Money, Value, and Monetary History

after Milton Friedman

One of the rights which the freeman has always guarded with most jealous care
is that of enjoying the rewards of his own industry. Realizing the power to tax
is the power to destroy, and that the power to take a certain amount of property
or of income is only another way of saying that for a certain proportion of his
time a citizen must work for the government, authority to impose a tax upon the
people must be carefully guarded.... It condemns the citizen to servitude.
President Calvin Coolidge, 1924

Practices of the unscrupulous money-changers stand indicted in the court of

public opinion....Yes, the money-changers have fled from their high seats in the
temple of our civilization. We may now restore that temple to the ancient truths.
The measure of that restoration lies in the extent to which we apply social
values more noble than mere monetary profit.

Franklin Roosevelt [1], First Inaugural Address, 1933

As Milton Friedman says in Money Mischief [HBJ, 1992], anything can be money:
stones, iron, gold, tobacco, silver, shells, cigarettes, copper, paper, nickel, etc. What
makes these things money is not what they are, but what they are used for. They may
have value in themselves, like gold ("commodity" money), or they may not ("credit"
money, which means banknotes, bank deposits, tokens, markers, etc.); but their value as
money is separate from their intrinsic value. What gives money value as such is that it is,
or can be, used for exchange, replacing the original human system of trade, which was
barter. The value of money is thus the value people attribute to what they want to
exchange, no more, no less. As a medium of exchange, all money is in effect "credit"
money: credit on an incomplete barter, like an IOU. An IOU can also be anything, as
long as it is recognized as a contractual obligation on an incomplete exchange.
Commodity money was originally the most natural money, but the value of money is not
always the same as its value as a commodity. The intrinsic value of commodity money
and its value as money can actually interfere with each other.[2] As a medium of
exchange, money also establishes a standard of value (e.g. items A and B may both be
worth $5, £5, ¥5, etc.), and as money is held in between exchanges, money becomes a
store of value.

What the value of money actually is (i.e. what units of the standard will buy, in general)
depends on 1) how much money there is, 2) how much money is held out of circulation,
and 3) how many exchanges circulating money is used to cover. This is the "quantity
theory of money" and can be expressed in a famous equation by the American astronomer
and economist Simon Newcomb: MV = PT. "M" signifies the actual quantity of
money; "V" signifies the "velocity," which is the rate at which money circulates or how
long money is held out of circulation; "T" is the number of transactions, or exchanges;
and "P" is the level of prices. This equation easily illuminates most questions about
inflation or deflation, which is how money becomes less or more valuable over time. The
evidence for the "quantity theory" is that historically inflation and deflation have occurred
independently of economic growth and recession, as can be seen in the data from
Friedman and Schwartz given below.[3]

Inflation is where the aggregate level of prices goes up and deflation where the aggregate
level of prices goes down. Inflation will occur if V and T remain constant but M goes up,
i.e. the supply of money increases without any other changes. Inflation can also occur if
V goes up (people spend money more quickly) or T declines (the economy shrinks), as
the other variables are constant. Most inflations, however, occur because of independent
increases in the money supply. That can happen either with commodity money or credit
money. A flood of silver from the New World caused a devastating inflation in 16th and
17th century Spain; and gold strikes in California, Australia, South Africa, and the Yukon
produced inflations in the 19th and early 20th centuries. Now inflations are always the
result of increases in the supply of credit money: it is easy to print paper, and
governments that have begun issuing paper money have always eventually fallen to the
temptation of just printing and spending new money.[4] Paper money achieved
legitimacy in the first place only because the Bank of England, which was privately
owned (founded in 1694 and nationalized in 1946),[5] was the first note issuing agency in
history that behaved responsibly and restrained its issue of paper money. Consequently,
Bank of England notes were "as good as gold." Inflation does not occur because of a
"wage-price spiral," an "overheated" economy, excessive economic growth, or through
any other natural mechanism of the market. A government debasing the currency would
not have fooled anyone a century ago. Now, through deception, a government can try to
blame inflation on anything but its own irresponsible actions.

