silver coin. Thus, when governments issue fiat money, they always declare it to be legal tender under pain of fine or imprisonment. The only way a government can exchange its worthless paper money for tangible goods and services is to give its citizens no choice.
The first notable use of this practice was recorded by Marco Polo during his travels to China in the thirteenth century. The famous explorer gives us this account:
1
156
THE CREATURE FROM JEKYLL ISLAND
The Emperor's mint then is in this same City of Cambaluc, and the way it is wrought is such that you might say he hath the Secret of Alchemy in perfection, and you would be right!...
What they take is a certain fine white bast or skin which lies between the wood of the tree and the thick outer bark, and this they make into something resembling sheets of paper, but black. When these sheets have been prepared they are cut up into pieces of different sizes. The smallest of these sizes is worth a half tornesel.... There is also a kind worth one Bezant of gold, and others of three Bezants, and so up to ten.
All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver; and on every piece, a variety of officials, whose duty it is, have to write their names and to put their seals. And when all is prepared duly, the chief officer deputed by the Kaan smears the Seal entrusted to him with vermilion and impresses it on the paper, so that the form of the Seal remains stamped upon it in red; the money is then authentic. Any one forging it would be punished with death. And the Kaan causes every year to be made such a vast quantity of this money, which costs him nothing, that it must equal in amount all the treasures in the world.
With these pieces of paper, made as I have described, he causes all payments on his own account to be made, and he makes them to pass current universally over all his Kingdoms.... And nobody, however important he may think himself, dares to refuse them on pain of death And indeed everybody takes them readily.
One is tempted to marvel at the Kaan's audacious power and the subservience of his subjects who endured such an outrage; but our smugness rapidly vanishes when we consider the similarity to our own Federal Reserve Notes. They are adorned with signatures and seals; counterfeiters are severely punished; the government pays its expenses with them; the population is forced to accept them; they—and the 'invisible' checkbook money into which they can be converted—are made in such vast quantity that it must equal in amount all the treasures of the world. And yet they cost nothing to make. In truth, our present monetary system is an almost exact replica of that which supported the warlords of seven centuries ago.
1- Original from Henry Thule's edition of
FOOL'S GOLD
157
THE COLONIAL EXPERIENCE
Unfortunately, the present situation is not unique to our history. In fact, after China, the next place in the world to adopt the use of fiat money was America; specifically, the Massachusetts Bay Colony. This event has been described as 'not only the origin of paper money in America, but also in the British Empire, and almost in the Christian world.'1
In 1690, Massachusetts launched a military raid against the French colony in Quebec. She had done this before and, each time, had brought back sufficient plunder to more than pay for the expedition. This time, however, the foray was a dismal failure, and the men returned empty handed. When the soldiers demanded their pay, Massachusetts found its coffers empty. Disgruntled soldiers have a way of becoming unruly, so the officials scrambled for some way to raise the funds. Additional taxes would have been extremely unpopular, so they decided simply to print paper money. In order to convince the soldiers and the citizenry to accept it, the government made two solemn promises: (1) it would redeem the paper for gold or silver coin just as soon as there was sufficient tax revenue to do so, and (2) absolutely no additional paper notes would ever be issued. Both pledges were promptly broken. Only a few months later, it was announced that the original issue was insufficient to discharge the government's debt, and a new issue almost six times greater was put into circulation. The currency wasn't redeemed for nearly forty years, long after those who had made the pledge had faded from the scene.
A CLASSIC PATTERN
Most of the other colonies were quick to learn the magic of the printing press, and the history that followed is a classic example of cause and effect: Governments artificially expanded the money supply through the issuance of fiat currency. This was followed by legal tender laws to force its acceptance. Next came the disappearance of gold or silver coins which went, instead, into private hoards or to foreign traders who insisted on the real thing for their wares.
Many of the colonies repudiated their previous money by issuing new bills valued at multiples of the old. Then came political 1- Ernest Ludlow Bogart,
^
158 THE CREATURE FROM JEKYLL ISLAND
discontent and civil disobedience. And at the end of each cycle there was rampant inflation and economic chaos.
In 1703, South Carolina declared that its money was 'a good payment and tender in law' and then added that, should anyone refuse to honor it as such, they would be fined an amount equal to
'double the value of the bills so refused.' By 1716, the penalty had been increased to 'treble the value.'
THE PRINTING PRESS AND INFLATION
Benjamin Franklin was an ardent proponent of fiat money
during those years and used his great influence to sell the idea to the public. We can get some idea of the ferment of the times by noting that, in 1736, writing in his
