The dedication to Alexander Hamilton signaled right away that Money was going in the right direction. We all know that Hamilton was an extraordinary financial engineer. Among other things, he established a federal sinking fund to finance the Revolutionary War debt. Hamilton also engineered a large debt swap in which the debts of individual states were assumed by the newly created federal government. Hamilton’s ability to solve the debt problem established America’s financial credibility and gave the new nation a much needed positive confidence shock. We are also aware of the fact that Hamilton was a great contributor to the Federalist Papers — a superb document. Indeed, no less than Milton Friedman once wrote in Newsweek (June 4, 1973) that Federalist Paper 15 “contains a more cogent analysis of the European Common Market than any I have seen from the pen of a modern writer.”
What we do not all know, particularly many of those who espouse the sanctity of private property rights, is that Hamilton was a distinguished lawyer who took on some of the most famous property cases in U.S. legal history. After the Revolutionary War, the state of New York enacted harsh measures against Loyalist and British subjects. These included the Confiscation Act (1779), the Citation Act (1782), and the Trespass Act (1783). All involved the seizure of property and garnered wide public support. Hamilton saw the acts as an illustration of the inherent difference between democracy and law. Hamilton took his views to court and successfully defended, in the face of enormous public hostility, those who had their property taken under the three New York state statutes.
Speaking of the taking of property and money — right here in the USA, not the USSR — let us not forget the U.S. Congress’ abrogation of the Gold Clauses in June 1933; a confiscation of property that the Supreme Court upheld in 1935.
Before that abrogation, private and public bond covenants included gold clauses. Under this system, bond holders received interest and principal payments in dollars that contained as much gold as the dollar contained when the bonds were issued. Well, after April 1933, the U.S. government manipulated the price of gold upward until President Roosevelt redefined the dollar in gold terms under the Gold Reserve Act of January 1934. Overnight, the dollar became 41% lighter. This left gold‐clause bond holders out to dry.
Because of the Congress’ abrogation of the gold clauses, bondholders could only receive the nominal dollar amounts of interest and principal, as stated on their bonds. They could not receive enough additional dollars to make their payments equal in value to the amount of gold originally stipulated. In short, bondholders were stuck with new “light” dollars, not the original “heavy” ones that had been specified in the original bond covenants.
Of course Bondholders sued over this theft. But, the Supreme Court held that the abrogation of the gold clauses for private bonds was constitutional in 1935. The Court’s decision rested on the fallacious argument that contracts that contained the gold clauses interfered with Congress’ authority to coin money and regulate its value (Article 1, Section 8 of the U.S. Constitution).
For bonds issued by the U.S. government, the situation was different because Congress did not have the authority to repudiate obligations of the U.S. government. But, because the legal briefs were defective in proving actual damages, the plaintiffs who had held U.S. government bonds “protected” by gold clauses could not collect damages from the U.S. government.
In anticipation of additional gold‐clause cases, Congress simply passed a law amending the jurisdiction of federal courts, barring them from hearing any further gold‐clause cases. Every time I reflect on this Congressional maneuver, Paul McCartney’s classic “Back in the USSR” rings in my ears. Yes, when it comes to money, the rule of law is rather elastic (particularly during National Emergencies), even in the U.S..
This elasticity in the rule of law with regard to money is not limited to the U.S., however. Even Germany has witnessed this elasticity: under the European Monetary System’s (EMS) exchange rate mechanism (ERM), which was established in December 1978, the Bundesbank was required by law to intervene with unlimited amounts of Deutschmark sales and foreign currency purchases, whenever another member country’s currency reached the ERM’s floor.
Well, the mighty Bundesbank could not bear the thought of such an external interference with its conduct of monetary policy. So, on November 16, 1978, prior to the final EMS agreement, Herr Emminger, President of the Bundesbank, sent a missive to the West German Chancellor Helmut Schmidt. The missive states that the Bundesbank wanted to be freed from its obligation to intervene during a currency crisis.
The Chancellor wanted an EMS agreement, which was ultimately agreed to by resolution of the European Council at a meeting in Breman on December 5, 1978. But, what to do about the Bundesbank? On November 30, 1978, the Chancellor complied with the Bundesbank’s wishes by initialing the Emminger letter, before he signed the EMS agreement. But, he also told the Bundesbank Council that the Emminger letter must remain secret and not be part of the EMS agreement — yes, a secret agreement.
The Chancellor further stated that all this agreement was allowable under the classical legal exemption clause: “Clausula rebus sic stantibus” (For those of you who aren’t Latin lovers: treaties may become inapplicable because of changes in circumstances).
Well, the Bundesbank trotted out the Emminger letter 14 years later. On Friday September 11, 1992, the Bundesbank indicated that, on Monday, it would stop supporting the hapless Italian lira. This forced a devaluation of the lira over the weekend and helped spark the run on the British pound on “Black Wednesday,” September 16th — the day both Italy and the U.K. were forced to leave the ERM. In case you have forgotten, this was the event that allowed George Soros to fill his pockets in a few minutes.
It is clear that Forbes and Ames have taken the water in Vienna, or perhaps in Baden bei Wien. Indeed, Money contains many Austrian themes:
- Forbes and Ames reject the closed economy model. Like Bob Mundell, who once said that the only closed economy is the world, Forbes and Ames embrace an open economy framework. This outlook is in sharp contrast to our last Fed Chairman Ben Bernanke. Bernanke did not even include the USD/EUR exchange rate (the most important price in the world) on his six‐gauge dashboard.
- Forbes and Ames junk the idea of equilibrium and economic stability.
- Also, they embrace the central role of the entrepreneur in markets that are seen as a means to assemble dispersed knowledge and information.
- As Forbes and Ames say, “Information combined with trade and enterprise: that says everything one really needs to know about economics. Money — sound, trustworthy money — is the crucial facilitator that brings it all together.” Totally Austrian, indeed.
For those who do not like to get out in the theoretical weeds and want a more practical takeaway from Money, allow me to quote from Paul Volcker’s preface to Marjorie Deane and Robert Pringle’s 1995 book The Central Banks. Volcker’s edifying preface captures both the substance and spirit of Money: