Historical Sketch of Paper Currency OF PAPER CURRENCY - History is repeating now

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From the Archives : Originally published April 30th, 2013
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Category : History of Gold

Debow's Review, January 1866
Hon. C. Gayarre, pp. 77-87


THIS article, which has been for sometime upon our table, has been amended in a few particulars by the author, and slightly enlarged. It is an interesting discussion of the paper money question from the pen of one of the leading literary and practical men of the South; the author of the "History of Louisiana," and other valuable works.-Editor.

IN the latter months of the year 1863, only two years after the beginning of the great struggle which has lately terminated, and long before there was any doubt, in the Southern Confederacy, of its final success, its paper currency had depreciated to an extent which made it almost valueless. 

This was looked upon as the natural and inevitable consequence of its excessive redundancy, but that redundancy was not the only reason of its depreciation, because it would have depreciated without it, although to a much less degree. 

We believe it may be laid down as an almost settled axiom, without much fear of any successful refutation, that depreciation is of the very essence of paper money, whether it exceeds or not the wants of the community where it is current-that its over-issue only accelerates, or increases the depreciation-and that the depreciation becomes still more rapid and fatal when that paper, either by the action of Government, or from the no less powerful dictates of circumstances becomes a forced currency.

Before proceeding further, let us, on the threshold of this disquisition, determine what we are to understand, strictly speaking, by paper currency. We wish it therefore to be kept in mind that we mean by paper currency all notes or obligations which are intended as a substitute for coin, and which are not redeemable on presentation in metallic currency, to the full amount of the promise to pay contained in those notes or obligations. Otherwise-that is, when it can be converted at will into gold or silver, or is believed to be thus convertible-it does not circulate as paper currency, but merely as the convenient and useful representative of metallic currency, over which it possesses a decided advantage for transportation and for other purposes of trade; and so long as this is the case it does not depreciate.

Although paper currency is a modern invention, the teachings of history in relation to its effects are sufficiently numerous and sufficiently instructive, if not to cause it to be altogether rejected by the rulers of nations, at least to inform them how to guard, as much as possible, against its evils, when it is once resorted to, if man could be kept from the commission of well-known errors by the warning examples of his predecessors.

We believe that we are correct in asserting that paper currency is an invention of the eighteenth century, and that all those nations which, since its invention, have had recourse to that fatal panacea, did not, in the end, have any reason to congratulate themselves upon the experiment.

The temptation, however, to create in pressing exigencies, by so simple an operation as that of a printing press, an abundance of fictitious wealth in substitution of the precious metals, is too overpowering to be resisted by modern statesmen. The only hope is that it is a resource which will be rarely used, on account of its dangerous consequences, and that when used, it shall be with the necessary precautions; although from the knowledge of the past, and the spectacle offered by the present, we are not justified in expecting much from the future. 

Great national wars have generally been the pretext for the emission of paper currency on a large scale, as a matter of course; and so much so, that in such contingencies it seems to be the first measure which, from its seductive facility, presents itself to the mind. It ought not, however, to be forgotten that the seven years' war of single-handed Prussia, under Frederic the Great, against the combined forces of France, Austria and Russia, in the last century, is a magnificent proof that a long struggle for national existence can be successfully maintained without having recourse to paper currency. 

It is true that, as Macaulay says, "The King carried on war as no European power has carried on war, except the Committee of Public Safety during the great agony of the French Revolution." Prussia, which had been devastated in every one of its provinces by uncivilized hordes of Croatians, Cossacks, and other barbarians, had been converted almost into a howling wilderness; but, adds the historian: "One consolatory circum- stance, indeed, there was; no debt had been incurred. The burdens of war had been terrible, almost insupportable; but no arrear was left to embarrass the finances." 

We all know how soon Prussia, free from debt, recovered from so many wounds which seemed mortal, and how those meager domains which so recently enjoyed no prouder name than that of Marquisate of Brandebury, assumed an importance and a rank equal to those of the most powerful kingdoms of Europe. We admit, however, that such an example is not easy of imitation, although it shows for the instruction of the world what the genius of one man and the endurance of a nation can accomplish without "issuing bonds," and without manufacturing a paper currency, which inevitably leads to demoralization, repudiation, bankruptcy, and national disgrace.

We have said that the genealogy of paper currency can hardly be traced up further back than the beginning of the eighteenth century. For the first time, we believe, ill 1702, a paper money was created in France, which was to be withdrawn on the 1st of April, 1705, bearing in the meanwhile the enormous interest of 71 per cent. per annum. It was received by the public with great favor, and circulated at par. But on the 1st of April, 1705, the paper could not be redeemed, as promised, and in order to induce the holders to consent to its renewal without too importunate clamors of discontent, the Government added 2 per cent. to the original interest, making 91 per cent.

Notwithstanding this encouragement, this tempting bait-notwithstanding this sop thrown to the fears of the multitude, the currency lost in a few days as much as 75 per cent. In 1706, by a decree of the Government, it was made a legal tender, and thus became a forced currency, under the penalty of pillory, exile, and a fine of three thousand livres. 

But, strange as it may appear to those among us who favor measures of this description, from that moment the currency became valueless, so much so, that the Government paid one-fourth of it in coin, on condition that the rest should be converted into treasury notes-which conversion was followed by other conversions, until at last the Government emitted notes bearing an interest of 20 per cent., but without succeeding in stopping the increasing depreciation of every paper currency that was issued in rapid succession. 

