Counterfeiting in the Revolutionary War, the American Civil War and World War II

Posted by PITHOCRATES - September 24th, 2013

History 101

Governments often turn to Printing Money to Pay for War

It takes money to wage war.  A lot of it.  War spending is always a country’s greatest expenditure.  Because fighting wars is costly.  And the longer they last the more costly they become.  Pushing countries that are waging war to the brink of financial collapse.  Opening the door for another means of waging war.  Counterfeiting.

How do you wage war with counterfeiting?  By pushing a country’s economy into a financial collapse.  If you can’t defeat your enemy with bullets and bombs you destroy their ability to make bullets and bombs.  And everything else.  Including food.  And you do this by devaluing a country’s currency by flooding the money supply with counterfeit bills.  Increasing the money supply causes inflation by having more dollars available to buy the same amount of goods.  Requiring more and more dollars to buy those same goods.  Thus raising prices.

As people struggle with rising prices they buy less.  Because they lose purchasing power.  Businesses see their sales revenue fall.  As people have less disposable income to buy their goods.  With falling sales they lay off workers.  All of this causes a dramatic fall in tax revenue.  Just when they need more to pay the costs of waging war.  As well as providing relief for those no longer able to afford food and housing because they lost their jobs.  Which is why governments print money during wars.  As it is the only choice they have to pay for the high costs of a nation at war.

By the End of the American Civil War about Half of all Money in Circulation was Counterfeit

One of the problems the British had during the American Revolutionary War was that it turned into a world war.  The British were also fighting the French and the Spanish.  Their entering the conflict stretched the British resources thin.  So they turned to counterfeiting.  The Americans were already suffering a terrible inflation as the Continental Congress had little choice but to turn to printing money to pay for the war.  They printed so many continental dollars that people began to refuse to accept it in payment.  Making the continental dollar more and more worthless.  Hence the expression ‘not worth a continental’.  The British tried to push the American economy into collapse by adding to that currency devaluation.  It was so destructive to the American cause that General Washington hanged counterfeiters.

During the early years of the American Civil War the North was running through her gold reserves.  So Congress passed the Legal Tender Act (2/24/1862).  Authorizing the printing of paper money to pay for war.  Just like they did during the Revolutionary War.  A new national currency was a counterfeiter’s dream.  Instead of different banks issuing different banknotes across the country there was now only one.  Counterfeits were easy to pass as few could tell a real one from a fake one.  And with the Confederate dollar worthless even the Confederates wanted these new dollars.  To buy things the Confederate dollar no longer could.  The new counterfeits were even easier to pass in the South as there was no official currency trading hands there.  Counterfeiting was so bad (by the end of the Civil War about half of all the money in circulation was counterfeit) that the Lincoln administration created the Secret Service to combat it.

The Nazis tried to bomb Britain into submission during World War II.  Or at least to weaken it enough for a cross-channel invasion.  The only problem with their plan was that the British had the Supermarine Spitfire.  One of the greatest fighter planes of the war.  And some of the finest pilots ever to fly.  Who had an able assist from the new radar.  Allowing these few to defeat the Luftwaffe in the Battle of Britain.  And made the cross-channel invasion impossible.  It’s these few Winston Churchill’s “Never in the field of human conflict was so much owed by so many to so few” refer to.

Counterfeiting is a very Effective Way to Wage War while being Cheaper and Less Risky than Conventional War

The Nazis took a beating in the Battle of Britain.  So Hitler turned his war machine eastward.  And invaded the Soviet Union instead.  But he did not give up on Britain.  For Britain was a great thorn in Hitler’s side.  They were in the Mediterranean and North Africa.  And they were producing oil in Iran.  They had the shipping lanes.  As well as the United States as an ally.  Who was feeding food and war material to Britain.  And using that island nation to base their bombers out of.  As well as building up an invasion force there that would one day open up a second front in the West.  Enter Operation Bernhard.

Operation Bernhard was a Nazi plan to flood the British economy with counterfeit money.  To destabilize the British economy.  And push it into collapse.  They set up operations in concentration camps.  And were printing about 1 million counterfeit banknotes a month.  The Nazis then laundered the money.  And used it to buy the war material they needed.  The counterfeits were so good that they were still turning up in Britain a decade after the war.  Forcing the British to withdraw all notes (larger than £5) from circulation and replacing them with a more counterfeit-proof money.

