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World Futures: Money, Trade, Value And Time Part 5

on November 9, 2017 - 7:01am

World Futures: What Do We Need?

Los Alamos World Futures Institute

We finished last week’s article by observing the creation of the Bank of England in 1694 to raise money for its war against France. Note that war does not produce tradable things of value but does consume things of value.

This is not intended to debate warfare because it may be essential for a country to maintain itself or its diplomatic bargaining position. But there is a cost, there is a consumption of value. And this affects the exchange of goods and services – trade.

In France, under Louis XIV (1638-1715), the government had a shortage of precious metals because of war payoffs. With the passing of Louis XIV, Louis XV became king and, with the support of the Duke of Orleans, John Law presented his concept for a centralized Banque Generale. The private bank was allowed to issue its own currency backed by gold.

Returning to the Bank of England, initially its handwritten banknotes were for a precise amount issued for a deposit or a loan. By 1745, the bank was issuing fixed denomination notes ranging from 20 to 1,000 pounds, but requiring the payee’s name and a cashier’s signature. This was money – paper money – but not legal tender in Scotland and Northern Ireland.

The Battle of Lexington and Concord Massachusetts occurred on April 19, 1775. At that time in the colonies there were coins, paper money and commodity money. You guessed it, commodities such as tobacco and beaver skins were used when other forms of money was not available. While it started in the 1600s, paper “money” was printed in all of the colonies and like British paper money was denominated in pounds. Because of the Spanish dollar, the colonies paper money morphed into dollars and the bills issued by the colonies were issued to pay debts. The bills were not backed by gold or silver but could be used to pay taxes. This was fiat money.

As you probably know, independence was approved July 2, 1776 and final approval of the wording was approved July 4, 1776. The actual signing occurred Aug. 2, 1776. But the confederation was already at war. How did it pay for it? With difficulty, of course, and that’s and understatement. The Continental Congress started issuing paper money known as Continentals in the total amount of $241,552, 700. It rapidly lost perceived value becoming “not worth a continental” and by May 1781 ceased to circulate as money. In 1782 the Bank of North America was chartered. With a specie (coin) loan from France and private money from Robert Morris, first Superintendent of Finance of the United States, the bank began issuing notes convertible into specie.

It was a painful time with runaway inflation, not to mention the burdens of war. Accordingly, the Constitutional Convention, when drafting the Constitution of the United States, included in Article 1, Section 8:

“To coin Money, regulate the Value thereof, and of foreign Coin and fix the Standards of Weights and Measures.”

And Section 10 explicitly prohibits states from making coin or issuing bills of credit. Note the word “coin.” The only money that could be issued was specie or coin money. Paper money (bills of credit) was receivable for payment of government obligations and taxes. The bank of North America issued notes convertible into specie (coins), but it was not legal tender. 

In 1862, the Congress passed the Legal Tender Act to fund the Civil War. Why does war always come up when money is examined? The paper money issued was backed by gold, but payment was deferred. In 1884, the US Supreme Court upheld the power of Congress to declare paper money legal tender, even in peacetime. 

US legal tender was, and still is, printed and minted under the Department of the Treasury, but there was no central bank for government functions. Under President Andrew Jackson, the Second Bank of the United States was dissolved and federal funds were deposited in state banks. The details become confusing and the issuance and control of money underwent several uh-ohs, eventually resulting in the Federal Reserve System, signed into law Dec. 23, 1913 by President Woodrow Wilson. There are12 Federal Reserve Banks that serve as operating arms of the US central banking system or Federal Reserve System (often referred to as the Fed). It serves, for the government, as a ready source of loans for banks and a safe depository for federal money.  Can you borrow money from a Federal Reserve Bank? No. Can Los Alamos National Bank, a member of the Federal Reserve System, borrow money from a Federal Reserve Bank? Yes.

Take out a US paper bill in current circulation and read the top line. It says “Federal Reserve Note,” a bank note issued by the Federal Reserve System, printed by the Bureau of Engraving and Printing. Is it worth more than a continental? Yes, because we have trust in the US Federal Government. What is its true value? To be determined. A few weeks ago, Romaine lettuce was less than a dollar a head. Last time I checked, it was $1.19.

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