American fiat currency made them patriotic… and broke

Dateline: San Diego, California

Near the height of the Roman Empire, consul Lucius Cassius was considered one of the most honest and wise judges in the land. He had a trademark question that is still referenced to this day: “Cui bono?”; literally translated “as a benefit to whom?”

Cui bono is a Latin adage used to suggest a hidden motive; and that the party responsible may not be who it would first appear to be. It implies that the person guilty of a crime is the one with the motive, particularly for financial gain.

No better example exists of this ancient suggestion to “follow the money” than in the long list of historical governments bound on depriving you of economic freedom.

In the pre-war colonial America of the mid-1700s, each colony issued its own currency and would value and devalue them at whim. This served to shift the trade balance over time, as well as to pay British creditors with devalued colonial pounds — the disorganized reality of a loosely assembled group of governments.

Adam Smith called it a system of “fraudulent cheaters”.

Continentals

After the American Revolutionary War began, the Continental Congress began issuing their own currency. While colonial currencies, manipulated as they were, were typically backed by metals, the colonists were well familiar with their ability to bankroll a war with paper; they’d been experimenting with bills of credit and paper money since the 1690s.

While loans and subsidies from the French monarchy covered part of the tab, colonists turned to their most reliable standby to finance their war for independence and fired up the printing press.

The Continental Congress issued nearly a quarter-billion dollars in Continental Currency, or Continentals. Like any well-meaning government, they were issued with the promise of backing from future tax revenues in the colonies.

Of course, not only did those taxes never materialize, but colonies continued to issue their own bills of credit as well. As more and more paper was printed, the level of depreciation became legendary. Soon, the phrase “not worth a Continental” was born.

Around the colonies, banknotes were hung on barber shop walls in jest. Debtors ran from creditors refusing to take worthless currency. But the government didn’t take it lying down.

Virginian officials alleged in 1776 that the notes had become worthless because greedy merchants wanted to charge higher prices to accept them over payment in coin.

Those who refused to sell their homes or land for devalued notes were branded as traitors and enemies of liberty. George Washington spoke out against “monopolizers” and “forestallers” and said these “pests of society” should be hanged.

Cui bono?

In Connecticut, assemblymen complained of “evil-minded persons” who went “against liberty” and country by depreciating the notes. There’s always a straw man, after all. As the continental depreciated further, the states came under pressure to make the notes legal tender in order to force the citizenry to accept it.

So it was done. And along with the new legalized tender came a propaganda campaign that sought to exile anyone refusing to accept the new notes.

In North Carolina, anyone who so much as spoke out against the paper currency was to be “treated as the enemy”. Back in Virginia, refusal to accept the notes in private transactions permitted the full cancellation of a debt you were owed. Penalties of various natures were enacted across the land.

As the young government went on to institute price controls, labor and food shortages resulted. Stores closed and people were left starving.

Ultimately, the Continental Congress resorted to the oldest trick in a governments’ book. After repeated assurances that the currency would one day be redeemable at face value failed to dissuade doubters, Congress declared that it was “derogatory” to Congress’s honor to proclaim otherwise. So much for fighting for “freedom of speech” and all that.

In March of 1780, Congress announced a plan to redeem the currency at one-fortieth of its face value, just years after its claims to the contrary; so much for Congress’s honor.

Within a year, the currency had been debased to anywhere from 100:1 to 1,000:1 in some places — an even steeper fall from the 40:1 redemption rates. It would be argued that while the currency had been inflated into oblivion, and the public’s savings decimated, the government benefited triumphed in being able to finance its war.

The government is enriched when the public is looted.

Cui bono?

Can we learn from history?

Years later, as the American Civil War was raging, critics of that era’s monetary policy reminded the Union’s fiscal architects and the Republicans about the folly of their ways based on the disastrous results of the revolution.

The response was to call into question the patriotism of those who dared to learn from history. Laissez-faire academic William Summer Graham framed the sentiment: “When the lessons of history were quoted they were answered by the flag and the eagle”.

History is no match for a government on a mission.

These lessons of history are easily translatable to the present. When the government proposes to devalue your currency, or limit your economic freedoms, ask who will really benefit. When the government wants to make it harder for you to send money overseas and burden you with endless reporting requirements, ask who is to benefit.

For centuries, even the most revered of government bodies have proposed that if you don’t go along with their printing press charade, you’re the one to blame. Perhaps unpatriotic. Maybe even a terrorist.

Times may change and new villains will be created who can be blamed for bad monetary policy and fewer economic liberties, but the play is still the same.

Act accordingly.