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Historical Error #21: There Was No Inflation on the Island of Guernsey after 1815, Despite Fiat Money.

Gary North
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Ellen Brown cites a sociologist to prove that the channel island of Guernsey suffered no price inflation, despite vast increases in fiat paper money.

The Remarkable Island of Guernsey

While U.S. bankers were insisting that the government must borrow rather than print the money it needed, the residents of a small island state off the coast of England were quietly conducting a 200-year experiment that would show the bankers' inflation argument to be a humbug. Guernsey is located among the British Channel Islands, about 75 miles south of Great Britain. In 1994, Dr. Bob Blain, Professor of Sociology at Southern Illinois University, wrote of this remarkable island:

In 1816 its sea walls were crumbling, its roads were muddy and only 4 1/2 feet wide. Guernsey's debt was 19,000 pounds. The island's annual income was 3,000 pounds of which 2,400 had to be used to pay interest on its debt. Not surprisingly, people were leaving Guernsey and there was little employment. Then the government created and loaned new, interest-free state notes worth 6,000 pounds. Some 4,000 pounds were used to start the repairs of the sea walls. In 1820, another 4,500 pounds was issued, again interest-free. In 1821, another 10,000; 1824, 5,000; 1826, 20,000. By 1837, 50,000 pounds had been issued interest free for the primary use of projects like sea walls, roads, the marketplace, churches, and colleges. This sum more than doubled the island's money supply during this thirteen year period, but there was no inflation. In the year 1914, as the British restricted the expansion of their money supply due to World War I, the people of Guernsey commenced to issue another 142,000 pounds over the next four years and never looked back. By 1958, over 542,000 pounds had been issued, all without inflation. [Web of Debt, p. 100]

Her footnote reveals that this report was published in a one-man leftist journal, Progressive Review.

I found the article on the Web. You can read it here. Click through. See for yourself. It offers no documentation. There are no footnotes. He said there was no price inflation. Saying it does not prove it.

The Greenbackers have cited Guernsey for over 70 years. They picked a tiny island for which no detailed price studies exist, and then drew huge conclusions. If you go to Wikipedia's article on Guernsey's currency, you will read this.

Until the early 19th century, Guernsey used predominantly French currency. Coins of the French livre were legal tender until 1834, with French francs used until 1921. . . .

In 1827, the States of Guernsey introduced 1 pound notes, with the Guernsey Banking Company and the Guernsey Commercial Banking Company also issuing 1 pound notes from 1861 and 1886, respectively. The commercial banks lost their right to issue notes in 1914, although the notes circulated until 1924. Also in 1914, the States introduced 5 and 10 shilling notes, also denominated as 6 and 12 francs.

So, Guernsey used French money in the era of "no inflation." It also used commercial bank notes. The Greenbackers always neglect to tell us these details. The story of Guernsey's pure fiat money flies away into the land of convenient and unverifiable legends.

What else does lawyer Brown's sociologist recommend? Total control over the economy by Congress (as if the Executive's bureaucracies would not run the economy.)

A second option is for Congress to create the money necessary to fund public works. As a sovereign government, Congress' power is unique. It can create money debt-free and interest-free. Congress needs to stop thinking of itself as the same as other organizations that must take money in before they can spend it. Money does not grow on trees. It must be created. The only choice is whether to have it created as loans at interest from private banks or to have it created by Congress debt-free and interest-free.

How can Congress create money without causing inflation? Congress must regulate its value. The power to create money includes this regulatory power.

A good way for Congress to regulate the value of money is by funding projects at the current national price level. The current national price level can be calculated by dividing the most recent gross domestic product by the number of hours of work that produced it. For example, in 1991 the total gross domestic product was $5.6 trillion. The employed labor force produced it with 237 billion hours of work. So the GDP was produced at the rate of $23.95 per hour of work. By now the price level per hour is probably $25.00. So let Congress fund projects at $25 per hour. How this amount is allocated among labor, land, and capital can be negotiated.

Ellen Brown is a statist. She relies on left-wing statists to prove her case. Why conservatives take her seriously is a mystery to me.

For my reply to her response, go here:

http://www.garynorth.com/public/7199.cfm

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

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


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