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The following is collection of short articles on the history of money

"Monetary Episodes From History"

Author : Paul Tustain 

    Article Table of Contents:

The monetary cycle

Ionia - Riches without strength [700BC]

Sparta - Gold prohibition in a collapsing economy [600BC]

The Carthaginian national state lottery [450BC]

Byzantium - Early fiscal indiscipline [410BC]

Athens - Housing the Gods (on borrowed money) [500 - 300BC]

Rome - Monetary expansion & republican militarism [200BC]

Chinese credit derivatives after Genghis Khan [1200AD]

John Law - The Royal Bank of France [1716AD]

Why Sweden’s central banker was beheaded [1719AD]

The US greenback [1870AD]

The Weimar inflation in Germany [1923AD]

What can we learn ?

Gold at the junction of monetary systems

Gold as a money of choice 

Back to previous page

The Greenback - 1860 to 1880 - The United States of America

In spite of a constitutional bar to un-backed paper money which existed at the time Abraham Lincoln was forced, in 1862,  to issue the first tranche of what was eventually $450,000,000 of "greenbacks" needed to finance the North's efforts during the civil war.

The greenback was a credit note.  Unlike America's extant currency it conferred no right of redemption into gold. What it did do was offer a promise that at some unspecified future date the issuer - Lincoln's government - would honor them with conversion back into a truly gold convertible currency.  Clearly this was an unfunded promise based on the outcome of the war, a fact which was not lost on the population.

When soldiers sent their greenbacks home they were inferior to the sounder notes backed by gold, and a price differential arose according to which type of money was being used.  As fears of a long and costly war peaked the credit of Lincoln's government diminished until the differential reached 3:1, and even that flattered the greenback because there were doubts about the gold backed currency itself, whose redemption rights had been suspended to prevent its owners bleeding the treasury dry as they hedged the military outcome with metal.

But - and here is a rarity - the greenback was redeemed, some fifteen years later.  This simple fact disproves the popular belief that 'all paper currency systems eventually end in disaster'.  On the contrary, this particular one was something of a success - especially for those who bought their government's integrity at a deep discount.

We could conclude that the greenback was a story to re-assert faith in paper money systems, but it would be simplistic.  A significant factor in the redemption was corruption.  At the time there was no such thing as insider dealing and for those who knew that a redemption of doubtful paper was likely the only respectable course of action was to buy some.  In fact one of the constitutional reasons for sound money in the first place was to prevent a conflict arising where those with privileged knowledge could benefit privately.  It is beyond doubt that by the time of redemption a substantial haul of deeply discounted paper had found its way to officials and their private and commercial associates.  Their money was made at the collective expense of others who had held the paper while it was sinking.

"The greenbacks ceased to be legal tender after a Supreme Court ruling struck them down as unconstitutional money. Who was the man who led the Supreme Court to strike down the very financing tool of the North's victory? It was the same man who ushered in its birth. For you see by 1870 the Chief Justice of the Supreme Court was none other than former Secretary of the Treasury, Salmon P. Chase."
Larry LaBorde proprietor www.silvertrading.com  Llaborde@cdswater.com

In the end the greenback's successful redemption was a mixed blessing.  This experience of state borrowing under duress was an important driver in encouraging the next political generation to embark, in the 1930s, on the deficit financing which is the cause of so much private prosperity and public debt today.  In that sense maybe the jury on the greenback case is still out.

The Weimar hyperinflation - 1923 - Germany

The most famous of modern monetary disasters occurred in Germany in 1923.  The indirect cause of the German hyperinflation was the Treaty of Versailles, which brought to a close the First World War. More directly it was the level of reparations which the German people were required to pay to the victors. More directly still it was the occupation by France and Belgium of Germany's industrial heartland in the Ruhr valley, as an attempt to force the payment of those reparations, which were outstanding.

Germany was already proving ungovernable as democrats, republicans, communists and the extreme right vied for power. Assassinations were rife.

In reaction to the Ruhr occupation the government, such as it was, encouraged the closure of factories to prevent the achievement of the foreign occupiers' aims, and it offered payment in newly printed money to Germans thrown out of work.

The results are well documented. Restaurant prices rose during the meal; workers had to be paid twice a day; the money presses consumed a vast tonnage of paper; the population took to shares as a possible money store and financial speculation ran amok. It was fine to enter into this era with nothing to lose, but a disaster for anyone who had built themselves even a small fortune on the old rules of the world. German savers were wiped out.

The inflation was a revolution of wealth - transferring it from those who had saved to those who had the foresight to act. It drove large numbers of the impoverished middle classes to despair and even suicide.

"The young, and quick-witted did well. Overnight they became free, rich and independent. It was a situation in which mental inertia and reliance on past experience was punished by starvation and death." Sebastian Haffner - 1939

What can we learn?

These monetary episodes are varied, and represent the tiniest fraction of the relevant historical facts about money systems.

The episodes are not easily comparable with modern states of today. But perhaps similar to our own times were the circumstances in Kublai Khan's China. Its borders were secure, it was enormously confident in its institutions of state, it had enjoyed a prolonged period of considerable economic success, and built its civic and commercial infrastructure on what amounted to capital issued for nothing. Credit - in the form of state and corporate paper - had been injected in quantities which had never previously been imagined. 

It left a population of savers holding paper promises of wealth, of which there were such a massive number that everyone was happy.

What seems to have happened in China is that a large and confident population worked harder than usual to accumulate a currency whose respectability was backed by the apparent integrity of a secure empire. As long as people strove to accumulate this money the state benefited from the productivity gains of a motivated population, which cost the state nothing.  The empire's infrastructure was constructed on credit, its economy expanded on credit.  This growth came from the power of a belief held by its citizenry that their labour was being validly remunerated in the token form of this Chinese imperial paper.

In Khan's China the very best living standards were enjoyed - not surprisingly - when people worked for something which it cost the state almost nothing to put into circulation in ever greater amounts. To be possible this required near unanimous confidence in the system, and not surprisingly the period was recognized as one of enlightened economic management - a view which persisted for several decades during a period of steady currency inflation (which was also experienced by Athens during its magnificent decline in the 60 years following 400BC).

Yet the most prosperous and confident period preceded rapid financial and political decline. When the confidence in the currency gave way there was wholesale destruction of the value of savings in almost all forms at once, and the popular energy required to sustain empire rapidly disappeared. As its hitherto reliable institutions imploded the state itself was overthrown from the inside within a few years.

At that time the few holders of gold - which had no formal monetary role whatsoever - saw their personal purchasing power increase quickly.

Gold at the junction of monetary systems................  (Click here to continue to next page)

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Copyright  © 2004 Paul Tustain

 Reprinted with permission and thanks to source- www.galmarley.com

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