[This article is based on a talk given at the Mises Circle in Manhattan: The Fed and War Finance, September 16, 2006, available for audio download.]
Certain historical cases of inflation have become sufficiently notorious to become textbook examples of government printing presses run riot. In the twentieth century the classic episode was the German hyperinflation of 1923.
The eighteenth century affords us the cases of the American and French Revolutions, and the monetary debasement for which those countries' governments were responsible. In the American case, the continental currency lost so much of its value that it became common to describe something as worthless by saying it was "not worth a Continental."
Financing for the American War for Independence included loans and subsidies from the French government as well as the modest sums Congress received as a result of its requisitions upon the states. But paper money played a central role in Revolutionary War finance.
When Congress first began printing bills of credit (irredeemable paper money that would be received as payment for taxes) in 1775, the idea was that the states would levy taxes and collect the bills in payment of the taxes, thereby retiring them. Not only did the states not levy those taxes, but they also began printing paper money of their own. The result was that more and more paper continued to be printed, leading in turn to a level of depreciation that has become legendary.
When I was a boy, my mother found it endearing that whenever my parents would say they needed money for this or that, I would simply recommend that they go to the bank and get some. But something like that is not far removed from the actual views of a great many people of influence over the years.
A flabbergasted Pelatiah Webster, in his history of "Continental Money," tells us that when the subject of increased taxation for the support of the war was under consideration by the Continental Congress, a member arose and indignantly asked "if he was expected to help tax people, when they could go to the printing-office and get money by the cart load."
This paper money provoked all manner of economic chaos and dislocation. According to John Witherspoon, the New Jersey clergyman who signed the Declaration of Independence, "For two or three years we constantly saw and were informed of creditors running away from their debtors, and the debtors pursuing them in triumph, and paying them without mercy."
In Rhode Island, sources tell us of creditors "leaping from rear windows of their houses or hiding themselves in their attics" in order to avoid debtors. The most vulnerable in society also felt its effects, with widows and orphans finding the guardians of their trust funds paying them in currency that was worth but a fraction of its face value.
In the case of the German hyperinflation, we have photographs of people using the worthless currency as wallpaper, and of children gluing the notes together to make kites or using stacks of it as building blocks. Similar stories could be told about the American experience. According to one contemporary, "The annihilation was so complete that barber-shops were papered in jest with the bills; and the sailors, on returning from their cruise, being paid off in bundles of this worthless money, had suits of clothes made of it, and with characteristic light-heartedness turned their loss into a frolic by parading through the streets in decayed finery which in its better days had passed for thousands of dollars."
It is surely some kind of sociological law that the state always blames actors other than itself for the unpleasant consequences of its own activities. In some situations it even goes so far as to stigmatize people for not wanting to enter into transactions that would make them poorer — as when, for instance, they are expected to accept payment for their goods and services in severely depreciated currency.
"Persons who refused to sell their lands, houses, or merchandise for nearly worthless paper were stigmatized as misers, traitors, forestallers, and enemies of liberty," wrote Charles Bullock in 1900, "but prices continued to rise, as the inflation of the currency proceeded apace." George Washington condemned "the monopolizers, forestallers, and engrossers," who he said should be hunted down as "pests of society" and "hanged upon a gallows."
In May 1776 Virginia alleged that the depreciation was attributable to people's refusal to accept the notes, or to the insistence on higher prices in terms of paper money than in coin, or by "other devices"; the following year the Virginia assembly blamed the depreciation on "the pernicious artifices of the enemies of American liberty, to impair the credit of the said bills, by raising the nominal value" of coin. The Massachusetts General Court spoke of "the avaricious conduct of many persons, by daily adding to the now exorbitant price of every necessary and convenient article of life."
The Connecticut government likewise blamed this phenomenon on "monopolizers, the great pest of society." It went on to note that "some evil-minded persons, inimical to the liberties of the United States of America, have endeavored to depreciate the bills of credit of this and the said United States," and that many of its citizens "are so abandoned and lost to all the feelings of humanity as to prey upon the bowels of their country." According to the legislature of Pennsylvania, "the prices of goods and merchandise are greatly enhanced by the practices and combinations of evil and designing men."
