Opinion On
Currency

Financial transactions serve as the lifeblood of American Democratic Capitalism.

They facilitate the flow of capital, investment, and economic activity within our democratic market system. These transactions encompass a wide range of activities, including buying and selling goods, services, stocks, bonds, and other financial instruments. By enabling individuals, businesses, and institutions to fairly exchange value, financial transactions contribute to the vitality and dynamism of the capitalist economy.

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Central to that purpose is our Dollar-denominated currency.

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“All money is a matter of belief” Adam Smith

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Thomas Jefferson advised ‘Never spend your money before you have it’. Americans are famously debt-ridden, as is our government. In fact, no entity in the history of the world has accumulated as much debt as the United States federal government. Americans also tend to save at a far lower rate than most other foreign nationals. Such a habit prevents us from enjoying things we may occasionally want, but also means we have less maneuverability in a crisis. Many of us spend more money than we must, and our government has proven negligent in guarding our common financial security, exposing us to perils that we can only begin to comprehend. For those who need to work on this vice, a good first step is Jefferson’s advice: only spend what you already have.

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Currency, in its many forms, has four fundamental elements. When a particular type of currency drifts from these core qualities, risk and ruin are not far behind.

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• Medium – an instrument that provides the means by which value is conveyed in a financial transaction. Could be beaver pelts or nickels, Dutch tulips or silver dollars.  

• Measure – provides a way to account for the quantity of the trade in defined units, say, four quarters to a dollar or twelve bottles to a case. Easier than guessing how much is in a handful.

• Standard – a commonly agreed value per unit based on some enduring redeemable commodity (or maybe a promise).

       Silver (and sometimes gold) has long been a standard by which currency is valued. It is the magic that first allowed you as a         child to give the nice man at the store a simple piece of paper for a whole sack of delicious candy. 

• Store – a means to save or preserve value for later purchases. Chocolate coins don’t work as well as metal ones but at least you can eat them in a pinch.

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The history of currency and its role in Capitalism in America offers some instruction and caution on the modern state of our financial system.

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Colonial American currency was a fascinating blend of improvisation and diversity. From the earliest English settlements in the 1600s until the United States minted its own money in 1783, the monetary system was far from standardized. Goods and services were often used in barter, especially when coins and paper money were scarce. Commodities such as tobacco and beaver pelts were often used as a form of money. Some hard currency was in circulation as well as fiat currency – money not backed by any commodity and with no intrinsic value of its own.

Here’s a glimpse into how currency functioned during that period:

• Coins:

In the century before the First American Revolution, coins, mainly the Spanish dollar, were often used as specie. These silver dollars were widely used in the American colonies for trade and transactions. They were valued not only for their silver content but also because they were accepted across borders, making them ideal for international commerce. Prices were often based on the English pound, but the actual value varied across colonies. The value of a pound in one colony was not the same in all. Each colony had its own government, laws, and currency valuation.

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• Paper Money:

The first paper notes were denominated in pounds, shillings, and pence. The Massachusetts Bay Colony issued the first of these colonial notes in 1690, followed by other colonies. As with coinage, their actual value differed from colony to colony. Though the British pound was not the official fiat currency, it served as a reference point for valuation and transactions. Commodity-backed paper emerged in the 1700s and was generally hard-asset based (typically on land, transaction promissory notes or warehouse receipts). Before and during the American Revolution, the Continental Congress issued their own paper money known as Continentals or Continental Currency. The early Continentals had no intrinsic value, relying on the promise of future tax revenue for redemption. Denominated in dollars from $1 to $80, Continentals were widely used. Runaway inflation led to their decline, and by 1780, they were worth only a fraction of their face value.

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The collapse of Continental currency prompted the inclusion of the gold and silver clause in the United States Constitution (Article I Section 10), preventing individual States from issuing their own currency and emphasizing the importance of sound money backed by precious metals (silver and gold). The intent was to ensure stability, prevent inflation, and maintain trust in the monetary system. The Bank of the United States was established in 1791 under Alexander Hamilton introducing private currencies to facilitate borrowing and lending.

The Dollar was established as the standard unit of currency by the Coinage Act of 1792 with 24 grams pure silver as the base metal and intrinsic value point, produced by the newly established United States Mint. Three larger denominations were authorized for gold coins up to $10. The first $10 gold “Eagles” were produced in 1795, with 16 grams of pure gold. Spanish, U.S., and Mexican silver dollars circulated side by side in the United States until the Coinage Act of 1857 ended all foreign coins as legal tender. The U.S. Dollar’s journey during this period involved its establishment, struggles with inflation, and the adoption of symbols and denominations that shaped its history.

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The Founders knew well the dangers of having a currency with no intrinsic value. That lesson was taught by their experience with the Continentals. Later, a series of national crises, ever expanding governmental bureaucracy, and the perceived need for maximum efficiency in financial transactions, would lead to the complete uncoupling of the Dollar from precious metals. The dictates of the U.S. Constitution notwithstanding.

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President Abraham Lincoln signed the First Legal Tender Act in 1862, authorizing the issuance of United States Notes by the U.S. Treasury, and redeemable for silver or gold, as legal tender. These “Greenbacks” were the first paper currency to circulate widely, starting around the time of the Civil War.

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Following the Silver standard in the 1700’s, the U.S. Dollar was tied to Gold during most of the 1800’s (except for a government-imposed hiatus around the War of 1812 and Civil War). At the dawn of the Republic, when a Dollar was worth a Dollar, it was also valued at nearly an ounce (85% pure) of Silver. By the 1830’s, the standard had shifted to Gold at about 1.5 grams to the Dollar. This was made official in 1900 by the Gold Standard Act.

