UNDERNEWS

Undernews is the online report of the Progressive Review, edited by Sam Smith, who has covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964. The Review has been on the web since 1995. See main page for full contents

January 27, 2009

OBAMA PRAISES AMERICA'S FIRST FISCAL CON MAN

Although he's losing ground to Governor Blogo in the race for the most self-serving historical references, Obama has already compared himself to Lincoln, Reagan and Roosevelt, a good trick for those other than schizoids. Now, however he may have gone to far. In a recent speech, he praised America's first great fiscal con man:

"With all history that's passed through the narrow canyons of Lower Manhattan, it's worth taking a moment to reflect on the role that the market has played in the development of the American story. The great task before our founders was putting into practice the ideal that government could simultaneously serve liberty and advance the common good. For Alexander Hamilton, the young secretary of the treasury, that task was bound to the vigor of the American economy. Hamilton had a strong belief in the power of the market, but he balanced that belief with a conviction that human enterprise, and I quote, "may be beneficially stimulated by prudent aids and encouragements on the part of the government." Government, he believed, had an important role to play in advancing our common prosperity. So he nationalized the state Revolutionary War debts, weaving together the economies of the states and creating an American system of credit and capital markets. And he encouraged manufacturing and infrastructure, so products could be moved to market."

In fact, Alexander Hamilton deserves no small credit for the mess we find ourselves in today, as the Review has suggested from time to time.

Stephen Zarlenga, American Monetary Institute - The Constitution left the money power up for grabs. Alexander Hamilton wasted no time in grabbing.

The Constitution went into effect in late 1789. Hamilton's first move as Secretary of the Treasury, was to assume $15 million of the state debts. . . an extremely unpopular act. Why?

The worthless debt was held by the revolutionary soldiers, farmers, manufacturers and merchants who furnished its supplies. As Congress secretly passed the bill behind closed doors, the country was overrun by speculators, buying up the certificates for pennies on the dollar.

Next Hamilton and associates, having kept the monetary power out of government, moved to assume it themselves. . .

Hamilton's Federalists quickly put through legislation chartering the First Bank of The United States, as a privately owned central bank on the Bank of England model. The Bank would be issuing paper notes not really backed by metal, but pretending to be redeemable in coinage, on the one condition that not a lot of people asked for redemption. They never had enough coinage.

Thus the real question was whether it would be private banks or the government that would issue paper money. Will the immense power and profit of issuing currency go to the benefit of the whole nation, or to the private bankers? That's always been the real monetary question in America.

Gold and silver served as a smoke-screen. What the bankers counted on were the legal considerations of the money. They knew that all that was needed to give their paper notes value, was for the government to accept them in payment for taxes. That, and not issuing too excessive a quantity. Under those conditions, the paper notes they printed out of thin air, would be a claim on any wealth existing in the society.

Just where did the money for first bank of the U.S. came from? . . . The $10 million subscription for the banks' shares, was oversubscribed within two hours. Only one tenth of it was ever paid in gold. The rest was accepted in the form of bonds - the government bonds that Hamilton had turned from pennies on the dollar to full value. The money for the private bank actually came from the American people.

Thanks to Jefferson's efforts, the bank was liquidated in 1811. Three quarters of it was found to be owned by English and Dutch.

Bob Blain, Progressive Review - The federal government has been adding interest to its debt for 204 years. James Jackson, Congressman from Georgia, predicted that this would happen in a speech he made to the First Congress on February 9, 1790. Jackson warned that passing Alexander Hamilton's plan to base the country's money supply on the existing federal debt of $75 million would "settle upon our posterity a burden which they can neither bear nor relieve themselves from." He predicted: "In the course of a single century it would be multiplied to an extent we dare not think of," He clearly saw that Hamilton's plan would put in place an exponential process of debt growth. To support his warning he cited the experience of Florence, Genoa, Venice, Spain, France, and England.

Hamilton's plan was for Congress to commit the country to pay interest on the debt until the debt was paid. In the meantime the debt certificates would circulate as money. He argued that this would turn a $75 million debt into a $75 million money supply. The problem was that interest payments would have come out of the money supply. This would reduce the quantity of money that remained in circulation -- and cause recession -- until new loans returned the interest money back into circulation. The history of federal government finance shows such periodic swings between debt reduction and recession to debt increase and recovery.

The power to deal with this problem that Congress has neglected all these years is the power "to coin money and regulate the value thereof." It has overused its power "to borrow money on the credit of the United States." According to the Federal Reserve, 98 percent of the U.S. money supply is borrowed. Only 2 percent is coined.

The First Congress set the wrong precedent. It should have created $75 million in money and paid off the debt. With a population of 4 million people and an economy starved for a medium of exchange, that would have increased the money supply by $18.75 per person.

Why did the First Congress borrow instead of coin money? Newspapers at the time accused members of Congress of acting to serve their own interests. They sent agents into the countryside to buy up debt certificates that the general public thought were worthless. They then passed the Funding Act knowing that it would give themselves and their heirs a source of income that would grow exponentially with the debt. For every debtor there is a creditor. What is a $4 trillion debt for debtors is $4 trillion in claims for creditors.

Abraham Lincoln - The privilege of creating and issuing money is not only the supreme prerogative of government, but is the government's greatest creative opportunity. By the adoption of these principles, the taxpayers will be saved immense sums of interest.

1 Comments:

Anonymous wellbasically said...

Way off the mark on this one. There is no need for all the money to be backed in gold, because the gold is useless in transacting everything in the economy. The only way your system would work is if the government forbade everybody from exchanging in any other way on pain of death, and gold cost $1M/oz.

Lincoln is not a good example. He took the country off the gold standard and simply printed greenbacks to finance the Civil War. At the the end of the war, everything had inflated to twice the cost it was before the war. The savings to the government were transitory. Gold which had been $20/oz was now $40/oz. The proposed solution was to simply yank the money back to the $20/oz level. This brought on a massive deflationary crisis which destroyed farmers, because monetary deflation hurts the debtors. Southern farmers were hurt worst, and race relations, which of course were bad, went to outright murderous because of rampant poverty.

January 27, 2009 3:32 PM  

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