The Nazis turned to the American dollar in 1945.  They set up printing presses in February.  But they cancelled their plans.  The war ended later that year.  Allowing the Americans to escape the economic damage the British suffered at the hands of the Nazi counterfeiting program.  But the idea lives on.  We see ‘superdollars’ (counterfeits so good that their quality is higher than the original) all over the world.  The U.S. suspects the source of these counterfeits are criminal gangs in Iran, Russia, China or Syria.  While suspecting the government of North Korea producing a share of these superdollars.  We don’t know for certain who is creating this counterfeit money but there is a lot of it out there.  Some may be doing it for financial gain.  While others may be doing it to damage the United States economically.  Whatever the reason the result is the same.  Resulting in the scourge of paper money.  Higher inflation.  Currency devaluation.  Higher prices.  And less economic activity.  Possibly even sending the economy into a deep recession.  Everything an enemy of the United States wants to do to the United States.  Making counterfeiting a very effective way to wage war while being cheaper and less risky than conventional war.

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Quantitative Easing, Inflation and Gold

Posted by PITHOCRATES - September 23rd, 2013

Economics 101

The FOMC makes Money out of Nothing to Buy the Bonds for their Quantitative Easing

The Federal Open Market Committee (FOMC) decided to keep their quantitative easing.  Their monthly $85 billion purchase of Treasury Securities and mortgage bonds.  To stimulate the economy.  Which hasn’t stimulated the economy.  But it has greatly expanded the money supply.

When people buy Treasury Securities and mortgage bonds they have to first work and save up the money.  Then when they buy these investments they no longer have that money.  It’s how we buy things.  We exchange money for things.  So we can have the money or the things.  But never both.

Unless you’re the federal government.  That has the power to print money.  When they make these monthly $85 million purchases of Treasury Securities and mortgage bonds they pay for them with an electronic transfer of money.  They add money to the account of the holders of the Treasury Securities and mortgage bonds.  And that’s it.  They subtract no money from their ledgers.  Because they ‘printed’ that money.  Just made it out of nothing.  Literally.

The Danger of a highly Inflated and Devalued Currency is that it loses its Purchasing Power and People lose Faith in It

The Secret Service protects our presidents.  Ironically, the president that created the Secret Service was assassinated.  Abraham Lincoln.  Who created it not to protect presidents.  But to combat a great threat to the country.  Counterfeiting.  The scourge of paper money.

During the American Revolutionary War the Continental Congress had no hard money (i.e., precious metals) to pay the Continental Army.  So they resorted to printing paper money.  Igniting massive inflation.  The more money they printed the greater the inflation.  And the greater they devalued the dollar.  Requiring more and more of them to buy what they once did.  Until no one would accept them in payment anymore.  Forcing the army to take what they needed from the people.  Leaving behind IOUs for the Congress to honor.  Once they figured out how to do that.

This is the danger of a highly inflated and devalued currency.  It loses its purchasing power.  Until it gets so weak that the people lose faith in it.  And refuse to accept it anymore.  Returning to the barter system instead.  Trading things that hold their value for other valuable things.  But the barter system has high search costs.  It takes a lot of time for people to find each other that can trade with each other.  Greatly reducing economic activity.  And crashing a nation’s economy.  Which is what Abraham Lincoln wanted to prevent.  And why a lot of America’s enemies have tried to flood the American economy with counterfeit bills.

The Hard-Money Prices remained Relatively Constant during the Inflationary Periods of the Revolutionary War

With the FOMC’s decision to continue their quantitative easing the stock market soared.  As investors were instead expecting a ‘tapering’.  A reduction in their purchases of Treasury Securities and mortgage bonds.  And if the government stopped creating this money out of nothing to buy bonds from these investors these investors could not continue to buy and sell in the market like they were doing.  Pocketing handsome profits in the process.  Which is why they were so happy to hear the FOMC would continue their currency devaluation to continue buying like they had been.

But this continued currency devaluation has a down side.  For it can’t go on forever.  There will come a point when it ignites inflation.  Causing prices to soar.  Requiring more and more dollars to buy what they once bought before.  So with this possibility on the horizon and with continued currency devaluation some people were taking steps to protect their assets.  Especially their cash.  For there is nothing worse than having a lot of cash when it’s losing its purchasing power at an alarming rate.  So they convert that cash into something that holds it value better.  Such as precious metals.  Which is why when the dollar tanked (after the FOMC decision) the price of gold surged.

