Money: Currency's Circuits

Robert Batt

[Reprinted from an online Land-Theory discussion, 1998]

This paper is in response to stimuli from Fred Foldvary, Scott, Victor Levis and Harry Pollard. Outside the list, stimulus sources include Larry Parks, Ph.D. (Foundation for the Advancement of Monetary Education [URL : fame.org]), and Howard Sharpe, Ph.D. (and semi-Georgist.) The latter two duked it out after Larry's lecture on money and gold that he presented at a Republican fund-raiser here in NYC that I and various libs and others (maybe even a few Rebublicans) attended. My interest in the subject was significantly heightened back around 1990 after reading "Extraordinary Delusions and Popular Beliefs and the Madness of the Crowds" by Chas. MacKay (Circa 1825). Sociological trends have for a long time been an obsession for me.

Thus far, I only have Book I of two prepared for view. Because Book II is much longer and more complex, I may send it one or two chapters at a time.


In the first four chapters of Book I, we will review the basics of money. A typical approach is to start with definition, then onto origin and evolution. I have chosen to place origin and evolution before definition because of the highly subjective treatment of the valuation and nature of money. The origin and evolution of money *are* for a large part its definition. This is true if we willing to accept the idea that common usage is the proper yardstick of definition. In the case of the word "money," common usage of it is associated with a dangerously destructive conception if we act on these notions. While there are objective measures of valuation, they are seldom considered.

The fifth chapter is a time line citing significant events pertaining to monetary affairs, presented for the purpose of proper analysis of the strengths and weaknesses in the banking system, and to invoke thought as to what a workable solution may be. In addition, as it may be a little naive to think that any single interest can alter the course of development, I feel it essential to explore the past and current trends. That is, the positive events that indicate effective shifts in sentiment, as opposed to just exploring the normative ponderings. The last chapter of this Book I, along with the bibliography is being sent in a separate attached file (b1_ch5.txt)

The essence of money and banking that has been laid out in book I is further explored, developed, and analyzed in book II. We will be venturing into the relations between the key players in the industry, their relations to the state, and the affects of such relations on the daily lives of the individual citizen.


I wish to make it clear that this is a work in progress. I do not claim that its contents are a comprehensive coverage of all the major aspects pertaining to the topic. Rather than to take the arrogant attitude that is all too common amongst writers on this subject, I shall put my ego aside, as I recommend we all discipline ourselves to do, so as to better facilitate the development of a clear assessment. This is especially necessary in this field of study due to the rapidly shifting dynamics within the industry. While there are universal and timeless truths pertaining to the subject, it is the relative significance of these truth that is of particular concern. I welcome any comments, and or notes of corrections, omissions, providing that they have been thoughtfully prepared. In bringing new information to light, it is essential to cite the source, whether it be other writings, or your own reasoning. If the latter, then be specific as to both the inductive and deductive reasoning processes. If you haven't already, you may wish to form a database containing your reference material. It will help in conveying your views, and in crystallizing your ideas in your own mind. This is a preliminary draft, and therefore the structure and sequence of the chapters undoubtedly will change as new information is introduced. The logical structure of the chapters in Book II are admitingly flawed. In fact, much of book II, as well as parts of book I, are still in their embryonic stages. Until book II is complete, or should I say 'presented', for it will not be complete without your contemporary inputs, I will entertain questions only for the purposes of clarification.

Book I On Origin and Evolution

Chapter 1) What is Money?

To answer the question "What is money?", it is helpful to look at its origin and evolution.

The origin and evolution of money.