As the continental depreciated, the states came under pressure to make it legal tender and thus force people to accept it in exchange for goods and services and in payment for debts. The states complied with this request. Rhode Island declared that anyone who would not accept the paper money would "incur the displeasure of the General Assembly; and ought to be held and esteemed as an enemy to its credit, reputation and happiness; and totally destitute of that regard and obligation he is under to his country and the cause of liberty…. [T]he good people of this colony and America ought to withdraw all communication from such person or persons." The law varied across the states, but in Virginia, for example, refusal to accept the notes amounted to a cancellation of the debt you were owed; other penalties of varying severity were enacted elsewhere. In North Carolina, if you so much as spoke disrespectfully of the paper you were "treated as an enemy to [your] country."
Naturally, the depreciating continental also led to calls for economic controls in order to contain the upward pressure that the inflation was having on wages and prices. The New England states approved price-control statutes in 1776 and early 1777. Other states followed, even after the failure of the New England price-control regimes should have been clear to everyone. Within a couple of years those experiments had been discontinued, partly at the behest of the very Congress that had at one time enthusiastically urged them upon the states.
And no wonder: the price controls had all the predictable effects, including massive shortages, disruption of the division of labor, and more government moralizing — it was bad people, you see, rather than stupid policy, that was responsible for the economic chaos.
John Witherspoon saw through the propaganda. "Fixing the prices of commodities has been attempted by law in several states among us," he explained, "and it has increased the evil it was meant to remedy, as the same practice has done since the beginning of the world."
Likewise, Pelatiah Webster wrote: "As experiment is the surest proof of the natural effects of all speculations of this kind … it is strange, it is marvelous to me, that any person of common discernment, who has been acquainted with all the above-mentioned trials and effects, should entertain any idea of the expediency of trying any such methods again…. Trade, if left alone, will ever make its own way best, and like an irresistible river, will ever run safest, do least mischief and do most good, suffered to run without obstruction in its own natural channel."
Inflation, price controls, and legal tender laws combined to produce chaos and want. "Stores were closed or pillaged," wrote Bullock, "and merchants were mobbed, fined, or imprisoned; but such action merely drove men out of business, and tended to produce a real scarcity."
A June 1777 letter from Boston read, "We are all starving here. [P]eople will not bring in provision, & we cannot procure the common necessaries of life." Two years later, the same person wrote: "We are likely to be starved thro'out Boston. Never such a scarcity of provisions."
On June 4, 1778, the Continental Congress adopted a resolution calling for an end to price controls:
Whereas … it hath been found by experience that limitations upon the prices of commodities are not only ineffectual for the purposes proposed, but likewise productive of very evil consequences to the great detriment of the public service and grievous oppression of individuals … resolved, that it be recommended to the several states to repeal or suspend all laws or resolutions within the said states respectively limiting, regulating or restraining the Price of any Article, Manufacture or Commodity.
In their history of price controls, Robert L. Schuettinger and Eamonn F. Butler concluded:
Public jawboning, private threats, ostracism, boycotts, fines — all proved useless against the flood of paper money. The price of common labor in Boston, which was fixed at three shillings a day in 1777, had risen to 60 shillings by mid-1779. In April 1779, George Washington complained that "a wagon-load of money will scarcely purchase a wagon-load of provisions." In 1779, when the Continental Congress again endorsed price controls, the request was for state laws limiting wage and price increases "not to exceed twenty fold the levels of 1774." Not even that modest goal was attainable, however, and Congress allowed controls to expire when it met again in February 1780.
Meanwhile, Continental Congress had repeatedly assured anyone who would listen that the continental currency would one day be redeemed at its face value, and that it was "derogatory" to the Congress's honor that anyone would spread rumors to the contrary. In March 1780, Congress announced a plan for redeeming the currency at one-fortieth of its face value. So much for Congress's honor.
