America’s On-and-Off relationship with Sound Money

Having been doing research for a paper on credit expansion and inflation in the U.S. in the 1790’s, I’ve been looking at mortgage documents from that era. Almost all of them feature what we might call a “sound money clause” i.e. they are explicitly payable in “gold or silver coin.” One particular mortgage note from Lancaster, Pennsylvania, dated May 15, 1799, for the sum of $533⅓, stood out for the rigor of its sound-money repayment terms. The debt was to be paid in “fine coined silver money…each Dollar weighing Seventeen pennyweights and six grains at the least and not in any paper money or depreciated Currency of any kind sort or quality whatsoever.”

My guess is that the lender, one Mr. Brinton, had been burned at some point or another by paper money, and he took steps to make sure it didn’t happen again. One can hardly blame him; even in 1799, memories of devastating paper money inflation were still fresh. The infamous Continental Currency episode of the revolutionary years had increased the nominal money supply about 24-fold ($240 million in paper money on top of a pre-war money stock around $10 million), and prices about 40-fold. While the wartime inflation was ruinous for people who were forced to exchange goods for worthless paper (often at the point of a bayonet), the post-war deflation was just as harmful, especially for people who had borrowed money to buy land or capital at the inflated prices. Hence after the war, although worthless Continentals went by the board, there were renewed calls for state-issued paper money, a desperate attempt to “reflate” their local economies. Some states, like Rhode Island, printed with abandon, causing renewed inflation that caused creditors to run from debtors and brought economic activity to a screeching halt.

Likewise for us today, memories of confiscatory inflation linger from the not-too-distant past. CPI inflation peaked at over 14% in early 1980, and it took a painful recession to bring it back down. The current recession also featured a small dose of CPI deflation (and a stiff asset price deflation), and, once again, we’re hearing calls for explicitly higher inflation rates aimed at easing debt burdens by “reflating” the economy. It’s probably too early to tell, but my sense is that the new breed of inflationists are gaining ground, and higher inflation is more likely than lower. In this case, hard-nosed hard-money attitudes, like that displayed by Mr. Brinton in 1799, are in order, lest we get burned by inflation… again.

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