From Part 1, we remember that Lydia is the first known society to have coined a precious metal into money.  It is true that many other products and goods have been used since then but always civilized societies have come back to gold. Thus we have a history of close to 2700 years in which gold was the ultimate form of money.  This period ended in either 1933 or 1971 depending on one’s perspective.  In 1933, FDR made it illegal for US citizens to own gold other than numismatic coins, however, the US Treasury still redeemed Federal Reserve Notes to foreign nations.  But even this ended in August 1971 when the Nixon administration closed the gold window to every person or entity in the world.  Thus, for the first and only time in modern history, there is no currency in the world that is backed by a reserve of precious metal or any other commodity.

Every modern nation uses a fiat currency, that is a currency that is given value only by the “full faith and credit” of the nation that issues that currency.  Within the defined territory of each nation, by law, that fiat currency must used to settle all debts, contracts, and other obligations that involve the use of money.

Thus we are now at a point in time when gold is not considered money–that is not considered “legal” money by any government in the world.  To see if, in fact, Gold = Money even today, we must try to determine why gold has been abandoned by ruling authorities throughout the world and this will be the primary topic of Part 3.

August 27, 2009 by the law perverted

Capital

August 25, 2009 by the law perverted

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August 23, 2009 by the law perverted

August 23, 2009 by the law perverted

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