CBO: Federal Debt and the Risk of a Fiscal Crisis

[charliebrown]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

thanks for this posting, so brazil could have taxed heavily instead? If so, what would the tax rate be?
Do you have any idea about the rates on short gvt debt during this time?
when was the tipping point reached? 100% debt gdp, 10% budget deficit to gdp?
How did this end, new gvt? I'm going to look now.

[dummass]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Nothing unorthodox about it; governments have always been short sighted.

http://www.sjsu.edu/faculty/watkins/hyper.htm

The CIA-Induced Inflation in the
Kurdish Area of Iraq, 2003
Six months before the invasion of Iraq the Central Intelligence Agency (CIA) of the U.S. sent a team of operatives into the Kurdish area of northwestern Iraq. They carried with them $32 million in American $100 bills. This money was to be used to secure the cooperation of Iraqis in providing information before and during the invasion. The financial inducement for cooperation had to be high because the punishment exacted by the Saddam Hussein regime was extreme; not only would the informant be executed with extreme cruelty but so would all of his family.

The money was brought entirely in one hundred dollar bills because such bills reduced the size of one million dollars to that which would fit into a backpack and weigh only 44 pounds.

The CIA team made large payments to various leaders of the Kurdish region of northern Iraq. This was to support their raising and arming a Kurdish militia.

After such payments had been make for a few months, the leader of the PUK faction, Jalal Talabani, came to the CIA outpost and told the operatives that they would have to supply some lower denomination American bills such as $10's, $5's and $1's. He said that because no one had change for a $100 bill the price for everything in Sulaymaniyah, even a cup of coffee, had become $100.

[charliebrown]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

one thing I don't understand.

In this article it said "gvt does not have to sell treasuries" Now the govt doesn't send t's in the mail for payments of goods and services, it sends checks in US$, therefore the bonds must be sold to someone who has USD. Below dummass posted a table of brazilian inflation in the 90's. During that period no-one is going to buy 10yr treasury unless the rate is something like 100% APR. So the only buyer is the fed, who creates cash from a computer and puts the bonds on its balance sheet. If some guy down the road starts printing 20's with his HP color laser jet, how long are they going to be accepted? Its really no different than the fed printing, except presumably the a fed note has an implicit guarantee that the note can be redeemed for something of value in the future.



I guess i don't understand the statement the treasury does not have to sell bonds.

[dummass]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Nothing unorthodox about it; governments have always been short sighted.

http://www.sjsu.edu/faculty/watkins/hyper.htm

The Hyperinflation in Bolivia, 1980-1994
Bolivia pursued for decades the typical Latin American fiscal policy of covering government budget deficits by printing money. The result of that policy was a hyperinflation in 1983-1985 that increased prices by about 23,000 percent. The index numbers during that period are not available.

In 1985 Gonzalo Sanchez de Lozada, working with Jeffrey Sachs of Harvard, formulated a financial program that curbed the hyperinflation. The program was basic. The government maintained a balanced budget. It did not spend any more than it took in in taxes. As the program began to work Jeffrey Sachs recommended that the Bolivian Central Bank use its funds to support the value of the Bolivian peso. This was a remarkable financial coup because it resulted in Bolivians who were afraid to hold their assets in Bolivian pesos regaining their confidence. The transfer of funds back into the Bolivian peso further shored up its value and led to even more capital flows back into Bolivia.

Thereafter monetary and fiscal policy in Bolivia produced a relative stability, as seen in the following statistics. However it did take more than a decade for the rate of inflation to reach a levels consistently below 10% per year.