Deflation usually occurs from one of two causes. Either the economy grows and the
volume of transactions (T) increases, or the quantity of money (M) decreases. After the
Civil War, when the United States issued hundreds of millions of dollars in paper money
("greenbacks") to spend on the war,[6] greenbacks and gold dollars circulated side by
side: but gold dollars were worth several greenback dollars.

UNITED STATES PRICE LEVELS: 1929=100% [data from Milton Friedman, Money
Mischief, Episodes in Monetary History, Harcourt Brace Jovanovich, 1992; and Milton
Friedman and Anna. J. Schwartz, Monetary Trends in the United States and the United
Kingdom, U. of Chicago Press, 1982, pp.122-137]. Divide by 2.162 to convert to 1967
prices.

40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
105%
1865------Withdrawl of Greenbacks started----------86.5
1866 82.6
1867 77.6
1868-------------------------------------76.2---Withdrawl of Greenbacks
1869 72.7 stopped
1870 68.7
1871 69.8
1872 66.3
1873-----banking Panic--------65.5----Gold Standard adopted
1874 64.8
1875 Depression 63.3 Era of Greenback agitation
1876 1873-79 60.4
1877 58.2
1878--------------53.9---Bland-Allison Act, silver dollars &
certificates;
1879 52.0 Greenbacks redeemed in gold.
1880 57.4
1881 56.3
1882 58.1 Depression 1882-85
1883 57.4
1884---Panic-------54.4-----hydraulic gold mining ended in California
1885 50.8
1886-----------50.1----gold discovered in South Africa; Haymarket Riot
1887 50.6
1888 51.5 Era of Free Silver agitation
1889 51.8
1890-----------50.8---Sherman Silver Purchase Act
1891 50.3 Depression 1893-94, 95-97
1892---------48.3-------Homestead Strike
1893--Panic---49.5------Sherman Act repealed; 156 railroads go bankrupt
1894-------46.4----18.4% unemployment; Pullman Strike
1895 45.7
1896-----44.4---"Cross of Gold" William Jennings Bryan defeated; end of
1897 44.6 free silver agitation; gold discovered in the Yukon
1898 45.9
1899 47.1
1900----------49.6-------Gold Standard Act, reaffirms Gold Standard
1901 49.3
1902 51.0
1903 51.5
1904 52.3
1905 53.4
1906---------------54.5----1.7% unemployment; Upton Sinclair's The
Jungle
1907-----------------56.8----banking Panic
1908-----------------56.7-----Aldrich-Vreeland Act expands money supply
1909 58.7
1910 60.2
1911 59.7
1912 62.3
1913-----------------------62.6-----Federal Reserve Act creates
1914 63.5 Federal Reserve System
1915 65.5
1916 74.0
1917-----World War I Inflation--------------------------91.4
1918 World War I, 1917-1918
105.1
1919
106.7
The government determined to deflate the greenbacks until they could trade at par with
gold.[7] There was considerable political opposition to this. Deflation is bad for
borrowers, whose debts become worth more over time. They would rather have inflation,
which reduces the value of debts over time.[8] This turned farmers, who are commonly in
debt and were a significant part of the population in those days, in favor of the Greenback
Party, which promoted paper inflation, and the Free Silver movement, which wanted both
gold and silver used for money (instead of just gold, as on the Gold Standard).[9] This
political opposition prevented too many greenbacks from actually being withdrawn from
circulation, but deflation occurred anyway because the economy grew into the money
supply. By 1878 greenbacks traded at par with gold dollars, and the Treasury began to
redeem them in gold ("resumed specie payments"). The entire period from the Civil War
to the late 1890's was a era of deflation, simply because the economy grew so much (see
table). Nevertheless, this was not well appreciated at the time. Falling prices mean falling
wages; and it was hard for workers to understand that if their wages were being cut, those
same wages might nevertheless be worth more. That is what happened, but the fact of
falling wages led to terrible labor strife. Employers knew that they had to cut wages, but
even they didn't understand quite why, and wouldn't have been believed anyway.

