The Great Depression Online




Great Depression Online Archive Issue:

Printing Money and Handing Out Cheer

Great Depression Online
Long Beach, CA
April 10, 2009

Inside This Issue You Will Discover…

*** Drapier’s Letters
*** Gresham’s Law
*** Printing Money and Handing Out Cheer
*** And More

The Drapier’s Letters

William Wood was an English retailer of iron goods.  Yet he had friends in high places.  For in 1722, he was granted a patent by the English Parliament to coin copper money for use in Ireland.

The Irish, however, were outraged.  For one thing, the Irish Parliament didn’t approve it.  Second, it left the Irish currency open to debasement.  Third, this was yet another instance of political and economic exploitation by the English.

Jonathan Swift, the famous satirist and political pamphleteer, took issue with William Wood’s copper money and wrote a series of scathing pamphlets in defense of the constitutional and financial independence of the Irish Kingdom

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Swift wrote under the pseudonym M.B. Drapier – hence the seven pamphlets are collectively called The Drapier’s Letters. 

Gresham’s Law

Swift’s complaint against Wood wasn’t that there wouldn’t be enough money…but rather there would be too much.  And that it would result in a flood of inferior copper coins into the Irish economy.  He was rightly concerned that these lower grade coins would cause the disappearance of more valuable silver coins from circulation.  Plus since the coins wouldn’t be minted under Irish authority, there would be no way for the Irish to control their quality or quantity.

This is known as Gresham’s Law…which commonly stated is: “Bad money drives out good.” 

More specifically, if a circulating currency consisting of both “good” and “bad” money (both forms required to be accepted at equal value under legal tender law), the currency quickly becomes dominated by the “bad” money.

This was seen in the United States in 1965 when the quarter was first minted from a copper-nickel composition.  Before that quarters were comprised of silver.  But the Federal Reserve had inflated the U.S. currency so that the silver contained in a quarter had become more valuable than what a quarter was worth.  We see this in the copper content of a penny today.

True to Gresham’s law, upon issuance of the copper-nickel quarter, pre-1965 silver based quarters rapidly disappeared from circulation.

Printing Money and Handing Out Cheer

What’s a community to do when its cash flow has trickled down to an intermittent drip? 

It prints more cash.  And gives it a happy name like Cheers, Hours, or Plenty. 

No kidding…that’s what more and more communities are doing.  Here are the details from USA Today…

“A small but growing number of cash-strapped communities are printing their own money.

“Borrowing from a Depression-era idea, they are aiming to help consumers make ends meet and support struggling local businesses.

“The systems generally work like this: Businesses and individuals form a network to print currency.  Shoppers buy it at a discount – say, 95 cents for $1 value – and spend the full value at stores that accept the currency.

“Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts.”

By this account the printed money is not entirely baseless.  For it’s backed by the dollar at an exchange of 100 BerkShares for $95…or $1 for roughly 1.05 BerkShares.  The dollar, of course, isn’t backed by anything…but that’s a different story.

For a moment let’s consider: Is $1 for 1.05 Berkshares a good trade?  Maybe.  At least you get more BerkShares for your dollars.  Still does that make it a good trade? 

By that rationale trading a quarter for three nickels is a good trade because three are more than one.  Yet ultimately the currency’s value is measured by its purchasing power – and its ability to retain its purchasing power.  Perhaps the 0.05 discount on BerkShares make them a good deal…barring the fact that they are only valued at certain stores in Massachusetts and that elsewhere they are worthless.

But then there’s this to consider…

“In Detroit, three business owners are printing $4,500 worth of Detroit Cheers, which they are handing out to customers to spend in one of 12 shops.”

Printing money and handing it out to people, regrettably, is a good way to call its value into question.  For exchange rates are subject to change.  And over issuance of a currency results in its devaluation. 

How will we know if the Detroit Cheers’ being over issued?  According to Gresham’s Law, Detroit would soon be full of Cheers and void of dollars.

Thus an abundance of Detroit Cheers…may not be reason for cheer.

Sincerely,

M.N. Gordon
Great Depression Online

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