Historical Error #31: Shays's Rebellion (1786-87) Took Place After the Constitution Was Ratified in 1788.

Gary North

Ellen Brown does not always bother to check her historical narratives. Here is a case in which she has everything scrambled chronologically, as well as factually.

Goldbugs argue that there will always be enough gold in a gold-based money system to go around, because prices will naturally adjust downward so that supply matches demand. But this fundamental principle of the quantity theory of money has not worked well in practice. The drawbacks of limiting the medium of exchange to precious metals were obvious as soon as the Founding Fathers decided on a precious metal standard at the Constitutional Convention, when the money supply contracted so sharply that farmers rioted in the streets in Shay's rebellion. [Web of Debt, p. 360]

It is hard to imagine that anybody could get this story as confused as she did.

The most important single event leading up to the Constitutional Convention was Shays's (not Shay's) rebellion. It took place in the summer of 1786 through the winter of 1787. It was in reaction to Shays' rebellion that George Washington finally consented to attend the Constitutional Convention. He had repeatedly resisted the request from James Madison. But his fear over the crisis in Massachusetts, which was based on false information given to him by an old colleague in the army, persuaded him to change his mind.

The rebellion in Massachusetts did not lead to rioting in the streets. It led to organized militia resistance, town by town. It had nothing to do with the contraction of the money supply. It had to do with the decision of the state government to tax the towns in silver instead of the paper money currency that had long been circulating. This was done in order to pay investors in depreciated state Revolutionary IOUs. Interest would henceforth be paid in silver.

The legislature was run that year by men who had an vested in these highly discounted bonds, and who were trying to make a fortune by forcing the taxpayers to provide the silver to pay off the bonds at face value. Local governments revolted.

This political resistance was based on a late change in the rules. The towns had not previously been required to pay taxes in silver. So, there was political resistance, not to a shrinking of the money supply, but to a new law that required the payment of property taxes in high-value silver. I have described all this in my essay, "John Hancock's Big Toe."

The fact that Ellen Brown could criticize the Constitution, which made gold and silver coins the only legal tender for the states to emit, indicates how hostile she is to the idea of currency based on the precious metals. She rewrote history in order to make her point.

The attendees at the Convention fully understood the threat of fiat money, meaning paper money not exchangeable for gold or silver, in the hands of politicians. They wanted to protect the citizens of the country against the printing of paper money. They wanted to protect creditors, who had made loans in terms of the purchasing power of a particular monetary unit, from suffering losses because of the decisions of politicians to debase the state currency.

The state that had been most inflationary was Rhode Island. At the Convention, the majority decide to keep state legislatures from printing money and then passing a law forcing creditors to accept this fiat of money in payment of debt. This is what legal tender laws require. This was another reason why Rhode Island was last state of the original 13 to ratify the Constitution (May 29, 1790).

The initial currency of the United States was based on the Spanish dollar, known as pieces of eight. This currency standard continued until the middle of the 19th century. The Coinage Act of 1792 created the United States Mint, but the first U.S. dollars were not as popular as the Spanish dollars, which were heavier and were made of finer silver. Spanish coinage was legal tender in the United States until an Act of Congress discontinued the practice in 1857.

If you are interested in the legal background of the monetary policy of the United States government, you can download this document for free: a detailed study of constitutional money which was written in 1982 by a legal scholar, Edwin Vieira. He is also an Austrian School economist and hard money advocate.

It is 300 pages. That is a lot to read. A shorter presentation is here:

If you want the whole nine yards, read his book, Pieces of Eight. It is over 1700 pages. It is available only in the used book market for about $600. I own a copy. Not many people do.

For my reply to her response, click here:

http://www.garynorth.com/public/7260.cfm

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

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