Encyclopedia of Money: P

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Plato

Plato (427–347 b.c.)

Plato ranks with Socrates and Aristotle as the most famous of the Greek philosophers during the golden age of Athens. Of the three, Plato was the most idealistic, and even today Plato is probably the most widely read philosopher among college philosophy students. Plato is less well known for being one of the first influential political philosophers to propose a system of token money.

Plato’s vision of the ideal state had no room for democracy, private property, competitive markets, or the institution of marriage. In one of the enduring lines in philosophical literature, Plato shares his secret for reforming society:

Until philosophers are kings, or the kings and princes of this world have the spirit and power of philosophy, and political greatness and wisdom meet in one, and those commoner natures who pursue either to the exclusion of the other are compelled to stand aside, cities will never have rest from their evils.

One of Plato’s ingredients for an idealized society has been realized on a large scale in contemporary society. In the Laws Plato describes the monetary system of his reformed society:

Further, the law enjoins that no private man shall be allowed to possess gold and silver, but, only coin for daily use, which is almost necessary in dealing with artisans, and payment of hirelings, whether slaves or immigrants, by all those persons who require the use of them. Wherefore our citizens, as we say, should have a coin passing current among themselves, but not accepted among the rest of mankind; with a view, however, to expeditions and journeys to other lands—for embassies, or for any other occasion which may arise of sending out a herald, the state must also possess a common Hellenic currency. If a private person is ever obliged to go abroad, let him have the consent of the magistrates and go; and if when he returns he has any foreign money remaining, let him give the surplus back to the treasury, and receive a corresponding sum in the local currency. And if he is discovered to appropriate it, let it be confiscated, and let him who knows and does not inform be subject to curse and dishonor equally with him who brought the money, and also to a fine not less in amount than the foreign money which has been brought back.

Plato’s proposal for monetary reform based upon a token currency may show the influence of Sparta on his thinking. Sparta made use of huge, unwieldy iron discs as money, hoping to elude the vices associated with money—class warfare—corruption, personal debauchery, etc. In the early ages of economic evolution, money was viewed with distrust, a contributor to moral decay. The New Testament says “The love of money is the root of all evil.”

Although Plato’s token money played a positive role in his utopian society, realistically, most token money has appeared in time of war and revolution, when governments were strapped for funds and debased currency as a means of transferring wealth from private citizens to government. Only in the twentieth century have properly managed systems of token fiat money symbolized advanced achievement in economic development, typical of the most prosperous economies in times of peace and stability.

Phoenician Weight Standard

The Phoenician weight standard bore a strong resemblance to the Babylonian system. Both systems expressed money values in shekels and talents, and both systems were bimetallic monetary regimes. In the Phoenician standard, a gold shekel was worth 15 silver shekels, weighing 112 grains each. A talent may have begun as the weight that one person could lift, but the Phoenicians and Babylonians fixed the value of the talent in terms of a set number of shekels.

One of the puzzles of monetary history is that the Phoenicians, who ranked among the most highly commercialized peoples of the ancient Mediterranean, hardly merit a footnote in the history of coinage, accepting it very slowly. The Phoenicians devoted themselves to commercial pursuits and found a place in history for inventing the alphabet. By contrast Lydia, a pastoral society that was a poor candidate for commercial innovations, became the birthplace of modern coinage.

It was not a shortage of gold or silver that hampered the development of coinage in Phoenicia, at least according to reports in the Old Testament. The first book of Kings says:

At the end of twenty years, in which Solomon had built the two houses, the house of the Lord and the king’s house, and Hiram, king of Tyre [a Phoenician city] had supplied Solomon with cedar and cypress timber and gold, as much as he desired…. Hiram had sent to the king one hundred and twenty talents of gold…. King Solomon built a fleet of ships…. And Hiram sent with the fleet his servants, together with the servants of Solomon; and they went to Ophir, and brought from there gold, to the amount of four hundred and twenty talents;… The prophet Zechariah says: “Tyre has built herself a rampart, and heaped up silver like dust, and gold like the dirt of the streets.”

John Maynard Keynes, the most famous economist of the twentieth century, observed in his Treatise on Money that coinage seemed to hold no charm for some of the societies of the ancient world, and held out the following suggestion:

The stamping of pieces of metal with a trade mark was just a piece of local vanity, patriotism, or advertisement with no far-reaching importance. It is a practice which has never caught on in some important commercial areas…. The Semitic races, whose instincts are keenest for the essential qualities of money, have never paid much attention to the deceptive signatures of mints, which content the financial amateurs of the North, and have cared only for the touch and weight of the metal. It was not necessary, therefore, that talents or shekels should be minted.

Evidence of Phoenician coinage appears during the middle of the fifth century b.c. Coinage had been in use for 200 years in the trading area of the Aegean Sea, and Athens had been coining money for 100 years.

The Phoenicians were famous as navigators and distant traders, perhaps often bringing them into contact with peoples who would be satisfied with nothing less than weighing precious metal and verifying its fineness on the spot. Such people would have been more suspicious of coinage whose fineness and weight was certified by the seal of a government in a distant land. Also, justly or unjustly, the Phoenicians were known to be sharp, aggressive, and sometimes unscrupulous traders, rendering it unlikely that traders in distant lands would accept Phoenician coins without questioning their quality in terms of weight and fineness. These factors may account for the slowness of the Phoenicians to adopt coinage.

See also:

Babylonian Grain and Silver Standard,Mosaic Silver Standard

References:

Betlyon, John Wilson. 1982. The Coinage and Mints of Phoenicia: the Pre-Alexandrine Period.

Burns, A. R. 1927. Money and Monetary Policy in Early Times.

Einzig, Paul. 1966. Primitive Money.

Keynes, John Maynard. Treatise on Money.

PUBLIC DEBTS

In Montesquieu’s The Spirit of Laws, published in 1748, one reads that: “Some have imagined that it was for the advantage of the state to be indebted to itself: they thought that multiplied riches by increasing the circulation” (Montesquieu, 183). The reasoning behind this statement had to do with the exclusive use of gold and silver for money. By issuing government bonds that households and businesses were willing to hold instead of hoarding gold and silver, more gold and silver became available to circulate as a medium of exchange. Alexander Hamilton, first secretary of treasury of the United States, also saw advantages in a public debt. He argued that interest-bearing government bonds gave businesses a place to earn interest on capital when it was not in use.

Most national governments of highly industrialized economies have public debt. The degree of indebtedness can be a matter of concern. The main consideration in debt, private or public, is the amount of income available to repay it. Doubling one’s debt while doubling one’s income, does not raise the debt burden or the chance of default. Economists use the ratio of public debt to gross domestic product (GDP) to measure the

degree of indebtedness of a particular government. As long as GDP grows faster than public debt, the ability of a government to pay off its debt is always improving. Below is a list of countries with public debts measured as a percent of GDP.

