Virtual Money Presents Real Legal Problems

By Thomas Claburn
InformationWeek
Monday, March 1, 2010

http://www.informationweek.com/news/software/showArticle.jhtml?articleID=223101009

Introducing a virtual currency in an online game or social Web site isn't simply a way to print money without paper.

Virtual money has real value and companies that operate online games, having recognized that selling nothing for something can create a profitable revenue stream, are rushing to cash-in on the imaginary economy.

The signs are everywhere. On February 25, social monetization company gWallet introduced the gWallet Brand Bar, an interactive banner ad that appears at the top of browser-based game screens to make interactions involving virtual currency easier. Gurbaksh Chahal, CEO and founder of gWallet, called virtual currency "a thriving industry."

On February 18, Facebook and PayPal said that PayPal had become a payment option for Facebook Credits, the virtual currency used in a rising number of Facebook games.

"Today more than 500,000 applications exist on Facebook, and the virtual goods within those applications (particularly games) have become an increasingly valuable part of the user experience," explained Deborah Liu, a product marketer on the Facebook Developer Network team, in a blog post last week week. "By providing a single, cross-application currency, our goal is to making transactions simpler for users, leading to a higher conversion rate for developers."

Facebook has been testing Facebook Credits with a select number of large developers, including Crowdstar, Playdom, Playfish, RockYou, 6waves, and Zynga. It plans to invite additional developers into its program in the months ahead.

On February 9, Offerpal Media, a virtual currency distributor, introduced "Offerpal Tasks," a way for consumers to collect virtual currency for online games and social networks in exchange for the completion of Amazon Mechanical Turk jobs.

Dax Hansen, a partner in law firm Perkins Coie's Electronic Financial Services practice, observes that "points," "coins," "bucks," and other forms of virtual currency are becoming commonplace at online gaming sites, social media sites, and among retailers and other businesses.

Read the rest of the article.

For further reading:
"Seed Money", Douglas Quenqua, OMMA, March 1, 2010
"Virtual Currencies: Real Legal Issues for Retailers", J. Dax Hansen, RetailingToday.com, February 26, 2010

Toward A Private Digital Economy

In April 2004, Wavyhill and Andre Goldman published a landmark achievement in the movement towards anonymous digital cash entitled, "Toward A Private Digital Economy: Trusted Transactions in an Anonymous World". The video presentation from DEF CON 12 can be seen here. It is significant in that it is one of the few written pieces that anticipates the forced closure of digital-issuing mints by the authorities. What is explored is the establishment of a trusted central mint that operates anonymously and therefore can remain operational in the face of direct governmental threats and assaults. From the abstract:

"Currently available financial privacy tools have drawbacks arising from centralized ownership and control, and the limitations of presenting specific services. A better approach would be to construct a fully distributed environment for economic activity which mimics the way cash is used in the physical world but is private, anonymous, trusted, and indestructible. A key to this variety is the element of locale, which we will explain in some detail."

"We will introduce a 'Farmer's Market' model of anonymous commerce and expand it into a detailed functional description. We will explore business models viable in this environment and ways to connect them to the transparent banking world."

"An anonymous economy must resolve issues of trust and reputation to be practical. We show how properties of number can be used to derive an 'algebra of trust' and exploited to reduce risk in anonymous transactions. Once reduced to a number, trust, like any other asset, can be quantified, evaluated, commoditized and even used as a currency. Algorithms that distribute data storage can distribute risk and trust once they are reduced to data. These things may overcome some of the barriers to the wide adoption of a private digital economy."