Deflation also occurs because the money supply shrinks. One way that can happen is
because of trade. If there are more imports into an economy than exports out of it, then
there will be a net outflow of money to pay for the imports. In the Merchantilist 17th
century and the protectionist 20th century this has been regarded as bad; but David
Hume (in "Of the Balance of Trade," 1752) had already recognized that it really didn't
make any difference: the outflow of money would inflate foreign prices and deflate
domestic prices, rendering foreign goods less attractive and domestic goods more
attractive, both for domestic and foreign markets. Thus, before too long, imports would
naturally decrease and exports would naturally increase, until money flowed back in to
rebalance prices. As Hume put it in a letter to Montesquieu in 1749: "It does not seem
that money, any more than water, can be raised or lowered anywhere much beyond the
level it has in places where communication is open, but that it must rise and fall in
proportion to the goods and labor contained in each state." A trade deficit is thus a sign of
nothing except the export of a certain kind of commodity, money. When money can
simply be printed by the government, exporting it is an extraordinarily profitable
business.

Another way that deflation can occur is because of banking. A bank receives money on
deposit, holds part of it as a cash reserve, and loans out the rest. In effect this increases
the supply of money since both the loaned cash and the credited deposit at the bank
function as money. The result could be inflationary, but the system tends to be self-
balancing because bank loans, especially commercial loans which are used to create or
expand businesses, multiply transactions. A loan is also a kind of deposit, as a bank
credits itself with the money it has loaned. A bad loan, to an unsuccessful person or
business, cannot be paid off and so at some point must be written off as a loss by the
bank. Thus the bank's "deposit" is simply lost, and the money supply thereby decreases
by that amount. Banking therefore can stimulate the growth of an economy through loans
but usually will not produce an inflation, as bad loans balance the transactions created by
the good loans. Instead of inflation, sometimes loans and credit get overextended and
their abrupt collapse can decrease the money supply to produce a conspicuous
deflation.[10] This was particularly severe in 1929. Such credit crises previously had
healed themselves in a year or two, as bad loans were written off and the extension of
new loans began again, without causing a Depression.[11] Herbert Hoover and Franklin
Roosevelt, however, both thought that high wages were the key to healing the economy.
They promoted high wages all through the Thirties. But, in a deflationary period, that far
overvalued labor, which in effect was priced out of the market. People with jobs,
especially union jobs, were very well paid in the Thirties, but unemployment peaked at
28.3% in 1933 and was still up at 20% in 1939 -- it had previously never been higher than
18.4% (in 1894). The inflation and price controls of World War II broke the logjam of
wages, and unemployment didn't return after the War (to everyone's surprise).

UNITED STATES PRICE LEVELS: 1929=100% [data from Friedman & Schwartz, op.
cit.; unemployment figures from Richard K. Vedder & Lowell E. Gallaway, Out of Work,
Unemployment and Government in Twentieth-Century America, Holmes & Meier, 1993].
Divide by 2.162 to convert to 1967 prices.

70% 75% 80% 85% 90% 95% 100% 105% 110% 115% 120% 125% 130%
135%
1920 121.7
1921---11.7% Unemployment-------------103.7---Recession
1922 98.6
1923----2.4% Unemployment----------100.9
1924----5.0% Unemployment---------99.6
1925 Roaring Twenties 101.6
1926----1.8% Unemployment------------102.1
1927 99.4
1928 100.1
1929----3.2% Unemployment----------100.0
1930----8.0% Unemployment-----95.5
1931---------------84.0----Great Depression Deflation
1932 74.3
1933----73.3-------24.9% Unemployment
1934 78.1
1935 77.1 Great Depression, 1929-1940
1936 80.3
1937 81.0
1938-----------80.6----19.0% Unemployment
1939-----------80.0----17.2% Unemployment
1940-----------80.9----14.6% Unemployment
1941------------------87.3-----9.9% Unemployment
1942---4.7% Unemployment---------98.7----World War II Inflation
1943 111.7
1944 World War II, 1941-1945 120.0
1945 125.3
1946------4.0% Unemployment----------------------------------126.4
1947------3.9% Unemployment-------Post-War Inflation-------------------
136.6

Actual prices of individual commodities depend on how much they are wanted (demand)
and how much is available (supply). This then is a relationship whose terms cannot be set
by suppliers or consumers independently. Suppliers, of course, always want higher prices,
as consumers want lower prices. The price that consumers are willing or able to pay for a
certain volume of a commodity that coincides with the price that suppliers are willing or
able to sell that volume for is the "equilibrium" or "market clearing" price. The free
market allows prices to move towards market clearing levels. Price fixing, which never
works without an application of force (either government force or gangsterism), produces
either surpluses or shortages: surpluses (as in "farm surpluses" and unemployment, a
surplus of labor) occur where prices are set too high and there is excess supply; shortages
(as with rental housing in Santa Monica and New York City, or with everything in the
Soviet Union) occur where prices are set too low and there is deficient supply.

