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Historical Error #14: The Civil War's Fiat Money Made the Surviving Americans Richer (Military Keynesianism).

Gary North
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Ellen Brown is a mercantilist and a statist. She is a follower of Henry Clay -- the great defender of central banking -- and Abraham Lincoln, the self-professed disciple of Clay. She praises Lincoln's centralization of power over the economy.

Considering the powerful forces arrayed against him, his achievements in the next four years were nothing short of phenomenal. His government built and equipped the largest army in the world, smashed the British-financed insurrection, abolished slavery, and freed four million slaves. Along the way, the country managed to become the greatest industrial giant the world had ever seen. The steel industry was launched, a continental railroad system was created, the Department of Agriculture was established, a new era of farm machinery and cheap tools was promoted, a system of free higher education was established through the Land Grant College System, land development was encouraged by passage of a Homestead Act granting ownership privileges to settlers, major government support was provided to all branches of science, the Bureau of Mines was organized, governments in the Western territories were established, the judicial system was reorganized, labor productivity increased by 50 to 75 percent, and standardization and mass production was promoted worldwide.

How was all this accomplished, with a Treasury that was completely broke and a Congress that hadn't been paid themselves? As Benjamin Franklin might have said, "That is simple." [This quotation is bogus -- G.N.] Lincoln tapped into the same cornerstone that had gotten the impoverished colonists through the American Revolution and a long period of internal development before that: he authorized the government to issue its own paper fiat money. National control was reestablished over banking, and the economy was jump-started with a 600 percent increase in government spending and cheap credit directed at production. A century later, Franklin Roosevelt would use the same techniques to pull the country through the Great Depression; but Roosevelt's New Deal would be financed with borrowed money. Lincoln's government used a system of payment that was closer to the medieval tally. [It was nothing like the medieval tally. -- G.N.] Officially called United States Notes, these nineteenth century tallies were popularly called "Greenbacks" because they were printed on the back with green ink (a feature the dollar retains today). They were basically just receipts acknowledging work done or goods delivered, which could be traded in the community for an equivalent value of goods or services. The Greenbacks represented man-hours rather than borrowed gold. Lincoln is quoted as saying, "The wages of men should be recognized as more important than the wages of money." [He never said it. -- G.N.] Over 400 million Greenback dollars were printed and used to pay soldiers and government employees, and to buy supplies for the war [Web of Debt, pp. 84-85].

The Confederacy also had fiat money, and lots more of it than the Union had. Why did fiat money not make the Confederacy even richer than the Union? For the same reason that the fiat money of the American Revolution made everyone poorer. It destroys wealth. The fiat money of the American Revolution fell to zero value. So did the fiat money of the Confederacy.

The fiat money of the Union fell in value by about 75%. This is the estimate of Prof. Roger Ransom of the University of California, Riverside, one of the nation's foremost authorities on the question of the economics of the American Civil War. He was selected by the professional Economic History site to write the article on the costs of the war. (He was my teacher, and he sat on my oral examination committee for my Ph.D. in 1969.) Read his detailed article here. As of February 2010, here is the assessment of the "elder statesman" of Civil War economics. He rejects lawyer Brown's assessment.

It is easy to see why contemporaries believed that the Civil War was a watershed event in American History. With a cost of billions of dollars and 625,000 men killed, slavery had been abolished and the Union had been preserved. Economic historians viewing the event fifty years later could note that the half-century following the Civil War had been a period of extraordinary growth and expansion of the American economy. But was the war really the "Second American Revolution" as Beard (1927) and Louis Hacker (1940) claimed? That was certainly the prevailing view as late as 1960, when Thomas Cochran (1961) published an article titled "Did the Civil War Retard Industrialization?" Cochran pointed out that, until the 1950s, there was no quantitative evidence to prove or disprove the Beard-Hacker thesis. Recent quantitative research, he argued, showed that the war had actually slowed the rate of industrial growth. Stanley Engerman expanded Cochran's argument by attacking the Beard-Hacker claim that political changes -- particularly the passage in 1862 of the Republican program of political economy that had been bottled up in Congress by Southern opposition -- were instrumental in accelerating economic growth (Engerman 1966). The major thrust of these arguments was that neither the war nor the legislation was necessary for industrialization -- which was already well underway by 1860. "Aside from commercial banking," noted one commentator, "the Civil War appears not to have started or created any new patterns of economic institutional change" (Gilchrist and Lewis 1965: 174). Had there been no war, these critics argued, the trajectory of economic growth that emerged after 1870 would have done so anyway.

Despite this criticism, the notion of a "second" American Revolution lives on. Clearly the Beards and Hacker were in error in their claim that industrial growth accelerated during the war. The Civil War, like most modern wars, involved a huge effort to mobilize resources to carry on the fight. This had the effect of making it appear that the economy was expanding due to the production of military goods. However, Beard and Hacker -- and a good many other historians -- mistook this increased wartime activity as a net increase in output when in fact what happened is that resources were shifted away from consumer products towards wartime production (Ransom 1989: Chapter 7).

War kills people. It imposes huge costs on civilians. It centralizes power. Why should we believe that it makes societies richer?

Lawyer Brown suffers from the fallacy of the broken window. She looks at the things seen (projects completed) and ignores the things unseen (costs).

Her footnotes reveal that she has not read any book on Civil War economics. She passes of as accurate a myth of the American Progressive movement (Charles A. Beard) that was popular in the 1920s, but which has been known to be false since 1960. She is unaware of this change of opinion among economic historians.

Ellen Brown is a Keynesian. She reveals her true colors: defending military Keynesianism.

For her response and my reply, click here:

http://www.garynorth.com/public/7171.cfm

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

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


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