Price Levels in Bolivia, 1984 to 2006
Year Consumer
Price Index
1990=100 Rate of
Inflation
%/yr
1984 0.1 NA
1985 14.8 14700
1986 55.8 277.0
1987 63.9 14.5
1988 74.1 16.0
1989 85.4 15.2
1990 100.0 17.1
1991 121.4 21.4
1992 136.1 12.1
1993 147.7 8.5
1994 159.3 7.9
1995 175.6 10.2
1996 197.4 12.4
1997 206.7 4.7
1998 222.6 7.7
1999 227.4 2.2
2000 237.9 4.6
2001 241.7 1.6
2002 243.8 0.9
2003 252.1 3.4
2004 263.3 4.4
2005 277.3 5.3
2006 289.2 4.3
Source: IMF Financial Statistics

[ThePythonicCow]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

As I read this I keep thinking that it would be true in a closed system, but the US has financial relationships with the rest of the world, and so the power to create money is limited by the willingness of our creditors suppliers to accept dollars.

There - fixed for ya' .

We don't (by the heretical views I endorse above) have to borrow to create dollars.

But we do (especially now with our eviscerated manufacturing and energy production) have to purchase goods from other nations. We have the luxury of paying for these goods in our own currency, so this can continue so long as others need Dollars.

Given the ability of our military to spike oil prices (mostly contracted in Dollars) and of our fraudulent banking industry to provoke debt crises (which also strengthens the Dollar by weakening alternative currencies and investments), it may be a while before the Dollar's hegemony on the world financial scene is seriously threatened.

[ThePythonicCow]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Given the delightful and well documented rebuttals above (thanks, dummass and charliebrown) I would be hard pressed to claim that unconstrained money printing cannot be associated with hyperinflation. However rather than claim that the printing caused the inflation, I would say rather that hyperinflation (due perhaps to supply side shocks) precipitated a great amount of money printing.

In each case I would claim that the essential problem was not money printing, but rather required payments in foreign currencies to foreign suppliers, nations or banks which could not be funded due to collapsing productivity. Money printing is no cure for such problems, just as check kiting is no cure for personal insolvency for someone with too little income or too much debt (debt that must be paid in currency whose supply is controlled by some one else.) Hyper-inflating currency but compounds the problems and shifts the burdens about. Price stability (not necessarily constantly flat, which is an unachievable and overly simplified ideal, but at least predictable) is an important element of a vibrant and productive economy.

Most recent examples of hyperinflation seem to involve destroying the productive capacity of a nation and burdening it with debt denominated in a foreign currency. This game has been played over and over again, first in the Treaty of Versailles with Germany after World War I, and then with many non-advanced nations abused by the Anglo-American Empire (Banksters, IMF, Intelligence, Military and Multi-national Corporations) after World War II.

The productivity of the United States has certainly take a serious hit these last few decades, however like a cold blooded poker player with a well practiced sidearm, we have other tools at our disposal to ensure our continued winnings.

[mmr]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Think of cash as a zero-year, 0% rate t-bill, basically; the backing for t-bills and cash ultimately is supported by the same taxing authority.

Treasury note issuance just changes the term structure and interest cost of the government's overall debt profile, while deficit spending changes the amount of the debt. For example, when the government sells a 10-year bond for cash, they're just exchanging one form of liability for another. Theoretically the government could finance its entire debt with non-interest bearing cash if it chose to do so. (Given where rates are on newly-issued Treasury debt today, with the 10-year below 3%, effectively the government isn't so far off from that point.) Of course, they can't guarantee the purchasing power of the currency, especially in international trade.

[ThePythonicCow]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Price stability (not necessarily constantly flat, which is an unachievable and overly simplified ideal, but at least predictable) is an important element of a vibrant and productive economy.

Eh -- this heretical view I am espousing confuses even me.

Minsky's Financial Instability Hypothesis suggests that prolonged periods of price stability can increase the fragility of capitalist financial systems such as ours, because such stability causes people to take increasingly great risk (as we've just been witnessing.)

And (the author of the comments posted above) Tymoigne's paper Asset Prices, Financial Fragility, and Central Banking., which is the basis for his book Central Banking, Asset Prices, and Financial Fragility, considers whether such goals as price stability (targeted inflation) are the proper goals of central banks This paper compares three views of economic thought on this question, the New Consensus and Post Keynesian frameworks and Tymoigne's view that central banks should focus on financial stability, not on inflation and interest rates.