Building on the Digital Monetary Trust due largely to J. Orlin Grabbe, the authors further anticipate that in order to have a reliable trusted issuing mint that is both anonymous and not geographically locatable, it is necessary to provide a mechanism for distributed trust and auditing provisions that do not compromise the anonymity or location of the issuing entity. This function is accomplished through a series of third-parties known as a guild of bondsmen, escrow agents, and fair witnesses. The bondsmen have access to an auditing process that does not put the assets at risk of seizure while still providing enough assurances to the financial integrity of the currency issuance. From the article:

Bondsman - This is a special case of insurance but one that merits special treatment. An insurer sells safety. A bondsman sells trust, the most precious commodity in the anonymous world. He sells it in the form of a promise to pay for losses incurred by a third party due to the non-performance of his client. The client posts a bond, assets worth some fraction of the amount at risk, depending on the bondsman's perception of that risk. There will be a non-returnable fee for the service. Where does the bondsman get his stock in trade? Some of it comes from his track record. In this business, reputation is literally as good as gold. Risk and trust are two sides of the same coin. He can distribute his risk (and gain trust) by posting secondary bonds with other bondsmen. The promise of 10 people to cover an obligation conveys more trust than the promise of any one person, hence the value of co-signers to a loan, trust is additive. Others have used the term “web of trust”. We introduce a related concept, the “web of bonds”. A guild of bondsmen backing each other generates more trust than the sum of the parts, because trust is associative. A bondsman's profit margin must be relatively large, in proportion to his risk. In section V we show how that proportion can be formally derived.

Escrow Agent - Escrow is another form of trust management, assets deposited with a neutral trusted third party to be delivered under contractually specified conditions. Like Bondsman, it is a service well-suited to the anonymous world because it can be transacted electronically. Like Bondsman, it is another way to rent trust, which may be acquired in the same ways. Escrow Agent doesn't pay as well as bondsman, because there is almost no risk.

Fair Witness - The professional witness sells truth, as a trusted reporter of fact. Unlike Heinlein's Fair Witness, an eidetic memory and hypnotically trained powers of observation are not required. Though a contract can be digitally signed in a non-repudiable way, the recording of it in a trusted neutral place has value. Likewise testimony about associated conditions and events not recorded in any contract (Johnny Carboncabin sent 12 threatening and intimidating messages to Clarke Kent after Clarke's whistle-blowing expose' was published). The Witness may verify Dark Side events, objects, conditions (Wolfie's Toy won today's trifecta, that 1909S VDB penny is in mint condition). There may be conditions on disclosure or limits on scope and audience. The witness may take the role of auditor: “I attest that on this date, 'The Anonymaker' proxy's logs were kept for no more than four hours. I reviewed their code and it was so configured. I probed their server and it was running the code I reviewed”. There is also the role of Notary: “I attest that the same individual signed both of these documents, though I can't disclose the content of the documents or the identity of the individual.”. Another valuable Witness service is putting a time stamp on identities, coins, messages, contracts, and so on. The Fair witnesses fee should be in proportion to the reputation of the Witness, and the amount or issue in contest.

For further reading:
"The Digital Monetary Trust Part 1: Introduction", J. Orlin Grabbe, November 15, 1999
"The Digital Monetary Trust Part 2: The Anonymous Account System", J. Orlin Grabbe, November 22, 1999
"A Brief Guide to Digital Cash Articles on My Webpage", J. Orlin Grabbe, February 28, 1998

South Carolina Bill Seeks to Refuse Federal Reserve Notes as Legal Tender

By Joe Wolverton, II
The New American
Monday, February 22, 2010

http://www.thenewamerican.com/index.php/usnews/politics/2987-sc-bill-seeks-to-refuse-federal-reserve-notes-as-legal-tender

As South Carolina State Representative Mike Pitts walked into the Greenwood (South Carolina) Chamber of Commerce annual Legislative Breakfast Friday morning, he knew what the local small business leaders gathered there were most anxious to hear about. Anybody listening to the radio or reading the paper had heard reports that Representative Pitts wanted to outlaw paper money in South Carolina. That sort of dust up is better than donuts at drawing at a crowd at the Chamber.

