Comment: What was occurring in the

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What was occurring in the

What was occurring in the Colonies was essentially the same as what is taking place today. The Colonies were doing little more than creating a "stimulus", creating scrip to stimulate economic commerce. But, just as we are witnessing today, there is an initial feeling of "good times are here again", but eventually it loses its luster. It creates what amounts to an illusionary economy and that is exactly what happened in the Colonies.

As I have stated numerous times on the DP under various articles on the subject of gold verses fiat currencies, one of my favorite historic economist, David Hume addressed the mechanics of inflation in several essays during the mid-1700s, the Founders were well versed in the works of David Hume. Hume stated that when a new influx of money enters the economy, that initially there is a gain, the appearance of growth and prosperity, but, at the beginning, the money does not impact all prices within the economy because it takes time for the "new money" to circulate, thus, in the beginning, prices rise by degrees, gradually, until all prices are increased throughout the economy in proportion to the amount of new money issued.

Usually however, the last increase is in wages, this does not pose a problem until there is an ever-increasing amount of new money issued into the economy and the rate of price increases out-strip wages to the point that it becomes increasingly difficult for the wage-earner to maintain a decent standard of living. Thus, inflation causes a rise in prices while at the same time reducing the real purchase value of each of the monetary units in the possession of the people. Now, this system works for a while, indeed, pressures increase on employers to the point that wages are increased, but no one is better off then they were before because the effects of the stimulus of fiat monetary inflation has equalized. There are essentially no lasting positive effects and, as time goes by, the official issue of more and more paper money takes on a very different scale of operation within the economy. There comes a time, as it did in the Colonies, when the issue of paper scrip was so drastic that mere inflation turned into hyper-inflation.

Indeed, the outrage of this growing threat of inflation caused many within the Colonies to address that issue with the Crown and thus the various attempts at reform in 1751 and 1763 were made. Contrary to the assertions within the above article, it was not that the Crown wished to deprive the Colonies of prosperity, it depended upon a prosperous Colonial system for its own welfare. The drastic degree of inflation that took place in the Colonies not only hurt the common people of the Colonies, but it damaged trade and commerce. The attempt by the Crown was to gradually reduce the level at which the Colonies issued scrip, the time-table for such reduction was to be several decades, not suddenly. Thus, the Crown did not simply issue an edict for the Colonies to immediately stop the issue of scrip, as is asserted, the currency reforms were to take place over a period of time.

The problem was that the Colonies, like our government today, was that the supply of scrip was increased so rapidly during the early portion of the 1700s, that the effects of inflation turned into hyper-inflation. Thus, the economy of the Colonies was beset by an increasingly vicious spiral of ever-increasing prices, followed by rising wages, again and again, the people were being subjected to the uncertainty of the pricing structure within the economy, business could not make future decisions because of the fact that there was such a great unknown in the pricing structure within the economy.

Like our economy today, commerce in certain sectors comes to depend in a new influx of fiat currency to effect the illusion of growth and indeed profit, but it is just illusionary and it eventually becomes obvious that it is unsustainable, the boom becomes a bust.

When looking at the economy of the Colonies during that period, it is easy to make comparisons to our own economy. With every issue of new currency, the same type of people got the real benefits from the issue, the bankers, investors and politicians reap the real rewards and are able to invest, make purchase with the new issue before inflationary depreciation takes place and the currency loses more of its purchasing power. Banks find themselves with more money to lend, the demand for investment rises, construction increases.

Misallocation of resources, mal-investment and down-right fraud becomes common-place. Eventually, everything becomes dependent upon the expansion of the money supply, it happened the same way in the Colonies as it is and has happened in our own modern economy under the auspices of the Federal Reserve. It doesn't matter who does it, whether it is the FED or the Congress, the effects are always the same when there is the ability to simply print currency without limitation or restriction. The entire economic substructure begins to crumble from either the reduction of stimulus or when the rate of monetary inflation reaches hyper-inflationary proportions, as was the case in the Colonies.

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