The Source of Money; G. Winder

THE SOURCE OF MONEY THE Right Honorable Mackenzie King, when Prime Minister of Canada, once made the following statement: "Until the control and issue of money is restored to the the government, and recognized as its most conspicuous and sacred responsibility, all talk of the sovereignty of Parliament and of democracy is idle. and futile." Now I believe that there is no greater danger to democ racy than for the source of its monetary supply to be in the hands of the government, and in this article I will give some reasons for thinking as I do in this matter; but the chief fault I find with the above assertion is the suggestion contained in the word "restored." The rest of the statement is, I suppose, a matter of opinion, but by the use of this word it is turned into an averment of fact. It implies-and appears to take for granted-that money has its source in the State, and that its issue wan a government prerogative of which, at some period of history, it has been deprived, either by the people or perhaps by the private banks.

This is a presumption which can be completely re.. Mr. Winder, British author, journalist, and lecturer, is best known for his writings on behalf of freedom in economic affairs. 385 386 GEORGE WINDER futed, for the known facts' indicate quite clearly that money was in circulation even before any settled organ ization resembling our conception of the State came into existence. If we go back to the earliest times, we find that no State controlled the supply of cattle, knives, spears, furs, salt, or ornaments which were among the first forms of money of which we have any record. In the Book of Genesis (chapter 24, verse 22) we read: "It came to pass, as the camels had done drinking, that the man took a golden earring of half-a-shekel weight and two bracelets for her hands of ten shekels weight of gold," and gave them to Rebekah. It seems most unlikely that these orna ments, which were then the favorite form of gold money, and were measured by weight, were either produced or weighed by a state-owned industry.

Sir George Macdonald-perhaps the greatest authority on coinage-attributes the invention of coins in Europe to Greek merchants to facilitate the circulation of their stock of metals. The first known instance of the State venturing into the monetary field occurred when the Kings of Lydia stamped their seal on coins made of elec tron, a natural amalgam of gold and silver. ,Croesus, who came to the throne of Lydia in 560 B.C., melted this elec tron down to produce gold and silver coins. Sir George Macdonald also tells us that the original object of the impression made on coins by a merchant was to indicate its purity and not its weight. It was only later, when coins came to be manufactured in uniform sizes so that their value could be ascertained by tally, THE SOURCE OF MONEY 387 that the State came into prominence in the monetary field by stamping coins to attest to both their purity and weight.

One of the first duties of any government is to see that citizens keep faith with one another; and, if merchants issue coins, this aim is furthered if the State cooperates by placing its imprint upon them as warranty that they are what they profess to he. So long as the State keeps to this function, there is every hope that a sound coinage will be the result. It is only when the State goes further than this, and becomes responsible for the whole production and issue of coins, that corruption occurs and baser metals are passed for genuine gold and silver. Debasement of the coinage is nearly as old as the State itself. Macdonald mentions that, in ancient Greece, the democratic States preserved the value of their coinage rather better than those ruled by tyrants, while some one has observed that in Rome the good Emperors is sued good coins and the had Emperors bad ones. In the Middle Ages, the debasement of coinage by gov ernments was so general that, when Venice struck an honest "ducat" and Florence an honest golden "florin,"

they were used for commerce over the greater part of Europe. In the sixteenth century, the Africa Company gave England her most reliable gold coinage. The sound prin ciple was at that time accepted that anyone who possessed gold could take it to the mint and have it converted into coins stamped with the state insignia to guarantee 388 GEORGE WINDER their weight and purity. No seigniorage or charge of any kind was made. The Africa Company made use of this service to convert the gold it obtained from Guinea into coins of a nominal value of twenty-one shillings. A small elephant-the Company's trade-mark-wasalso impressed upon them, perhaps as an additional assurance to the public. This golden guinea became so popular· that men gradually used it to value all other commodities, and so it became the national unit of account in place of the silver shilling. In this way the country moved from a sil ver to a gold standard without conscious effort.

When the guinea was superseded by the pound in the early part of the nineteenth century, it left behind it the ineradicable habit of all professional men to charge for their services in guineas instead of pounds, a custom which plagues the British people to this day. Paper Money Began with Goldsmiths There is certainly nothing in the history of primitive money or of coinage to support the supposition that the State was the original source of the supply of money. It is, of course, possible that when Mr. Mackenzie King made his statement, he was thinking only of modern pa per money; but if this be so, he is again quite wrong. The note issue was not the invention of a state official, nor has its development taken place at the instance of the State; quite the contrary. Paper money was evolved from the receipts given by goldsmiths for coins and bullion deposited with them THE SOURCE OF MONEY 389 for safekeeping. Depositors found that when they wanted to make a purchase, it was sometimes easier to hand over the goldsmith's receipt than to collect and transfer the gold.