Public debts often soar significantly during wars. Following the Napoleonic wars, Great Britain’s public debt as a percent of GDP stood close to a dizzy 300 percent. It steadily fell, dropping

below the 50 percent range by the eve of World War I (Miles and Scott, 606). By the end of World War II, the United Kingdom’s debt had climbed to a lofty level of 250 percent of GDP. The United States finished World War II with a public debt above 100 percent of GDP (Miles and Scott, 266). Inflation helps countries reduce the burden of public debts. In the post–World War II years, inflation helped reduce the public debt

burdens of the United Kingdom and the United States. The stress of wartime finance, coupled with war reparations sent post–World War I Germany into a frenzy of runaway inflation.

It is true that a government should never face default if its debt is denominated in its own currency. It can always print up the currency to redeem a debt, but the outcome is likely to be inflation and economic chaos. Governments usually turn to hyperinflation to get out from under a debt only if creditors have lost confidence in the government and are withholding credit. All the U.S. government debt is denominated in U.S. dollars. Governments in developing countries often contract debt denominated in the currency of a foreign government. These governments can face default if they run short of foreign currency reserves.

In the United States, the public debt as a percent of GDP steadily fell from the end of World War II until around 1980 (Miles and Scott, 266). It reached a trough roughly at 25 percent of GDP. In the 1980s, the U.S. public debt as a percent of GDP turned upwards with larger budget deficits, reaching a level of 70

percent of GDP in 1996 (OECD, 2008). The public debt as a percent of GDP steadily fell from 1997 until 2001, and then began climbing. In 2008, the OECD Economic Outlook was expecting the U.S. public debt as a percent of GDP to reach 80 percent in 2010.

The public debt equals the accumulation of past budget deficits. The budget deficit is the annual shortfall in government revenue relative to government spending. A public debt indicates that over a span of years the annual budget deficits outweigh annual budget surpluses. Even if a public debt remains within a moderate range, observers and critics claim that the annual budget deficits have harmful effects. Firstly, these deficits subtract from the amount of credit available to finance house purchases and business capital expansion.

Secondly, they elevate interest rates, and create a class of financial assets that pay good interest rates at low risk. Foreign investors in the pursuit of these government bonds bid up the value of the domestic currency in foreign exchange markets. A strongly valued currency in foreign exchange markets makes imports less costly to domestic consumers and home exports more costly to foreign consumers. Critics charge that imports

swell while exports shrink, and that the result is fewer domestic jobs.

References

Miles, David, and Andrew Scott. 2002.

Macroeconomics: Understanding the Wealth of Nations.

PROPAGANDA MONEY

As a circulating medium, money has drawn the attention of political organizations looking for a vehicle to spread propaganda. In times of war and social turmoil paper money is particularly susceptible to becoming a medium for bearing revolutionary messages.

In 1967, the Chinese Communist Party instigated riots against the Hong Kong government and put to use the circulating money of Hong Kong to propagate messages discrediting the government. The communists were

exploiting a touchy economic situation associated with the devaluation of the pound sterling and subsequent devaluation of the Hong Kong dollar. Hong Kong was a colony of the British government at the time.

The Hong Kong and Shanghai Banking Corporation issued notes in Hong Kong, and the communists took in

$10 and $100 notes and overprinted messages calculated to inflame the populace against the government. The top left corner of the overprinted $10 notes bore the famous figure of John Bull with outstretched hands and a gaping mouth. Behind his head in Chinese characters was the message, “He is so greedy that he swallows money.” At the bottom of the overprinted $10 notes were two Chinese characters meaning “Devaluation.” On the reverse side of the $10 banknotes the communists overprinted a text heavily sprinkled

with words such as “imperialism,” “banditry,” and “fascism,” and describing the British exploitation of Hong

Kong that led to the devaluation of the Hong Kong dollar.

The communists overprinted the $100 notes with a caricature of a pirate with a sack of protruding $100 notes thrown over his back. Printed on the sack were the words “Open Banditry.” In the center of the bill the communists overprinted the message, “Worth only 94.30 dollars after devaluation.” On the reverse side

the communists overprinted a text ending with the rallying cry, “fellow brothers: in order to survive we must unite together and fight to the end against the British in Hong Kong.”

During the Vietnam War, peace protesters in the United States drew peace symbols and slogans on dollar bills. At the height of the peace protests the Federal Reserve Banks withdrew the bills bearing antiwar messages. During World War II, the British authorities overprinted German military notes with propaganda messages derogatory of Adolf Hitler.

Metallic coinage may have begun as a means of advertising seaports, and the use of propaganda money demonstrates that money is a vehicle for communication. Propaganda money defaces a symbol of government—usually images hallowed by time that are typically placed on paper money—and at the same time propagates a message that discredits the government.

PROMISSORY NOTES ACT OF 1704 (ENGLAND)

The Promissory Notes Act of 1704 officially established promissory notes as negotiable instruments. A promissory note is negotiable when it can be transferred to a third party by an endorsement, usually in the form of a signature of the recipient of the note. Because the banknote is a direct descendant of the

promissory note, the act of 1704 furnished the legal prerequisites for the use of banknotes as a medium of exchange.

In 17th-century England, people deposited gold in the safekeeping of goldsmiths, who in return issued something like a warehouse voucher made out to the owner of the gold. It was a receipt for a deposit of gold. Rather than exchange gold in trade it was much easier to exchange warehouse receipts, giving rise to the custom of making these receipts transferable by endorsement. Promissory notes originated from these receipts. The wording on promissory notes entitled a certain person, or the “bearer,” of the note, to a fixed amount of gold on demand. The custom arose of transferring the ownership of promissory notes with signature endorsements. The ownership of these notes might change over and over as long as there was room

for more endorsements. With promissory notes changing hands through repeated endorsements, invariably disputes came before the courts involving cases in which someone did not want to redeem an endorsed promissory note, or in which the recipients of endorsed promissory notes did not receive the same consideration as the initial recipients of the notes. For promissory notes to circulate as a medium of exchange, it was necessary that the holders of endorsed notes suffer no disadvantages when demanding that notes be paid in gold. That is, the promissory notes had to be negotiable. The courts waffled on the issue of the negotiability of promissory notes, forcing Parliament to take action.

Parliament named the law “An Act for giving like Remedy upon Promissory Notes, as is now used upon Bills of Exchange, and for the better Payment of Inland Bills of Exchange.” The act provided that promissory notes payable to order, or bearer, were legally binding obligations, assignable by endorsement to new holders, and new holders could sue in the courts for enforcement of their rights. Parliament cited the benefits to trade and commerce accruing from the provisions of the act.

