In 1729 Benjamin Franklin wrote a 6,500 word article advocating an increase in America’s money supply. I’ve done a 700 word summary below. (I learned about Franklin’s article from Mike Norman’s blog.)
Ultra brief summary.
Basically, Franklin argues that a shortage of money leads to a semi-barter economy, which is inefficient. And he argues for money to be created in the form of bills of exchange with land being the collateral that backs such bills. Interestingly, he is aware of the Real Bills doctrine (or the idea behind it) namely that banks will only issue an amount of money or bills that the rest of the private sector actually wants or needs to do business, etc.
This summary is not 100% accurate.
I don’t guarantee the summary is entirely accurate, particularly as there are some convoluted passages I don’t understand. But hopefully the summary will give a flavour of Franklin’s arguments. In fact Franklin himself pleads for similar indulgence. He says, “As this Essay is wrote and published in Haste, and the Subject in itself intricate, I hope I shall be censured with Candour, if, for want of Time carefully to revise what I have written, in some Places I should appear to have expressed myself too obscurely, and in others am liable to Objections I did not foresee.”
700 word summary.
Franklin starts with four points, after which he lists another four points relating the SORT OF PEOPLE likely to favour and oppose a money supply increase. I’ll take all his points in turn including the above eight. I’ve put MY COMMENTS on Franklin’s ideas in brackets.
First, he claims that a shortage of money results in a high interest rate. And trade is discouraged because those with money will tend to lend it out at interest rather than invest in a business. As distinct from businesses in general, Franklin is particularly concerned about the price of land, and thinks that a high price for land is desirable because it encourages husbandry.
(Strikes me that a shortage of money will result in people paying a high price to borrow MONEY, but I see no reason it would result in a high price (in terms of person hours) to borrow anything else. A country that is short of money is a semi-barter economy. Trade is discouraged in that barter is inefficient, but not because of the “high price” of business assets.)
Second, Franklin claims an increase in the money supply has encouraged ship building.
(I expect he is right: I would expect more money to encourage specialisation, e.g. in shipbuilding.)
Third, a lack of money induces would be immigrants to migrate to countries with more money. This is a problem when those potential immigrants are what Franklin calls “Labouring and Handicrafts Men, which are the chief Strength and Support of a People”.
Fourth, lack of money encourages the consumption of European goods. Plus it encourages employers to pay their employees partially in kind rather than in cash (which is what you’d expect in a semi-barter economy).
The sort of people likely to favour and oppose a money supply increase.
1, Those currently engaged in money lending.
2. Those currently in possession of plenty of money, even if they don’t engage in money lending.
3. “Lawyers, and others concerned in Court Business.” The reason Franklin gives is that the legal business results in people going into debt (presumably to pay fines, etc).
4. Dependents on and friends of the above three.
In contrast, traders and manufacturers will favour a money supply increase.
Franklin then considers whether a money supply increase will debase the value of money, and he starts by pointing out that barter is inefficient. He then points out that gold and silver have often been used as money. But the value of precious metals varies. Franklin claims the value of silver in terms of person-hours shrank to a sixth is former value after large quantities of gold and silver were transported to Europe by Spaniards from mines in central America.
He then considers bills of exchange and points out their convenience.
Then he argues for bills based on land. He says, “For as Bills issued upon Money Security are Money, so Bills issued upon Land, are in Effect Coined Land.” Plus he points out that with America’s population rising, the value of land should continue to rise so there is minimal danger of the value of the collateral declining.
He gets the point that more than one factor gives money its value. He says, “Money as Bullion, or as Land, is valuable by so much Labour as it costs to procure that Bullion or Land. Money, as a Currency, has an Additional Value by so much Time and Labour as it saves in the Exchange of Commodities.”
In the paragraph starting “From these considerations” he doesn’t seem to think that an excess money supply leads to inflation. He does not give any good reasons in this paragraph. The really good reason comes in the next paragraph…..
In the paragraph starting “If it should be objected…” he gets the point that the population will only “coin land” (i.e. demand money) to the extent that money is needed in order to do business. This is essentially the “Real Bills Doctrine”.