Merchants asked their customers in what currency the goods desired were to be paid for, and had one price for those who offered to pay in gold or silver, and another price for those who tendered paper; and frequently to those of this latter denomination they pretended that they had no goods at all on hand. The peasantry of France refused also to take it, as many of the Southern farmers refused to take Confederate currency. 

A maximum rate having been decreed, at which the French peasants were compelled to sell the produce of their labors, many ceased to work their lands. This circumstance, combined with the effects of an unusually rigorous winter, produced such a famine in 1709, that, even in Paris, only coarse brown bread was used for several months; that in the very palace of Versailles, the seat of so much splendor, several families fed on bread made of oatmeal. and that the celebrated Madam de Maintenon, the avowed confidential friend and the secret spouse of one of the most magnificent monarchs of the world, gave the example of abstemious frugality by partaking of this rude diet. 

The price of wheat flour had gone up to 120 livres the sack, but the Government having found out the means of reducing the amount of the paper currency afloat, flour suddenly fell down to 40 livres. It would be profitable and instructive to examine separately and in detail the curious devices to which financiering ingenuity resorted in those days, but this could not be done here without exceeding the bounds which we have prescribed to this article.

Soon after, under the regency of the Duke of Orleans, followed the introduction of the famous' scheme, invented by John Law, to absorb the paper currency which had been emitted with so little success in the preceding reign, to relieve the other necessities of the State and supply the scarcity of the precious metals. 

That wonderfully skillful adventurer had first attempted to try his great financial experiment in Holland, but had found an insurmountable obstacle in the cold phlegmatic temperament of the Dutch, whom he could not dazzle into the adoption of his magical discovery of assimilating paper to gold and silver. 

Then, in 1705, he had, under the patronage of some of the highest magnates of Scotland, whom the plausibility of his plans had fascinated, presented to the Parliament of that kingdom a scheme for removing the difficulties resulting from the scarcity of coin and from the stoppage of payments by its national bank; and in illustration of his views on that subject, he gave publicity to a work entitled: "Money and trade considered, with a proposal to supply the nation with money." What could be more tempting?

The proposal of Law was that commissioners, appointed in the manner provided for by Parliament, and remaining under the control of that body, should be empowered to issue notes, either in the way of loan at ordinary interest upon land mortgages, provided the loan should not exceed half; or at most two-thirds of the value of the land; or upon land pledges redeemable within a certain period of time, to the full value of the land; or, lastly, upon sale, irredeemably, to the amount of the price agreed upon. 

The most timid, as he conceived, could not object to this kind of paper money on the ground of its being deficient in safe guarantees, and he maintained that it would constitute a currency equal in value to gold and silver coin, to which it might even be preferred for reasons which he enumerated in his work. 

Thus a piece of land would not only be a farm answering all the purposes for which it was originally destined, but also, according to its value, so much capital thrown into circulation. The wealth of the kingdom would evidently be doubled, argued Law, and an incalculable impulse given to industry and enterprise of every sort. By this ingenious operation a double source of profit was to be secured to Scotland, the one proceeding from the agricultural produce of her soil, and the other from the employment of so much capital as that soil represented. 

But this scheme, though presented to a needy public in a glowing style, and with arguments elaborate with exquisite art, and though powerfully supported by the court party, and by the influence of such men as the Duke of Argyle and others of high, social position, was rejected by the Parliament on the ground that, " to establish any kind of paper credit, so as to oblige it to pass as currency, was an improper expedient for the nation." This conclusion was worthy of the proverbial sagacity, prudence and integrity of the Scottish people. 

That a government should change its metallic currency into printed notes or promises to pay, and compel its citizens, who had loaned certain sums in gold and silver, to receive in reimbursement, the same amount in depreciated or worthless paper money, may, not without some appearance of reason, have appeared, to the Puritanic but brave and loyal descendants of Wallace and Bruce, a somewhat doubtful question of morality and policy. They also apprehended that if Law’s plan were adopted, all the real estate in the kingdom would thereby be brought to a complete dependence upon the bank proposed by him, and collaterally upon the Government, as the bank itself was dependent on the Government.

It is useless to add that the wisdom of England and her knowledge of the laws of trade and the exigencies of public credit prevented her from listening to the proposals of Law. But, nothing abashed by these repulses, Law, after the fashion of Columbus searching for a sovereign into whose lap he should be permitted to shower the treasures of America, wandered about in quest of some Power who would accept the El Dorado which teemed in his brains. In his peregrinations he repaired to the Court of Turin, and addressed the reigning prince, Victor Amadeus, on the financial conceptions which he thought had been so unwisely rejected: but that prudent sovereign shrewdly and quaintly answered, "I am not rich enough to afford being ruined."

This short historical sketch shows the instinctive aversion entertained in Europe for paper currency, when it made its first appearance at the beginning of the eighteenth century. It is evident that the dangers of such an innovation were as apparent then as they are now, although not actually demonstrated by experience as they have been since. 

It was impossible to be oblivious of the fact that, for ages, great nations had existed, with great military and commercial wants, as great comparatively as in modern times, and that they had met those wants without any paper currency, or anything like it. Why depart from the line of safe precedents? said the enemies of the new system. Coins, it must be admitted, had frequently been debased by governments as a momentary resource, but always with fatal effects; and the policy of paper money was certainly, they thought, as questionable as that of adulterating coin for temporary purposes. 

It is possible, however, that paper currency might have been distinguished as an earlier invention if the press had been sooner known, or if, shortly after it was known, it had worked with as much marvelous rapidity as in our days....Finish reading>> ART
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