The first step toward the evolution of banknotes came when goldsmiths dropped the names of individuals entitled to gold, and instead made the unnamed “bearer” of the note entitled to a fixed amount of gold. The rise of engraved notes completed the transition to banknotes. Indorsed checks also became negotiable instruments by virtue of the act of 1704. With the legal status of notes clarified, banknotes grew in popularity. Adam Smith observed in The Wealth of Nations, published in 1776, that bank money had surpassed metallic

money in quantity of circulation, marking a turning point in monetary history.

PRODUCER PRICE INDEX

The producer price index (PPI) for all commodities is an index of the domestic price level that the United States Bureau of Labor Statistics estimates and publishes once a month. It is concerned only with domestic producers and the prices that they receive for their output. The PPI ranks among the oldest economic

indicators assembled and reported by the Federal Government. It owes its origins to a resolution passed by the United States Senate in 1891. This resolution authorized the Senate Committee on Finance to look into the impact tariffs had “on the imports and exports, the growth, development, production, and prices of agricultural land manufactured articles at home and abroad.”(Senate Committee on Finance, 1893) In 1902,

the United States Department of Labor published a bulletin on the course of wholesale prices between 1890 and 1901, marking the first publication of a U.S. price index. Until 1978, the PPI was called the “wholesale price index.” The change in name was intended to emphasize that the PPI aims to measure the prices received by producers from the first buyers.

The PPI for all commodities and the consumer price index (CPI) provide the two main measures of monthly inflation in the United Sates. Whereas the CPI emphasizes the retail prices of goods and services relevant for a family’s or household’s cost of living, the PPI measures what prices output bring for the producers rather than for the retailers. It includes all kinds of goods absent from the CPI, such as business capital equipment. The PPI includes the price of footwear, but it also includes the prices of leather, hides, and skins. The prices of agricultural and construction equipment are reflected in the PPI, but not in the CPI. The prices of aircraft, ships, and railroad equipment help make up the PPI.

The PPI for all commodities incorporates fifteen different commodity groupings. The groupings are Farm Products; Processed Foods and Feeds; Textile Products and Apparel; Hides, Skins, Leather, and Related Products; Fuels and Related Products and Power; Chemicals and Allied Products; Rubber and Plastic

Products; Lumber and Wood Products; Pulp, Paper, and Allied Products; Metals and Metal Products; Machinery and Equipment; Furniture and Household Durables; Nonmetallic Mineral Products; Transportation Equipment; and Miscellaneous Products. Indexes are calculated for each one of these sub-groups, as well as for individual commodities within these subgroups. As a case in point, there is a price index for Fuels and

Related Products and Power subgroup. The fuel subgroup is broken down into further subgroups including crude petroleum, refined petroleum products, electric power, and gas fuels. A price index is also reported for each of the subgroups within the Fuel subgroup.

The PPI calculations also make available price indexes for subgroups based on the stage of processing. A finished goods index provides a price index for a class of goods ready to be purchased by final users. They need no further processing and may be either durable or nondurable goods. Finished goods include capital equipment for business firms. Another index measures the cost of intermediate materials, supplies, and

components. The intermediate goods undergo some processing before they serve as material and component inputs to other manufacturing and construction activities. Another index measures the cost of crude materials, which are unprocessed goods and raw materials. In the calculation of the PPI, the Bureau of Labor Statistics make allowances for changes in the quality for products. Suppose the cost of a new automobile rises by $500, but $300 of the price increase is owed to extra safety equipment required by new government

regulations. The PPI only counts $200 of the price increase as an increase in the price of automobiles.

References

Bureau of Labor Statistics. June 2008. “Producer Prices.” Chap 14 of BLS Handbook of Methods.

Senate Committee on Finance, Wholesale Prices, Wages, and Transportation. “The Aldrich Report.” Senate Report no. 1394, Part I, 52nd Congress, 2d sess., March 3, 1893.

PRIVATE PAPER MONEY IN COLONIAL PENNSYLVANIA

In 1766, eight Philadelphia mercantile houses issued short-term, interestbearing promissory notes that circulated as a medium of exchange. The experiment was short-lived but represents the first instance of private money in what was to become the United States.
The colonial economies suffered from a shortage of currency. Parliament forbade the coinage of money in the
colonies, and the enactment of the Currency Acts of 1751 and 1764 restricted the authority of colonial governments to issue paper money. In addition, colonial economies invariably faced an excess of imports over exports, and an outflow of metallic currency paid for the extra imports, further leaving the colonial
economies impoverished of currency. Colonial governments lobbied for the repeal of the Currency Act of 1764, not because of a need to finance budget deficits, but because a currency shortage was strangling the colonial economies.
By 1766, the shortage of colonial currency led to an appreciation of colonial currency relative to British pounds sterling, putting at a disadvantage export merchants who earned British pounds sterling in exports and had to convert British money back into colonial money to purchase colonial goods for export. The currency appreciation enhanced the incentives for creating fresh supplies of colonial currency that could be used to
purchase colonial goods for export to earn British pounds.
Eight Philadelphia mercantile companies saw an opportunity to issue private notes, easing the shortage of a circulating medium of exchange and purchasing domestic produce at good prices for profitable export. These firms issued 30,000 pounds in short-term, interestbearing promissory notes to pay for “Wheat and other Country Produce.” The notes were payable in nine months in British sterling pounds.
A public outcry rose up against the issuance of private paper money for profit. Nearly 200 provincial merchants put an advertisement in the Pennsylvania Gazette on December 11, 1766, declaring that they would not accept these notes in payment for goods. A month later the inhabitants of the city and county of Philadelphia petitioned the General Assembly, the Pennsylvania colonial legislature, pleading that the privilege to issue money belonged only to the legislature. Eventually the king’s attorney general and solicitor general
took up the issue and declared that the notes were probably not illegal, but the notes were withdrawn in the face of a strong negative public reaction.
After the War of Independence private banks began to issue banknotes, but during the colonial period the issuance of paper money remained strictly a government prerogative.
See also: Land Bank System, Currency Act of 1764
References
Ernst, Joseph Albert. 1973. Money and Politics
in America, 1755–1775.
Yoder, Paton S. 1941. Paper Currency in
Colonial Pennsylvania. Ph.D. dissertation,
Indiana University.