So what’s the difference between gold and paper money?  Well, the government can’t print gold.  They can’t create gold out of nothing and add it to someone’s account.  So they can’t devalue gold.  And because of this gold will hold its value during inflationary periods.  Which was why during the Revolutionary War people sold things with two prices.  One was in paper Continental Dollars.  With these prices increasing sometimes daily.  And one in hard money (i.e., precious metals).  The hard money prices remained relatively constant.  Even during the inflationary periods of the Revolutionary War.

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A Weak Currency may Boost Exports but it will Raise all Prices Businesses and Consumers Pay

Posted by PITHOCRATES - February 24th, 2013

Week in Review

China created a booming economy thanks to a healthy export market.  In part because of their cheap labor.  An in part by keeping their currency weak.  For when you buy goods from China you first have to exchange your currency for theirs.  If your currency is stronger than theirs is you will get a lot more of theirs in exchange for yours.  Allowing you to buy a lot more Chinese goods with your stronger currency.  This is why China likes to have a weak currency.  And takes actions to keep it artificially weak.  Something her trading partners don’t like.  For their weaker currency tends to make the net flow of goods in international trade with China flowing from China to everyone else.  Thus giving China a healthy export market.  At the expense of everyone else’s export market.

But China is a developing economy.  Things change when you become an advanced economy.  Because you don’t have impoverished masses filling your factories manufacturing goods for export.  You have a thriving middle class.  With a high standard of living.  With good jobs giving them disposable income.  And few of them work in the export economy.  So despite all the talk about unfair trade practices of China most people in an advanced economy don’t worry that much about trade deficits.  For they’re buying a lot of imported goods.  From smartphones to coffee beans.  And a weak currency makes these items more expensive.

So there are two sides to the value of your currency.  If you have impoverished masses filling factories to build export goods a weak currency is good.  It lets the state sell more of those export goods.  In an export-dominated economy.  And provides a lot of low-paid factory jobs.  If you have a thriving middle class a strong currency is good.  For it lets the people buy a lot of stuff.  Creating a lot of better paying non-factory jobs.  In a non-export-dominated economy.  Basically the difference between free market capitalism.  And mercantilism (see Is the World on the Brink of a Currency War? by Michael Sivy posted 2/21/2013 on Time).

Currency wars – and trade wars generally – have their origins in a 17th and 18th century economic theory known as mercantilism. The idea was that a country’s wealth comes from selling more than it buys. A colonial empire could achieve this positive balance of trade by acquiring cheap raw materials from its colonies and then ensuring that it exported more finished goods than it imported. This was usually accomplished with tariffs that made imports very expensive.

Such an approach couldn’t work in the modern world. Countries don’t get cheap raw materials from colonies anymore. They have to buy them – especially oil – on the open market. So while currency devaluation makes exports cheaper for foreign buyers, it also makes essential imports more expensive. For Europe in particular, which imports so much of its energy, devaluation isn’t necessarily a plus…

The Federal Reserve’s quantitative easing – buying bonds to swell the money supply – is aimed principally at stimulating domestic demand. European advocates of a cheaper euro currency, meanwhile, are hoping to make national debt easier to finance, not trying to pump up exports. In fact, the continent’s greatest exporter, Germany, is the country least amenable to currency devaluation…

So forget all the talk of a currency war. What’s going on has nothing to do with trade and everything to do with debt and growth and inflation. If the global economy is in danger of reliving the past, it will not be a repeat of the 1930s. Rather, it will be a repeat of the 1970s, when the Federal Reserve expanded the money supply to offset the economic slowdown caused by the oil crisis – and ended up encouraging double-digit inflation.

The double-digit inflation of the Seventies really devalued the currency.  Raised prices.  Greatly limiting the amount of stuff people could buy.  Even though printing money then didn’t work these nations believe it will work now.  Because it will make their exports cheaper for foreigners to buy.  Despite making everything more expensive inside their own country.

