Creature From Jekyll Island by G. Edward

treated as an enemy in this Country and precluded from all trade or intercourse with the inhabitants of these colonies.'1

Rhode Island not only levied a heavy fine for non-acceptance of its notes but, upon a second offense, an individual was stripped of citizenship. When a court declared the act unconstitutional, the legislature called the judges before it and summarily dismissed the offenders from office.

ENTER ECONOMIC CHAOS AND INSURRECTION

If the ravages of war were a harsh burden for the colonies to bear, the havoc of fiat money was equally so. After the war, inflation was followed by deflation as reality returned to the market place. Prices fell drastically, which was wonderful for those who were buying. But, for the merchants who were selling or the farmers who had borrowed heavily to acquire property at inflated wartime prices, it was a disaster. The new, lower prices were not adequate to sustain their fixed, inflated mortgages, and many hard- working families were ruined by foreclosure. Furthermore, most people still did not understand the inflation process, and there were many who continued to advocate the 'paper money cure.' Several of the states were receptive to the pressure, and their printing presses continued to roll.

Historian Andrew McLaughlin recalls a typical scene in Rhode Island at that time as witnessed by a visiting Frenchman: A French traveler who passed through Newport about this time gives a dismal picture of the place: idle men standing with folded arms at the corners of the streets; houses falling to ruins; miserable shops offering for sale nothing but a few coarse stuffs;...grass growing in the streets; windows stuffed with rags; everywhere announcing misery, V . D a v i d Ramsay, History of the American Revolution (London: Johnson and Stockdale, 1791), Vol. II, pp. 134-36. *

2- Merrill Jensen, The New Nation (New York: Vintage Books, 1950), p. 324.

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THE CREATURE FROM JEKYLL ISLAND

the triumph of paper money and the influence of bad government The merchants had closed their stores rather than take payment in paper; farmers from neighboring states did not care to bring their produce.

Idleness and economic depression also led to outbursts of rebellion and insurrection. In 1786, George Washington wrote to James Warren: 'The wheels of government are clogged ancU.. we are descending into the vale of confusion and darkness.' Two years later, in a letter to Henry Knox, he said: 'If... any person had told me that there would have been such formidable rebellion as exists, I would have thought him a bedlamite, a fit subject for a madhouse.'

Fortunately, there is a happy ending to that part of the story. As we shall see in a subsequent chapter, when the state delegates assembled to draft the Constitution, the effects of fiat money were so fresh in their minds they decided to put an end to it once and for all. Then, the new republic not only rapidly recovered but went on to become the economic envy of the world—for a while, at

least—until the lesson had been forgotten by following generations.

But that is getting ahead of our story. For now, we are dealing with the topic of fiat money; and the experience of the American colonies is a classic example of what always happens when men succumb to its siren call.

NATURAL LAW NO. 3

Let us pause at this point and observe another of those lessons derived from centuries of experience. That lesson is so clear and so universal and so widely seen throughout history that it may be stated as a natural law of human behavior:

LESSON: Fiat money is paper money w i t h o u t

precious-metal backing and which people are required by law to accept. It allows politicians to increase spending without raising taxes. Fiat money is the cause of inflation, and the amount which people lose in purchasing power is exactly the amount which was taken from them and transferred to their government by this process. Inflation, therefore, is a hidden tax.

1. Andrew C. McLaughlin, The Confederation arid the Constitution (New York: Collier Books, 1962), pp. 107-08. .

2. Harry Atwood, The Constitution Explained (Merrimac, Massachusetts: Destiny Publishers, 1927; 2nd ed. 1962), p. 3.

3. Ibid., p. 4.

FOOL'S GOLD

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This tax is the most unfair of all because it falls most heavily on those who are least able to pay: the small wage earner and those on fixed incomes. It also punishes the thrifty by eroding the value of their savings. This creates resentment among the people, leading always to political unrest and national disunity.

Therefore,

LAW: A nation that resorts to the use of fiat money has

doomed itself to economic hardship and political disunity.

FRACTIONAL MONEY

Let us turn, now, to the fourth and final possible form of money: a most intriguing concept called fractional money. And, to understand how this functions, we must return to Europe and the practice of the early goldsmiths who stored the precious metal coins of their customers for a fee.

In addition to the goldsmiths who stored coins, there was another class of merchants, called 'scriveners,' who loaned coins.

The goldsmiths reasoned that they, too, could act as scriveners, but do so with other people's money. They said it was a pity for all that coin to just sit idle in their vaults. Why not lend it out and earn a profit which then could be split between themselves and their depositors? Put it to work, instead of merely gathering dust. They had learned from experience that very few