PRICE STICKINESS

“Price stickiness” refers to the tendency of prices to adjust sluggishly to changes in the economy. Many economists believe that if wages and prices adjusted freely and quickly, then changes in the

money supply should cause only proportionate changes in prices and the rest of the economy would feel no repercussions. With perfectly flexible wage and prices, a doubling of the money stock would double the average level of prices. According to this thinking, if doubling the money stock quickly doubled prices, other important variables such as the unemployment rate and the level of industrial production would remain

unchanged.

The level of prices is measured by indices such as the consumer price index (CPI), the gross domestic product (GDP) deflator, and the producer price index (PPI). Because of price stickiness, the level of prices does not quickly mirror changes in the money stock. Therefore, changes in the money stock can bring about at least temporary adjustments in real variables such as the unemployment rate and industrial production.

In some markets, prices are highly flexible. For commodities such as corn and wheat, prices react quickly to

changes in supply and demand. In these markets, the sellers have no control over the prices of the commodities they produce and sell. Farmers that grow these commodities are what economists call

price takers. They have to take the market price and cannot charge one cent more without all the buyers disappearing. Corn farmers produce a standardized product and one farmer cannot claim that his corn is superior to the corn produced in other markets. Price stickiness does not occur on any appreciable scale in these markets.

It is in markets where producers and sellers set the price that price stickiness occurs. In industries populated with only a handful of sellers, competition becomes personalized rivalry. These sellers become fearful of price competition as a path to destructive price wars. The U.S. automobile industry of the 1950s and 1960s is a good example of an industry that shunned price competition. Instead, the U.S. automobile industry of that era

favored competition based on styling, advertising, and gadgetry, unveiling new body styles yearly. In times of falling costs, individual sellers in these types of industries are afraid to cut prices for fear of sparking a price war. In times of rising costs, these sellers are afraid to raise prices out of fear that competitors will not raise prices.

In some industries, firms that set their own prices face a large number of competitors. Restaurants are a good example of this type of industry. The fear of price wars does not loom as large in these industries, but these firms may still find it costly to change prices too often. These firms bear what are called “menu costs.” Changing prices involves producing a new menu or catalogue. Menu costs can be as simple as the cost of

remarking the prices of goods already on the shelf.

The regulation of prices accounts for some price stickiness. Utility rates for electricity and gas are still set by regulatory authorities. Union contracts make some wages rigid, which may contribute to some price rigidity among unionized employers. In addition, some prices are fixed by long-term contracts.

Economists have studied the frequency of price changes among firms that set their own price. One study found that nearly half the firms in a sample changed prices no more than once a year. Some economists refuse to accept that price stickiness is the deciding consideration in the relationship between the money stock and real variables such as industrial production. They argue that the general tendency of producers to increase production when prices go up and vice versa leads to a positive correlation between money stock changes and output changes. This positive correlation occurs because producers tend to only see the prices of their own products going up, and are unaware that other prices and costs are increasing at roughly the same rate.

References

Bils, Mark, and Peter Klenow. “Some Evidence on the Importance of Sticky Prices.” Journal of Political Economy, vol. 112, no. 5 (October 2004): 947–985.

Blinder, Alan. 1994. “On Sticky Prices: Academic Theories Meet the Real World.” In Monetary Policy, edited by N. Gregory Mankiw, pp. 117–150.

PRICE REVOLUTION IN LATE RENAISSANCE EUROPE

Historians call the wave of inflation that swept Europe during the 16th and 17th centuries the Price Revolution. It is seen as revolutionary in character partly because it followed a long period of stable prices, and partly because the prevailing view at the time was that prices and wages should be matters of fairness and justice rather than functions of supply and demand. By the mid-17th century, the inflation had ceased in most

countries, followed by a century of stable or even falling prices.

Economists have mostly ascribed the influx of gold and silver from the New World as the cause of the inflation. An increase in the supply of anything, including money, relative to its demand causes its value to go down. A reduction in the value of a unit of money translates as inflation to the public. Scholars in other areas seem less satisfied with this single explanation. The timing of the beginning, the peak, and the end of the

inflation only roughly corresponds with the timing of dates for the influx of gold and silver. The economist Jean Bodin (1530–1596) listed five reasons for the inflation: (1) the abundance of gold and silver, (2) monopolies, (3) scarcity of goods caused by exports and waste, (4) the luxury of kings and nobleman, and (5) the debasement of coin. He regarded the abundance of gold and silver as the principal reason.

The inflation struck Spain the hardest, quadrupling prices within a century. In England from 1580 to 1640, prices of necessities rose 100 percent while wages inched up only 20 percent. England’s first series of humane poor laws came into being in the midst of the Price Revolution. The acceleration in prices reached a peak in most countries between 1540 and the 1570s. Wages and rents fell behind prices and profits soared. Entrepreneurs ploughed these profits into new industries and new ventures of trade, speculation, and building,

laying the foundation for further economic expansion.

See also: Gold, Inflation and Deflation, Potosi Silver Mines, Silver

References

Flynn, Dennis O. 1996. World Silver and Monetary History in the Sixteenth and Seventeenth Centuries.

Hamilton, Earl J. 1934. American Treasure and the Price Revolution in Spain, 1501–1650.

POW CIGARETTE STANDARD

A unique form of commodity money surfaced in the Nazi prisoner-of-war (POW) camps during World War II. Cigarettes came to fulfill all the functions of money: a medium of exchange, unit of account, standard of deferred payment, and store of value.

The Red Cross furnished the prisoners with cigarettes along with food, clothing, and other goods. The goods

were distributed without precise knowledge of individual needs and taste, giving prisoners an incentive to barter unwanted goods for goods that more closely met their needs. A situation in which trade can considerably raise individual welfare is fertile ground for the emergence of a money commodity, and in the POW camps cigarettes came to play the role of money.

Prisoners set prices in cigarettes. Shirts cost 80 cigarettes, and one prisoner would do another prisoner’s laundry for two cigarettes. Even nonsmoking prisoners kept a store of cigarettes to buy other goods and services, and prisoners built up supplies of cigarettes as savings, making cigarettes a store of value—

another function of money. Cigarettes met the need for a standard of deferred payment. Debts were also run up in cigarettes, particularly gambling debts, and prisoners bought goods and services on credit, promising to pay out of future allocations of cigarettes.

As a monetary commodity, cigarettes possessed many advantages. Their value was maintained by a strong consumer demand; they were somewhat durable, not perishable; and to make change they could be subdivided from a box to individual packages and even to individual cigarettes.