[ThePythonicCow]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Think of cash as a zero-year, 0% rate t-bill, basically; the backing for t-bills and cash ultimately is supported by the same taxing authority ... especially in international trade.

Though I have previously agreed with your comments that Treasury debt is ultimately supported by U.S. tax collections, today I am wearing the hat of the heretic and am disagreeing with that position.

Today I am claiming that the U.S. Dollar is supported not by U.S. taxes, but rather by:

• the trade exports of the U.S. (if foreigners can buy good products with the Dollar, the Dollar will be valued),
• the trade exports of other nations selling for Dollars (OPEC oil is the elephant in the living room here),
• the financial shenanigans of the Anglo-American banks and NGO's (e.g. the IMF) which suppress (rather immorally and fraudulently in my view) competitive economies and currencies, and
• oppression by the U.S. military and intelligence organizations, which also work to keep competitors in-line and infighting.

The first item above, trade, has become a negative for the Dollar the last couple of decades. The other three items (unfortunately) remain strong positives for the U.S. Dollar.

[dummass]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

In each case I would claim that the essential problem was not money printing, but rather required payments in foreign currencies to foreign suppliers, nations or banks which could not be funded due to collapsing productivity.

Better yet, why doesn't someone provide us with some historical examples of this Utopian society working. If trading unlimited fiat (or debts in fiat) for goods and services works, there must be at least one (1) recorded example of such. Humanity has been experimenting with civilization for thousands of years, surely the odds are good (statistically speaking), that we would have one (1) successful attempt. They couldn't all have ended in complete failure, could they?

[ThePythonicCow]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Better yet, why doesn't someone provide us with some historical examples of this Utopian society working. If trading unlimited fiat (or debts in fiat) for goods and services works, there must be at least one (1) recorded example of such. Humanity has been experimenting with civilization for thousands of years, surely the odds are good (statistically speaking), that we would have one (1) successful attempt. They couldn't all have ended in complete failure, could they?

Give me an example of any credit-based or other capitalist, communist, fascist, or socialist system which has been successful long term .

And note that I not saying unlimited. I am saying financially unlimited. The limits on successful currency and debt paper (in that currency!) creation by a sovereign nation are not those on the rest of us who are borrowing or trading in someone else's currency.

Once again (third time now), I encourage anyone who has read this far read a few of the results of a Google seach for the "endogeneity of the money supply". If you can wrap your mind around that concept, there's a good chance you entire perspective will shift such that the rest of Tymoigne's heresies at least seem as a coherent alternative view.

[dummass]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Give me an example of any credit-based or other capitalist, communist, fascist, or socialist system which has been successful long term .

Your attempting to muddy the water; we are not debating the success or failure of political systems.

Tymoigne's article makes the claim that governments who trade in their own fiat (or debts in their own fiat) face no "financial limits" to their borrowing and spending needs, because their ability to repay the debts are "unlimited."

I have argued, on the other hand, that natural limits do exist and I have provided several historical example of where Tymoigne's suggestion has been tried and failed. Surely you can provide at least one (1) example of were this has been tried and succeeded.

[dummass]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Once again (third time now), I encourage anyone who has read this far read a few of the results of a Google seach for the "endogeneity of the money supply". If you can wrap your mind around that concept, there's a good chance you entire perspective will shift such that the rest of Tymoigne's heresies at least seem as a coherent alternative view.

Cow! Have you lost your tinfoil hat? The IMF is behind this. http://www.imf.org/external/pubs/ft/wp/2000/wp00188.pdf

[Rajiv]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Better yet, why doesn't someone provide us with some historical examples of this Utopian society working.

