The Panic of 1857 on This Day in History

 

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This Day In History: The financial Panic of 1857 started on this day in, of course, 1857. 

"During the nineteenth century the free world was on what was called the classical gold standard. It was a century of unprecedented production. More wealth and a greater standard of living was achieved and enjoyed by more people than in all the previous history of the world. The two conditions most responsible for the great increase in wealth during the nineteenth century were competitive capitalism and the gold standard: Capitalism because it provided a social system where men were free to produce and own the results of their labor; the gold standard because it provided a monetary system by which men could more readily exchange and save the results of their labor.

While capitalism afforded men the opportunity to trade in the open market which led to economic prosperity, the gold standard provided a market-originated medium of exchange and means of saving which led to monetary stability.

But because neither competitive capitalism nor the gold standard were ever fully understood or practiced, there existed a paradox during the nineteenth century: a series of disruptive economic and monetary crises in the midst of a century of prosperity.

These crises can all be traced to excessive supplies of money and credit. The U.S. panics of 1814, 1819, 1837, 1857, 1873, 1893, 1907 and the international monetary crises of 1933 and 1971 all have one thing in common: excessive supplies of money and credit. The fact is that no monetary crisis in history has ever resulted from a lack of money and credit. Every monetary crisis can be traced to excessive supplies of money and credit."

Where does this money and credit come from?

"...the world never achieved a pure gold standard. While individuals operated under a classical gold standard with the conviction that production was the only way to gain wealth, they allowed their government to become the exception to this rule.

Government produces nothing. During the nineteenth century it operated mostly on money it taxed from its citizens. As government’s role increased, so did its need for money.

The Policy Makers knew that gold stood in the way of government spending, that direct confiscation of wealth via taxation was unpopular. So Policy Makers advocated a way of indirectly taxing productive men in order to finance both government programs and the increasing government bureaucracy necessary to implement those programs.

The method was to increase the money supply. Since government officials were not about to go out and mine gold, they had to rely on an artificial increase. Although the methods of artificial monetary expansion varied, the net effect remained the same: an increase in the claims to goods in circulation and a general rise in commodity prices. The layman called this phenomenon 'inflation.' This resulted invariably in monetary crises and economic depressions.

Capitalism and gold got the blame for these crises, but the blame was undeserved." Paul Stevens

https://fee.org/articles/the-making-of-an-international-monetary-crisis/

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The First Paper Money on This Day in History

 

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This day in history: The colony of Massachusetts issued the first paper money in the Americas on this day in 1690. "Apart from medieval China, which invented both paper and printing centuries before the West, the world had never seen government paper money until the colonial government of Massachusetts emitted a fiat paper issue in 1690." Murray Rothbard

"Prior to this, settlers in America used silver coins. In 1652, the Massachusetts Bay Colony began minting their own coins, even though it was against British law. The British eventually shut down this mint, leaving few of these coins in circulation. Then in 1689, the British wanted their American settlers to fight the French in Canada. However, they rarely sent money to the colonies, so there wasn’t any money to pay the soldiers with. The British government then came up with a new idea – to issue certificates instead of coins. Each piece of paper represented the value of coin and could be redeemed at a later time for 'real money.'" Source

However, the temptation to inflate this currency was too great to bear. "As early as February 1691, the Massachusetts government proclaimed that its issue had fallen 'far short' and so it proceeded to emit £40,000 of new money to repay all of its outstanding debt, again pledging falsely that this would be the absolute final note issue." Murray Rothbard

More money printing ensued, and after more than 20 years, prices rose so dramatically that the tide of opinion in Massachusetts began to turn against paper money, and that the result of it was a doubling of prices.

During the Revolutionary War, the Continental Congress issued new paper money known as Continentals. However, the value of this currency depreciated so dramatically that it lead to the phrase, “not worth a continental.” 

Paper (fiat) money always fails. "Fiat money is inflationary. Its buying power dwindles over time, and history has shown that this entropy is almost as irreversible as gravity. Fiat money enriches a select few at the expense of many others. The first to get new money benefit to the detriment of latecomers. What's more, fiat money fosters speculative bubbles and capital misallocations that culminate in crises. This is why economies boom and bust. Fiat money lures states, banks, consumers and firms into the pitfall trap of excessive debt. Sooner or later borrowers find themselves in a deep hole with no way out. Fiat money is easy to come by so the state can finance its adventures and misadventures. Easy money; easy come, easy go. And the government keeps growing as it keeps spending." Source

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