The history of POW cigarette money furnishes examples of a wide range of monetary phenomenon. Gresham’s law could be seen in the tendency for inferior cigarettes to remain in circulation while prisoners hoarded higher-quality cigarettes. Sometimes prisoners debased the currency by removing tobacco in the middle of the cigarette and replacing it with inferior material. A diminished (or expectation of a diminished) influx of cigarettes caused a fall in the velocity of circulation as prisoners hoarded cigarettes, which were becoming more valuable as prices in cigarettes fell. An added infusion of cigarettes, or rumors of an added infusion, brought a rise in velocity, dishoarding, and rising prices in cigarettes. Even banks were established that issued banknotes convertible into cigarettes, but unfortunately the banknotes were often easily forged. Communal stores emerged that were capitalized in cigarettes, and paid dividends in cigarettes.

The history of cigarette money continued after the war. In postwar Germany, a cigarette standard emerged, particularly in transactions between Germans and British and U.S. troops. In the late 1980s in the Soviet Union, packs of Marlboro brand cigarettes served as a medium of exchange in a large underground economy

that had lost faith in the ruble.

References Einzig, Paul. 1966. Primitive Money.

Radford, R. A. “The Economic Organization

of a POW Camp.” Economica (November

1945): 189–210.

POUND STERLING

The pound sterling is the currency unit for the United Kingdom and has a longer continuous history than any other currency. For 1,300 years the pound has been the currency unit of England, never replaced by a “new pound” or any other change of name signifying a break with the past. Even the French franc, dating back to 1803, is young compared to the pound sterling. The German Deutsche Mark came into being immediately following World War II.

Around the time of William the Conqueror, the English government began striking coins from a silver alloy containing 925 parts of pure silver per 1,000. Debased coins appeared occasionally, but Norman and English kings always returned to the silver alloy containing over 92 percent pure silver, which came to be known as the “ancient right standard of England.” Early in the 12th century, the English called their silver pennies “sterling.” The reputation of the English silver coinage for consistent fineness gave rise to the term “sterling silver.”

We do not promise you pounds sterling, but you can earn rubles. Active advertising and earnings.

The English currency system traces its ancestry directly to the Carolingian currency reform. Charlemagne’s father, Pepin, established a silver standard that made 1 livre (pound) equal to a pound weight of silver. Also, 240 silver denarii (pennies) equaled a pound, and 20 shillings equaled a pound. In the English version of the Carolingian system, 1 pound equaled 20 shillings, which equaled 240 pence. The Carolingian system did not remain intact long on the Continent, particularly regarding the silver content of the pound, but it came to England with the Norman Conquest, where it survived longer than anywhere else. Only in 1971 did the United Kingdom decimalize its currency, making 100 pence equal to a pound.

Over the first eight centuries of its existence, the pound lost two-thirds of its silver content, averaging a depreciation of 0.13 percent per annum. After 1696, the silver content of the pound remained steady until 1817 when the United Kingdom officially adopted the gold standard, and silver coinage became only subsidiary. During the 19th century, the pride of the British currency was the gold sovereign, equal to 20 shillings or 1 pound. The sovereign and half-sovereign continued in circulation until 1914.

During the 19th century, the pound sterling began to wear the aspect of an international currency. Although the pound sterling played no special role on continental Europe, the currencies of other European countries financed trade only within colonial empires, leaving the field free for the pound sterling to become the dominant international currency.

After World War I, the United Kingdom made a frantic, and briefly successful, effort to return to the gold standard at the prewar parity, which was 3 pounds, 17 shillings, and 10.5 pence per fine ounce. In truth, the United Kingdom needed to devalue the pound sterling, and failure to do so helped usher in the British Great Depression. In the Gold Standard Amendment Act of 1931, the United Kingdom abandoned the gold

standard, and other countries had to decide to keep their currencies tied to the pound sterling, remain on the gold standard, or follow an independent policy. The Commonwealth countries, excepting Canada, the British colonies, Portugal, and the Scandinavian countries, elected to keep their currencies linked to the pound sterling, and these areas became known as the sterling area.

The pound sterling emerged from World War II as second only to the U.S. dollar as an international currency. In the post–World War II era, the prestige of the pound sterling suffered from currency devaluation, and the vast U.S. gold stock, combined with production facilities undamaged by war, gave the U.S. dollar the preeminent position as the international currency.

England’s long history of conservatism in monetary matters may explain why the United Kingdom has been slow to participate in the European movement toward monetary union. In May 1998, members of the European Union announced plans to launch a European currency to replace the national currencies of several European countries, including France and Germany. The European Union launched the euro in a non-physical form on January 1, 1999, and on January 1, 2002, euro notes and coins replaced the circulating currencies

of several European countries, including Germany and France. As of mid-2009 Britain still refused to adopt the euro and planned to retain its own national currency, the pound sterling.

See also: Act for Remedying the Ill State of the Coin, Bank of England, English Penny, Gold Standard, Gold Standard Act of 1925, Gold Standard Amendment Act of 1931, Liverpool Act of 1816

References

Chown, John F. 1994. A History of Money.

Davies, Glyn. 1994. A History of Money.

Feavearyear, Sir Albert. 1963. The Pound

Sterling: A History of English Money.

Horton, Dana S. 1983. The Silver Pound and England’s Monetary Policy Since the Restoration, together with the History of the Guinea.

POTOSI SILVER MINES

Potosi, a desolate plateau 12,000 feet above sea level, now in Bolivia, was the site of a virtual “silver mountain,” discovered in the 16th century. As a flood of silver poured into Europe, in England and Spain the word “Potosi” became synonymous with “wealth”; in France, the word “Peru” symbolized wealth, because that area of Latin America was then called Peru. In the aftermath of Columbus’s discovery of America, until 1530, Europe imported substantial quantities of readily accessible gold from the New World, but silver was not significantly in evidence. After 1530, silver production in the New World reached significant levels, but still

was dwarfed by the gold imports following Pizarro’s conquest of the Incas between 1531 and 1541.

Europeans discovered the silver mountain of Potosi in 1545, a time when silver was still a highly favored metal in the Middle and Far East; a unit weight of silver exchanged for twice as much gold in the Eastern world as in Europe. Also, existing silver deposits were playing out, putting silver in strong demand. The base of the silver mountain measured six miles in circumference. The windy, dusty plateau of Potosi nourished a few fields of potatoes amid an otherwise agricultural wasteland. From an uninhabited, desolate plateau, Potosi grew to

a sizable city, boasting a population of 55,000 by 1555, and climbing to a peak of 160,000 by 1610. Everything to meet the needs of this population had to be brought in, and a journey to Lima, the capital of Peru, took two and a half months.