To facilitate this custom, the goldsmiths eventually made their receipts with the space for the depositor's name left blank. Later, instead of giving only one receipt for the gold deposited, they issued a number of receipts in con venient denominations. By the time of Charles I, these receipts were recognized by merchants as the secure prom ises of honest men to produce gold and silver money on demand. They passed from hand to hand in the ordinary course of business in payment for goods and services. The goldsmith's receipt had evolved into the forerunner of the bank note. The State had nothing to do with this development, but, in the reign of Charles 1,1, it did try to imitate it. In 1667 Parliament granted Charles the right to issue paper notes promising to pay money from the revenue. These were issued in denominations as low as £ 1, £2, and £'5 and were used to pay the contractors who sup plied the dockyards and other public works. They are the first known examples of an English government· actu ally issuing paper money.

Had the experiment proved a success, it might have changed the whole history of modern money and given at least a partial justification for Mr. Mackenzie King's suggestion that governments were once responsible for the monetary system. But it was not a success. This state issue of money was repudiated by Charles in 1672, and Great Britain did not see state-created paper money again 390 GEORGE WINDER until the outbreak of war in 1914 when Treasury notes were issued. The State no more originated paper money than it did any other form of money. There are, how ever, a few countries in the New World which can claim that their right to create money, including paper money, is practically contemporaneous with the State itself. Continental Currency in the Unite.d States The most important of these exceptions to the general rule is, of course, the United States itself. Mr. Marriner Eccles, Chairman of the Board of Governors of the Fed eral Reserve Board, probably had this in mind when, at a dinner given by the Ohio Bankers Association in 1935, he said: "The power to coin money and to regulate the value thereof has always been an attribute of a sovereign power." As a general statement this is quite wrong, but we will take it that Mr. Eccles was thinking only of his own country. He went on to say: "It was one of the first powers given to the federal government by the Constitu tional Convention." True, but it is a little surprising that Mr. Eccles mentions it. The grant of power to which he refers was made in 1775 by the Continental· Congress which met at Philadelphia. It issued notes in denomina tions of 71 to 8 dollars. On each side of their text the words "Continental Currency" were boldly printed.

But what happened to this first issue of United States dollar notes? It was their fate to provide the English language with that expressive phrase: "Not worth a Con tinental," -thus crystallizing, as it were, in the very lanTHE SOURCE OF MONEY 391 guage itself, a warning against the follies of all govern ment-created currencies. A subsequent experience with the famous greenbacks gives us another example of the dangers of government-created money in America. I think it is safe to say of the United States that far more wealth has been taken from owners without their consent as a result of government-inflated currencies than has ever occurred through the occasional fraud or failure of private bankers. But why confine my case to showing the dangers of state-created money? These are, after all, negative argu ments. Let me now give an example of money created by private enterprise which became the most useful cur rency the world has ever known, and the very symbol of honesty and worth.

The word "sterling" originally meant nothing more than "little star," and referred to the symbol on ancient Norman coins. By being constantly· associated, however, with the British pound, it has absorbed a reflected glory; and now, according to the Oxford Dictionary, means "genuine, of standard worth or purity." There is little doubt that the "pound sterling" owes a great deal of the respect in which it was once held to the long record for honesty and security earned by the Bank of England, so that to say that anything was "as safe as the Bank of England" became proverbial. In the great days of the pound sterling, before the out break of war in 1914, this great bank was a private com pany beyond the control of the State. In that year its con trol passed to the British Treasury, where it has remained 392 GEORGE WINDER ever since, although it was not nationalized until 1946. The Bank, like the Suez Canal, was one of those great projects which owe their existence to the imagination and energy of a company promoter.

The man responsible in this instance was William Pat erson, a Scotsman. He was not a banker; he possessed the typical drive and optimism which characterizes the entre preneur. Another of his promotions was the Hampstead Water Works. Most of his schemes were vast and mag nificent, but he brought a capable brain to work on his attempts to implement some of them. Like that other great projector, Ferdinand de Lesseps,he was interested in canals. One of his ideas was to cut through the Isthmus of Panama, and he actually examined the terrain for this purpose, but decided that the times were a little pre mature for suchan undertaking. He did, however, form a company to establish a British settlement on the Isth mus, which he hoped would break the Spanish monopoly and open up the trade of South America to the world. The failure of this famous "Darien Scheme" wrecked his health and was the commercial scandal of the century.

Early Problems of the Bank of England Such was the man who secured a Charter from the Crown to form the Bank of England. In 1694 the Bank was safely established with a private capital of £ 1,200,000, after which Paterson sold his shares to de vote his energies to his Darien Scheme. Fortunately, his co-directors-or Governors, as they were described in the THE SOURCE OF MONEY 393 Charter-were typically hardheaded businessmen, with less imaginative minds than the founder of the firm. They were also highly respected-a great advantage to the Bank when it ran into trouble, as it did within two years of its inception. As always in its subsequent history, it was the govern ment which was the author of its misfortunes. One of the objects of the Bank was to .lend money to the govern ment, but this time it lent more than it could afford. By May 1696, the Bank was unable to meet its notes. Strange as it may seem, the holders of these notes had such con fidence in the integrity of the Bank's governors that they were satisfied with payments on account. The bank tellers recorded on the backs of the notes presented the amount paid and promised to find the balance later.

