Democratic Finance vs.Banking Fraud in Early America

Ordinary 18th-century Americans fought for fair access to small-scale credit and usable currencies. Big finance fought back.

Calling modern banking “a widespread fraud,” Rob Burns wants to push the finance industry out of everyday lending. A candidate for Congress in the fourth district of Illinois, Burns proposes using federally insured savings as a public fund for mortgages, student loans, consumer credit, business bridge loans – the kind of borrowing engaged in by ordinary Americans, not entrepreneurs. On a different finance reform front, the technology pioneer and culture critic Douglas Rushkoff has been exploring complementary currencies. Rushkoff envisions new monetary units, exchanged via handheld devices, helping to break what he calls “the money monopoly.”

Far-reaching ideas for getting money, currency, and credit to flow more democratically through the American economy would probably draw all-purpose condemnations like “socialism!” from the rightists led by Sarah Palin and Michele Bachmann. Liberal high finance experts too might find such proposals dangerously chaotic. But regardless of practicalities and politics, it’s useful to recognize that ideas like Burns’ and Rushkoff’s have deep roots in the American founding period. The Tea Party has done such a successful job of associating anti-government, free-market politics with essential American values – and historians have been so eager to ignore the economic activism of ordinary, founding-era Americans in favor of assessing and re-assessing the elite founders’ republican philosophies – that it can be startling to confront the democratic theories about popular finance that prevailed in 18th-century America.

And “theories” is the right word. People of the founding period put forth their economic ideas in resolutions, petitions, and actions. In an earlier post in this series, I discussed traditional rioting in the context of struggles between American debtors and creditors. Long before the Stamp Act riots of Revolutionary fame, crowd action – rowdy, creepy, theatrical, sometimes violent – played an important role in American social life. Crowds dismissed by the upscale as “the mob” called their movements “regulations.” From the North Carolina Regulation of the 1760’s to Shays’ Rebellion of the 1780’s and beyond, American debtors, barred from fair representation in politics, engaged in obstruction, boycott, court closing, jury nullification, building teardown, and physical intimidation. They wanted their legislatures to restrain the power of wealth.

Just like Rushkoff and Burns today, 18th-century popular regulators focused on small-scale credit and readily negotiable currencies. Scarcities of cash gave merchants a monopoly on gold and silver coin, enabling them to dominate small farmers, artisans, and laborers through loan shark-style lending terms: debtors, in constant danger of foreclosure, could effectively become merchants’ laborers. Hoping to elude the money monopoly’s clutches, people looked to their colonial governments to create “land banks,” where small operators could take small loans on reasonable terms. Spent by holders on purchases, land bank notes found their way into circulation, becoming a kind of currency that at times came even into the hands of the landless.

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Another thing governments could do: issue paper currency. Government notes represented amounts in metal; their value depended on people’s belief that they’d be worth roughly what was printed on them. A commonplace of American history has it that early paper currencies depreciated disastrously, but the reality is far more varied. New England had difficulty making paper finance work, but Pennsylvania successfully alleviated economic crunches using both land banks and its own paper. The trick to encouraging confidence and controlling depreciation was to issue limited amounts of the paper and then to retire it through scheduled taxes, payable in the notes themselves. Depreciation did occur, as it does today. But popular finance activists saw mild depreciation as a natural and democratic effect, benefiting debtors.

Improvised popular currencies existed, too, complementary in Rushkoff’s sense. A craft commodity like whiskey – not a mere instrument of barter but always exchangeable for gold somewhere down the line – held value well.

Merchant lenders, however, wanted to be paid in coin. They wanted the gold that, they believed, held perfect value in imperial trade and which ordinary people could rarely come up with. The people countered by pressuring governments to make paper currencies legal tender, forcing merchants to accept paper at face value for payments and principal – a kind of government program to prevent foreclosure and debt peonage. Lenders forced to take payments worth less, against gold, than when loans were made disdained paper currencies as confiscatory, rotten, mobbish, and vile, “the curse of pulp.”

Lenders may actually have contributed to financial crises by recoiling so violently from any hint of depreciation. Yet their philosophy had a certain consistency. American merchants were already calling the English government tyrannical for violating ancient rights to security in property. Now merchants feared that American governments, vulnerable to what they saw as another kind of tyranny, that of the mob, would take property in another way, through legal tender legislation and state enforced devaluation. The debtor class, for its part, had little interest in what merchants defined as the big picture.

So even as the country moved toward climactic conflict with England, a great social battle raged between American merchants and American working people over credit and currency. We’ve been distracted from that battle’s significance by historians’ relentless focus on merchants’ frustration over Parliament’s trade acts. Those acts included currency laws, which restricted paper emissions in the colonies: sometimes American merchants too had advocated issuing paper. But merchants came to hate paper’s democratizing, socially equalizing tendencies in American society. By the time American elites began relying on ordinary people for help in opposing England – especially on the people’s facility with organized protest! – working Americans’ desire for economic, social, and political equality was driving the merchants’ anxiety to a nearly hysterical pitch.

Our current financial crisis reflects those deep-seated American economic disagreements, wired into events and philosophies that gave birth to our country, were never resolved during that period, and glossed over in certified stories of our origins for more than two centuries. Many people today, of various political persuasions, will want to dismiss thinking like Rushkoff’s and Burns’, which goes far beyond finance reform and asks fundamental questions about how, and for whose benefit, we want credit and money to work in American society. To our little known 18th-century ancestors, the founding activists for democratic finance, those questions would be among the most important we could be asking.