Even high wages could not compensate for the prohibitive cost of living and arduous living conditions that the new immigrants faced at Potosi. To supplement a voluntary labor force, the mita system of forced labor required Indian villages within a certain radius of Potosi to send a quota of conscripted or drafted young men to work in the mines. The work was harsh, and labor in the silver mines came down through history as a

symbol of Spanish oppression of the Indians. One eyewitness tells the following account of the plight of the Indian miners:

The only relief they have from their labors is to be told they are dogs, and be beaten on the pretext of having brought up too little metal, or taken too long, or that what they have brought is earth, or that they have stolen some metal. And less than four months ago, a mine-owner tried to chastise an Indian in this fashion, and the
leader, fearful of the club with which the man wished to beat him, fled to hide in the mine, and so frightened was he that he fell and broke into a hundred thousand pieces. (Vilar, 1969, 127)

In 1563, rich mercury deposits were discovered at Huancavelica, located between Potosi and Lima, Peru. Convenient accessibility to mercury enabled the Spanish to employ the mercury amalgam process of silver extraction, substantially increasing the productivity of low-quality silver ore left after the richest veins were mined.

Much of the silver found its way to the East to cover Europe’s balance of trade deficit, and some of the silver was shipped directly from the New World to China. China enjoyed an economic boom until silver shipments fell off in the 1640s, plunging China into a depression. In Europe, the infusion of silver fueled the price revolution, the centurylong wave of inflation that engulfed Europe from 1540 until 1640.

Spain came to view the flood of silver less as a blessing from heaven and more as the curse of the devil. In the 17th century, Spain entered into a phase of monetary disorder that could rival any of the modern periods of inflation. Spain squandered its newfound wealth on costly wars, royal extravagance, and the growth

of churches, convents, and ecclesiastics. By the second half of the 17th century, Spain had reverted to the Bronze Age, its coinage minted from copper.

See also: Great Bullion Famine, Price Revolution in Late Renaissance Europe, Silver

References

Davies, Glyn. 1994. A History of Money.

Flynn, Dennis O. 1996. World Silver and Monetary History in the 16th and 17th Centuries.

Vilar, Pierre. 1969. A History of Gold and Money, 1450–1920.

POSTAGE STAMPS

Postage stamps have served as money in areas as diverse as the United States, Europe, and the Far East. During the U.S. Civil War, merchants, struggling with a shortage of small coins, began the practice of making small change with postage stamps. Daily purchases of stamps increased fivefold in New York City alone, and individual stamps circulated until they became too dirty and tattered for recognition. John Gault, a Boston sewing-machine salesman, proposed the encasement of stamps in circular metal discs with transparent mica on one side showing the face of the stamp. Soon the metal side of the discs was bearing inscriptions of advertisements; one series of encased stamps bore the slogan, “Ayer’s Sarsaparilla to Purify the Blood.” Denominations of encased stamp money ranged from 1 cent to 90 cents, and one rectangular encasement

had three 3-cent stamps, making a 9-cent coin.

The government took up the idea of postage money and begin issuing postage currency in denominations of 5-, 10-, 15-, and 50-cent stamps, and some of the postage currency was even perforated around the edges to resemble stamps. The postage currency soon dropped any association with postage stamps and became simple fractional currency in denominations of 3 cents to 50 cents and bearing the inscription “Receivable for all U.S. stamps.”

The British South Africa Company issued stamps affixed to cards bearing the statement, “Please pay in cash to the person producing this card the face value of the stamp affixed thereto, if presented on or after the 1st August 1900. This card must be produced for redemption not later than 1st October 1900” (Beresiner, 1977, 210).

Either during or immediately after World War I, postage stamps circulated as money in Germany, Austria, France, Russia, Italy, Norway, Denmark, Belgium, Greece, and Argentina. Germany and Austria imitated the U.S. practice of encasing the stamps in a circular metal disc with a transparent face, and a reverse side bearing an advertisement. France issued similar discs, but put a numeral on one side indicating the value of the encased stamp. Russia issued stamps on stout cards that bore the inscription “On par with silver currency.”

The Russian stamps were intended to circulate as money, but could also be used as postage stamps.

During World War II, Ceylon and the Indian state of Bundi issued small change in the form of cards printed with contemporary stamps. In 1942, Filipino guerrillas fighting the Japanese issued 5-peso notes to which stamps of the appropriate amount were affixed.

In both World War I and World War II, the British government declared postage stamps legal tender, but the stamps were never encased for special protection, or affixed to a special card.

Postage stamp money has usually emerged as money for domestic circulation when wartime finance has mobilized hard currency for purchasing military goods abroad.

PONTIAC’S BARK MONEY

Pontiac was an Ottawa Indian chief and intertribal leader who organized the Indian resistance to British control in the aftermath of the French and Indian War in North America. The Indian resistance, known as Pontiac’s War (1763–1764), gave rise to one of the first examples of siege money in America.

The French defeat in the French and Indian War had left the Great Lakes area in control of the British, who were less hospitable to the Indians. The Indians also discovered that the British were the thin edge of the wedge of an aggressive settler movement. As friction developed between the British and the Indians, Pontiac organized virtually every Indian tribe from Lake Superior to the lower Mississippi and launched a coordinated

and simultaneous assault against 12 British forts in the area. Each tribe attacked the nearest British fort, and

Pontiac laid siege to the fort at Detroit.

Pontiac’s siege of Detroit lasted from May through October, and, unlike the assaults on most of the other forts, ended in failure. Nevertheless, while the siege was in process, Pontiac had recourse to an interesting experiment in money. In October, Pontiac issued “notes” in payment for supplies his warriors needed to

continue the siege. These notes were none other than pieces of birch bark. Each bark note bore two images, an image of the item that Pontiac wanted to purchase with it, and a figure representing the otter, which he adopted as his totem or hieroglyphic signature. Apparently, Pontiac fulfilled his commitment to redeem all the notes after the war, and the notes were withdrawn from circulation, but the details of how this was done

are sketchy.

Pontiac’s confederation of Indian tribes achieved a momentary success, but in 1766, Pontiac, seeing the

inevitable superiority of the British, negotiated a peace treaty. His expedient of bark money probably indicates how far European practices had influenced the Indians rather than the evolution of ancient Indian practices. The French trappers and hunters, who still had strong connections with the Indians, had agitated against the British, and the bark notes bear a striking resemblance to various sorts of token money or inconvertible

paper money that governments often issue during wartime. By the time of Pontiac’s War, the British colonies had issued vast quantities of paper money to finance the French and Indian War.

PLAYING-CARD CURRENCY OF FRENCH CANADA

The French colonies shared with the British colonies the problem of insufficient money to transact the volume of business that was possible in a land with bountiful resources. French Canada turned to using playing cards as paper money to cope with a currency shortage.

