On one of the lists I’m on there’s been a bit of excitement about an article published by Californian Ms Ellen Brown on Civil War monetary policy. The argument argues that Lincoln simply printed money to get around the usurious banks of the time and fund the vast expense of the Civil War – and we should do that now to fund climate change mitigation. A lot of people welcomed the article, which I found worrying, because simply printing money without backing is a highly risky and doubtful policy idea.
I’m not an expert on the impact of monetary supply or on leveraging deposits (which is the essence of the argument Ms Brown is making), and I appreciate that there are some potentially interesting arguments in this area, but I do know that Ellen’s description of how Lincoln printed money to finance the Civil War is not correct.
Yes, there was an increase in monetary supply in the North, but the big distinction between the North and the Confederacy was that the latter ended up having to rely largely on printing money – contributing to to 9,000% p.a. inflation (vs 80% inflation in the North), a collapse in resources for their armies and, arguably, the loss of the war despite initial successes.
The North relied much more on increases in income and customs taxation (laying the foundation for tax-funded federal government services). One of the curiosities of wartime taxation policy was that it was the Republicans who first introduced progressive income taxes, based on “ability to pay”, to the US, to ameliorate the impact of the large number of regressive tariffs and sales taxes they introduced. New taxes were an important revenue source.
But by far the biggest source of Northern war financing – 65% – was from the issuing of bonds. Yep, bonds. I.e. they actually got the money in before they spent it.
This is a precedent for the effort to address climate change – long-term climate bonds are the best financing vehicle for the transformation we need to bring about.
It’s interesting to also note that the US marketed war bonds widely – some 25% of the population owned them by the war’s end – but most of the money was actually raised from the richest 10%. Wide marketing served to get more of the population behind the war (having a stake in the outcome) as well as serving as a general propaganda vehicle. In the Climate Bonds Initiative we are proposing a similar mix of retail bonds to give as many people as possible a chance to participate in and thus support the transformation of energy supply, while actually relying on institutional investors to stump up the bulk of the money.
The Civil War government’s takeover of monetary supply and re-introduction of government-issued paper money was more to provide currency liquidity within the economy – paper money had been tied to specific banks and was not necessarily interchangeable. This was the equivalent of radios being sold that only worked on one station (which was the case in the 1920s!). The government legislated to ensure that money could be used everywhere, much to the annoyance of the banks who quite liked having proprietal bank notes. This is what is meant by “the government printing paper money”.
Monetary supply did increase, and so did inflation (to a problematic 80%), but nothing compared to the South’s crippling reliance on it.
Monetary-policy-induced inflation is essentially a kind of wealth tax, using inflation to redistribute wealth from private savings to the government. In an emergency situation this is not necessarily a bad thing, except that in our financially porous world richer people have all sorts of opportunities to shift money to inflation-resistant vehicles, including taking it offshore; the people that tend to get hit by inflation now are welfare beneficiaries continually waiting for the urgently needed inflation-responsive increase in benefits, or pensioners living off savings. High inflation has become a regressive form of taxation.
Monetary supply was also increased by Britain and the US in WW1 and WW2, and quickly led to significant levels of inflation with all sorts of consequent problems. Governments then relied more on war bonds instead, which helped stabilise their economies.
Ellen Brown’s article conflates many developments and ascribes them, willy-nilly, to one policy action. It’s especially misleading to suggest that the US economic boom was as a result of printing money. While monetary liquidity was important to a unified economy, even that was less important than:
– disease (plus a few genocidal massacres, especially after the Civil War) that depopulated (by 95%) local Indian populations and allowed rapid and massive land grabs that sucked in millions of European immigrants between 1830 and 1900. The rapid application of large-scale human resources to this vast and fertile (seized) resource allowed the US to make all sorts of mistakes and still thrive economically. It’s worth noting that part of the dispute between the North and South was about differing conceptions of human resources management – the North thrived economically on free settler immigration (on depopulated Indian land) while the South was built on old-fashioned slavery.
– the importation from the UK and Europe, and the refinement and cost reduction (thanks to volume deployment!) of a wide range of industrial technologies, and subsequent labour productivity improvements. (This same phenomena was mirrored in the Asian Tigers in 1960-1990, as Paul Krugman has eloquently shown). With the benefit of late-mover advantage (a bit like China today), by the 1900s this had become by far the most important factor in economic growth.
– Declining energy costs as a result of the exploitation of coal and then oil.
It is true that Lincoln used monetary policy to subdue the usurious banks in the middle of the war, effectively establishing a dominance of State over finance and introducing a unifying and more liquid national currency. But monetary policy was a minor gambit in financing the war, and one that was demonstrably disastrous when applied in much larger proportion in their opposing entity, the Confederacy.
Some commentators on recent US monetary policy, like Chris Martinson, continue to make the same sorts of errors in their analysis. Martinson for example equates deficits in the last 10 years to printing money without backing (e.g. of gold). But actually the US borrowed the money first from the Chinese, who effectively funded both Bush’s war effort and his tax cuts for the super-wealthy (one of the stupidest tax policies in modern history).
I’m worried that talk of simply printing money is a potentially dangerous distraction, when, as in wars, we have the straightforward means to finance mitigation with good, old-fashioned, long-term debt. Climate Bonds.
