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Guest Post: James Madison On Quantitative Easing
James Madison on Quantitative Easing
By JM
This isn’t a “call to action”. Nor is it a brow-beating for those who care about the political institutions of this country. It is just an indication that when a national/global economy toilet-bowls there are neither easy nor satisfying answers. The powers that be are going to do what is necessary to prolong their survival. This is applies very generally. You can see this in the source materials of democracy, the original material.
When it comes to the framing minds of the United States of America, you can keep that ideologue Jefferson. The real genius was James Madison: pragmatic and driven by strategic reasoning married to direct observation. The whole structure of governance depends on his notion of checks and balances. He also had some things to say about monetary policy in extreme circumstances.
“If the circulating medium be a municipal one, as paper currency, still its value does not depend on its quantity. It depends on the credit of the state issuing it, and on the time of its redemption; and is no otherwise affected by the quantity, than as the quantity may be supposed to endanger or postpone the redemption.”
December 19 and 22, 1791. Freneau’s Philadelphia National Gazette
In Madison’s case, he was referring to the “redemption” of a paper certificate to gold. As I understand it, money at the time was a bearer bond that didn’t accrue interest. Upon maturity it could be redeemed as a claim on gold or silver. Many such currencies circulated in Virginia in Madison’s time. Mid-1700s excavations and documentation indicate that just about any currency was accepted in colonial Yorktown: 1615 sixpence Bermuda “Hog” money, 1762 Mexico silver reales, 1762 Dublin half-pennies, 1722 Ireland Coppers, 1764 Prussian “Frederick the Great” silver thalers. Today the concept is more general… redemption of a paper certificate for goods and services with instantaneous maturity.
“Being engaged in a necessary war without specie [gold—JM] to defray the expense, or to support paper emissions for that redeemable on demand, and being at the same time unable to borrow, no resource was left, but to emit bills of credit to be redeemed in future.”
December 19 and 22, 1791. Freneau’s Philadelphia National Gazette
Queasing was a necessary step according to James Madison, and the best on tap was hope for better days. True, it was a wartime situation, in the context of an emerging economy. But the Tories would say that was no excuse, no stopping thieves.
“To make it still more palatable that the value of our currency does not depend on its quantity, let us put the case, that Congress had, during the first year of the war, emitted five millions of dollars to be redeemed at the end of ten years; that, during the second year of the war, they emitted ten millions more, but with due security that the whole fifteen million should be redeemed in five years; that, during the two succeeding years, they hade augmented the emissions to one hundred millions… A general promise entitling the bearer to so many dollars of metal as the paper bill express, has been the only basis of their credit.”
December 22, 1791. Freneau’s Philadelphia National Gazette
Madison was smart. He understood the iron law binding a state is its credit.
“In like manner the effect of a distrust of public credit, the other source of depreciation, been erroneously imputed to the quantity of money. Thus, a further discredit of our money has necessarily followed the augmentation of its quantity; but every one must perceive, that it has not been the effect of the quantity, considered in itself, but considered as an omen of public bankruptcy.”
December 22, 1791. Freneau’s Philadelphia National Gazette
“Whether the money of a country, then, be gold or silver, or paper currency, it appears that its value is not regulated by its quantity. If it be the former, its value depends on the general proportion of gold or silver, to circulating property throughout all countries free intercommunication. If the latter, it depends on the credit of the state issuing it, and the time at which it is to become equal to gold and silver.”
December 22, 1791. Freneau’s Philadelphia National Gazette
If the Federal Reserve and the duly elected stooges of the United States abuse the iron law of credit, then they simply will not much longer have creditors to abuse.
“By rendering the labor of one, the property of the other, they cherish pride, luxury, and vanity on one side; on the other, vice and servility, or hatred and revolt.”
James Madison
One more quote.
“The characteristic feature of the loser is to bemoan mankind's flaws, biases, & irrationality –without exploiting them for fun and profit.”
