A Virginia Currency, Jefferson on Financial Speculation

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It appears that Virginia is the latest state to take steps toward adopting some sort of metallic currency as lawmakers recently approved a measure to study the creation of alternate money in gold and silver coin form. This follows similar moves by other states in recent years that included the decision last year by the state of Utah to recognize gold and silver coins from the U.S. mint as legal tender.

What’s interesting about the development in Virginia is that the state has a long history of favoring sound money and eschewing debt that goes all the way back to the founding fathers, something that I’ve taken a keen interest in lately. This New York Sun story from last week provides some context:

New York SunThe chairman of the convention that wrote the Constitution, George Washington, the so-called “father of the Constitution,” James Madison, and the author of the Declaration of Independence, Thomas Jefferson, were, after all, all Virginians.

They were also of the view that gold and silver are the true money. Washington warned that paper money always has the effect “to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.” Jefferson called specie — meaning gold and silver “the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war.” Madison had a similar view.

Back when the country was founded, there was a great debate over the role of money and debt as the “Federalists”, led by Alexander Hamilton, opposed the Virginia “Republicans” on these matters at every turn. Along with slavery and whether the newly formed nation should count Britain or France as their top international ally, the nation’s money and debt were major “wedge issues” dividing the north and the south.

For more on this, it’s instructive to examine the details behind one of the “grand bargains” during George Washington’s first term as president – when Hamilton was Treasury Secretary and Jefferson was Secretary of State – for anyone wondering why the nation’s capital is located where it is.

It  was the the establishment of a national bank and the assumption of state debt (incurred during the revolutionary war) by the federal government that led to the creation of Washington D.C. next to Virginia and this excerpt from Jon Meacham’s excellent Thomas Jefferson: The Art of Power about a meeting between Hamilton, Jefferson, and Madison fills in some important details.

Jefferson Art of PowerAt dinner, Madison agreed to ease his opposition to assumption and leave it to its fate in the Congress. A victory for Hamilton. In Jefferson’s account, either Madison or Hamilton then said that, “As the pill would be a bitter one to the southern states, something should be done to soothe them”.

The capitol ought to be cited along the Potomac. The final result, Jefferson believed, was the least bad of all the turns that they could take.

It was true that he hated the financial speculation that would result from the Hamiltonian vision of commerce. “It is much to be wished that every discouragement should be thrown in the way of men who undertake to trade without capital”, Jefferson said. “The consumers pay for it in the end and the debts contracted and the bankruptcies occasioned by such commercial adventurers bring burden and disgrace on our country.”

This marked the first expansion of U.S. government debt, something that Hamilton favored for a variety of reasons, one of which was that he often marveled at the ability of Britain to borrow money to finance wars. As Treasury Secretary, Hamilton modeled the U.S. financial system on what the British had done (which was quite successful at the time), much to the chagrin of the Virginians who favored a much simpler approach.

I’ve purchased, but not yet started, Ron Chernow’s Alexander Hamilton, but, after reading about him through the eyes of Washington, Adams, and Jefferson, it’s unlikely that my very negative impression will change.

Source: Iacono Research

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About Tim Iacono