Money is common sense. Just because the entire 21st century world economy is completely based on valueless paper money, does not change this reality. The insanity is not money’s fault.
Receiving the fruit of one’s labor, community specialization, market efficiency and money are all common sense, for they are all part of a healthy human condition. Poverty, debt, freely surrendering the fruit of one’s labor to usury is more complex, and these evils impact every aspect of money’s common sense.
All fiat money is debt. This is intuitive, for money is common sense. Fiat money relies on a second transaction to make its recipient whole. If the second transaction is for goods or services, the holder of the fiat currency is a creditor. If the second transaction is to retire a debt, the holder of the fiat currency is a debtor.
Still valued as an example by Federal Reserve bankers and economists, Ben Franklin’s ingenious early colonial monetary policy provides a basis for examining the power of fiat currency under the modern Federal Reserve Banking system.
The intrinsic, commodity-like, value of a currency protects it from the need for monetary policy. If the commodity used as money is rare, it purchases more goods. If it becomes plentiful, it purchases fewer goods. If goods become more plentiful, and the value of the commodity-like currency remains the same, more goods can be purchased.
During the colonial period, Wampum, tobacco, and beaver skins were used as currency. The later were colonial exports that could easily be exchanged for metal currencies while wampum could be exchanged for both furs and tobacco. Ultimately, these commodity-based currencies vanished as their utilitarian value vanished with trade conditions. No monetary policy was necessary.
Precious metal currencies have a greater utilitarian value than other commodity-based currencies because of their ability to store monetary value over time. First, they survive the physical ravages of time more easily than beaver skins and tobacco, and, secondly, the demand for these items remains more static. Because the communist ideal is but a pipe dream told to the desperately impoverished, there will always be a leisure class of the ridiculously wealthy. This provides a constant market for gold and precious metals.
This was certainly true in the American colonial era where the great economic world powers were mercantilists led by very nervous but prolific aristocracies. Indeed, it was the scarcity of precious money currencies in the colonies that occasioned the rise in alternative commodity-based currencies.
The colonies had a trade deficit because England had a trade monopoly (The Navigation Acts p.5 see also: Wool Act and Hat Act). The British purposely (p. 4) took a form of capital from the colonies, their money: their gold, silver, or copper. Because of the British use of fractional reserve banking, they could offer an abundance of manufactured goods for colonial precious money currencies. This is because every Spanish Doubloon garnered from the colonies was worth nine Spanish Doubloons (in Pounds Sterling) of promissory notes issued from the banks of London. These promissory notes, in turn, maintained the mercantilist subsidies for domestic manufacturing (Grub 4). All of this further suppressed colonial manufacturing and trade.
Into this condition of debt and of unfair trade policies and exchange rates, enter Franklin, his printing press, and colonial monetary policy. Though those intellectual supporters of fiat currencies who would stab us with their pointy-heads may hail Franklin’s departure from gold (Grub 7), his views must be kept in the complex of debt into which the colonies had been shackled.
Franklin agreed with Part I‘s common sense explanation of the utilitarian value of money: “Money,” he wrote, “as a Currency, has an Additional Value by so much Time and Labour as it saves in the Exchange of Commodities,” (Franklin 352). and further: “MONEY, properly called a Medium of Exchange, because through or by its Means… it is, to those who possess it (if they want any Thing) that very Thing which they want…It is Cloth to him that wants Cloth, and Corn to those that want Corn…” (Franklin 345). Since British Mercantilism had reduced Pennsylvania to barter, Franklin could passionately, convincingly, and correctly argue that colonial governments should give the colonists fiat money representing future taxes due and mortgage installments payable on land held by and deeded by the government.
Secondly, Franklin instinctively recognized both who was controlling monetary policy and how that policy was directed by personal interests (Franklin 342). Americans today should be as perceptive. Franklin argued that the scarcity of money increased interest rates. He was correct in particular but incorrect in general. He was correct that colonial paper money freed the colonial economy from the vice grip of mercantilism and, at the same time, reduced interest rates. However, this was not because of “increased money supply.”