In more primitive civilizations it was possible to trade using a barter system. That is, direct exchange of goods for goods from one consumer to another. As division of labor arose as the new mode of production, it became necessary the develop a means of exchange. What one person produced might not be what another desired. Therefore, people need a way to account for their product that may be demanded elsewhere in the marketplace. This needed to be a standard unit of measure to be accepted as widely as possible. The earlier methods devised used commodities such as cattle or tobacco as currency. These commodities were impractical in that they were not easily transportable and not very durable. The first quality, transportability, is necessary because without it, your geographical trading range is limited. The second, durability, is seen as necessary in order to defer trade. That is, to save or store earnings. We began to seek a currency that could be easily carried, would be universally accepted, and would be durable. In smaller communities where everyone knew each other, tokens such as sea shells were sufficient for trade, much in the same way that personal checks are used today. As we began to trade with those who we did not know, the need arose to have a system that did not rely on trust as much. So we turned to precious metals, primarily gold. In a small town, a trustworthy goldsmith would keep gold deposits for the people for a small fee. When a depositor needed to trade, he or she would go to the goldsmith and get an amount of gold sufficient enough for the trade. This method was somewhat bothersome, having to go to the goldsmith, then to the trading partner who would just bring the gold back the smith anyway. So a system developed whereby a buyer in the market would simply use his receipt from the goldsmith as currency. This was our first paper money. As you can see, this system that is the essence of the gold standard was not designed. Rather, it simply evolved out of a perceived necessity. This system worked fine as long as the seller also knew and trusted the goldsmith. If not, as with larger purchases from out of towners, the seller would ask for the gold instead of the receipt.

Over time, it became obvious to the goldsmith that he could lend out a portion of the gold at interest, as it would not all be demanded at once. As was sensible, the goldsmith began to issue notes as loans of gold in excess of the actual amount of gold in his vaults. If he got too ambitious in lending out gold, or if some other exogenous event unfavorably upset the gold supply and demand balance, or the supply and demand balance of goods, the goldsmith could become insolvent. That is, if demands for gold outstripped its supply, the receipts and notes were perceived as worthless. This was the case with many goldsmiths and their ancestors, the banking institutions, at different points in history.

There are three basic functions of money that are accepted by a most diverse group of economists. They are: a) a means of exchange; b) a unit of account; c) a store of wealth.

3) Is there more than one type of money?

Yes. While a number of different currencies (currency meaning money in use,) will take similar physical form, that is, paper or coin, they may differ in how they are backed. Some are 100% backed by gold on deposit, while others are fractionally backed, meaning only a portion (perhaps 8-20%) of the gold that the bill or coin represents is kept on deposit. These may or may not be convertible into gold on demand. If they are not convertible, then the gold serves only as a unit of account to gauge the value of the currency in relation to the value of various goods. There are also paper currencies that are not backed by gold, but by the full faith and credit of a government. This type is referred to as fiat money. I suppose technically speaking, the sea shells used in more primitive societies qualify as fiat money as well.

4) What are the basic theories of money?

One widely accepted theory of money is known as the Quantity Theory of Money. This simply states that the price level of money is a function of the quantity of money as it relates to the demand for money necessary to meet the needs of current transactions. This is referred to as the transactions demand for money. Here's a brief explanation: For the purpose of analysis, let us assume that full employment is the natural state of the economy. Further, we shall assume that the total output (GNP) is at its maximum in this natural state. That is, technological advances are ignored. In such an economy, an increase in the supply of money will cause people to spend the added quantity. That is, aggregate demand for goods will increase. This in turn, with output fixed, will push up prices until a new equilibrium is established. Thus, the increase in money supply can only increase price levels.

Conversely, given the same conditions, if the supply of money is decreased, aggregate demand will fall, and with it, prices. in a word, deflation.

In the real world however, one can expect deflation to lead to unemployment before a new equilibrium is reached. This does not invalidate the theory however. There is empirical evidence that the quantity theory does operate:

  • a) As the Spanish took gold home from the New World, their money supply increased at home. In line with the theory, prices rose because there was no corresponding increase in the transactions demand for money which is a function of an increase in output.
  • b) From 1800-1865, there was rapid economic growth here and in Europe. Yet the money supply did not expand as rapidly because gold supply was too scarce. Prices fell as a result.
  • c) During the New Deal era, tax increases to fund government spending were not politically feasible, but "pump-priming," deficit spending seemed like a good idea at the time, so the government borrowed from the central bank by issuing bonds, thereby increasing money supply. Price increases followed for a long time to come. Short-run affects of money supply tinkering are discussed in book II, chapter 3.

While the basic theory has withstood the test of time, Neo-classical economists have expanded it so that precautionary and speculative demands for money are added to the transactions demand for money.

