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people. Franklin wrote from England during the war, “the whole is a
mystery even to the politicians, how we could pay with paper that
had no previously fixed fund appropriated specifically to redeem it.
This currency as we manage it is a wonderful machine.” Thomas Paine
called it a “corner stone” of the Revolution:
Every stone in the Bridge, that has carried us over, seems to
have claim upon our esteem. But this was a corner stone, and
its usefulness cannot be forgotten.12
The Continental™s usefulness was forgotten, however, with a little
help from the Motherland . . . .

Chapter 3 - Experiments in Utopia

Economic Warfare: The Bankers Counterattack

The British engaged in a form of economic warfare that would be
used again by the bankers in the nineteenth century against Lincoln™s
Greenbacks and in the twentieth century against a variety of other
currencies: they attacked their competitor™s currency and drove down
its value. In the 1770s, when paper money was easy to duplicate, its
value could be diluted by physically flooding the market with coun-
terfeit money. In modern times, as we™ll see later, the same effect is
achieved by another form of counterfeiting known as the “short sale.”
During the Revolution, Continentals were shipped in by the boatload
and could be purchased in any amount, essentially for the cost of the
paper on which they were printed. Thomas Jefferson estimated that
counterfeiting added $200 million to the money supply, effectively
doubling it; and later historians thought this figure was quite low.
Zarlenga quotes nineteenth century historian J. W. Schuckers, who
wrote, “The English Government which seems to have a mania for
counterfeiting the paper money of its enemies entered into competi-
tion with private criminals.”
The Continental was battered but remained viable. Schuckers
quoted a confidential letter from an English general to his superiors,
stating that “the experiments suggested by your Lordships have been
tried, no assistance that could be drawn from the power of gold or
the arts of counterfeiting have been left untried; but still the currency .
. . has not failed.”13
The beating that did take down the Continental was from
speculators -- mostly northeastern bankers, stockbrokers and
businessmen -- who bought up the revolutionary currency at a fraction
of its value, after convincing people it would be worthless after the
war. The Continental had to compete with other currencies, rendering
it vulnerable to speculative attack in the same way that foreign
currencies left to “float” in international markets are vulnerable today.
(More on this in Chapters 21 and 22.) The Continental had to compete
with the States™ paper notes and the British bankers™ gold and silver
coins. Gold and silver were regarded as far more valuable than the
paper promises of a revolutionary government that might not prevail,
and the States™ paper notes had the taxation power to back them.
The problem might have been avoided by making the Continental the
sole official currency, but the Continental Congress did not yet have
the power to enforce that sort of order. It had no courts, no police,

Web of Debt

and no authority to collect taxes to redeem the notes or contract the
money supply. The colonies had just rebelled against taxation by the
British and were not ready to commit to that burden from the new
Congress.14 Speculators took advantage of these weaknesses by buying
up Continentals at a deeper and deeper discount until they became
virtually worthless, giving rise to the expression “not worth a

Web of Debt

Chapter 4

The Witch happened to look into the child™s eyes and saw how
simple the soul behind them was, and that the little girl did not know
of the wonderful power the Silver Shoes gave her. So the Wicked
Witch laughed to herself, and thought, “I can still make her my slave,
for she does not know how to use her power.”
“ The Wonderful Wizard of Oz,
“The Search for the Wicked Witch”

J ust as Dorothy did not know the power of the silver shoes on
her feet, so the new country™s leaders failed to recognize the power
of the government-issued paper money Tom Paine had called “a cor-
nerstone of the Revolution.” The economic subservience King George
could not achieve by force was achieved by the British bankers by
stealth, by persuading the American people that they needed the bank-
ers™ paper money instead of their own.
President John Adams is quoted as saying, “There are two ways to
conquer and enslave a nation. One is by the sword. The other is by
debt.” Sheldon Emry, expanding on this concept two centuries later,
observed that conquest by the sword has the disadvantage that the
conquered are likely to rebel. Continual force is required to keep them
at bay. Conquest by debt can occur so silently and insidiously that the
conquered don™t even realize they have new masters. On the surface,
nothing has changed. The country is merely under new management.
“Tribute” is collected in the form of debts and taxes, which the people
believe they are paying for their own good. “Their captors,” wrote
Emry, “become their ˜benefactors™ and ˜protectors.™. . . Without realiz-
ing it, they are conquered, and the instruments of their own society
Chapter 4 - How the Government Was Persuaded