The return of prosperity in the 50's and early 60's meant good economic growth but with
a couple of qualifications: There was steady, if low, inflation; and unemployment,
although negligible by Depression standards, was not as low as in previous periods of
growth. There also occurred three recessions in a ten year period. It now appears that the
high tax rates of the time, retained by President Eisenhower for the fiscally responsible
purpose of paying down the debt from World War II, may have been responsible for the
recessions. But the steady inflation, almost invisible at the time, may also have been a
wise corrective to the political power of the labor unions, who otherwise exercised steady
pressure to drive up wages. The result, overall, was optimism and growth such as had not
been seen since the 20's and, at last, a decisive answer on the part of the democracies to
the claims that had been made for economic success by the totalitarian regimes.
Unfortunately, this success at the same time nurtured a generation that took economic
growth for granted, would still find the claims of totalitarian ideologies attractive, and
sometimes would not even be exposed to the new defenses of capitalism that post-war
prosperity motivated.

UNITED STATES PRICE LEVELS: 1929=100% [data from Friedman & Schwartz, op.
cit.; unemployment figures from Vedder & Gallaway, Op. cit.]. Divide by 2.162 to
convert to 1967 prices.

135% 140% 145% 150% 155% 160% 165% 170% 175% 180% 185% 190% 195%
200%
1947--136.6
1948 145.6
1949---------143.7-------Recession
1950 146.5
1951 156.1
1952 158.0
1953----Recession-------------160.4
1954 162.6
1955 166.1
1956 Average Unemployment=5.0% 170.8
1957 176.6
1958-----Recession-------------------------------179.0
1959 183.1
1960 186.4
1961 188.3
1962 Average Unemployment=5.7% 192.2
1963 195.2
1964-----5.2% Unemployment------------------------------------------
198.5

President Kennedy came to believe, despite the opposition of crypto-socialist

economists like John Kenneth Galbraith, that high tax rates were what had hampered the
economy in the 50's. After his death, President Johnson pushed through the tax cuts, and
soon the economy took off as never before, pushing unemployment below 4% for the
first time in a while. Unfortunately, why the tax cuts worked was open to different
interpretations. Rather than unleashing supply-side production according to Say's Law,
the effect was largely taken to be the result of a Keynesian demand-side stimulation.
Along with this the idea also began to develop, which Keynes had not believed, that
inflation itself, by stimulating demand, created prosperity. Since President Johnson also
had the War in Vietnam to pay for, it became a convenient thought that inflationary
money creation, by which wars had usually been financed, now could be used, not just
for that purpose, but to promote civilian prosperity as well. This made it possible, as it
was said, to have both "guns and butter."

Such a policy was continued by President Nixon, who famously said, "We are all
Keynesians now." However, inflation soon seemed to be getting positively out of control.
Since inflation erodes the value of savings and reduces the return on loans (in a period
when many usury laws capped interest rates), the damage being done began to outweigh
the perceived benefits. Also, vast money creation began to mean that the United States
might be unable to redeem dollars in gold for uncooperative countries, like France, that
might want to cash in their dollar holdings. Nixon responded with wage and price
controls and by "closing the gold window," so that dollars could no longer be redeemed
by anyone, even foreign governments, for gold.

