Bitcoiners’ dubious sense of economic history 2

JISHOU, HUNAN — Banks are all evil, right? Especially the Federal Reserve Bank, which if you believe Sen. Ron Paul (R-TX), is unconstitutional and shouldn’t even exist. And governments shouldn’t control currency, because … free markets!

That’s pretty much the reasoning behind bitcoin and its various clones. Although I have playing with bitcoin and other crypto-currencies for the last month, I don’t totally buy into the philosophy behind their creation. For one thing, bitcoin fans don’t know their economic and political history too well.

Here’s a tip, guys. It’s important to get your history straight before you introduce a whole new currency to replace something that’s been used for centuries.

Maybe I’ve put the cart before the horse, but only now have I had the time to review the rationale for introducing bitcoin and its offshoots. Quite simply, I am not impressed.

The wiki for Devcoin, an offshoot of bitcoin, links to this so-called “History of Money,” which contains this reference to Colonial Scrip (paper money) and Parliament’s regulation of it.

In Response the world’s most powerful independent bank [The Bank of England] used its influence on the British parliament to press for the passing of the Currency Act of 1764.

This act made it illegal for the colonies to print their own money, and forced them to pay all future taxes to Britain in silver or gold.

Here is what [Benjamin] Franklin said after that.

“In one year, the conditions were so reversed that the era of prosperity ended, and a depression set in, to such an extent that the streets of the Colonies were filled with unemployed.”
Benjamin Franklin

“The colonies would gladly have borne the little tax on tea and other matters had it not been that England took away from the colonies their money, which created unemployment and dissatisfaction. The inability of the colonists to get power to issue their own money permanently out of the hands of George III and the international bankers was the PRIME reason for the Revolutionary War.”
Benjamin Franklin’s autobiography

Wrong! Franklin never said such a thing. These are fake quotes, and anyone with some familiarity with 18th century English prose could spot them as fakes a mile away. Yet, these quotes are all over the Internet, at such warm and fuzzy places like Free Republic and Stormfront, and a ton of libertarian “the Fed is evil!” sites.

How do I know they’re fake? I looked in the horse’s mouth, as it were. If you go to the online collection of Franklin’s papers, you can do a global search for words or phrases. I checked the first quote, and turned up nothing.

As for the second, you can easily find Franklin’s autobiography online [PDF], and likewise search for key phrases in it. Surprise! He says nothing of the sort. [I suspected as much as soon as I read it, because the vocabulary and style of writing is too modern.]

What about the Currency Act of 1764? Here the article hews somewhat more closely to reality. Before the Revolution, gold and silver were in short supply in the American colonies, as was official British currency. The colonists used Spanish gold coins and paper money (called bills of credit or Colonial Scrip) in business transactions. The scrip represented a debt. In theory, once the debt was settled, the scrip was supposed to be destroyed and taken out of circulation. In practice, this didn’t always happen.

As a result, there was a lot of paper money floating around the colonies with no tangible assets supporting it. Its value against the British pound plummeted and British merchants being paid in Colonial Scrip appealed to Parliament for legislation.

The Currency Act of 1764 forbade the colonial governments from issuing any more paper money for public or private debts. This policy did create hardships in the colonies, and Franklin — who was representing the colonies in London at the time — lobbied against the Act. The Act was one of the colonies’ grievances against King and Parliament. [See here for historically accurate details.]

Nine years later, Parliament loosened restrictions somewhat, allowing New York to issue paper money for public debts. Saying the Currency Act was the “PRIME reason” for the Revolutionary War is a bit of stretch.

The rest of the xat.com article referenced by the Devcoin wiki has more errors It gets this bit about the role of financier Robert Morris all wrong, then misquotes Gouverneur Morris (no relation).

THE BANK OF NORTH AMERICA (1781-1785)

If you can’t beat them, join them, might well have been his argument when arms dealer, Robert Morris suggested he be allowed to set up a Bank of England style central bank in the USA in 1781.

Desperate for money, the $400,000 he proposed to deposit, to allow him to loan out many times that through fractional reserve banking, must have looked really attractive to the impoverished American Government.

Already spending the money they would be loaned, no one made a fuss when Robert Morris couldn’t raise the deposit, and instead suggested he might use some gold, which had been loaned to America from France.

Once in, he simply used fractional reserve banking, and with the banks growing fortune he loaned to himself, and his friends the money to buy up all the remaining shares. The bank then began to loan out money multiplied by this new amount to eager politicians, who were probably too drunk with the new ‘power cash’ to notice or care how it was done.

The scam lasted five years until in 1785, with the value of American money dropping like a lead balloon. The banks charter didn’t get renewed.

The shareholder’s walking off with the interest did not go unnoticed by the governor.