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A key milestone was the Federal Reserve Act of 1913 making the Federal Reserve (Fed) the U.S. Central Bank. Ostensibly, the primary purpose of the Fed was to enhance the stability of the American banking system. Prior to its establishment, banking panics were common, characterized by widespread bank runs and failures. These crises were often blamed on the nation’s “inelastic currency.” The national banking acts of the 1860s resulted in most of the nation’s currency being issued by national banks. However, the supply of these banknotes was deemed unresponsive to changes in demand. Reformers sought a more “elastic” currency that could rapidly expand to meet that public demand, unencumbered by the anchor of precious metals and the vagaries of multiple bank-sponsored currencies. The Federal Reserve achieved this through the creation of Federal Reserve Notes in 1914, which are, for now, the predominant form of U.S. currency. The Pittman Act of 1918 took silver coins out of circulation, replaced by these new Federal Reserve Notes. Beyond currency, the Federal Reserve System aimed to improve the flow of money and credit throughout the United States. It was meant to ensure that banks have the resources to meet customer needs across the country - an expanding national economy, thirsty for efficient money and credit. Good intentions that would ultimately produce serious unintended consequences.

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The stage was being set to make the U.S. Dollar a true “fiat currency”- having value because the government decrees it has value but with no tie to a physical commodity. People’s trust in the government determines the currency’s stability. Only the Fed has the authority to print and regulate our fiat currency and control other non-cash financial instruments and policy mechanisms. Once disconnected from any tangible commodity, the fiat currency can be printed at will and unchecked. Enter the specter of inflation and its evil cousin – hyperinflation.

Into the 1920’s paper money was still “Redeemable in Gold on Demand at the United States Treasury, or in Gold or Lawful Money at any Federal Reserve Bank”. Then came 1933. Newly elected President Roosevelt, to address the chronic effects of the Great Depression, took the currency off the Gold standard and made private ownership of gold illegal by Executive order. Violation of this order was punishable by a $10,000 fine or 10 years in prison, making it a felony to own gold. Eventually, gold coins from 1933 and earlier were exempted from this rule so coin collectors, and the politically influential, could avoid prosecution. The Emergency Banking Act and a series of other acts and executive orders that year would prove to be the beginning of the end for intrinsic currency.  The following year, The Gold Reserve Act transferred the Fed’s gold inventory to the Treasury causing the Fed’s reserves to be held in gold certificates, not actual gold. Two decades later, Congress required “In God We Trust” to be placed on all U.S. currency, literally passing the endorsement buck to the Deity.

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Except for a brief period from 1957-1968 when Silver Certificates were issued and redeemable, U.S. bank notes have not since been convertible by its citizens to precious metals, though President Ford did lift the gold ownership ban at the end of 1974. The Coinage Act of 1965 removed all silver from quarters and dimes, which were 90% silver prior to the act. The final tether that our currency had to any tangible value was cut in 1971. In that year, President Nixon deemed the gold supply insufficient and unilaterally cancelled the direct international convertibility of the United States Dollar to gold. Our Dollar was irrevocably cast as a Fiat Currency. The new bank notes now read “This Note is Legal Tender for all Debts, Public and Private.” It has value because we say it has value.

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While the Dollar was slowly becoming just another government promise, a new period of crisis would set the scene in a different theatre for the transformation of the Dollar on the World stage. At the end of World War II, under the Bretton Woods Agreement, the U.S. Dollar became the world’s reserve currency, based largely on our dominance in the war and factors such as domestic budget surpluses, trade relationships and other economic influences.

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Through the rest of the 1900s the share of global reserves in U.S. Dollars grew steadily, peaking in 2000 at over 70%. That same year, the U.S. National Debt began an inexorable rise, climbing from about $5.5 trillion and just over 50% of the Gross Domestic Product (GDP), to $17 trillion and 100% of GDP by 2013. During this same period, the international faith in the Dollar began to erode, accelerated by the emergence of the European Union Euro as an alternate reserve currency in 1999-2002 under the European Central Bank. A growing China and other restive central banks diversified away from the Dollar, with China reducing its Dollar reserves by 15% in a five-year period ending in 2005. Aggregated foreign reserves in U.S. Dollars fell steadily to about 58% by 2022. Emerging countries are increasingly decoupling from the Dollar, favoring currencies like the Chinese yuan, and China is aggressively courting that opportunity. It is no coincidence that the U.S. National Debt grew during this time to record heights and will likely hit $35 trillion and 130% of GDP in 2024.

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The Dollar remains, for now, the most influential currency due to our legacy position in global trade and political presence. More countries are exploring the reserve and transaction options beyond the Dollar and the weight of the U.S. National Debt causes some to fear the potential collapse of the Dollar.

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Digital currencies are being considered by some central banks as an acceptable haven outside the Dollar. The most pernicious of these data dollars is the Central Bank Digital Currency (CBDC). Unlike other forms of digital currency, CBDC brings with it an opportunity for nations to add layers of social control and surveillance, conditions that should chill people with a grave concern for the loss of individual liberties and self-determination.

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History has shown that crisis is the best catalyst for currency and monetary controls. The cure for a collapsed Dollar and the resulting inflation, or hyper-inflation, may well be the imposition of a USCBDC.

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The price we paid for rapid national growth and economic success since our founding was the gradual dependence on a fiat currency and its bloated mothership bureaucracy. The price we may well pay for the resulting runaway spending and political largess could be a loss of principal liberties. The Seven Enemies of Freedom that our Founders fought to abolish could be re-animated by imposition of a USCBDC and should be resisted as if our very lives and fortunes depend on it.

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