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to be an American citizen, and three-quarters of the directors of a
bank had to be residents of the State in which the bank did business.
Interest rates were limited by State usury laws; and if no laws were in
effect, then to 7 percent. Banks could not hold real estate for more
than five years, except for bank buildings. National banks were not

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allowed to circulate notes they printed themselves. Instead, they had
to deposit U.S. bonds with the Treasury in a sum equal to at least one-
third of their capital. They got government-printed notes in return.
So what was the problem? Although the new national banknotes
were technically issued by the Comptroller of the Currency, this was
just a formality, like the printing of Federal Reserve Notes by the Bureau
of Engraving and Printing today. The currency bore the name of the
bank posting the bonds, and it was issued at the bank™s request. In
effect, the National Banking Act authorized the bankers to issue and
lend their own paper money. The banks “deposited” bonds with the
Treasury, but they still owned the bonds; and they immediately got
their money back in the form of their own banknotes. Topping it off,
the National Banking Act effectively removed the competition to these
banknotes. It imposed a heavy tax on the notes of the state-chartered
banks, essentially abolishing them.5 It also curtailed competition from
the Greenbacks, which were limited to specific issues while the bankers™
notes could be issued at will. Treasury Secretary Salmon P. Chase
and others complained that the bankers were buying up the Greenbacks
with their own banknotes. Zarlenga cites a historian named Dewey,
who wrote in 1903:
The banks were accused of absorbing the government notes as
fast as they were issued and of putting out their own notes in
substitution, and then at their convenience converting the notes
into bonds on which they earned interest [in gold].6
The government got what it needed at the time “ a loan of
substantial sums for the war effort and a sound circulating currency
for an expanding economy “ but the banks were the real winners.
They not only got to collect interest on money of which they still had
the use, but they got powerful leverage over the government as its
creditors. The Act that was supposed to regulate the bankers wound
up chartering not one but a whole series of private banks, which all
had the power to create the currency of the nation.
The National Banking Act was recommended to Congress by Trea-
sury Secretary Chase, ironically the same official who had sponsored
the Greenback program the Act effectively eliminated. In a popular
1887 book called Seven Financial Conspiracies That Have Enslaved
the American People, Sarah Emery wrote that Chase acquiesced only
after several days of meetings and threats of financial coercion by bank
delegates.7 He is quoted as saying later:


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Web of Debt

My agency in procuring the passage of the National Bank Act
was the greatest financial mistake of my life. It has built up a
monopoly that affects every interest in the country. It should be
repealed. But before this can be accomplished, the people will
be arrayed on one side and the banks on the other in a contest
such as we have never seen in this country.8
Although Lincoln was assassinated in 1865, it would be another
fifty years before the promise of his debt-free Greenbacks were erased
from the minds of a people long suspicious of the usury bankers and
their gilded paper money. The “Gilded Age” “ the period between the
Civil War and World War I “ was a series of battles over who should
issue the country™s currency and what it should consist of.

Skirmishes in the Currency Wars

Chase appeared on the scene again in 1869, this time as Chief
Justice of the Supreme Court. He wrote the opinion in Hepburn v.
Griswold, 75 U.S. 603, holding the Legal Tender Acts to be unconsti-
tutional. Chase considered the Greenbacks to be a temporary war
measure. He wrote that the Constitution prohibits the States from
passing “any . . . law impairing the obligation of contracts,” and that
to compel holders of contracts calling for payment in gold and silver
to accept payment in “mere promises to pay dollars” was “an uncon-
stitutional deprivation of property without due process of law.”
In 1871, however, with two new justices on the bench, the Su-
preme Court reversed and found the Legal Tender Acts constitutional.
In the Legal Tender cases (Knox v. Lee, 79 U.S. 457, 20 L.Ed. 287; and
Juilliard v. Greenman, 110 U.S. 421, 4 S.Ct. 122, 28 L.Ed. 204), the
Court declared that Congress has the power “to coin money and regu-
late its value” with the objects of self-preservation and the achieve-
ment of a more perfect union, and that “no obligation of contract can
extend to the defeat of legitimate government authority.”
In 1873, an Act the Populists would call the “Crime of ™73” elimi-
nated the free coinage of silver. Like when King George banned the
use of locally-issued paper scrip a century earlier, the result was “tight”
money and hard times. A bank panic followed, which hit the western
debtor farmers particularly hard.
In 1874, the politically powerful farmers responded by forming
the Greenback Party. Their proposed solution to the crisis was for the
government to finance the building of roads and public projects with