Precautionary Demands for Money

Precautionary Demands for money involve the retention of cash for the purposes of protecting against the uncertainties of the timing of receipts and payments. For instance, A proprietor may order a good not knowing if credit will be extended, nor on which specific day those goods may be delivered. He or she may simultaneously hold the other side of a transaction meaning that he or she may not know if credit should be extended, or when the goods will be ready for shipment. For these reasons, there is an additional demand for money over and above that which is needed for current transactions.

Speculative Demands for Money

Speculative demands for money are those associated with the withholding of expenditures in anticipation of a lower price being offered in the future. Increased demands for money will arise from the uncertainty of short-term price levels. For example, if one perceives the price of a good to be too high at a particular point in time, he or she may hold off on spending until par value or lower is perceived. This reserve increases the total amount of money necessary for trade in real time, the currency.

These three functions of demand (transactions, precautionary and speculative) are a complete set, and are separate from the other two primary functions of money: a unit of account, and a store of wealth.

For a review of the Gold Standard in theory and practice, see Book II, Chapter 1.4.

The last chapter of this book I, along with the bibliography is being sent in a separate attached file (b1_ch5.txt)

Chapter 5) Timeline: US History 1789 to Present

1789: On September 11, 1789, Alexander Hamilton becomes the first secretary of the Treasury.

1791: As a plan to recover from bankruptcy, following Hamilton's plan, the US Bank was established. These were private banks working under either federal or state charters.

1811: The dissolution of the US Bank as its charter expires.

1816: The second Bank of the US was established to replace the state charters that floundered in corruption.

1833: Jackson orders withdrawal of all treasury deposits from the US bank, citing abuse by polticians who borrowed from it.

1837: The panic in financial markets. To head off "Wildcat" currency with no backing from being used for land speculation, Jackson orders payment in gold or silver only for land purchases. Consequently, banks failed here and in England.

1840: In an attempt to facilitate accountability, a Sub-Treasury system was put in place in which government funds were kept in Independant Treasury Vaults in large cities.

1857: Panic in financial markets caused by speculation in industry and over-expansion in railways.

1863: Congress passes into law the formation of a federal body, the O.C.C., to overlook the activities of the national banking system.

1873: Financial and business failures, including Jay Cooke & Co. which failed after The Philadelphia Ledger exposed a plan for government money set to be channeled into Jay Cooke & Co., agricultural distress caused by Civil War burden. 2,000,000,000 in debt was accrued. The Greenback movement, a push for inflation through expansion of money supply to help agriculture, gains momentum.

1878: The Bland-Allison Act allows for the purchase of Silver at the rate of 2,000,000 - 4,000,000 per month.

1879: The not so common commoner, Henry George publishes "Progress and Poverty" which out-sold Adam Smith's "Wealth of Nations." In this book, George pointed out the linkage between land speculation and the boom and bust cycles, and promoted a single tax on land value as the remedy.

1887: Henry George runs for mayor of New York City, but the notriously corrupt Tammany Hall political machine thwarts his efforts, in spite of George's overwhelming popularity especially amongst the Irish immigrants who suffered the plight of the Potatoe Famine, and who, like much of rest of the populous were virtually enslaved by the railroad tycoons here by the means of a pathological corporate-state alliance.

1887-1933: A series of ten major federal regulations were enacted to curb abuses primarily in the railroad industry. The intense effort to regulate this indusrty is known as the Granger Movement.

1890: The Sherman Silver Purchase Act upped the anty of silver purchases to $4,500,000 monthly. This pushed gold and gold - backed currency down. As people cashed in gold notes, and traded gold overseas, a depletion of gold reserves ensued. Silver kept falling, making it worth only sixty cents to a dollar of gold.

1893: Cleveland Repeals the Sherman Silver Purchase Act. In an attempt to replentish gold reserves, the government issued bonds to buy gold. This attempt failed because people who wished to buy the bonds merely had to cash in thier notes for gold. Financial speculation leading to failures of its intitutions as well as those in business in general. Labor unrest, Populist movement. Rebound in 1910.

1895: In order to defer the circular flow of money, the government bonds were sold to J.P. Morgan instead of to the public.

1900: Gold Standard enacted in the US. One dollar, represented by 25.8 grams of gold 9/10ths fine would be the standard unit of measure.