On February 2, 2010, former college baseball coach and retired police officer, Mike Pitts submitted bill number 4501 to the clerk of the South Carolina House of Representatives. The title of the bill, “Gold and Silver Coins as Legal Tender,” reveals the constitutional and controversial purpose of the measure. Representative Pitts, a dedicated constitutionalist, wrote the bill to fight what he describes as “constant federal intrusion into states’ rights.”

Section 1 of the proposed bill succinctly proclaims the impetus and spirit of the measure, “The South Carolina General Assembly finds and declares that the State is experiencing an economic crisis of severe magnitude caused in large part by the unconstitutional substitution of Federal Reserve Notes for silver and gold coin as legal tender in this State. The General Assembly also finds and declares that immediate exercise of the power of the State of South Carolina reserved under Article I, Section 10, Paragraph 1 of the United States Constitution and by the Tenth Amendment, is necessary to protect the safety, health and welfare of the people of this State, by guaranteeing to them a constitutional and economically sound monetary system.”

By placing the lion’s share of the blame squarely at the feet of the federal government, particularly its unrepentant, unchecked, and (most importantly) unconstitutional manipulation of the monetary system of the United States through the creation and perpetuation of the Federal Reserve system, Representative Pitts is reasserting the sovereignty of the state of South Carolina and re-enshrining the Tenth Amendment to the Constitution wherein the Founding Fathers intended to erect an impregnable barricade around the self-determination of the sovereign states.

Specifically, Representative Pitts bill would prohibit the state of South Carolina including all the departments, agencies, and political subdivisions thereof) from accepting “anything other than silver and gold coin as a legal tender in payment of any debt.” The bill also sets out the precise standards of measurement to be employed in determining the legal weight and purity for the specie of coin to be accepted as legal tender.

According to the author’s interview with the sponsor of this bill, the local Columbia, South Carolina media is firing a steady volley of arrows at him and describing him as a “wing nut.” Predictably, the news media using Representative Pitts as a bulls-eye have recruited “experts” to deconstruct the measure and label it as “unconstitutional.” Representative Pitts respects the opinion of genuine economists, but questions the qualifications of the local political science professors whose assessment of the bill has been offered by the media as determinative. “I’ve had Harvard trained economists tell me that this bill is constitutional,” responds Representative Pitts.

Regardless of the battle of expert testimony, Representative Pitts reckons that the only way to finally and fully establish the constitutionality of his bill is to pass the bill and then wait and see if the federal government challenges it’s mandates in the Supreme Court. “The Supreme Court is the forum for determining the constitutionality of a bill, not the media,” states Representative Pitts.

As a retired police officer, Representative Pitts has first hand experience with the federal government’s efforts at shackling the hands of local law enforcement through regulations promulgated under the Commerce Clause. “Everyday as a police officer I ran up against the federal government’s attempts to use the Commerce clause to get into every avenue of law enforcement,” reports Representative Pitts. After being recruited by his local Republican Party to run for office, Mike Pitts was determined to bring his life experience and his constitutionalism to bear during his service to the people residing in the three counties he represents.

In the General Assembly of South Carolina, representative are seated geographically, rather than by party affiliation. During a meeting of the House of Representatives Republican Caucus, Representative Pitts was seated next to state representative Jeff Duncan (now a candidate for a U.S. House seat) himself a staunch constitutionalist, when House Majority Leader Kenny Bingham announced that he was “making standing up to the federal government a top priority” of the caucus. Upon hearing this, Representative Pitts leaned over to his seatmate Duncan and whispered, “That’s news to me. They haven’t supported any of my state sovereignty bills in the past.”

Mike Pitts is the first Republican elected in the 14th District to serve in the South General Assembly and from day one he has devoted his time and talent to challenging the federal government’s constant encroachment on the rights of states to govern themselves. Since taking the oath of office in 2003, Representative Mike Pitts has written or sponsored several key pieces of legislation aimed at reaffirming the principle of state sovereignty.