Wheat, moose skins, beaver skins, and wildcat skins are among the commodities that belonged on the list of

mediums of exchange in 17th- and 18thcentury Canada. In 1713, the British soldiers stationed at Nova Scotia, which France had just ceded to Great Britain, petitioned the British authorities to end the practice of paying soldiers in rum, asking “that they be payd in money, or Bills, & not in Rum or other Liquors, that cause them to be Drunk every days, and Blaspheme the name of God” (Lester, 1935). In 1740, the accounts of a

storekeeper in Niagara showed a “deficit by 127,842 cats” (Lester, 1935).

In 1685, the colonial authorities faced a cash-flow crisis that led to the issuance of ordinary playing cards as a form of paper money. During that year, the French government ended its practice of appropriating and sending funds to French Canada in advance of a budget period. The funds for 1685 did not reach Quebec until September, leaving the civil and military authorities in Canada to fend for themselves for the first eight

months of the year. By June 1685, the authorities saw the necessity of issuing some sort of paper money that they could redeem when fresh funds arrived from France. The absence of suitable paper and printing facilities to produce paper money forced the expedient of using playing cards. Each denomination of paper money was associated with playing cards of a certain color and cut into a certain shape. It was a system easily understood by the generally illiterate population. Also, the colonial agent of the treasurer wrote the denomination on each card and, with the governor general and the intendant, signed each card. As long as the French government sent adequate funds once a year to redeem the playing-card money, prices in the new currency remained steady.

The authorities acted to discourage counterfeiting. In 1690, a surgeon found guilty of counterfeiting was condemned “to be beaten and flogged on the naked shoulders by the King’s executioner” (Lester, 1939). He got six lashes of the whip in each “customary square and place.” After surviving this ordeal, the surgeon was sold into bondage for three years. Later, the crime of counterfeiting drew the death penalty, often by hanging.

When hostilities broke out between France and England, France stopped sending silver coin to Canada for

redemption of playing-card money. Instead, the authorities redeemed playing-card money with bills of exchange drawn payable in silver coin in Paris. The merchants in Canada made use of these bills of exchange to pay for supplies imported from France.

As was the case with many other early experiments with paper money, war proved to be the greatest enemy to the integrity of the playing-card system. The supply of playing-card money stood at 120,000 livres in 1702, when war erupted between England and France. By 1714, one year after the war ended, the supply stood at more than 2 million livres. During the war, France began paying the bills of exchange in paper money rather than silver coin, and prices in Canada entered a spiral of inflation. In 1714, the French government offered to redeem all the playing-card money in silver coin at half its face value. The program of redemption took place over a five-year period, and after 1720, the playing-card money was declared worthless.

From 1730 to 1763, the French government again issued card money in Canada, but the cards were blank cards rather than playing cards. The second issue of card money was again reasonably successful until war put a strain on resources.

The use of playing-card money seems a far-fetched expedient for a New World that had supplied the Old World with an abundance of precious metals for coining money. Unlike the Spanish colonies, however, the French and British colonies were not rich in deposits of precious metals. The episode of playing-card money shows the flexibility, adaptability, and inventiveness of an expanding economic system to raise up something to

serve as a medium of exchange. It is also a reminder of the role of culture in identifying a suitable medium of exchange. The sensibilities of the New England Puritans would have been shocked at accepting playing cards as a form of money.

See also: Inconvertible Paper Standard, Siege Money

References

Beresiner, Yasha. 1977. A Collector’s Guide to Paper Money.

Heaton, Herbert. “Playing Card Currency of French Canada.” American Economic Review (December 1928): 649–662.

Lester, Richard A. 1939/1970. Monetary Experiments.

PIG STANDARD OF NEW HEBRIDES

Until the eve of World War II, pigs played the role of money in the New Hebrides. The pig standard of New

Hebrides was more than another livestock standard that combined a ready source of food with a store of wealth. In the New Hebrides boar hogs with curved tusks conferred status in a unique economic, political, and social system. On some islands, neutered pigs qualified, if they also grew tusks. The length of the tusks was the crucial quality determining the value of pigs, rather than weight or condition of the animal. Islanders

removed two teeth from the upper jaw, causing the tusks to grow longer, adding to the pig’s value.

The special role of pigs as sacrificial victims at feasts raised them above the category of a common source of food, endowing them with a special cultural significance that substantially increased their value as a store of wealth. Islanders gauged a man’s wealth by the number of boars in his possession, which enabled him to make handsome contributions to sacrifices and feasts. They were too valuable for the small change of everyday transactions, which were facilitated by other exotic forms of money, such as mats, shells, quartzite stone money, and feathers. Pigs were used to buy land, pay workers (including magicians, dancers, and mortuary officials), purchase brides, and pay blood money, ransoms, and fines for violating taboos. Debts were defined in terms of pigs, and a large share of the murders on the islands arose from disputes over pig debts.

The social life of the islanders was dominated by men’s clubs or secret societies. To purchase a bride, gain admission to a secret society, or earn promotion within a secret society, young men borrowed pigs, probably from relatives. A young man already in a secret society borrowed pigs from fellow members. A person acquired power by being able to loan pigs to those who needed to borrow them. Interest on debts was paid

not by returning to the lender more pigs than were originally borrowed, but by returning pigs with longer tusks.

Because pigs became more valuable as their tusks grew, interest on debts was paid by returning to the lender pigs with longer tusks. The rate of interest was determined by the growth of the tusks.

In the 1930s, pigs with quarter-circle tusks fetched 4 British pounds, half-circle tusks 6 pounds, three-quarter-circle tusks between 10 and 15 pounds, and full-circle tusks over 30 pounds. Pigs with tusks

extending beyond one circle, perhaps a circle and a half, commanded premium prices.

The pig standard of New Hebrides shows that cultural and religious factors can outweigh utilitarian factors in raising up a commodity to serve as a medium of exchange in universal demand. Livestock standards are founded in the reality that people must find food on a daily basis, rendering them receptive to accepting edible livestock in exchange. Having a large reservoir of livestock, as a source of food, however, can become a

status symbol, further enforcing the value of the livestock as money. In the New Hebrides, the length of a pig’s tusks bore no relationship to its food value, but the tusks became a status symbol that acquired a cultural life of its own, making tusk length the lynch pin of the monetary standard.

See also: Cattle, Goat Standard of East Africa

References

Cheesman, Evelyn. 1933. Backwaters of the Savage South Seas.

Einzig, Paul. 1966. Primitive Money.

Humphreys, C. R. 1983. The Southern New Hebrides: An Ethnological Record.

PAPAL COINAGE

The Roman papal court rose to become a significant European financial center in the late Middle Ages, and the papal mint, called the Zecca, was a major focus of curial activity. The famous Renaissance artist and architect, Donato Bramante, built a new mint for Pope Julius II. Another Renaissance architect of some

renown, Antonio da Sangallo the Younger, later remodeled the mint, his facade remaining on the building to this day. The Renaissance popes needed money to pay soldiers, hire artists, and build monuments and buildings, and the papal mint often furnished the coins to make payment.

