Our Federal Reserve (1)

The most enduring, and bitter, controversy in American politics concerns the dependability of the currency. That's not unusual, since as far back as 1000 B.C. the person or group that controls any government of any country has met resistance in raising taxes, and so was tempted to coin more money. Unless you received a big chunk of that coinage, you were opposed to the system, because of the inflation it invariably created. Prices go up.

So people got upset with watered currency, and refused to consider something to be real money unless it was made of gold.Gold doesn't rust,, there's only a limited amount in the world, and everybody agrees it's pretty. Silver was maybe all right, too. Gold dust was weighed in the marketplace, but if you trusted it you took a risk that it had been diluted with something. So coins evolved, with a picture of the king stamped on them, and the edge of the coin serrated, so no one would be able to shave the coin and use the shavings. It didn't matter who stamped the coin, and throughout Colonial times in America, the Spanish piece o'eight was good as gold. But the use of gold and silver coins was cumbersome, and occasionally there were local shortages. One of the important causes of the American Revolution was local discontent with the way the British allowed disruptive shortages of coinage to interfere with commerce in the colonies, at the same time the British prohibited paper currency as too easy to counterfeit.

So, barbarous relic or not, gold was quite effective in restraining governments from their irresistible tendency to promote inflation. The downside began to appear when the Industrial Revolution caused a great increase in trade, because a fixed amount of money in circulation impeded progress. When the economy expands and the amount of gold in circulation remains fixed, the price of gold may remain steady, but the price of everything else goes down. Merchants don't like lower prices, and debtors don't like to repay their debts with money that's scarcer.

It's sort of true that an unstable currency puts rich people and poor people into contention. But the more essential fact is that it puts creditors and debtors in conflict, thereby injuring everybody else by paralyzing commerce. For three centuries, our political rhetoric has enlisted support of "workers" against the "the rich", but that's only acceptable shorthand if the balance of currency has gone too far in one direction or the other, and needs to be corrected. If you really let those slogans polarize society, you won't get fairness, you will get another French Revolution and the guillotine. What's needed is to adjust temporary imbalances, so that the amount of currency in circulation gradually grows in parallel with the economy. During nearly three centuries of struggling with this mysterious issue, we have frequently lost our way with attempts to have "free silver" , with honoring or dishonoring the Continental currency, with issuing Greenbacks during the Civil War, War Bonds during various wars, deliberate national deficits during recessions, going off the gold standard, and a host of other expedients and desperate political gestures. The first person to devise a workable system of matching the money in circulation with the size of the economy, was Nicholas Biddle, of 715 Spruce street.

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