are used to transfer their wealth to their captors and make the con-
quest complete.”1
Colonies in the seventeenth and eighteenth centuries all had the
same purpose “ to enhance the economy of the mother country. That
was how the mother country saw it, but the American colonists had
long opposed any plan that would systematically drain their money
supply off to England. The British had considered the idea of a land
bank as far back as 1754, as a way to provide a circulating medium of
exchange for the colonies; but the idea was rejected by the colonists
when they learned that the interest the bank generated would be sub-
ject to appropriation by the King.2 It was only after the American
Revolution that British bankers and their Wall Street vassals succeeded
in pulling this feat off by stealth, by acquiring a controlling interest in
the stock of the new United States Bank.
The first step in that silent conquest was to discredit the paper
scrip issued by the revolutionary government and the States. By the
end of the Revolution, that step had been achieved. Rampant coun-
terfeiting and speculation had so thoroughly collapsed the value of
the Continental that the new country™s leaders were completely disil-
lusioned with what they called “unfunded paper.” At the Constitu-
tional Convention, Alexander Hamilton, Washington™s new Secretary
of the Treasury, summed up the majority view when he said:
To emit an unfunded paper as the sign of value ought not to
continue a formal part of the Constitution, nor ever hereafter to
be employed; being, in its nature, repugnant with abuses and
liable to be made the engine of imposition and fraud.3
The Founding Fathers were so disillusioned with paper money that
they simply omitted it from the Constitution. Congress was given the
power only to “coin money, regulate the value thereof,” and “to bor-
row money on the credit of the United States . . . .” An enormous
loophole was thus left in the law. Creating and issuing money had
long been considered the prerogative of governments, but the Consti-
tution failed to define exactly what “money” was. Was “to coin money”
an eighteenth-century way of saying “to create money”? Did this
include creating paper money? If not, who did have the power to
create paper money? Congress was authorized to “borrow” money,
but did that include borrowing paper money or just gold? The pre-
sumption was that the paper notes borrowed from the bankers were
“secured” by a sum of silver or gold; but in the illusory world of fi-
nance, then as now, things were not always as they seemed . . . .

Web of Debt

The Bankers™ Paper Money Comes in
Through the Back Door

While the Founding Fathers were pledging their faith in gold and
silver as the only “sound” money, those metals were quickly proving
inadequate to fund the new country™s expanding economy. The na-
tional war debt had reached $42 million, with no silver or gold coins
available to pay it off. The debt might have been avoided if the gov-
ernment had funded the war with Continental scrip that was stamped
“legal tender,” making it “money” in itself; but the revolutionary gov-
ernment and the States had issued much of their paper money as prom-
issory notes payable after the war. The notes represented debt, and
the debt had now come due. The bearers expected to get their gold,
and the gold was not to be had. There was also an insufficient supply
of money for conducting trade. Tightening the money supply by lim-
iting it to coins had quickly precipitated another depression. In 1786,
a farmers™ rebellion broke out in Massachusetts, led by Daniel Shays.
Farmers brandishing pitchforks complained of going heavily into debt
when paper money was plentiful. When it was no longer available
and debts had to be repaid in the much scarcer “hard” coin of the
British bankers, some farmers lost their farms. The rebellion was de-
fused, but visions of anarchy solidified the sense of an urgent need for
both a strong central government and an expandable money supply.
The solution of Treasury Secretary Hamilton was to “monetize”
the national debt,i by turning it into a source of money for the coun-
try.4 He proposed that a national bank be authorized to print up
banknotes and swap them for the government™s bonds.5 The govern-
ment would pay regular interest on the debt, using import duties and
money from the sale of public land. Opponents said that acknowl-
edging the government™s debt at face value would unfairly reward
the speculators who had bought up the country™s I.O.U.s for a pit-
tance from the soldiers, farmers and small businessmen who had ac-
tually earned them; but Hamilton argued that the speculators had
earned this windfall for their “faith in the country.” He thought the
government needed to enlist the support of the speculators, or they
would do to the new country™s money what they had done to the
Continental. Vernon Parrington, a historian writing in the 1920s, said:
To monetize means to convert government debt from securities evidencing
debt (bills, bonds and notes) into currency that can be used to purchase goods
and services.
Chapter 4 - How the Government Was Persuaded