Although several of these bills were admittedly mere declarations of state sovereignty without any legal force, there is one act “with real teeth” of which Representative Pitts is particularly proud: the South Carolina Illegal Immigration Reform Act of 2008. This act, signed into law by Governor Mark Sanford, has been described as “one of the nation’s strongest immigration laws.” The section of the bill co-authored by Representative Pitts requires that all parents enrolling their children in public school must provide proof of residence, regardless of immigration status. Representative Pitts also contributed to the part of the act restricting all but emergency health care from being provided to those illegal aliens living in South Carolina.

Despite the slings and arrows of outrageous fortune being hurled at Representative Pitts, he has no plans to run for cover. “There are two groups left that can challenge the federal government’s power grab and make a change: the voters and the legislatures of the fifty sovereign states,” Pitts explained. The recent election in Massachusetts and the growth of the Tea Party is evidence to Representative Pitts that the voters are expressing their distaste with the federal government’s plans to nationalize health care and continue spending taxpayer money on billion dollar bank bailouts. “We may have to defend this bill in federal court, but it’s worth it,” Pitts stated.

Representative Mike Pitts believes that the real value of his bill to restore silver and gold as the coin of the realm in South Carolina by refusing to accept Federal Reserve notes as legal tender for payment of debts cannot be weighed today, but in coming generations. Accordingly, Pitts thus soberly admonishes all of his fellow Americans, “If we allow the federal government to continue printing paper money in order to pay the interest on all the foreign loans that are funding their unconstitutional schemes, and if we don’t stand up and fight then our grandchildren will live either broke and in abject poverty or as Chinese citizens.”

Interview with gWallet CEO Gurbaksh Chahal

By Jon Matonis

The Monetary Future interviewed gWallet CEO Gurbaksh Chahal on February 18, 2010, shortly after Facebook announced the partnership with PayPal. gWallet is a virtual currency platform for social media, operating in social gaming, virtual worlds, mobile platforms, and microtransaction environments.

Jon: Welcome to The Monetary Future, Gurbaksh. In a general sense, where do you think the future of virtual currency is headed? What are the needs of developers and players as it relates to virtual currency?

Gurbaksh: I think there are two levels of direction where it's going to be headed. Right now, anyone that feels like their product is here to stay is probably going to hurt themselves in a few years, because right now what we have is a first iteration of a platform that sits in an offer wall environment. When we looked at the business last year before we launched it we looked at that as an immediate opportunity, because we basically said it's pretty ugly. It's not brand-friendly and only a small percentage of users have access to this offer wall that end up ever going there. It's basically a slapped together product rather than an in-depth product.

What we ended up innovating -- we actually launched our Brand Bar product this week -- is the closest in-game experience that a game can interact with that sits right above the game. Someone can either buy through direct payment or through a selection of brands click on specific offers that they're interested in and after they filled out a survey or watched a video or interacted with whatever they wanted to can go back into the game and it's a totally uninterrupted environment.

We're definitely excited about the future in terms of the innovation that we're bringing in to that and secondly more brands are going to be inside virtual currency. The third category is that it's going to become more and more integrated -- the advertising and virtual currency environment will be quite more immersed, because there are a lot of businesses that tried to do that with in-game advertising on console games but it wasn't scalable. I think this is the first social gaming environment that automatically has shown its scale through companies like Zynga and so forth. The sky's the limit in terms of the amount of people you can reach. Now it's all about reaching them and integrating different ways to monetize.

Jon: How does gWallet address the market sector that is different than its competitors?

Gurbaksh: We focus our business on connecting with brands and developing products that consumers can have a better user experience with. The product that I mentioned, Brand Bar, will allow someone to go ahead and see it 100% of the time. Right now, on offer walls that OfferPal, SuperRewards, Gambit all have created, only 2-4% of the users that go on there ever go to. We're creating products that don't interrupt the gaming experience but at the same time have 100% of the pie for you to monetize. It's almost like 'why force someone to go to the store -- bring the store to you'. Right? You're a lot more impulsive, you're a lot more interactive. We're creating cutting-edge products to increase the pie of virtual currency.

