An article titled Currency, Finance and the Civil War makes some common errors about money.
Correcting those errors will let us clarify the nature of inflation, and how governments control it. (The images above will make sense farther below.)
Banking in the early years of the American Republic was decentralized, inefficient and disorganized, leading to frequent panics and depressions. While attempts were made to resolve these problems, none were substantial or comprehensive enough to put the USA on a solid financial footing.
As in many other areas of national development, it was the Civil War which prompted radical change in the USA’s financial system.
To pay for the men and material needed to fight the war, the government needed to increase revenue.
Wrong. When we falsely claim that the U.S. government “pays for its wars,” or we say that the federal government “needs revenue,” we maintain the Big Lie that the U.S. government cannot create money out of thin air.
Wars are fought between humans. Monetarily Sovereign governments issue currency that facilitates wars, so that people pay each other.
Put another way, when a government wants to mount a war, it needs people to increase their interactions with each other, whether the interactions involve killing, manufacturing, or whatever. In order to increase human interaction, the government increases the amount of money it spends into the economy. This is not the same as “paying” for something. You and I pay for things, since we are not Monetarily Sovereign. When we pay, we lose money. However the U.S. government creates money out of thin air. It does not “pay” for things. It facilitates things, and it regulates them.
Suppose that you could create an infinite amount of money by pressing buttons on your computer keyboard, like the U.S. government does. After you had bought all the toys and luxuries you wanted, you would cease to “pay” for things in the ordinary sense. As you continued to create and distribute money, you would add money to the economy at a rate that you decided. People would use your money to interact with each other. You would control people’s rate of interaction by controlling the amount of money you created and — if you choose — the amount of money you taxed back out of the economy. Certainly you would have no need for revenues, and have no need to borrow money from anyone.
Therefore, again, the U.S. government does not “pay” for anything. Instead, the government facilitates and regulates.
This is not merely a semantic quibble. The way we use words can either free us from the Big Lie, or trap us by it.
There are three ways that a central government can increase revenues: increasing taxes, borrowing funds, or printing money.
Governments can also derive revenues from a trade surplus (aka a “positive current account”). Such revenues may occur in the government’s own currency, or in some foreign currency. But once again, a central government that can create money out of thin air has no need for revenues in the first place. The government may need foreign exchange reserves if its currency is not accepted abroad, but it does not need revenues in its own currency.
The U.S. Congress took action quickly, increasing the tariff (the main source of government income to that time) and passing the first federal income tax in August 1861. Treasury Secretary Salmon P. Chase started the first war bond program in American history to provide loans to the federal government.
Wrong again. When we (falsely) claim that the U.S. government needs “income” or loans, we champion the Big Lie. The U.S. government has no need for income or loans, since the government creates its money out of thin air. Thus, the purpose of the federal income tax and the war bonds was not to “fund the government,” but to control inflation.
To clarify this, let’s use an analogy…
When you have a flu virus, your body creates a fever to increase your metabolism, which in turn causes your body’s defenses go into overdrive. However your body must control the fever. If your body loses control, the fever can kill you.
Likewise when a government wants its citizenry to go to war, the government creates a social fever in order to increase the citizenry’s metabolism (i.e. increase public interactions). The government generates this fever by issuing propaganda, and by creating money out of thin air, and spending it into the economy.
However the government must control this fever. If the government loses control, there will be inflation (too much feverish activity) which threatens the social body. Therefore the government must be able to lower the fever whenever necessary. The government does this by removing money from the economy.
There are three main ways that Monetarily Sovereign governments remove money from circulation, and thereby “lower the fever” (i.e. control inflation).
2. Raising interest rates
3. Selling bonds
Taxation removes money from the economy by essentially destroying money. Increased interest rates remove money from the economy by making it harder to obtain and pay off loans. Bonds remove money from the economy by tying up money until the bonds mature.
Since average people don’t like to pay taxes to the government, or be in debt to banks, the U.S. government’s preferred method of controlling inflation during times of major wars is to issue “War Bonds” (or “Liberty Bonds” or “Defense Bonds,” or “Victory Bonds,” or whatever). These pay interest to the buyer, and they can be purchased by any person at any bank or movie theatre, plus other places. What’s not to like?