Yes there is -- in Benjamin Franklin's Pennsylvania -- See Ellen Brown - Credit Default Swaps: Derivative Disaster Du Jour

The most brilliant banking model in our national history was established in the first half of the eighteenth century, in Benjamin Franklin's home province of Pennsylvania. The local government created its own bank, which issued money and lent it to farmers at a modest interest. The provincial government created enough extra money to cover the interest not created in the original loans, spending it into the economy on public services. The bank was publicly owned, and the bankers it employed were public servants. T he interest generated on its loans was sufficient to fund the government without taxes; and because the newly issued money came back to the government, the result was not inflationary.⁷ The Pennsylvania banking scheme was a sensible and highly workable system that was a product of American ingenuity but that never got a chance to prove itself after the colonies became a nation. It was an ironic twist, since according to Benjamin Franklin and others, restoring the power to create their own currency was a chief reason the colonists fought for independence. The bankers' money-creating machine has had two centuries of empirical testing and has proven to be a failure. It is time the sovereign right to create money is taken from a private banking elite and restored to the American people to whom it properly belongs.

See also Chapter 3 of Ellen Brown's book - "Web of Debt"

Chapter 3

EXPERIMENTS IN UTOPIA: COLONIAL PAPER MONEY AS LEGAL TENDER

Dorothy and her friends were at first dazzled by the brilliancy of the wonderful City. The streets were lined with beautiful houses all built of green marble and studded everywhere with sparkling emeralds. They walked over a pavement of the same green marble, and where the blocks were joined together were rows of emeralds, set closely, and glittering in the brightness of the sun. . . . Everyone seemed happy and contented and prosperous.

– The Wonderful Wizard of Oz,
“The Emerald City of Oz”

Frank Baum’s vision of a magical city shimmering in the sun captured the utopian American dream. Walt Disney would later pick up the vision with his castles in the clouds, the happily ever after endings to romantic Hollywood fairy tales. Baum, who was Irish, may have been thinking of the Emerald Isle, the sacred land of Ireland. The Emerald City also suggested the millennial visions of the Biblical New Jerusalem and the “New Atlantis,” the name Sir Francis Bacon gave to the New World.

The American colonies were an experiment in utopia. In an uncharted territory, you could design new systems and make new rules. Paper money was already in use in England, but it had fallen into the hands of private bankers who were using it for private profit at the expense of the people. In the American version of this new medium of exchange, paper money was issued and lent by provincial governments, and the proceeds were used for the benefit of the people. The colonists’ new paper money financed a period of prosperity that was considered remarkable for isolated colonies lacking their own silver and gold. By 1750, Benjamin Franklin was able to write of New England:

There was abundance in the Colonies, and peace was reigning on every border. It was difficult, and even impossible, to find a happier and more prosperous nation on all the surface of the globe. Comfort was prevailing in every home. The people, in general, kept the highest moral standards, and education was widely spread.

Money as Credit

The distinction of being the first local government to issue its own paper money went to the province of Massachusetts. The year was 1691, three years before the charter of the Bank of England. Jason Goodwin, who tells the story in his 2003 book Greenback, writes that Massachusetts’ buccaneer governor had led a daring assault on Quebec in an attempt to drive the French out of Canada; but the assault had failed. Militiamen and widows needed to be paid. The local merchants were approached but had declined, saying they had other demands on their money.

The idea of a paper currency had been suggested in 1650, in an anonymous British pamphlet titled “The Key to Wealth, or, a New Way for Improving of Trade: Lawfull, Easie, Safe and Effectual.” The paper currency proposed by the pamphleteer, however, was modeled on the receipts issued by London goldsmiths and silversmiths for the precious metals left in their vaults for safekeeping. The problem for the colonies was that they were short of silver and gold. They had to use foreign coins to conduct trade; and since they imported more than they exported, the coins were continually being drained off to England and other countries, leaving the colonists without enough money for their own internal needs. The Massachusetts Assembly therefore proposed a new kind of paper money, a “bill of credit” representing the government’s “bond” or I.O.U. – its promise to pay tomorrow on a debt incurred today. The paper money of Massachusetts was backed only by the “full faith and credit” of the government.1

Other colonies then followed suit with their own issues of paper money. Some were considered government I.O.U.s, redeemable later in “hard” currency (silver or gold). Other issues were “legal tender” in themselves. Legal tender is money that must legally be accepted in the payment of debts. It is “as good as gold” in trade, without bearing debt or an obligation to redeem the notes in some other form of money later.2