1907: Panic in the environment of excessive business consolidation. Perceived lack of capital due to inelasticity of currency. Financial speculation.

1908: The temporary measure of the Aldrich-Vreeland Act which allowed for the issuance of currency backed by state and city bonds as well as commercial paper (corporate bonds.)

1912: Socialist candidate for president, Eugene Debs, gets one million votes.

1913: The establishment of the Federal Reserve with its twelve district banks. (Federal Reserve Act, A.K.A the Glass-Owen Bill December 23.) The intent was said to be to give flexibility to the US banking system, with the hopes of heading off deep business cycles and panics such as those in 1837, 1857, 1873, 1893, and 1907.

1931: Great Britain abandons the gold standard amdist world-wide depression.

1933: FDR's formation of the Securities and Exchange Commission.

1933: The Glass-Stiegal Act prohibits banks from trading in securities, and loaning money to loan officers. Also, it allowed the formation of branch banks in states where permitted.

1933: FDR declares a gold embargo, prohibiting gold exports, thus officially taking us off the Gold Standard. In a special session, congress passes the Emergency Banking Act of 1933. FDR shut down the banks for one day nation-wide, and was granted the power to regulate gold, silver and foreign exchange. He then assigned "conservators" to take charge of the national banks. On March 12, FDR announces that the banks would re-open the next day after being approved and licenced by the Fed. When the Federal reserve banks opened on the 13th, deposits were much greater than withdrawals. By the 15th, 4/5ths of the nation's banks were reopened and operating normally.


I am hereby deviating from a structured format of presenting only facts in this time line. I inserted the following opinion for no logical reason other than it was what happened to flow from my keyboard at the time. My original intention was to possibly move it to another chapter that would be in conformity with the structure, or to omit it completely. I subsequently gained the courage to leave it be, after having read a similar sentiment expressed in a publication called "The Weirs Times" (New Hampshire, August 20, 1998.) I will include this passage after my own:

In this time of uncertainty, paternalism seemed welcome. If on the other hand, the uncertainty was seen as being the result of tyrannical government (which of course it was,) the psychology may been completely different. In the US in 1933, the corporation was seen as the villain, and the state as the savior. Going back to the revolution, the state was seen as the villain.

Liberation and laissez faire the solution.

Perhaps the level of sophistication in financial matters was lacking at that time, hence accounting for the failure of Americans to utilize their newly found liberty in a prudent manner. An alternative explanation might be that there was something of a culture lag where custom superceded rational thought. In any case, the heavy hand of government was then ushered in. The same series of events took place in Europe after the French Revolution of 1789. With King Louis XVI beheaded, and the first republic in place, people seemed not to have a clear idea of where to go from there. Disorder followed, and Napoleon's dictatorship was welcomed in by the masses. FDR's interventions however, were less dictatorial in the sense that for the most part he had the backing of the public, congress and the supreme court. The means by which the backing was obtained is an entirely different issue.

From The Wiers Times:

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public Treasury. From that moment on, the voters always vote for the candidate promising the most benefits from the public Treasury with the result that a democracy always collapses from a loose fiscal policy, always followed by dictatorship." Alex Frazer Tyler, "The Decline and Fall of the Athenian Republic."

Return to conformity:

1934: Congress passes the Gold Reserve Act of 1934 which meant: a) to nationalize the gold stocks of the country; b) to empower FDR to reduce the value of the dollar by 50%; c) to create a 2 billion dollar stabilization fund from the profits of the devaluation in order to protect the dollar from speculative attacks in world markets.

1934: Pressure from the agricultural sector leads to the second Silver Purchase Act as a means of inflating the currency. This was not re-monetization of silver, but a means of expanding the currency through more bank deposits made possible by borrowing from the banks. This was more politically plausable than to directly issue fiat money.

1935: The Banking Act of 1935 creates the Federal Deposit Insurance Corporation (FDIC.)

1935: In the ruling of the Farm Mortgage Moratorium Act as being constitutional, the supreme court lays down the principle that during an economic crisis, public welfare must outweigh the rights of private property. Public welfare in this context means political stability.