Nassim Nicholas Taleb, Twitter
Use whatever information you have to protect, hedge, and profit. Keep your head down and be unobtrusive in how you do it. Pickpockets, duly elected or otherwise, get into your wallet. Play even the James Madisons of the world like fools. He’d be proud.
James Madison’s full essay can be read here.
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Does James Madison mention anything about shorting Google?
I think he said "When the price of ownership shares arrive at the heady price of 1/2 ounce of gold, it is time to dispense with said ownership"
Sorry to link you to CNBS... get some bleach, don't lick anything and you'll be fine:
http://www.cnbc.com/id/37180969
"Romer: US economy still needs further boost".
I hope you're long helicopters by now.
Your US Economy (read StockMarkets) are going to need something Monday.
This thing has turned "Butt Ugly" off shore - And the bull horn noise sounds like this _ whoop whoop whoop - Calling the PPT, PPT needed in the Emergency room. PPT code red - This is not a drill. Instigate Immediate Contagion plans.
"boosting"- old heroine addict term for shooting up. Same difference.
"targeted actions that will help the private sector back more strongly"
I like that. That's nice. You know what I'm going to do? I'm going to leave your words right up here for all my classes to enjoy, giving you full credit of course, Mr. Spicoli.
James Madison is referring to "Continentals," a debt based currency which the "Founding Fathers" were "forced" to create to pay for the "Revolution." They created such a debt that a "Constitution" (bill to pay an expense signed by Constitutors: co-signees who obligated the "States" to pay the Revolution's debt.)
"Just as good as a Continental" was a common sarcastic oath of the day due to overprinting. So the quantity statement by Mr. Madison is "interesting."
This Consitutional debt was defaulted on in 1789, necessitating a shopping of this paper overseas where it was purchased by an outside party (either the Rothschilds or BOE, same deal).
James Madison writes glorified smokescreen material in this article. He was no different than politicians of this day.
Madison obviously never studied the destruction of the Spanish economy ca. 1500-1600 caused by oversupply of new world specie. A pretty clear cut case. Furthermore as economists Like John K. Galbraith have pointed out (in Money and yes, I know he is a hated Keynesian but he knew his history), as Spain became a net importer of goods and exporter of specie to other European nations the inflationary effect actually rippled outward to its trade partners. First principle, historically proved: Over supply, whether pixels, paper or specie drives inflation. Period.
Thomas Jefferson was still a pretty smart cookie for his time. He was certainly correct on his questioned utility and stated mistrust of central bankers.
Where Jefferson was the brains of that operation, Jackson was the brawn. Lincoln was situationally opposed, because of his war needs, he became anti-NY bank.
Jefferson and Adams were right about public debt and a national bank. Of the Founding Fathers, we can thank Alexander Hamilton for the legacy of a national bank. Thank God ole Stonewall took out Nicholas Biddle and the Second Bank of the United States. We should look to Andy Jackson for the way from here.
I think this means we're fucked.
I think the Fed admitted that we are bankrupt / insolvent when they resorted to "quantative easing". Actions speak louder than words.
Plus ça change, plus c'est la même chose.
The language is a bit more flowery but the message is the same.
http://www.youtube.com/watch?v=cv2EMiR65NY
The entire Larry Parks Testimony in Support of the Montana Sound Money Bill should be required watching if this kind of historical piece interests you.
This is the entire presentation.