When confidence in the new paper money waned, Cotton Mather, who was then the most famous minister in New England, came to its defense. He argued:

Is a Bond or Bill-of-Exchange for £1000, other than paper? And yet is it not as valuable as so much Silver or Gold, supposing the security of Payment is sufficient? Now what is the security of your Paper-money less than the Credit of the whole Country?3

Mather had redefined money. What it represented was not a sum of gold or silver. It was credit: “the credit of the whole country.”

The Father of Paper Money

Benjamin Franklin was such an enthusiast for the new medium of exchange that he has been called “the father of paper money.” Unlike Cotton Mather, who went to Harvard at the age of 12, Franklin was self-taught. He learned his trade on the job, and his trade happened to be printing. In 1729, he wrote and printed a pamphlet called “A Modest Enquiry into the Nature and Necessity of a Paper-Currency,” which was circulated throughout the colonies. It became very popular, earning him contracts to print paper money for New Jersey, Pennsylvania, and Delaware.4

Franklin wrote his pamphlet after observing the remarkable effects that paper currency had had in stimulating the economy in his home province of Pennsylvania. He said, “Experience, more prevalent than all the logic in the World, has fully convinced us all, that [paper money] has been, and is now of the greatest advantages to the country.” Paper currency secured against future tax revenues, he said, turned prosperity tomorrow into ready money today. The government did not need gold to issue this currency, and it did not need to go into debt to the banks. In America, the land of opportunity, this ready money would allow even the poor to get ahead. Franklin wrote, “Many that understand . . . Business very well, but have not a Stock sufficient of their own, will be encouraged to borrow Money; to trade with, when they have it at a moderate interest.”

He also said, “The riches of a country are to be valued by the quantity of labor its inhabitants are able to purchase and not by the quantity of gold and silver they possess.” When gold was the medium of exchange, money determined production rather than production determining the money supply. When gold was plentiful, things got produced. When it was scarce, men were out of work and people knew want. The virtue of government-issued paper scrip was that it could grow along with productivity, allowing potential wealth to become real wealth. The government could pay for services with paper receipts that were basically community credits. In this way, the community actually created supply and demand at the same time. The farmer would not farm, the teacher would not teach, the miner would not mine, unless the funds were available to compensate them for their labors. Paper “scrip” underwrote the production of goods and services that would not otherwise have been on the market. Anything for which there was a buyer and a producer could be produced and traded. If A had what B wanted, B had what C wanted, and C had what A wanted, they could all get together and trade. They did not need the moneylenders’ gold, which could be hoarded, manipulated, or lent only at usurious interest rates.

Representation Without Taxation

The new paper money did more than make the colonies independent of the British bankers and their gold. It actually allowed the colonists to finance their local governments without taxing the people. Alvin Rabushka, a senior fellow at the Hoover Institution at Stanford University, traces this development in a 2002 article called “Representation Without Taxation.” He writes that there were two main ways the colonies issued paper money. Most colonies used both, in varying proportions. One was a direct issue of notes, usually called “bills of credit” or “treasury notes.” These were I.O.U.s of the government backed by specific future taxes; but the payback was deferred well into the future, and sometimes the funds never got returned to the treasury at all. Like in a bathtub without a drain, the money supply kept increasing without a means of recycling it back to its source. However, the funds were at least not owed back to private foreign lenders, and no interest was due on them. They were just credits issued and spent into the economy on goods and services.

The recycling problem was solved when a second method of issue was devised. Colonial assemblies discovered that provincial loan offices could generate a steady stream of revenue in the form of interest by taking on the lending functions of banks. A government loan office called a “land bank” would issue paper money and lend it to residents (usually farmers) at low rates of interest. The loans were secured by mortgages on real property, silver plate, and other hard assets. Franklin wrote, “Bills issued upon Land are in Effect Coined Land.” New money issued and lent to borrowers came back to the loan office on a regular payment schedule, preventing the money supply from over-inflating and keeping the values of paper loan-office bills stable in terms of English sterling. The interest paid on the loans also went into the public coffers, funding the government. Colonies relying on this method of issuing paper money thus wound up with more stable currencies than those relying heavily on new issues of bills of credit.