And secondly, the way we're bringing offers to the space is to proceed ethically. I'm sure you read the Scamville scandal that transpired a couple of months ago. We basically harped on that the most by realizing that at the end of the day, you have to do things ethically -- you can't scam the advertisers. There's a huge opportunity here, because you're dealing with people that are spending hours and hours a day on playing these games and that's ripe for brand advertisers to want to be a part of. Advertisers like Coca-Cola, Disney, BestBuy, JC Penney that we're bringing to the equation are definitely a lot more different than what our competitors have.

Jon: What is gWallet's current revenue model?

Gurbaksh: We launched in September 2009 and we raised $12.5 million. We're five months in to this and we've eaten up a lot of market share already. Our revenue model is that we receive a cut of the overall advertising revenue.

Jon: I am sure that you've seen the recent Facebook Credits initiative. In what way does that change the strategy for the virtual currency platform companies and for your company? Even with the 30% fee, preliminary statistics are that Facebook Credits provide a 20-25% sales increase for developers.

Gurbaksh: What we offer is a way for people to fund currency through advertising. While we do allow people to insert payment modules like direct payment that's not our primary business. Our primary business is how can we have brands integrated inside the environment where a brand says 'watch this video trailer and receive 15 cents of virtual currency' or 'fill out this form or become a subscriber to this product that you want and we'll fund some virtual currency'. Ours is an alternative payment method to direct payment so we're not really affected by the decrease in revenue associated with direct payment. At the same time, I think Facebook is doing a smart thing. If they can charge 30% when a credit card only charges 3% and they can increase the pie, kudos to them that they have figured out another model where they can make money.

The way to look at the entire graph of people that play games is: 1-2% of people pay cash for virtual currency, another 3-4% of people use alternative methods, such as offers to fund virtual currency, and 95% that will never pay for anything. We're solving the problem in two ways: (1) increase the pie by putting brands into the offers so consumers actually recognize the brands that are in it; and (2) monetize the 95% of people by allowing them to see the Brand Bar instead of going knee-deep into the offer wall, so at the end of the day we get the ability to monetize up to 100% of the users.

Jon: How does today's Facebook alliance with PayPal as a payment choice impact the gWallet strategy for virtual currencies? Does it change anything for your installed base?

Gurbaksh: No, we work with PayPal. So the fact that PayPal going to work with Facebook Credits is fine. For people that rely heavily on that 1-2% for direct payment, it will affect them. It doesn't really affect our business. At the end of the day, I think it's basically two 800-pound gorillas getting together and realizing that it's probably better to do business together than to compete in that area.

Jon: Does gWallet provide the platform for any of the Facebook games and what games are they?

Gurbaksh: Yes, alot of Facebook games, anywhere from Dogbook, Snowball Fight, Drinks on Me, Nitrous Racing, FooPets, and various others. We obviously work with some of the top ones as well but we're not privy to name those -- it should be pretty easy to figure out who they are.

Jon: I'd like to shift the conversation to the topic of a universal virtual currency. Does a universal currency have any appeal in the virtual goods marketplace or do you foresee isolated pockets of in-game proprietary currencies?

Gurbaksh: I think that if you're able to aggregate greater than 50% of all the social games, then a universal currency makes sense. I think Facebook is trying to solve that with Facebook Credits -- they're tring to become that default cash/currency in that category. They already have that leverage because by default if you're on the Facebook platform you probably want to put Facebook Credits in there. The way we look at the market is that the business is a lot bigger than Facebook only. There's virtual worlds out there that want to adopt virtual currency -- there's MySpace and there's all these other social networks worldwide that are not going to adopt Facebook Credits.