http://www.vimeo.com/3722256
LeBalance is wrong. The "continentals" were the paper currency issued by the Continental Congress; our Declaration of Independence was an "Action" of that same body. The Convention that was called in Philadelphia in 1787 to write and ratify the Constitution of the United States of America was a new body - the United States in Congress. The primary purpose of that Convention was to deal with the fact that the Continentals issued by the Continental Congress had proved worthless. Washington, Madison, Franklin, Hamilton, Morris and the other Founders (Jefferson and Adams were NOT among them) were angered by the refusal of the individual states to honor their pledges under the Articles of Confederation to redeem the debts incurred during the Revolutionary war. Our Federal system owes its origins to the anger of those Founders; Washington was particularly incensed because his soldiers and officers, the very men who had fought in and won the Revolution, had been given worthless pieces of paper as the redemption of their much promised and much delayed pay. It is for this reason that the Constitution of the United States defined our national Money as specie. The words of Section 8 of Article I are unambiguous: "Congress shall have Power To…coin Money". The Founders were equally adamant that, if the Federal government was to "borrow …on the credit of the United States", it would borrow "Money". JM is mistaken in writing that "money at the time was a bearer bond that didn’t accrue interest." It was Coin - either silver or gold. Because Coin came in various denominations from differing countries, Congress was also given the power to "regulate the Value thereof (of U.S. Money) and of foreign Coin" (Article I, Section 8).
JM also misunderstands Madison's position. He was, in fact, arguing for quantitative easing - by the individual States. Madison was arguing that, as long as the States promised to redeem their warrants and notes in specie, the quantity of issue by them would not matter; and they should be allowed to continue to print paper and designate it as legal tender - as they had been doing - and present it to the national government and creditors as payment in full. Hamilton argued, with his usual forcefulness, that this was utter folly: allowing any government - State or Federal - to have a sovereign authority to issue IOUs and designate them as legal tender would allow the same monetary inflation that occurred under the Articles of Confederation and made "continentals" worthless. Madison was right in saying that quantity did not matter if State or Federal Money was specie or was instantly exchangeable for specie on demand because the natural scarcity of precious metals would check the ability of governments to use their legal tender monopolies to spend what they had not collected. Hamilton reminded the Convention that quantity did very much matter if Money and IOUs - the promises to pay Money in the future - were made legally equivalent. Hamilton won the argument - primarily because a majority of the delegates to the Constitutional Congress were themselves military veterans, and they had seen what could happen if fiat Money was allowed to become the instrument by which government discharged its debts.
The new Federal government did not, as LeBalance asserts, default on its debts. On the contrary, because the Federal Constitution promised that the United States would pay its debts in Coin and because Washington was the new country's President and his word was literally as good as gold, Hamilton as Secretary of the Treasury was able to refinance the accumulated war debts of the States and the Continental Congress. Even with the interruptions to growing American trade from the undeclared wars with both Britain and France during the 1790s and 1800s, the new Federal government was able to collect enough specie from customs duties and western land sales to redeem Hamilton's borrowings in full. It is an indication of how far we have come from those days that even Zero Hedge's erudite contributors have difficulty understanding what was common sense to our Founders: Money and Credit are not and cannot be the same thing if prices are to have any meaning.
Well said, sir; I tip my tricorne to you.
Great post!
Interestingly, Hamilton "bailed out" individual states by lumping their debts together and pledging Federal support for them. This is how he re-financed them. Kind of like the EU......
Even more interestingly, his plan was the subject of the first "insider trading" scandal in US history. A shady banker, expecting a rally, got overlevered on the long side. Even though he was right, his timing was off, he got margin calls, and a panic ensued.
There's nothing new under the sun, alas......
+1, ditto, great post.
One further quibble. Assetman completely misunderstands Jefferson's position. He was an opponent of banks precisely because they were the institutions that prevented Jefferson's cherished state governments from issuing paper currency that was to be - like our current Federal Reserve notes - legal tender for all debts, public and private. The private banks redeemed their bank notes in specie and insisted on discounting IOUs from people and institutions that were less reliable about tendering Coin on demand. For financially overstretched Virginians like our 3rd President that was an outrage. Jefferson would have loved the current Federal Reserve system precisely because it allows the Federal government to monetize its debts. Jefferson's only complaints would be (1) the system should be expanded so that each State had its own State Reserve system that enjoyed the same privileges of monetary issue and (2) the Federal government and its Reserve system should be compelled to accept all State paper at par.
How would that prevent profligacy and eventual bailouts?