The most successful loan offices were in the middle colonies – Pennsylvania, Delaware, New York and New Jersey. The model that earned the admiration of all was the loan office established in Pennsylvania in 1723. The Pennsylvania plan showed that it was quite possible for the government to issue new money in place of taxes without inflating prices. From 1723 until the French and Indian War in the 1750s, the provincial government collected no taxes at all. The loan office was the province’s chief source of revenue, supplemented by import duties on liquor. During this period, Pennsylvania wholesale prices remained stable. The currency depreciated by 21 percent against English sterling, but Rabushka shows that this was due to external trade relations rather than to changes in the quantity of currency in circulation.5

Before the loan office came to the rescue, Pennsylvania had been losing both business and residents due to a lack of available currency. The loan office injected new money into the economy, and it allowed people who had been forced to borrow from private bankers at 8 percent interest to refinance their debts at the 5 percent rate offered by the provincial government. Franklin said that this money system was the reason that Pennsylvania “has so greatly increased in inhabitants,” having replaced “the inconvenient method of barter” and given “new life to business [and] promoted greatly the settlement of new lands (by lending small sums to beginners on easy interest).” When he was asked by the directors of the Bank of England why the colonies were so prosperous, he replied that they issued paper money “in proper proportions to the demands of trade and industry.” The secret was in not issuing too much, and in recycling the money back to the government in the form of principal and interest on government issued loans.

The paper currencies of the New England colonies – Massachusetts, Rhode Island, Connecticut and New Hampshire – were less successful than those of the middle colonies, mainly because they failed to limit their issues to these “proper proportions,” or to recycle the money back to the government. The paper money of the New England colonies helped to finance development and growth that would not otherwise have occurred, but the currencies did not maintain their value, because bills of credit were issued in far greater quantities than the provincial governments ever hoped to redeem. Because the money was pumped into the economy without flowing back to the government, the currency depreciated and price inflation resulted.

King George Steps In

Rapid depreciation of the New England bills eventually threatened the investments of British merchants and financiers who were doing business with the colonies, and they leaned on Parliament to prohibit the practice. In 1751, King George II enacted a ban on the issue of all new paper money in the New England colonies, forcing the colonists to borrow instead from the British bankers. This ban was continued under King George III, who succeeded his father in 1752.

In 1764, Franklin went to London to petition Parliament to lift the ban. When he arrived, he was surprised to find rampant unemployment and poverty among the British working classes. “The streets are covered with beggars and tramps,” he observed. When he asked why, he was told the country had too many workers. The rich were already overburdened with taxes and could not pay more to relieve the poverty of the working classes. Franklin was then asked how the American colonies managed to collect enough money to support their poor houses. He reportedly replied:

We have no poor houses in the Colonies; and if we had some, there would be nobody to put in them, since there is, in the Colonies, not a single unemployed person, neither beggars nor tramps.6

His English listeners had trouble believing this, since when their poor houses and jails had become too cluttered, the English had actually shipped their poor to the Colonies. The directors of the Bank of England asked what was responsible for the booming economy of the young colonies. Franklin replied:

That is simple. In the colonies we issue our own money. It is called Colonial Scrip. We issue it to pay the government’s approved expenses and charities. We make sure it is issued in proper proportions to make the goods pass easily from the producers to the consumers. . . . In this manner, creating for ourselves our own paper money, we control its purchasing power, and we have no interest to pay to no one. You see, a legitimate government can both spend and lend money into circulation, while banks can only lend significant amounts of their promissory bank notes, for they can neither give away nor spend but a tiny fraction of the money the people need. Thus, when your bankers here in England place money in circulation, there is always a debt principal to be returned and usury to be paid. The result is that you have always too little credit in circulation to give the workers full employment. You do not have too many workers, you have too little money in circulation, and that which circulates, all bears the endless burden of unpayable debt and usury.7