In developing his policies as Secretary of the Treasury, [Hamilton]
applied his favorite principle, that government and property
must join in a close working alliance. It was notorious that during
the Revolution men of wealth had forced down the continental currency
for speculative purposes; was it not as certain that they would
support an issue in which they were interested? The private
resources of wealthy citizens would thus become an asset of
government, for the bank would link “the interest of the State in
an intimate connection with those of the rich individuals
belonging to it.”6
Hamilton thought that the way to keep wealthy speculators from
destroying the new national bank was to give them a financial stake
in it. His proposal would do this and dispose of the government™s
crippling debts at the same time, by allowing creditors to trade their
government bonds or I.O.U.s for stock in the new bank.
Jefferson, Hamilton™s chief political opponent, feared that giving
private wealthy citizens an ownership interest in the bank would link
their interests too closely with it. The government would be turned
into an oligarchy, a government by the rich at war with the working
classes. A bank owned by private stockholders, whose driving motive
was profit, would be less likely to be responsive to the needs of the
public than one that was owned by the public and subject to public
oversight. Stockholders of a private bank would make their financial
decisions behind closed doors, without public knowledge or control.
But Hamilton™s plan had other strategic advantages, and it won
the day. Besides neatly disposing of a crippling federal debt and
winning over the “men of wealth,” it secured the loyalty of the
individual States by making their debts too exchangeable for stock in
the new Bank. The move was controversial; but by stabilizing the
States™ shaky finances, Hamilton got the States on board, thwarting
the plans of the pro-British faction that hoped to split them up and
establish a Northern Confederacy.7

Promoting the General Welfare:
The American System Versus the British System

Hamilton™s goal was first and foremost a strong federal government.
He was the chief author of The Federalist Papers, which helped to get
the votes necessary to ratify the Constitution and formed the basis for
much of it. The Preamble to the Constitution made promoting the

Web of Debt

general welfare a guiding principle of the new Republic. Hamilton™s
plan for achieving this ideal was to nurture the country™s fledgling
industries with protective measures such as tariffs (taxes placed on
imports or exports) and easy credit provided through a national bank.
Production and the money to finance it would all be kept “in house,”
independent of foreign financiers.
Senator Henry Clay later called this the “American system” to
distinguish it from the “British system” of “free trade.”ii Clay was a
student of Matthew Carey, a well-known printer and publisher who
had been tutored by Benjamin Franklin. What Clay called the “Brit-
ish system” was rooted in the dog-eat-dog world of Thomas Hobbes,
John Locke and Scottish economist Adam Smith. Smith maintained
in his 1776 book The Wealth of Nations that if every man pursued his
own greed, all would automatically come out right, as if by some “in-
visible hand.” Proponents of the American system rejected this laissez-
faire approach in favor of guiding and protecting the young country
with a system of rules and regulations. They felt that if the economy
were left to the free market, big monopolies would gobble up small
entrepreneurs; foreign bankers and industrialists could exploit the
country™s labor and materials; and competition would force prices
down, ensuring subjugation to British imperial interests.
The British model assumed that one man™s gain could occur only
through another™s loss. The goal was to reach the top of the heap by


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