200% 205% 210% 215% 220% 225% 230% 235% 240% 245% 250% 255% 260%
265%
1965----203.2-----4.5% Unemployment
1966 209.9 "Guns & Butter" Keynesian Inflation
1967-----3.8%--------216.2
1968-----3.6% Unemployment----225.8--------------Richard Nixon elected:
1969-----3.5% Unemployment---------------236.8 "We are all Keynesians
now."
1970-----4.9% Unemployment----------------------------249.7
1971-----August: Wage & Price "Controls" to stop inflation----------
263.2

Wage and price controls -- a wartime expedient that now went with wartime levels of
inflation -- could not end inflation, only temporarily mask it. That inflation was now
thought to be something that could be "cooled off" by simply not allowing people to raise
prices shows how far people had gotten out of touch with the ancient wisdom that a
debased currency is worth less, even if prices are controlled by law. As it happened, the
wage and price controls, although copied by others, like Britain, had little overall effect
on inflation. At the same time, detaching the dollar from gold meant that money could be
created more freely than ever before, which was the real engine of inflation. The clueless
President Ford was persuaded that a farcical campaign of moral exhortation ("Whip
Inflation Now," or WIN) was the answer. Even worse, the "Phillips Curve" relation of
inflation to employment began to break down: The boom in inflation by 1975 was
suddenly attended with elevated levels of unemployment and with poor economic
growth. The stagnation of the economy despite massive money creation was dubbed
"stagflation." This was the "malaise" -- his own word -- of the years of President Carter.
This began to indicate to the perceptive that the demand-side interpretation of the 60's
prosperity was a mistake. Since inflation had also raised many people into higher tax
brackets, the Kennedy-Johnson tax cuts had also been wiped out in the process in the
70's.

275% 280% 285% 290% 295% 300% 305% 310% 315% 320% 325% 330% 335%
340% 345%
1972-----279.8--------5.6% Unemployment The Collapse of
1973---4.9% Unemployment----298.9 Keynesian Economics
1974----------5.6% Unemployment--------------------321.7
1975----8.5% Unemployment = "Stagflation" = Inflation +
Unemployment--------346.5

The theory that inflation was caused by money creation, rather than by an "overheated"
economy, and that economic growth is caused by capital investment in the free market,
rather than by high taxes and the demand-side effects of government spending, led to the
tax cuts promoted by President Reagan, the fiscal conservatism of the Volker-Greenspan
Federal Reserve System, and the economic prosperity of the 80's and, evidently, the 90's.
This was little more than a vindication of common sense and Classical Economics.
However, the political constituency for high taxes and government spending, regardless
of their justification, has not disappeared. On the contrary. The massive "social" spending
and expansion of the government in the 70's created whole classes of people who were
dependents of that spending and who really knew or cared little about the sources of
growth or prosperity. Indeed, since they didn't have to engage in economically productive
activity, just in politics, they perpetuated the Leftist fantasy that politics alone is
responsible for wealth.

This is now the greatest problem in American politics: the promotion of essentially
Marxist ideas, which are so discredited by history and science and morality as to be
laughable, by an educated intelligentsia, among academia, the press, and the literati, who
depend only on the power of their own sophistry. This makes them perfect shills for
interest-group politics, where the only real interest is in getting money out of the
government. For this to work, taxes and spending must be as high as possible. But then it
was discovered, during the Reagan years, that spending could be run up far beyond the
tax base without immediate consequences. The deficit spending that had been the animus
of conservatives since the New Deal now was sold to conservatives on the principle that
the relatively low tax rates did promote prosperity, while the high spending bought off the
interest groups. The future, evidently, could take care of itself.

Nevertheless, interest-group politicians, meaning all Democrats and most Republicans (or
at least most Republicans in office), retained an instinctive love of taxes. The credulous
President Bush was thus duped, with old fashioned fiscally conservative arguments, to
break his only meaningful campaign promise of 1988, and his only real link to the
Reagan political constitutency, by raising taxes. A Democratic Congress then never
bothered providing the promised spending reductions. President Clinton, under the
deceptive "New Democrat" banner, but still a whole-hearted believer in taxes, spending,
and socialist command-economy devices for politically hot areas like "health care" and
"child care," slowed the recovery from Bush's 90-91 recession with his own tax increases.

