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Historical Error #4: Pre-Revolutionary Colonial Pennsylvania's Government Avoided Most Taxes Because It Issued Fiat Loans.

Gary North
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Ellen Brown makes this amazing claim:

From 1723 until the French and Indian War in the 1750s, the provincial government collected no taxes at all. The loan office was the province's chief source of revenue, supplemented by import duties on liquor. During this period, Pennsylvania wholesale prices remained stable. [Web of Debt, p. 39]

This was a miracle! Or was it?

First, the provincial government did nothing much. It built some buildings. Local property taxes supported the colonial governments, because almost all political power was local. We forget this. That was a very different world.

Second, there were import duties. Import duties are sales taxes on imported goods. She says these revenues were supplemental. She offers no evidence.

Third, the province issued very little of this pseudo-money: loans for farms. So, prices did not rise.

Fourth, when the French and Indian War came in 1755, the province started issuing many more of these fiat loans, and prices denominated in this non-money rose rapidly.

Fifth, hardly anyone used paper money exclusively. Most money in the cities was Spanish: silver coins called "pieces of eight." This currency had no legal standing in 1755, but it was the universal currency in the colonies in the 18th century, up to and after the Constitution. It served as legal tender in the United States until 1857.

Sixth, at least 90% of the population was rural. Trade was mostly by barter. This was true in all of the colonies. People rarely used money, except to pay taxes and to import luxury goods, which few farmers could afford.

Seventh -- not a mistake, but deadly for her theory of sovereign money issued by the government -- these paper bills were not legally money. She relies on Alvin Rabushka's 2004 article, "Representation Without Taxation," to make her case. But Rabushka was clear: "From a legal standpoint, colonial paper money was not official paper money. The British government did not allow colonial governments to issue official paper money, mint coins, or even establish local note-issuing private banks."

Ellen Brown uses this example to support her case that government-issued paper money is both practical and noninflationary. But this example does not support her case. It was not legally money, and eventually there was inflation from the issue of these loans. For Greenbackers, money that is not lawful money -- issued by a government -- is not money, as she argues constantly. This example disproves her thesis, for this was not lawful money.

She tried to respond to my analysis here:

http://webofdebt.wordpress.com/response-to-gary-north-2

Read my response here:

http://www.garynorth.com/public/7121.cfm

For a detailed critique of Ellen Brown's economics, go here:

http://www.garynorth.com/public/department141.cfm


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