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Chapter 9 - Lincoln Loses the Battle

additional debt-free Greenbacks, augmenting the money supply and
putting the unemployed to work, returning the country to the sort of
full employment and productivity seen in Benjamin Franklin™s time.
The Greenbacks could also be used to redeem the federal debt. Under
the “Ohio Idea,” all government bonds not specifying payment in gold
or silver would be repaid in Greenbacks.9 The plan was not adopted,
but the Scarecrow had shown he had a brain. The Timid Lion had
demonstrated the courage and the collective will to organize and make
a difference.
In 1875, a Resumption Act called for redemption by the Treasury
of all Greenbacks in “specie.” The Greenbacks had to be withdrawn
and replaced with hard currency, producing further contraction of
the money supply and deeper depression.
In 1878, the Scarecrow and the Tin Woodman joined forces to
form the Greenback-Labor Party. They polled over one million votes
and elected 14 Representatives to Congress. They failed to get a new
issue of Greenbacks, but they had enough political clout to stop fur-
ther withdrawal of existing Greenbacks from circulation. The Green-
backs then outstanding ($346,681,016 worth) were made a perma-
nent part of the nation™s currency.
In 1881, James Garfield became President. He boldly took a stand
against the bankers, charging:
Whosoever controls the volume of money in any country is
absolute master of all industry and commerce . . . And when
you realize that the entire system is very easily controlled, one
way or another, by a few powerful men at the top, you will not
have to be told how periods of inflation and depression originate.
President Garfield was murdered not long after releasing this
statement, when he was less than four months into his presidency.
Depression deepened, leaving masses of unemployed to face poverty
and starvation at a time when there was no social security or
unemployment insurance to act as a safety net. Produce was left to
rot in the fields, because there was no money to pay workers to harvest
it or to buy it with when it got to market. The country was facing
poverty amidst plenty, because there was insufficient money in
circulation to keep the wheels of trade turning. The country sorely
needed the sort of liquidity urged by Lincoln, Carey and the
Greenbackers; but the bankers insisted that allowing the government
to print its own money would be dangerously inflationary. That was
their argument, but critics called it “humbuggery” . . . .

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Chapter 10
THE GREAT HUMBUG:
THE GOLD STANDARD AND THE
STRAW MAN OF INFLATION


“Hush, my dear,” he said. “Don™t speak so loud, or you will be
overheard “ and I should be ruined. I™m supposed to be a Great
Wizard.”
“And aren™t you?” she asked.
“Not a bit of it, my dear; I™m just a common man.”
“You™re more than that,” said the Scarecrow, in a grieved tone;
“you™re a humbug.”
“Exactly so!” declared the little man, rubbing his hands together as
if it pleased him. “I am a humbug.”
“ The Wonderful Wizard of Oz,
“The Magic Art of the Great Humbug”




H umbug is a word that isn™t used much today, but in the
Gilded Age it was a popular term for describing frauds, shams
and con artists. Vernon Parrington, a Pulitzer prize-winning historian
writing in the 1920s, used it to describe the arguments of the bankers
to silence the farmers who were trying to reform the banker-controlled
money system in the 1890s. It was the farmers who particularly felt
the pinch of tight money when the bankers withheld their gold.
Parrington wrote that the farmers “pitted their homespun experience
against the authority of the bankers and the teaching of the schools.”
In response to their clear-headed arguments, the bankers defended
with a smokescreen of confusing rhetoric:
Denunciation took the place of exposition, and hysteria of
argument; and in this revel of demagoguery the so-called
educated classes -- lawyers and editors and business men -- were
perhaps the most shameless purveyors of humbuggery. Stripped
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Chapter 10 - The Great Humbug

of all hypocrisy the main issue was this: Should the control of
currency issues -- with the delegated power of inflation and deflation
-- lie in the hands of private citizens or with the elected representatives
of the people? . . . [But] throughout the years when the subject
was debated in every newspaper and on every stump the real
issue was rarely presented for consideration. The bankers did
not dare to present it, for too much was at stake and once it was
clearly understood by a suspicious electorate their case was lost.
Hence the strategy of the money group was to obscure the issue, an
end they achieved by dwelling on the single point of inflation . . . .1