A new Republican Congress in 1995 derailed, somewhat, where that was all headed; but
it is now clear that the Republicans have been corrupted both by the same interest group
politics and by fear of the self-righteous disdain of the intelligentsia. They have thus
cooperated with Clinton in the lie that hemorrhaging "social" spending, whose liabilities
are kept off budget, does not count and that a "balanced budget" will soon arrive. They
have also joined in the despicable practice of transferring expenses from the government
to private business by mandating uneconomic "benefits," like "family leave." The
government thus can hand out goodies by law rather than by taxing and spending. This
evades the truth that, as Walter Williams says, "businesses are tax collectors, not tax
payers," which means that people will be paying for these "benefits" anyway, in higher
prices, higher unemployment, lower wages, or in whatever ways that businesses will need
to use to finance them. It is only the forseeable bankruptcies of Social Security and
Medicare, hurried by any unforseen problems with the economy, that will put an end to
the continuation of this era of political dishonesty and looting.

Statistics on Inflation, 1946-1997

British Coins before the Florin, Compared to French Coins of the Ancien Régime

American Dollars

Six Kinds of United States Paper Currency

Political Economy

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Copyright (c) 1996, 1997, 1998, 2001, 2003 Kelley L. Ross, Ph.D. All Rights Reserved

Money, Note 1

The "money-changers" in the Temple were, of course, Jews. Franklin Roosevelt is usually
not thought of as anti-Semitic; but Paul Johnson, in his A History of the Jews
[HarperPerennial, 1987], says of him:

He was both anti-Semitic, in a mild way, and ill informed. When the topic came up at the
Casablanca Conference, he spoke of "the understandable complaints which the Germans
bore towards the Jews in Germany, namely that while they represented a small part of the
population, over 50 per cent of the lawyers, doctors, schoolteachers, college professors in
Germany were Jews" (the actual figures were 16.3, 10.9, 2.6 and 0.5 per cent). [p. 504]

Even if it were not disturbing that Roosevelt should have held such views, at the time an
actual genocide was being carried out against the Jews in Eastern Europe, it should be
suspicious that Roosevelt in our "money-changers" quote is clearly laying the blame for
the Depression on financiers and on the profit motive. The "ancient truths" he speaks of
turn out to be the principles of mediaeval economics, things like the "just price," the "just
wage," and a Guild (i.e. union) monopoly over labor. Such principles, dressed up as
"Progressivism," created the Depression under Hoover, prolonged it under Roosevelt, and
have haunted American politics ever since with destructive and corrupting devices like
the minimum wage, "collective bargaining," and Social Security.

Return to text

Money, Note 2

Certainly if it is worth less as money than as a commodity, as is now the case with pre-
1964 US silver coins. Also, see note [9] below.

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Money, Note 3

From recent news, the economies of Argentina and Venezuela have been shrinking, one
might even say collapsing. According to The Economist of March 1st-7th, 2003, the GDP
of Argentina is 10.1% smaller from one year ago, and that of Venezuela is 16.7% smaller.
Nevertheless, Argentina has experienced 39.6% inflation, and Venezuela 33.8% inflation.
When the United States entered the Great Depresson, however, from 1929 to 1933, with
the economy collapsing, there was steady deflation. Prices dropped by 26.7%. This drop
was arrested, but prices did not return to 1929 levels until 1942.

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Money, Note 4

With the United States government this occurs through a kind of shell game. The
Treasury was wisely prohibited from just printing and spending money. It sells bonds to
get extra money, i.e. borrows it from the public. However, the Federal Reserve System
can buy Treasury bonds, both directly and indirectly. The effect of that is for the Federal
Reserve to print the money and then give it to the Treasury. The Federal Reserve then
holds the bonds and collects interest on the debt, which it then turns over, with all its
earnings, to the Treasury. The Federal Reserve can also buy any bonds or securities on the
public market, which is the same as printing money and loaning it to anyone. When the
Federal Reserve loans money directly to member banks of the Federal Reserve System,
the interest rate it charges is called the "discount rate." The discount rate is the only link
between interest rates and inflation, since a higher rate discourages banks from borrowing
(newly created) money from the Fed and a lower rate encourages it. Encouraging such
borrowing could stimulate both economic growth and inflation, or just inflation, resulting
in the common link made by press and politicans between an "overheated" economy and
inflation. But a growing economy itself has absolutely nothing to do with inflation.
Economic growth without devices for increasing the money supply actually results in
deflation, as it did from the end of the Civil War until 1896.