Banks were limited to lending money into the economy; and since more money was always owed back in principal and interest (or “usury”) than was lent in the original loans, there was never enough money in circulation to pay the interest and still keep workers fully employed. The government, on the other hand, had two ways of getting money into the economy: it could both lend and spend the money into circulation. It could spend enough new money to cover the interest due on the money it lent, keeping the money supply in “proper proportion” and preventing the “impossible contract” problem — the problem of having more money owed back on loans than was created by the loans themselves.

After extolling the benefits of colonial scrip to the citizens of Pennsylvania, Franklin told his listeners, “New York and New Jersey have also increased greatly during the same period, with the use of paper money; so that it does not appear to be of the ruinous nature ascribed to it.” Jason Goodwin observes that it was a tricky argument to make. The colonists had been stressing to the mother country how poor they were — so poor, they were forced to print paper money for lack of precious metals. Franklin’s report demonstrated to Parliament and the British bankers that the pretext for allowing paper money had been removed. The point of having colonies was not, after all, to bolster the colonies’ economies. It was to provide raw materials at decent rates to the mother country. In 1764, the Bank of England used its influence on Parliament to get a Currency Act passed that made it illegal for any of the colonies to print their own money.8 The colonists were forced to pay all future taxes to Britain in silver or gold. Anyone lacking in those precious metals had to borrow them at interest from the banks.

Only a year later, Franklin said, the streets of the colonies were filled with unemployed beggars, just as they were in England. The money supply had suddenly been reduced by half, leaving insufficient funds to pay for the goods and services these workers could have provided. He maintained that it was “the poverty caused by the bad influence of the English bankers on the Parliament which has caused in the colonies hatred of the English and . . . the Revolutionary War.” This, he said, was the real reason for the Revolution: “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.” John Twells, an English historian, confirmed this view of the Revolution, writing:

In a bad hour, the British Parliament took away from America its representative money, forbade any further issue of bills of credit, these bills ceasing to be legal tender, and ordered that all taxes should be paid in coins. Consider now the consequences: this restriction of the medium of exchange paralyzed all the industrial energies of the people. Ruin took place in these once flourishing Colonies; most rigorous distress visited every family and every business, discontent became desperation, and reached a point, to use the words of Dr. Johnson, when human nature rises up and asserts its rights.9

Alexander Hamilton, the nation’s first Treasury Secretary, said that paper money had composed three-fourths of the total money supply before the American Revolution. When the colonists could not issue their own currency, the money supply had suddenly shrunk, leaving widespread unemployment, hunger and poverty in its wake. Unlike in the Great Depression of the 1930s, people in the 1770s were keenly aware of who was responsible for their distress. One day they were trading freely with their own paper money. The next day it was gone, banned by order of a king an ocean away, who demanded tribute in the coin of the British bankers. The outraged populace ignored the ban and went back to issuing their own paper money. In his illuminating monetary history The Lost Science of Money, Stephen Zarlenga quotes historian Alexander Del Mar, who wrote in 1895:

[T]he creation and circulation of bills of credit by revolutionary assemblies . . . coming as they did upon the heels of the strenuous efforts made by the Crown to suppress paper money in America [were] acts of defiance so contemptuous and insulting to the Crown that forgiveness was thereafter impossible . . . [T]here was but one course for the Crown to pursue and that was to suppress and punish these acts of rebellion . . . . Thus the Bills of Credit of this era, which ignorance and prejudice have attempted to belittle into the mere instruments of a reckless financial policy were really the standards of the Revolution. They were more than this: they were the Revolution itself!10