The Bank was then able to persuade the government to repay part of its loan by regular monthly installments, and, by the end of the year, it wasahle to meet its notes in full. From this time forward the Bank flourished. It ap peared to have learned the great lesson that the more it could keep itself. free from the influence of the State the more secure it would be. However, such a bank has some times no option but to advance money to the State, and this led to another unhappy experience. Toward the end of the 'eighteenth century, the bank was required to finance the war against Republican France and to supply the Emperor of Austria with money to keep his troops in the field. This led to its gold being drained away. On February 18, 1797, the Bank suspended 394 GEORGE WINDER gold payments. The final rush on the BaJ)k had occurred when it was announced that the French Fleet was off Beachy Head. Later, the French landed in Wales but were easily defeated. This French expedition to Wales is one of the mysteries of history. It had no possible chance of success. The explanation· sometimes offered is that its sole purpose was to bring about the failure of the Bank of England. The French believed that the Bank's notes would be valueless withou t gold backing.

However, after the first shock of the suspension, the Lord Mayor and four thousand London businessmen signed a declaration that they would accept payment of debts in notes, and it soon hecame apparent that the Bank's inconvertible notes had become the chief medium of exchange in the country, and for the carrying on of the war. Inflation did ensue, but it was mild compared with that which occurred during the last two world wars. The important point, however, is that, after Napoleon had been banished to St. Helena, ·the Bank of England took steps to meet all its liabilities in full and by May 1821 twenty-four years after it had suspended gold payments-it was able honorably to meet all its notes in gold. Thus Great Britain returned to the gold standard. From that date to the outbreak of war in 1914, banking in England was free from state control, except for those general laws which govern the honesty of all men alike.

It is true that, in 1844, the Bank Charter Act was passed in an attempt by the government to restrict the quantity of money by controlling the note issue. This THE SOURCE OF MONEY 395 Act, however, completely failed in its object, for bank notes had by this time become merely the small change of commerce. Bank credit money-the medium by which the far greater part of the country's business was carried on during the Industrial Age-completely escaped the government's legislative net. This Act of 1844 also gave the Bank of England a monopoly of the note issue. But for the same reason, this again made little difference. During this period, as a result of the repeal of restric tive legislation, several great joint stock hanks, all with the power of issuing credit money, grew up and flour ished. These treated the Bank of England as a central bank with which they kept an account and deposited their gold. They did this not from compulsion but be cause the Bank provided reliable service.

In the British Dominions· this same type of private banking developed, each bank issuing its own notes. The result was as satisfactory as in Great Britain itself. Sel dom have undeveloped countries been developed so quickly. World Expansion with Private Banking It must be remembered also that the nineteenth cen tury was, for England, the period of her greatest expan sion. The whole weight of this development was borne without difficulty by this private banking system. Not only did the pound sterling become the securest form of money which a trading people have ever possessed, but 396 GEORGE WINDER it also became so widely respected that it was used for the payment of cargoes of merchandise passing from one country to another in any part of the world. The Bill of Exchange, payable in pounds sterling, accepted by a London banker, became a type of money which is very badly missed today. It became, in fact, the most perfect international currency the world has ever known.

But, from the point of view of the American citizen today, faced with the steady deterioration of his own country's currency, the all-important fact concerning this British nineteenth century' privately-issued pound ster ling is that its purchasing power was almost exactly the same when the system ended in 1914 as when it began with the Bank of England returning to the gold standard in 1821. This is so in spite of the fact that, during the same period, wages had nearly trebled. Privately-owned banking had served the people so well that, in 1914, they did not know what inflation was. With the outbreak of war, most States took control of their banking systems and have not surrendered them since. During the next forty years, nearly all the currencies of Europe were either completely destroyed or greatly re duced in value, and their depreciation frequently went on just as steadily in peace as in war.

Great -Britain suffered not only inflation but also se vere deflation and the greatest unemployment she has ever known. A somewhat similar experience was also inflicted upon America. Apart altogether from wartime inflation, the once sterling pound has lost a third of its value in the last ten years.

THE SOURCE OF MONEY 397 These are some of my reasons for believing that Mr. Mackenzie King's statement is utterly and dangerously false. The exact opposite is the truth. Unless the creation and issue of money is withdrawn from the State and re stored to the private banking system, I believe that parlia mentary government and democracy will -become impos sible to maintain. John Maynard Keynes, in Essays in Persuasion., refer ring to the famous statement of Lenin as to the best way to destroy the capitalist system, wrote: "Lenin was cer tainly right. There is no subtler, no surer means of over turning the existing basis of society than to debauch its currency. This process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one in a million is able to diagnose." The strange thing is that it appears never to have oc curred to Lord Keynes that, under a free economy, it is impossible to debauch the currency.