By itself, increasing the supply of paper money does not reduce interest rates because interest rates are a matter of negotiation. If the lender has little need of the borrower, but the borrower has great need of the lender, interest rates will be higher. The mercantilists of England had the monopoly on money and lent at their leisure.
The lender becomes an investor when the lender and the borrower stand to profit mutually from, not just the interest on the loan, but on the very success of the venture itself. This was much more likely among colonists in the same land profiting from the same economy. Hence, Franklin’s elegant paper money solution changed the lender-borrower paradigm. First, it increased competition among lenders and, because there was still great money to be made at lower rates, this lowered interest rates. Secondly, the fiat money allowed greater direct, colonial, oversight and, hence, less risk for the lender; that reduced interest rates. Finally, the lenders, middle class merchants, small businessmen, recognized their own interests in the prosperity of the local economy; that also reduced interest rates.
An increase in money supply, can, of course, lead to price inflation. Inflation should lead to higher interest rates, interest rates designed to recoup the loss of value in the currency returned to the lender.
Franklin argued for, as we would term it today, a strong dollar. He argued that money based on gold resulted in inflation (!) while money based on land, land sold in the colonies, could never be inflationary. The money based on gold was inflationary because, even then, the banks of England practiced fractional reserve banking (Franklin 347). However, Franklin’s analysis of real estate values in the colonies was absolutely correct. Since no one of Franklin’s adversaries, the moneyed mercantilists, dared admit the evils of fractional reserve banking, and because Franklin’s analysis of real estate values was undeniable, Franklin’s argument stood invincible. The Pennsylvania colony vigorously reissued their paper currency. And, oh yes, the young printer Benjamin Franklin, age 23, got the commission to provide the inky paper.
Because the money Franklin printed could be used to pay taxes or mortgages, it had a limited, commodity-like value. Was this currency the perfect solution? What if you had a ton of the fiat currency because you worked for the government and couldn’t find someone who needed this medium to pay taxes or mortgages? There was still an element of barter involved. Nevertheless, it was genius. The British mercantilists would have no interest in a colonial currency. Hence, they would be shut out of the colonial economy as expressed in Franklin’s dollars. Of course, because the fiat currency of the colonies did not have much utilitarian value in foreign exchange compared to precious metal currencies had. it would tend to become devalued over time compared to hard money.
The type of currency Franklin advocated and printed, called flat currency or “bills of credit,” if issued money only according to a government’s actual annual income, maintained a natural, publicly regulated monetary policy as the supply of bills was retired with the payment of taxes each year (Grub 6). Hence, Franklin’s vision was antithetical to fractional reserve banking. Unlike a bank with only a fractional reserve, a government would not issue more money than could be bought back at any one time. Hence,Franklin argued, when the point at which trade did not support the money in circulation, in which the utilitarian value was less than the promised commodity-like intrinsic value, the money would, of nature be retired and the money supply contracted and corrected. Franklin’s notion of money involved an ethical, responsible government. In such an instance, again, monetary policy was organic. Money was tied to intrinsic value and money that has intrinsic, commodity-like value needs no monetary policy.
However, what would happen if a colonial government issued more paper money than the taxes and mortgages it was owed? While Franklin preached against inflation, in reality, colonial flat money was so continually debased that Adam Smith railed against it. Because the nature of government is so evil it must be fettered with systems of checks and balances, out of control governments as the source of paper money are always inflationary.
The ability of the Federal Reserve Banking system to maintain the value the fiat reserve currency of the world comes from King Debt. As long as the debt owed by governments and individuals can be paid in dollars, the dollar has a commodity-like value as well as a utilitarian value.
All fiat currency involves stated or unstated monetary policy. Honest monetary policy is intuitive and common sense. Honest policy can be plainly stated and publicly evaluated. Of course, unstated, or impossibly complex monetary policy, or monetary policy that fluctuates, are policies less likely to be honest.
Exchange based on money that has an intrinsic commodity value requires no monetary policy.