The Cornerstone of the Revolution

Like Massachusetts nearly a century earlier, the colonies suddenly found themselves at war and without the means to pay for it. The first act of the new Continental Congress was to issue its own paper scrip, popularly called the Continental. Most of the Continentals were issued as I.O.U.s or debts of the revolutionary government, to be redeemed in coinage later.11 Eventually, 200 million dollars in Continental scrip were issued. By the end of the war, the scrip had been devalued so much that it was essentially worthless; but it still evoked the wonder and admiration of foreign observers, because it allowed the colonists to do something that had never been done before. They succeeded in financing a war against a major power, with virtually no “hard” currency of their own, without taxing the people. Franklin wrote from England during the war, “the whole is a mystery even to the politicians, how we could pay with paper that had no previously fixed fund appropriated specifically to redeem it. This currency as we manage it is a wonderful machine.” Thomas Paine called it a “corner stone” of the Revolution:

Every stone in the Bridge, that has carried us over, seems to have claim upon our esteem. But this was a corner stone, and its usefulness cannot be forgotten.12

The Continental’s usefulness was forgotten, however, with a little help from the Motherland . . . .

Economic Warfare: The Bankers Counterattack
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[dummass]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Yes there is -- in Benjamin Franklin's Pennsylvania -- See Ellen Brown - Credit Default Swaps: Derivative Disaster Du Jour

See also Chapter 3 of Ellen Brown's book - "Web of Debt"

Thank you for your example Rajiv. As quoted, the government appears to have been operating under constraints and conditions that were not outlined in Tymoigne's article.

The provincial government created enough extra money to cover the interest not created in the original loans, spending it into the economy on public services. The bank was publicly owned, and the bankers it employed were public servants. T he interest generated on its loans was sufficient to fund the government without taxes; and because the newly issued money came back to the government, the result was not inflationary.7

The problem is alway the enforcement of said constraints and conditions.

Confederate States of America
1861-1865


From October of 1861 to March of 1864 the commodity price index rose an average rate of 10 percent per month. When the Civil War ended in April 1865 the cost of living in the South was 92 times what it was before the war started. This inflation was obviously caused by the expansion of the money supply. The role of the money supply in establishing the price level is confirmed even more strongly by the results of an attempt to curb the growth of the money supply in 1864.

In February the Confederate Congress decreed a currency reform. All bills greater than five dollars were to be converted into bonds paying 4 percent interest. All bills not converted by April 1 would be exchanged for a new issue at a ratio of 2 for 3. Prior to the reform people spent wildly and drove prices up 23 percent in one month. But, by May 1864, the reform had been completed and the stock of money was reduced by one third. The general price index declined. Eugene Lerner, an economist who studied this inflation, commented on this result:

This price decline took place in spite of invading Union armies, the impending military defeat, the reduction of foreign trade, the disorganized government, and the low morale of the Confederate army. Reducing the stocks of money had a more significant effect on prices than these powerful forces.
The increase in the money supply came as a result of the Confederacy inability to collect funds through taxes. Only 5 percent of its expenditures were covered by taxes. Initially the Confederate government tried to borrow extensively. This failed because the planters had funds only after the fall harvest, but the war started in April. The war interferred with the harvest and export of the cotton crop so the planters were asking the government for help instead of loaning it funds. Consequently less than 30 percent of the funds for the Confederacy came from bonds. Thus, the Confederate government saw printing money as an unavoidable method for financing the war. The Confederate Congress was reluctant to use this measure and stated in the act which authorized the printing of money that it was "not to exceed at any one time one million of dollars." Actually 1500 times this amount was printed.

The printing of such large sums created a major problem. Paper, engravers and printers were hard to find. In desperation, the Secretary of the Treasury recommended that counterfeit money be utilized. Anyone holding a counterfeit bill was supposed to exchange it for a government bond and the government would stamp it "valid" and spend it.

The stock of money and the general price index are shown in Tables 1 and 2.

When the Union army captured sections of the Confederacy people took or sent their Confederate money to the areas where it still could be used. Thus the effect of the capture of Confederate territory was like an increase in the money stock in the remaining Confederate territory. The disruptions of the war also decreased production so it was a matter of more and more money chasing fewer and fewer goods.