After 1780 the value of the remaining continentals plummeted still further. By early the following year it had reached a ratio of 100 to 1, and in some places it tumbled to 1,000 to 1 — at which point, recalled the New York Herald in 1863, "it expired … without a groan."
When more monetary manipulation was contemplated — and then carried out — during the Civil War, critics reminded its architects of the terrible example of the Continental. The Republican response was to call into question the patriotism of anyone so discourteous as to remind them of that episode; as William Graham Sumner put it, "When the lessons of history were quoted they were answered by the flag and the eagle." In short: your history is no match for our patriotism.
Let me close by bringing to your attention something I read not long ago in arguably the most prestigious historical journal in the English-speaking world. Now I realize I probably shouldn't be surprised at much of what I read in the professional journals, but I was really quite shocked, looking through the American Historical Review, to come across a 1929 article on Revolutionary War finance by Ralph Volney Harlow.
Wartime inflation, according to Harlow, was simply not that bad. Sure, people suffer under an inflated currency, since they see their savings sometimes dramatically reduced in value. But he reminded us that, after all, "what the public might lose in depreciation would be counterbalanced by the gain to the government of means to finance the war."
You don't say — the government is enriched to the extent that the public is looted. A real insight, that.
To be sure, depreciated paper would inflict irreparable damage on some individuals, but what of it? So too would the war…. And as for the ethical principle involved in partial or complete repudiation, that, judged by the accepted standards of war-time morality, is a small matter. In every department of wartime activity except financial, we have long accepted the maxim that the war justifies the means. The public becomes resigned to extraordinary practices: the suppression of private privilege, compulsory military service, the most abandoned distortion of facts to stimulate and maintain the necessary war spirit, in general the purposeful cultivation of a deep and far-reaching spiritual and intellectual dishonesty. For ages all this has been taken for granted as a part of the necessary trappings of war.
So, really, what's the big deal? During wartime you're being lied to, conscripted, killed — and you're complaining about inflation?
It is very common to hear it said that, yes, inflation is a bad thing, but that in emergencies it may have to be used as a last resort. In The Theory of Money and Credit, Mises addressed the emergency argument for inflation. Some people, he wrote,
believe that there are emergencies which peremptorily require or at least justify recourse to inflation. A nation, they say, can be menaced by evils which are incomparably more disastrous than the effects of inflation. If it is possible to avoid the total annihilation of a nation's freedom and culture by a temporary abandonment of sound money, no reasonable objection can be raised against such a procedure. It would simply mean preferring a smaller evil to a greater one.
Mises replied to this argument by reminding people of the fairly obvious point that printing up additional green paper tickets does not increase the available resources in society, which of course remain at the same level as before.
In order to appraise correctly the weight of this emergency argument in favor of inflation, there is need to realize that inflation does not add anything to a nation's power of resistance, either to its material resources or to its spiritual and moral strength. Whether there is inflation or not, the material equipment required by the armed forces must be provided out of the available means by restricting consumption for nonvital purposes, by intensifying production in order to increase output, and by consuming a part of the capital previously accumulated. All these things can be done if the majority of citizens are firmly resolved to offer resistance to the best of their abilities and are prepared to make such sacrifices for the sake of preserving their independence and culture…. The great emergency can be dealt with without recourse to inflation.
But as long as people can be led to believe that running the printing press and issuing fiduciary media can substitute for saving and capital accumulation as a way to achieve prosperity and create wealth — or, yes, prosecute a war — government will continue to get away with this particularly insidious and underhanded form of expropriation.
In the eighteenth century, people learned lessons from their wartime experience, and devotion to hard money was widespread in the years that followed. Today, the workings of the Federal Reserve are so obscure to most people that hardly anyone is even aware that there is a lesson to be learned in the first place. It is in just such an intellectual environment that government is able to get away with its greatest mischief.