But there is another reason they love to print money.  It lets them spend more.  And it makes old debt easier to pay off.  We call it monetizing the debt.  For example, if a nation has a GDP of $1 million and a debt of $500,000 that debt is huge.  It’s 50% of GDP.  But if we turn on the printing presses and devalue the currency to one tenth of its original value that GDP is now $10 million ($1 million divided by 1/10).  Making that outstanding debt only 5% of GDP.  And a whole lot easier to repay.  But what is one person’s debt is another person’s retirement savings.  So not only does inflation increase prices it destroys our retirement savings.  And all this just so we can boost the small sliver of our economy we call exports.

If this is so bad on so many levels why do governments print money then?  For one simple reason.  To get people to vote for them.  Because all the people see is the free stuff the politicians are giving them.  The damage it causes comes later.  And they can always blame that on Republicans.  Who refuse to raise tax rates on rich people to make them pay their fair share.

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LESSONS LEARNED #39: “Socialism is easier said than done.” -Old Pithy

Posted by PITHOCRATES - November 11th, 2010

The Bolshevik Revolution Gave Russian Peasants Freedom.  And Famine.

Russia was one of the most backward nations at the turn of the 20th century.  Feudalism was still the economic model.  The only European nation still using it.  There were two Russias.  Hungry and impoverished peasants.  And a rich and well-fed ruling elite.  Then World War I came.  Russia bled on the Eastern Front.  There was a lot of discontent.  Germany took advantage of this by returning the exiled Vladimir Lenin to Russia via Germany.  And it worked.  Marxist revolutionary fervor forced Tsar Nicholas II to abdicate.  Russia pulled out of the war.  Lenin led the Marxist Bolshevik Revolution against capitalism.  White and Red Russia plunged into civil war.  And a few assassination attempts later, Joseph Stalin launched the Red Terror to kill all enemies of the Soviet state.  Including the Romanov family.  When Lenin died, Stalin consolidated his power.  Through terror.  And he would rule by terror.

With capitalism suppressed, Stalin was ready to build the new socialist/communist state.  He industrialized the state (with foreign engineering and machinery).  He collectivized farms to increase output.  Soviet industry made a great leap forward.  But the cost was devastating.  Famine.  Forced deportations.  Terror.  Millions died.  And the quality of life for the common Russian peasant went into the toilet.  Anyone who complained was an enemy of the state.  There were chronic grain shortages.  Which were blamed on farmers hiding grain to force prices higher.  The solution?  Stalin deported or executed these farmers as enemies of the state.  But they never found any ‘hidden’ grain.

Dictators rise to power through terror and violence.  And they hold power by even more terror and violence.  To silence their enemies.  These enemies of the state.  You see, if you disagree with the dictator, you disagree with the state.  For they are one and the same.  So they get a little testy when their policies fail.  They blame others.  Attack those who are clinging to capitalism and liberty.  Who don’t submit themselves completely to the state.  And herein lies their fatal flaw.  Slaves don’t willingly work for the greater good.  They only do the bare minimum to minimize their pain and suffering.  Either the work or the state will kill them.  They know that.  So they work hard enough to keep the state from killing them.  But not too hard that the work does.  It’s a bleak world.  But that is the life of the slave.

China’s Great Leap Forward Resulted in Even Greater Famines

The communist/socialist movement spilled over into China from Russia.  Mao Tse-tung rose to power much like Stalin.  Ruthlessly.  He industrialized China.  And collectivized their farms into giant collective communes.  He forced peasant farmers into these communes.  Which lowered the quality of life for millions.  The result?  China’s industrial output did increase.  But, like in Russia, the cost was devastating.

The Great Leap Forward was their second five-year plan.  The plan was to increase grain harvests by using the power of the state to collectivize and direct giant farming communes.  Party members (i.e., career politicians who kissed communist ass) ran these communes.  They reported to Mao.  None of them were farmers, though.  But they acted like they were.  Trying some screwy new ideas that only reduced the harvest.  But, being good party men, they lied.  They reported record harvests.  As the lying went up the party chain of bureaucracy, party leaders made decisions based on the lie.  They took so much of the harvest for party members, cities and for export that the peasant farmers working on the communes starved in history’s greatest famines.  Note that ‘famines’ is plural.  Yeah, it was that bad.  Tens of millions starved to death.  All in the name of helping the poor and oppressed.