The Quantity Theory of Money

The gold standard and the inflation argument that was used to
justify it were based on the classical “quantity theory of money.” The
foundation of classical monetary theory, it held that inflation is caused
by “too much money chasing too few goods.” When “demand” (the
money available to buy goods) increases faster than “supply” (goods
and services), prices are forced up. If the government were allowed to
simply issue all the Greenback dollars it needed, the money supply
would increase faster than goods and services, and price inflation
would result. If paper money were tied to gold, a commodity in limited
and fixed supply, the money supply would remain stable and price
inflation would be avoided.
A corollary to that theory was the classical maxim that the gov-
ernment should balance its budget at all costs. If it ran short of money,
it was supposed to borrow from the bankers rather than print the
money it needed, in order to keep from inflating the money supply.
The argument was a “straw man” argument “ one easily knocked
down because it contained a logical fallacy “ but the fallacy was not
immediately obvious, because the bankers were concealing their hand.
The fallacy lay in the assumption that the money the government bor-
rowed from the banks already existed and was merely being recycled.
If the bankers themselves were creating the money they lent, the argu-
ment collapsed in a heap of straw. The money supply would obvi-
ously increase just as much from bank-created money as from govern-
ment-created money. In either case, it was money pulled out of an
empty hat. Money created by the government had the advantage
that it would not plunge the taxpayers into debt; and it provided a
permanent money supply, one not dependent on higher and higher
levels of borrowing to stay afloat.
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Web of Debt

The quantity theory of money contained another logical fallacy,
which was pointed out later by British economist John Maynard
Keynes. Adding money (“demand”) to the economy would drive up
prices only if the “supply” side of the equation remained fixed. If new
Greenbacks were used to create new goods and services, supply would
increase along with demand, and prices would remain stable.2 When
a shoe salesman with many unsold shoes on his shelves suddenly got
more customers, he did not raise his prices. He sold more shoes. If he
ran out of shoes, he ordered more from the factory, which produced
more. If he were to raise his prices, his customers would go to the
shop down the street, where shoes were still being sold at the lower
price. Adding more money to the economy would inflate prices only
when the producers ran out of the labor and materials needed to make
more goods. Before that, supply and demand would increase together,
leaving prices as they were before.
That theoretical revision helps explain such paradoxical data as
the “economic mystery” of China. The Chinese have managed to
keep the prices of their products low for thousands of years, although
their money supply has continually been flooded with the world™s
gold and silver, and now with the world™s dollars, as those currencies
have poured in to pay for China™s cheap products. The Keynesian
explanation is that prices have remained stable because the money
has gone into producing more goods, increasing supply along with
demand. Keith Bradsher, writing in The New York Times in Febru-
ary 2006, observed:
A longstanding mystery for economic historians lies in how so
much silver and gold flowed to China for centuries for the
purchase of Chinese goods, yet caused little inflation in China.
Many of China™s manufactured goods remained much cheaper
than other countries™ manufactured goods until the early 1800™s,
despite the rapidly growing supply of silver sloshing around the
Chinese economy. One theory is that Chinese output was expanding
as fast as the precious metals supply . . . The same phenomenon
has appeared today, as dollars inundating China have resulted
in practically no increase in prices for most goods and services
(although real estate prices have jumped in most cities).3
By 2007, Chinese economists were complaining that consumer
prices were rising, but this was primarily due to the rising international
costs of fuel and food, and to the fact that the yuan was tightly pegged
to a U.S. dollar that was rapidly becoming devalued in international

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