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The essay makes a common mistake. It assumes that Greenbacks were part of a single "money supply". Specie - gold - was the only legal tender that had the universal negotiability we commonly define as a characteristic of "money". Greenbacks were, at best, a "near-money"; they could not be used, for example, to pay U.S.customs duties - the principal source of income for the U.S. government. By regularly selling the gold that the Treasury collected in customs receipts Boutwell was adding to the "money supply", not contracting it. The Contraction Act had been enacted because then, as now, the citizens of the country were concerned about the further expansion of Federal debt, which had already exploded during the Civil War. The Greenbacks, which did not even pay interest, were seen as the worst part of that spending spree. Their retirement cannot in any sense be described as “open market operations”; in that world, unlike this one, the government's own debts were not considered to be money.
The only comment that can be added to Michael's extraordinarily fine essay is this: the people who promoted this folly were as mad as the people who think that a war will pay for itself. FNM and FRE's destroying underwriting standards was justified no matter what the cost because, it was hoped, the price would be paid by the enemy - those awful people who lived in nice neighborhoods and could afford mortgages. Barney Frank is right to claim victory. As Michael has explained, it is the prudent and thrifty who will end up paying for this latest attempt to make war on a social problem.
Toggle Commented May 28, 2010 on 'Who Benefits?' at Financial Armageddon
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May 27, 2010