Let me repeat: during times of major war (e.g. a world war) the U.S. government seeks to generate a social “fever” by creating vast numbers of dollars and spending them into the economy. However the government must control this fever. The government must control the inflation rate. The government does this by removing money from the economy when necessary. The preferred way to remove money during wartime is to sell “war bonds.” If not enough people buy war bonds, then the government can also remove money (i.e. control inflation) via taxation, and by raising general interest rates.
During times of major wars, inflation is always a problem, because there are increased numbers of dollars in circulation, and decreased numbers of consumer goods to spend those dollars on. This causes hoarding, black markets, price inflation, and so on. If this is not controlled, then the economy will break down, and the war will be lost.
Therefore during the U.S. Civil War and both World Wars, the U.S. government launched massive propaganda campaigns to get people to buy “war bonds.”
This has nothing to do with “funding the government” or “paying for the war.”
However, since the U.S. government needs people to buy “war bonds” (so that inflation can be controlled) the government lies to people. The government falsely tells them, “The money that you use to buy war bonds is desperately needed to by ammunition! Bonds buy bombs!”
In other words, during wartime, the government uses the Big Lie to control inflation. It falsely tells the masses that the government needs their money.
During the Second World War, the U.S. government no longer needed to pretend that it wanted Americans to die in wars to “defend liberty,” or “defend democracy.” WW II was a race war against ‘dem evil Japs and Krauts. Hence U.S. citizens of Japanese descent were rounded up and put into concentration camps. Hence the special bonds were simply called “war bonds.”
Government-commissioned advertisements urging people to buy “war bonds” appeared everywhere. In all print media (newspapers, magazines, comic books, postage stamps, etc). In newsreels at the cinema. Sometimes in the main movie itself. In radio broadcasting. On the sides of buses, buildings, and barns. There were parades and beauty pageants and carnivals to encourage people to buy “war bonds.” The message was inescapable. This shows how important it is to control inflation during times of major wars.
The messages also enjoined people to not waste food or consumer goods, and not take any time off from their jobs at the munitions plants, nor be careless with their gossip, and so on. These were often racist in character, since mobs always respond well to racism and bigotry.
These posters served a number of purposes, one of which was to sustain public energy by encouraging a racist hatred for the enemy. When we hate, we become ugly. Since we love to hate, but we don’t like being ugly, we project our ugliness onto others, reducing them to caricatures like those seen above. After a war ends, and the hate subsides, we no longer need to project our own ugliness onto the enemy. We are once again permitted to see foreigners as they really are. The “ugly Jap” changes back into this…
Today the “ugly” enemy is Muslims. This phenomenon never changes.
Anyway we were talking about the U.S. government’s control of inflation during times of major war. Let’s see some of those WW II “buy war bonds” posters…
I said above that one of the purposes of these posters was to “sustain public energy by encouraging a racist hatred for the enemy.”
Another way to sustain public energy was via sex, e.g. that image at the lower left. Sexual suggestion causes arousal in wartime and peacetime alike. Sex sells.
Anyway let’s return to our article. I’ve made some corrections in blue….
Lincoln’s Treasury Secretary, Salmon P. Chase, started the first war bond program in American history to provide loans to the federal government control wartime inflation. Chase sold government bonds both to financiers and ordinary people. By the war’s end, he had sold $400 million worth of “five-twenties”—6 percent bonds that could be redeemed between five and twenty years after issuance—and $800 million worth of 7 percent bonds (“seven-thirties”).
The most controversial action was the 1862 passage of the Legal Tender Act, which allowed the government to print paper money (greenbacks) to pay its bills finance the war effort. Up to this time, the federal government had minted gold and silver coins, but did not issue currency notes. The central government had last issued paper money when the Continental Congress printed dollars during the Revolution, which had become worthless by the end of the war. Fears of inflation, as well as constitutional doubts about the right of the government to print currency, led many Americans to oppose the Legal Tender Act.
Revolutionary War dollars became worthless because of inflation caused by the lack of a nationwide money system of government-issued money. There was no U.S. Monetary Sovereignty, since there was no United States, and thus no U.S. government. There were only private banks, plus private companies that issued currency and notes of credit. Amid such conditions, inflation is bound to happen in wartime.
Regarding the Legal Tender Act of 1862, it was opposed by private bankers and their paid cronies in the printed media. How dare the U.S. government create money out of thin air like the bankers did? The criminal bankers were the lords of money. They were gods. Didn’t Lincoln realize this?
Below is a pro-banker cartoon at that time, which lampooned Chase’s “greenback mill.”
Bad news on the war front in late 1861 led people to hoard gold. Those who had bank notes exchanged them for gold coins. By early 1862, both private banks and the Treasury were running short of gold reserves and had stopped paying out gold in exchange for their notes. Though Secretary Chase was uncertain of the constitutionality of the Legal Tender Act, he considered it an emergency measure, writing to Congress in February 1862, “Immediate action is of great importance. The Treasury is nearly empty.” Passed as a war measure, the action was viewed as temporary.
Secretary Chase was uncertain of the constitutionality because Article I, Section 8 of the U.S. Constitution says that Congress shall have the power to “coin money.” What about the Executive Branch (i.e. the U.S. Treasury)? Also, does “coin money” include the power to issue currency notes, and issue bills of credit? Anyway the U.S. Congress passed the Legal Tender Act, thereby establishing Monetary Sovereignty with a fiat money system and a U.S. national currency.
The legislation made greenbacks legal tender for all debts, except custom duties and interest on government bonds—these payments had to be made in gold specie to shore up the Union’s supply of gold reserves. To maintain these reserves, the new federal currency could not be exchanged for gold specie.
If the U.S. government could now create money out of thin air, then why did the government need gold reserves? The answer is that many people falsely think fiat money is worthless unless it is “backed by gold.” This is an illusion that some people refuse to part with. Therefore, during the Civil War, key suppliers to the government (especially foreigners who exported to the USA) wanted to be paid in gold, not dollars.
Concern over these unprecedented acts on the part of the federal government actually led many Americans to clamor for higher taxes to pay for the war, rather than printing currency. “Resort must be had to taxes, direct or indirect, or both, to place the government upon a basis of credit which will enable it to command the required means [to fight the war].” ~ Geneva Gazette, January 24, 1862
The average American thinks that nothing in life (including money) has value unless it involves suffering. Since paying taxes involves suffering, only tax money is “real money.” Money created by the government out of thin air is not “real money,” since it involves no suffering, and therefore has “no worth.” By contrast, money created by bankers out of thin air is “real money,” since it involves debt, which entails suffering.
So thinks the stupid American peasant.
This stupidity is, in part, the source of the idiotic slogan, “There’s no free lunch,” which some people use to dismiss the facts of Monetary Sovereignty. A “free lunch” does not entail suffering.
This stupidity at the time was fostered by banks, who did not enjoy having to compete with the U.S. government in money matters.
The change to currency laws enabled the Union to pay its expenses with money it printed. It stopped the run on reserves, but caused inflation. Though far less severe than in the Confederacy (80% compared to 9000%), complaints about the Union’s actions appeared in the press:
“Rise in Prices.— Almost every article of domestic consumption has doubled in price within the past two years, and in some instances has trebled; and upon those who depend upon fixed wages, for the support of themselves and family, have fallen heavily. There is no probability, so far as human foresight can see, of any change for the better. Just so long as Government keeps printing greenbacks, in almost fabulous amounts, just so long will prices tend upward of everything that can be bought and sold. A greenback representing one dollar is now worth only about 68 cents.”
—Geneva Gazette, November 20, 1863
Major wars entail inflation, regardless of whether the money in circulation comes from banks (with debt added to it) or from the government (with no debt load). This occurs because the money supply increases, while the supply of consumer goods decreases. As goods become scarce, sellers become able to charge higher prices. The government controls this inflation by reducing the amount of money in circulation. Scarcity of money brings prices back down.
The National Banking Acts of 1863 and 1864 consolidated and expanded on the changes to the financial system introduced in 1862. Based on New York’s Free Banking Law of 1838, these Acts created a system of national banks under federal regulation. They also created a uniform national currency, and provided a market for government bonds to help finance the Union’s war expenses control inflation.
The new National banks were required to purchase U.S. bonds equal to one-third of their capital, thus ensuring buyers for the bonds. They were to accept bank notes from other national banks at par or face value, and to circulate Treasury notes (greenbacks) in place of their own bank notes. A 10% tax on bank notes issued by other banks was added in 1865, effectively ending the use of state and private bank notes.
This must have infuriated the bankers of that day. They had been money gods, but now they had to abide by federal laws.
The changes brought about by the crisis of war were the beginnings of the banking system we have today. The next major change to the financial system would emerge at the turn of the 20th century with the Aldrich Act of 1907 and the construction of the Federal Reserve System in 1913.
Thus the Civil War fostered the birth of U.S. Monetary Sovereignty.