“The rich will strive to establish their dominion and enslave the rest. They always did. They always will… They will have the same effect here as elsewhere, if we do not, by (the power of) government, keep them in their proper spheres.”
Governor Morris 1

So much wrong in one place. Let’s deal with the quote by Gouverneur Morris. First off, his given name was Gouverneur, after his mother. He was never the governor of Pennsylvania. The quote is a heavily edited version of his remarks during debate at the Constitutional Convention of 1787, and it has nothing to do with the bank associated with Robert Morris. The delegates were discussing the lengths of terms of US Senators, and the recording secretary condensed Morris’ remarks.

All the guards contrived by America have not restrained the Senatorial branches of the Legislatures from a servile complaisance to the democratic. If the 2d. branch is to be dependent we are better without it. To make it independent, it should be for life. It will then do wrong, it will be said. He believed so: He hoped so. The Rich will strive to establish their dominion & enslave the rest. They always did. They always will. The proper security agst them is to form them into a separate interest. The two forces will then controul each other. Let the rich mix with the poor and in a Commercial Country, they will establish an oligarchy. Take away commerce, and the democracy will triumph. Thus it has been all the world over. So it will be among us. Reason tells us we are but men: and we are not to expect any particular interference of Heaven in our favor. By thus combining & setting apart, the aristocratic interest, the popular interest will be combined agst. it. There will be a mutual check and mutual security…He was also agst. paying the Senators. They will pay themselves if they can. If they can not they will be rich and can do without it. … A firm Governt. alone can protect our liberties. He fears the influence of the rich. They will have the same effect here as elsewhere if we do not by such a Govt. keep them within their proper sphere. We should remember that the people never act from reason alone. The Rich will take advantage of their passions & make these the instruments for oppressing them. The Result of the Contest will be a violent aristocracy, or a more violent despotism.

Source. The bolded part is contained in the xat.com misquote above.

Morris was not speaking specifically of Robert Morris and the central bank he had proposed and financed in 1781, but of the wealthy gaining control of the government.

How about the bit about Robert Morris and the Bank of North America? Here again, the history is all wrong. Robert Morris was one of the wealthiest men in the American Colonies and basically financed the War of Independence. He served as Superintendent of Finance for the new nation under the Articles of Confederation from 1781 to 1784. (Gouverneur Morris served as assistant superintendent, by the way.)

Secretary of the Treasury Alexander Hamilton proposed there be a central bank for the new nation. Morris drafted legislation and submitted it to the Continental Congress. Named the Bank of North America, it was chartered by the Continental Congress in 1781 and opened the following year. Despite what the xat.com article says, the bank did not become insolvent, and in recent years has merged with Wachovia and later Wells Fargo.

As for Morris’ financial involvement, he had contributed 10,000 pounds of his own money to fund the Bank of Pennsylvania, which the Bank of North America superseded. As superintendent of finance, he also proposed using money loaned to America by France to finance the war as reserves for the central bank.

So, basically, the article gets Morris’ involvement in the Bank of North America and the bank’s later history all wrong. And misquotes a founding father as an extra bonus.

The article goes on about the role of the Rothschilds in European wars, the centralization of banking in the USA around the time of the Civil War, and more stuff you’ll likely find in any website focusing on the Illuminati, the Bilderberg group and Jewish bankers. In short, it’s unreliable.

That’s my point here. It’s all well and good to promulgate an alternative form of money, free from centralized control by banks or governments — a people’s currency, as it were. But the reasons for creating such a currency should be grounded in reality and a deep understanding of economic history, not on the fanatical delusions of conspiracy theorists, amateur historians and quote-miners. Central banks serve a useful purpose as a brake on wild fluctuations in money markets. Some regulation is beneficial. No regulation is usually not. Take for example the money crunch and mortgage crisis in the last decade, which bank deregulation under the Reagan administration helped create.

Bitcoinists cite the “free market” as the guiding light for their chosen currency. Yet, even the “father” of free market economics, Adam Smith, recognized the need for regulation and government control, because people can get greedy, businesses can form cartels to set prices artificially high, or big companies can become monopolies. Smith was a capitalist, but he was also a realist.

So, I’ll play around with bitcoin and its pals, if only for amusement and maybe making some money, but I don’t see it replacing regular money any time soon. The rationale for it is inherently flawed, and its future as a completely unregulated form of money will be short-lived.

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2 thoughts on “Bitcoiners’ dubious sense of economic history

  1. Reply David Hochman Jan 3,2014 8:41 pm

    Oh, man, those pseudo-historians skewered by a comp lit guy!

  2. Reply John Wheaton Jan 4,2014 10:26 pm

    I know something about early American history. More than they do, anyway.

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