1944: The Bretton Woods convention forms the IMF (International Monetary Fund.) The objective was said to be to create a fund that would be large enough to allow for the maintenance of a fixed rate of exchange in the face of short-term fluctuations. This was a similar measure to the Gold Reserve Act of 1934. The IMF however was different in that its member nations had an agreed upon fixed rate of exchange from which equilbria could deviate no more than 10%. It's known as the trading band. This relatively nominal flexibility was deemed necessary because of long-term labor contracts, local political pressures, and other rigidities in the pricing systems.

1944: The Bretton Woods convention forms the International Bank for Reconstruction and Development (A.K.A the World Bank.) Its purpose was to facilitate long-term capital payments by homogenizing the pool of credit, and improving access to information so as to issue loans more efficiently. In some sense, the World Bank needed to be something of an intelligence agency. They would also receive loans from member countries. Also under the IMF, the Gold Exchange Standard is formalized. This would clear balance of payment deficits and surpluses between nations using a gold pool.

1967: France exits the GATT, leaving seven nations remaining. This due to local political pressures, primarily due to inefficiencies in their agricultural production, prompting them to place tariffs.

1967: Ayn Rand publishes her book entitled "Capitalism: An Unknown Ideal" which included excerpts from Alan Greenspan's speech in which he attacked the practice of the Fed in the excessive issuance of fiat money, and supported the reinstatement of the Gold Standard. Anti-statist sentiment runs high, partially due to opposition to US involvement in Vietnam and partially due to the changing dynamics of the economy marked by the waning industrialism in developed nations that caused economic disequilibrium, among other factors.

1968: Upward pricing pressures in the gold market due to speculation that the target price of gold would need to be raised, forces the IMF to discard any further attempts to fix the market price of gold at $35.00 an ounce by its practice of buying and selling gold. A two tiered variant of the Gold Exchange System develops where IMF members maintain the $35.00 price level, while the market price rises to $43.00. Central banks in the US and England faced with gold reserve shortages caused by hoarding in the private sector, gold redemptions by the French government, and dwindling gold production are forced to resort to increasing fiat money supply.

1971: President Nixon abandons the Gold Standard entirely, leading to global abandonment.

*Note: Due to the need for a contiguous time line to the present, I am holding off on completion of the time line until I am able to fill the gap between 1971 and 1980. I can then include the period from 1981 to 1998.


Note: Book I draws primarily on the works from the itemized list below inclusive of the following item numbers:


The other resources listed are of course used primarily in Book II, although the sets are not mutually exclusive.

[1] Economics, Second Edition by Richard G. Lipsey and Peter O. Steiner 1969;
[2] Visualized American History, by Philip Dorf 1944.
[3] Legalized Theft [author currently unavailable]
[4] Profits and the Future of American Society. by S.J Levy and David Levy 1983.
[5] [title currently unavailable] Economist Jude Wanniski, Founder and President of Polyconomics, Inc. URL: goldeagle.com 1998.
[6] The Financial Revolution by Adrian Hamilton 1986
[7] John Law, circa 1750 [title currently unavailable. Subject: propasal for a French banking system, the Land Bank]
[8] "The Decline and Fall of the Athenian Republic." by Alex Frazer Tyler
[9] Extraordinary Beliefs, Popular Delusions, and the Madness of the Crowds Charles MacKay circa 1825
[10] Currency competition: Some Options Considered.
[11] Worldly Philosophers by Robert Heilbroner 0rignal c 1953
[12] The Law by Fred Bastiat circa 1825
[13] The Basic teachings of the Great Economists by John w. McConnel 1943
[14] Progress and Poverty by Henry George 1879
[15] The Science of Political Economy by Henry George 1897
[16] The condition of Labour by Henry George 1891
[17] How to Buy Life Insurance and Live to Enjoy it: A Shocking Expose of the Insurance Industry. Lies, frauds and abuses, and how to beat them, by Clifford G. Allen, Jr., CLU, and Murt Davis. The Equity Press, 1993
[18] Thoreau: People, Principles and Politics by Milton Meltzer 1963
[19] Fragments [Individualist periodical:] Henry George's Theory of Value by Jack Schwartzman (Editor-in-Chief); Value: A Subjective Concept by Oscar Johannesen. Summer/Fall 1997