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Money, Note 5

The Federal Reserve System is theoretically "owned" by its member banks; but the true
state of affairs is revealed by the fact that its profits are paid to the Treasury and by the
fact that it is controlled by political appointees on the Board of Governors.

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Money, Note 6

Congress simply gave the Treasury the power to print money. This was subsequently
found to be unconstitutional. Then the decision was reversed. But finally Congress
decided that it didn't want the Treasury to have that power. Eventually, in 1913, the
Federal Reserve System was created. Its power to issue Federal Reserve Notes led to our
present currency.

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Money, Note 7

The Federal Government knew that it was unconstitutional, and politically impossible, to
try and "call in" (i.e. confiscate) the gold coinage, as Franklin Roosevelt did in 1933.
Roosevelt himself said that he was going to confiscate gold whether the Supreme Court
judged it Constitutional or not. The Court, however, complied and found the action
Constitutional, even thought it characterized the unilateral voiding of the gold clauses in
private contracts and United States securities as "immoral."

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Money, Note 8

That the government is the biggest borrower of all and thus has the greatest interest in
inflation is a tribute to the responsibility of American government in the post-Civil War
era, as it is an indictment of most government since, which has been perfectly willing to
inflate the currency to devalue the national debt -- although this steals money right out of
the pockets and hard-earned savings of every American.

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Money, Note 9

The Gold Standard was introduced by Great Britain in 1816 because of the conflict that
was always occurring between the relative values of gold and silver, as commodities, and
their value as money. A gold strike would make gold relatively less valuable in relation to
silver, which meant that a gold unit of value would have to be marked down in terms of a
silver unit of value. Between 1670 and 1717, the British gold coin, the Guinea, bounced
around between a value of 20 shillings (in silver) and 30 shillings, as gold became
relatively more valuable. It was settled at 21 shillings in 1717, which was slightly
overvalued (against the advice of Issac Newton, Master of the Mint at the time, who said
that it should be no more than 20 shillings and 8 pence). That drew gold into England for
the following century, as speculators sold gold there to obtain a greater profit in silver.
The Gold Standard ended all those kinds of problems, although it did then limit the rate at
which the money supply could grow naturally.

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Money, Note 10

Also, writing off bad loans can put banks into bad financial shape themselves. Before
deposit insurance, rumors could start a "run" on a bank, as people would try to withdraw
their money. A bank's reserves could never cover all deposits, so a serious run could
cause a bank to default and fail. A failed bank takes with it a lot more of the money
supply than a few failed loans. In the banking panic of 1907, banks briefly suspended
cash payments to stop runs on them. That was illegal, but it was tolerated and succeeded
in ending the panic.

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Money, Note 11

The Federal Reserve System, which had been created to support the banks during credit
crises (to replace ad hoc devices like the suspension of cash payments in 1907), failed to
do so in the early 30's, allowing banks to fail in unprecedented numbers. This was
particularly egregious because in the 1920's the Fed had encouraged banks to extend their
credit further than ever before. The banks did, with confidence, since they understood
that the System had been created to stand behind them if they might be threatened in a
credit collapse. But when the collapse came, with all the force of a fall from an
unprecedented height, and a banking panic began, the Federal Reserve mostly stood idly
by and let the banks fail. By 1933 40% of all the nation's commercial banks had gone
bankrupt or been closed by regulators. Nothing like that had ever happened before, in part
because the banks had not let it happen. But the ability of the banks to protect themselves,
and the public, had been taken from them and given to irresponsible bureaucrats whose
only real interest was to protect themselves, not the banks or the public. The result was
that the savings of businesses and individuals were wiped out, the currency deflated
tremendously, and debts, mortgages, and taxes were suddenly many times more valuable
than before. Countless bankruptcies and foreclosures followed. Thus, Franklin
Roosevelt's "money-changers" (see quote above) were not the cause of the Depression
but in fact its first victims. But it was easy to blame the victims, since most people didn't
even know that the Federal Reserve System existed, much less what it was supposed to
do.

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