Everyone lives in fear in a totalitarian state.  Even members in the ruling elite.  The communes were supposed to increase the harvest.  So those responsible for that increase lied.  To minimize their own pain and suffering.  For they knew if they failed the greater common good, the state would come after them.  So they protected themselves.  At the expense of the peasant.  The life of the peasant/proletariat only got worse.  The Bolshevik Revolution was supposed to free them from the oppression of the bourgeois capitalists.  It only oppressed them more.

Using Capitalism to Attack Capitalism

The socialists/communists learned some valuable lessons.  Although they may be good at terror and violence, they didn’t have any real talent or ability.  And though they hate capitalism (because they lack any real talent or ability), they understood that they needed capitalists to be their bitch.  They couldn’t kill them.  Because if they did, nothing would get done.  No wealth created.  And they needed these people to create wealth.  Because they can’t take wealth if the wealth creators don’t create it.  With no wealth to take, they have nothing to give the masses.  To keep them dependent.  And subdued.  So this was the next phase in the socialist/communist revolution.  To exploit the wealth creators for state gain.

The social democracies followed the same general plan.  Attack capitalism.  Oppress the poor by making them dependent on the state.  But instead of using physical fear and intimidation, they used psychological fear and intimidation.  At election time.  They, the compassionate state, wanted to give them stuff.  The mean, cold-hearted capitalists wanted to take away their Social Security.  Eat their children.  And other nasty things.  It worked.  It got votes.

The problem they ran into was that populations grow.  And costs go up.  That meant the social democracies had to give more and more people these ‘benefits’.  While at the same time the costs of these ‘benefits’ kept going up.  And herein lies their fatal flaw.  To keep the people dependent (and docile) you have to keep raising taxes.  But if you raise taxes too much, you kill the golden goose.  Because you can push the wealth producers only so far.  If the state makes them work harder for less so others can enjoy the fruit of their labors, the state is for all intents and purposes enslaving these wealth producers.  And what do we know about slaves?  They don’t willingly work for the greater good.  They do the bare minimum to minimize their pain and suffering. 

Communist China Concerned About the United States’ Anti-Capitalistic Behavior

There are all sorts of ways they can do this.  If the cost of hiring employees is too great, businesses will hire fewer employees.  If taxes are too high, people will cut back on their spending and businesses will lay off workers because of the weaker demand.  If the investment climate is too unfavorable (say, because of a high capital gains tax), investors will invest their money where the climate is more favorable (and not create jobs).  If taxes get too high, the economy will go underground where people pay no taxes.  As more of this happens, the government collects less and less in taxes.  They get to a point where they simply can’t raise them anymore.  So they borrow.  And when they borrow to excess and cannot borrow any more, they have to do the unthinkable.  Cut the benefits that have so successfully enslaved so many people to the government.  And when governments try, the enslaved fight back.

Following the financial crisis of 2008, some debt-ridden nations tried to do just that.  Cut benefits to avoid bankruptcy.  Greece tried.  France, too.  Both had riots.  Other nations are at the tipping point.  Great Britain is making draconian cuts that the people aren’t too happy with.  Ireland is staring down bankruptcy and may need a Greece-like bailout.  (Interestingly, Ireland’s problems don’t stem from a fat social welfare state.  Their troubles resulted from a real estate bubble fueled by the European Central Bank keeping interest rates low.  They, like the U.S., saw no downside in cheap, risky mortgages.)  And, of course, Communist China is lecturing the United States about the evils of currency devaluation as a solution to our problems.  Which we’re doing.  In a last-ditch attempt to stimulate our economy.  A weaker dollar would help.  It would make our exports cheaper.  And make our massive debt cheaper to pay off.  Which really concerns the Chinese as they’re holding the majority of that debt.  So they are not going to sit idly by while we slash the value of their U.S. holdings.  They’ll fight back.   And do whatever it takes (capital controls, tariffs, etc.) to protect their investment.

Whether by physical fear and intimidation or by bribery and deceit, socialism ends the same.  In failure.  For it to work people have to work hard so others can live better.  And people just don’t willingly submit to slavery.  When they’re forced into it, they do the bare minimum to minimize their pain and suffering.  And when people do, the economy will never reach its full potential.  Which is why the United States won the Cold War.  Capitalism encourages people to do their best.  Socialism encourages them to do the least they can get away with.  And you just don’t achieve greatness with mediocrity.

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