The popes minted gold and silver coins. The principle gold coin of the Renaissance era was the gold ducat of

the Chamber, named after the Apostolic Chamber that handled the financial affairs of the papacy.

The gold ducat was preceded by the gold florin of the Chamber, approximately equivalent in value to the ducat. In 1530, the papal mint issued a new coin, the scudo d’oro in oro, a coin that in value fell short of the ducat by a

small margin. A papal ducat equaled about one-third of a Tudor pound sterling. The papal mint struck silver coins called carlina, and later, giulii, that equaled approximately one-tenth the value of a ducat.

The papal treasury and Roman treasuries tended to accumulate precious objects, and during times of financial

stress, treasures were melted down and minted. Under Innocent III, the opening of a sepulcher of a noble lady of imperial Rome brought to light a golden brocade on her robes, which was promptly sent to

the mint and melted down.

The papal court of Rome drew income from benefices across Europe, and the Apostolic Chamber expected

payment in its own coinage, partly to protect itself from payments in mixed and depreciated silver money. Princes usually made payments in gold and the lower classes in silver. The combined gold and silver sent to Rome raised the ire of northern Europe, leading to charges that the Roman church was bleeding Europe white.

Papal coinage was noted for its beauty, a trait not surprising in light of the celebrated Renaissance artists who

applied their gifts to coinage at the papal mint. The most eminent was Benvenuto Cellini, the Renaissance goldsmith, sculptor, and author of a famous autobiography. Perhaps less known is Francesco Francia, who struck coins so distinguished by their beauty that they became collectors’ items and sold at premiums

soon after his death. Vasari, in his Lives of the Most Eminent Painters, Sculptors, and Architects, says of Francia that he was “so pleasant in conversation that he could divert the most melancholy individuals, and won the affection of princes and lords and all who know him”(Vasari, 1927, 119).

Papal coinage is among the more modern manifestations of a familiar theme in monetary history. Temples and religious institutions usually have had the inside track on the accumulation of gold and silver. Because of the reverence for these institutions, the treasures of these institutions are usually safe from theft and extortion.

(This reverence did not keep the papacy from losing much of its treasure during the Sack of Rome in 1527.) The moral leadership of these institutions can also add credibility to the precious metal purity of coinage. Historically, these institutions have often held a stronger claim of trust on the public than kings and princes.

Today the Vatican issues its own paper money, in francs and lire, which is noted for beautiful pictorial and religious themes.

References

Cellini, Benvenuto. 1931. The Life of Benvenuto Cellini.

Cellini, Benvenuto. 1967. The Treatises of Benvenuto Cellini on Goldsmithing and Sculpture.

Partner, Peter. 1976. Renaissance Rome, 1500–1599.

Ryan, John Carlin. 1989. A Handbook of Papal Coins.

Vasari, Giorgio. 1927. Lives of the Painters, Sculptors, and Architects, vol. 2.

PACIFIC COAST GOLD STANDARD

California and Oregon remained on a gold standard during the 1862 to 1879 period when the rest of the country transacted business on an inconvertible paper standard. During the Civil War the Confederate

government abandoned all monetary discipline and flooded the South with Confederate paper money. In 1862, the North began issuing inconvertible greenbacks, and only in 1879 provided for the redemption of greenbacks in gold and silver specie. During the 1862 to 1879 period, Gresham’s law drove all gold and silver coins out of circulation in the eastern United States, but state laws and organized business interests kept

gold in circulation on the Pacific coast. The Pacific coast could boast of no less than $25 million of gold and silver coins in circulation during the period when the rest of the country used paper money as a medium of exchange and standard of value.

Before the Civil War, both California and Oregon relied exclusively on gold and silver coins rather than banknotes to circulate as money. When greenbacks were first issued, banknotes accounted for almost half of the circulating money in the East. The constitutions of both California and Oregon banned the issuance and circulation of paper money, and banks were forbidden to create “paper to circulate as money.”

Aside from legal barriers to the circulation of paper money, merchants collectively agreed not to accept greenbacks on par with gold. The merchants of San Francisco agreed to neither receive nor make payment in greenbacks at any rate other than the greenback market value in terms of gold. They set prices in gold

and accepted greenbacks at whatever discount the market dictated. When leading merchants in Portland agreed to accept greenbacks at the going rate in San Francisco, merchants throughout Oregon enforced the same policy. The merchants in Portland went so far as to circulate an announcement that customers

who insisted on paying debts in greenbacks would find their names on a blacklist of the Portland merchants’

association. Commercial ostracism awaited any businessperson who paid a business debt in greenbacks, that is, who “greenbacked” a creditor. Banks in California and Oregon refused to accept deposits in greenbacks, and newspapers worked to keep down the circulation of greenbacks.

After the federal government began issuance of greenbacks, the legislatures of both California and Oregon enacted measures allowing people to contract debts in either coin or greenbacks but requiring that payment be made as specified in the contract. The Oregon legislature enacted legislation requiring the payment of state and local taxes in only gold and silver coin, ruling out greenbacks. The California Supreme Court ruled that greenbacks were not acceptable in the payment of state and county taxes.

Organized opposition to greenbacks triggered a bitter debate on the Pacific coast. Critics charged that repudiation of greenbacks was tantamount to refusing to share in the financial burden of the Civil War. Crowding all the greenbacks on to the East Coast caused faster depreciation of the greenbacks, putting a greater burden of inflation on the East Coast. Although prices in greenbacks doubled over the course of the Civil War, Oregon prices in gold increased only 25 percent.

Two factors may help explain opposition to greenbacks on the Pacific coast. First, gold discoveries in California had already given that region a taste of inflation caused by increases in the money supply. A paper issue would only accelerate money growth, contributing to further inflation. Second, as a gold-producing

region, the Pacific coast did not want to encourage the use of any other form of money. As abundant gold production drove out silver money, the Pacific coast moved essentially to a gold standard between 1862 and 1879, a unique exception to the paper standard that reigned in the rest of the country.

References

Greenfield, Robert L., and Hugh Rockoff.

“Yellowbacks Out West and Greenbacks

Back East: Social-Choice Dimensions of

Monetary Reform.” Southern Economic

Journal, vol. 62, no. 4 (April 1996):

902–915.

Lester, Richard A. 1939/1970. Monetary

Experiments.

Moses, Bernard. “Legal Tender Notes in California.”

Quarterly Journal of Economics,

vol. 7 (October 1892): 1–25.