Historical Response #17: Ellen Brown Confuses Legal Language With Economic Reality--Civil War Greenbacks as Pure Fiat Money.
Ellen Brown says that Civil War Greenbacks were pure fiat money. I say they were not.
What is the dividing issue? She says that the language of the law was. I say that economic practice was. She says that the absence of a promise to redeem Greenbacks for gold identifies them as pure fiat money. I say the sellers' willingness to sell goods for Greenbacks was in part based on their hope of post-War redemption in gold. Because of this in part factor, the Greenbacks were not pure fiat money.
In my critique, I pointed to the obvious fact that the gold standard was re-established in 1879 at the 1861 price for gold. People holding Greenbacks could buy gold from the government at $20 per ounce.
Here is what she writes in response:
17. The Greenbacks were pure fiat money unrelated to gold backing.You cite some 1993 source which says:
Did people believe that the government would eventually redeem Greenbacks for gold? As Unger [1964, p.16] noted, "Little had been said on the subject of redemption when Congress debated the Legal Tender" issue. However, all the available evidence indicates that the public believed that at some future date, convertibility would be reinstated, and all Greenbacks would be redeemed in gold.The cite acknowledges that redemption was not discussed. The fact that "all the available evidence was that the people believed" something does not mean that the notes were not pure fiat money. They bore no promise to redeem in gold.
When she wrote "cite," she obviously meant "citation." (I don't think she meant "site.")
She is writing as a lawyer would write -- a lawyer with no understanding of economic theory. I am writing as an economic historian. I consider people's beliefs and their behavior as more relevant for understanding what money is than what Congress failed to write into a statute. I wrote this:
So, the North's public believed that the Greenbacks would be redeemed at par value with gold after the War ended. This faith was rewarded. In 1879, the gold standard was re-established at the pre-War price of gold. A person could buy gold with his Greenbacks at the government-guaranteed price.
She is saying that what the public believed is economically irrelevant. She insists that the Greenbacks were pure fiat money, because of what the law did not promise. I say they weren't pure fiat money; they were partial fiat money.
Here is my logic. From 1862 to 1879, the year of redemption, sellers of goods accepted the Greenbacks in exchange for goods and services. Why? They were taking a risk. The Greenbacks might never be redeemed in gold at any price, let alone $20 per ounce. The money might fall to zero value, just as Confederate money did by 1864. On the other hand, it might not. It might rise in value because of resumed gold convertibility. This very uncertainty offered a profit opportunity: "Buy low, sell high." Accept depreciated money today, when gold's market price was far above $20 an ounce, and convert it to more gold later on. (Just for the record, gold's price in dollars peaked in July, 1863. Lee retreated from Gettysburg on July 3, and Vicksburg surrendered on July 4. After that, it looked as though the North would win. Gold's price fell.)
The North's retailers sold goods at ever-higher prices: 75% higher by 1865. For the actual sellers of goods, it was worth the risk. They could take the Greenbacks and buy goods and services. They could also invest the paper currency, or even hoard it, on the expectation that it would be worth more after the War. Those who waited until 1879 were proven correct. The money was redeemed for lots more gold than it was worth in 1862-65. They did not have to wait that long. The price of gold fell close to $20 before then.
Ellen Brown insists that there was no legal promise of gold redemption made by the government. That is obvious. The economic issue, 1862-78, was not the absence of a promise; rather, it was the possibility of redemption at $20 an ounce. That possibility came true in 1879.
I am saying that there is an economic distinction between pure fiat money -- what the dollar became on August 15, 1971 -- and partial fiat money: what the Greenbacks were, 1862-78.
Ellen Brown sees no difference. This indicates that she is conceptually blind. She sees what she wants to see, not what the public saw in 1862-78, and not what three economic historians saw in 1993.
I prefer believing the economic historians, not Ellen Brown. How about you?