LHUP: Good stuff. Your facts rhyme with my memory. Thought provoking, especially the theorizing re Jefferson's position on today's Fed. I'm assuming you've studied on the creation of the Fed, Justice Brandies' and Bryan's positions as opposed to the banks at that time? I've been reading Brandies recently. Interesting.
I'd love to read your opinions about the choices we faced at that time and what you think might have been better. I've always loved reading Jefferson but later in life I had bigger questions about his positions on central banking system and system of credit, how would people expand, get loans, and build a huge nation starting with a small bit of wealth. I see the differences as cultural. I don't think Hamilton meant harm like some suggest, rather they saw the nation as two different animals. I can appreciate his opinion, but I can also appreciate Jackson's hatred for them, based likely on prior experience in South.
Lincoln too. There's not a major body of work to rely on there, but his problems with finance during the war and issue of greenbacks made sense to me. I can also see the danger of putting that in the hands of the wrong president.
I've questioned fractional reserve central banking, but am yet to read a good, detailed alternative that can meet the demand of OUR view of ourselves as expanding, powerful nation. I don't think you can end it before the people understand what that really means for the nature of country they will then have.
Then today, here we are with massive fraud and our central bank bailing it out. Galbraith would say it's the fraud, not the central banking and Austrians will say it's the central banking alone. I think the Austrians are right about Greenspan. But, i also agree with Galbraith that without the unregulated fraud, perhaps not this outcome. But, I still think the easy money would have burst, just differently than it did. Rambling, its late..
Opinions?
“If the circulating medium be a municipal one, as paper currency, still its value does not depend on its quantity. It depends on the credit of the state issuing it, and on the time of its redemption; and is no otherwise affected by the quantity, than as the quantity may be supposed to endanger or postpone the redemption.”
This sounds like the quality theory of money to me, which is 100% correct.
The quantity theorists don't seem to understand how the money market operates.
Or, more pertinently, how it can fail to work.
Fly below the radar. Good call.
I muse from time to time, usually when I spend a $20, that all America needs right now is another Jackson. After all, congress passed the charter extension of the 2nd national bank inspite of the fact that Jackson ended up in the highest office partially on public distrust of the banks. Regardless, Jackson veto'ed. I impute from this that congress was sold out back then too.
Then reality sets in again and I realize how fscked we are...
Cooter
In answer to Water Wings question, Jefferson's "plan" would not have prevented "profligacy and eventual bailouts". It was designed to further them, to allow the gentlemen farmers (and slaveholders) like Jefferson and Madison to get themselves out from under their borrowings. To this day people read Jefferson's grand statements about an agrarian America and take them at face value, not seeing how much they were a very special pleading for the interest of the gentlemen farmers who had seen their revenues from tobacco farming decline and their amateur speculations in Western lands go bust. These gentlemen from Virginia feared that the Federal insistence on sound money would complete their ruin them by making their debts payable in Coin. The upland Virginians and Carolinians who migrated along the Great Wagon Road - the "yeoman" farmers whom Jefferson claimed to be protecting - needed no bailouts; on the contrary they were - and remained - advocates of what we would now call "the gold standard". That explains the seeming paradox of Jackson, a fellow Southerner, speculator in Western lands and slave-owner, threatening to lead the U.S. Army to subjugate the planters of lowland South Carolina if they defied the Federal tariff. If the tariff was evaded, the Federal government would have to collect its taxes through excises on grain, livestock and liquor (precisely what the majority of farmers produced). The only alternative would be to have the national government once again - as it did during the Revolutionary War and the Articles of Confederation - default on its promise to pay its debts in Coin. Jackson's insistence on an Independent Treasury - one that would not make the U.S. government's specie holdings available to a central bank - had its root in the same notion: the Constitution committed the national government to dealing only in Money (specie), not Credit. Jackson was a "populist" as were Ulysses Grant and Grover Cleveland. However, their populism was not progressivism. Their constituents, who wanted their incomes and savings to be safe-guarded from inflation and credit fraud, wanted the "sound" money that the Constitution promised. They still do.