Jon: Well, that's exactly the point. They have probably cut themselves off from that part of the business even if they were able to get it, because now they're isolating themselves to the Facebook world for payments.

Gurbaksh: That's right.

Jon: It was phrased in some ways that they ended Facebook Wallet and went to Facebook Credits.

Gurbaksh: That's right.

Jon: Is virtual currency that is convertible to the outside world an advantage? In other words, allowing two-way exchange, easy in and out, and the things that you see with goldfarming and the MMORPG environment?

Gurbaksh: Yes, I think there is a huge opportunity there in trying to go ahead and monetize that category. Not many people have done it. They're figuring it's more slow to market -- Facebook games and MySpace games were more first-to-market, but I think that's where the learning curve is. There's the international market too. There's so many virtual worlds internationally. In China, for example, which is the largest virtual currency market, it's just a matter of time that they adopt alternative methods to fund currency as well.

Jon: Will virtual currency ever be used to purchase non-virtual goods?

Gurbaksh: Yes, if it gets far enough, it probably will go ahead and have regulation. China, where virtual currency is a multi-billion dollar industry, basically did something where they passed a law that said virtual currency can never be used for real currency. I'm sure that will just be a matter of time. America realizes it's a big enough market and they have to go ahead and deal with it.

Jon: I believe that Facebook partnering with PayPal instead of challenging them opens up the market for a universal virtual currency, because Facebook has abdicated that road for the near term. Can a universal virtual currency have an impact on the fee structure? What is the biggest driver of the fee structure?

Gurbaksh: Basically, it comes down to how much cost can you charge. If you can charge that, are you going to drive more top-line revenue? I think that Facebook's argument has been that they can go ahead and charge more and if they charge more, it's going to go ahead and increase your revenue by 20-25%. So, I think they're directly proportional.

Jon: How is the gWallet partner program working out that you announced.

Gurbaksh: gWallet Ventures. It has worked out phenomenally. We've actually had a ton of interest. We launched it and we got over a hundred applications on the first day. The way we look at that entire ecosystem is that we're funding the money that we have raised, that we'll never use anyway, back into the ecosystem and we're trying to find the next rising star. The crazy thing about this industry is that you don't know who will be the next number one, number two, number three, number four. You're one big hit away from being that big developer. What our focus is is to invest in a few of them so that hopefully we will capitalize on who will be that developer.

Jon: Can you mention any of those yet?

Gurbaksh: Not yet, but we're very close to announcing our first deal there.

Jon: Thank you for the interview today.

Gurbaksh: My pleasure.

For further reading:
"gWallet launches 'brand bar' platform to monetize social games", Dean Takahashi, VentureBeat, February 25, 2010
"gWallet Launches New Format For Virtual Currency Offers; Eyes International Expansion", Leena Rao, TechCrunch, February 25, 2010
"gWallet Launches Fund to Invest up to 1M per Social Game Developer", Virtual Currency Platforms, January 20, 2010
"Gurbax Chahal sees gold in virtual currency", Ajit Jain, India Abroad, January 8, 2010

Atlas Sound Money Project Essay Contest

By Tom Duncan
Atlas Sound Money Blog
Monday, February 22, 2010

http://www.soundmoneyproject.org/?p=810

The Atlas Sound Money Project is proud to announce the winners of its 2010 Atlas Sound Money Essay Contest.

We are grateful for the carefully crafted, well-reasoned essays that we received from undergraduate and graduate students and young scholars from the think tank and policy communities. It has been gratifying to see so many who display a solid grasp of the issues and the challenges involved in restoring principles of Sound Money. Especially outstanding are the following winning essays:

Overall Winner:
Nicolas Cachanosky, Ph.D. Student, Department of Economics, Suffolk University
“The Endogenous Stability of Free Banking; Crisis as an Exogenous Phenomenon”

Winners (Junior Faculty, Graduate Student, and Policy Writer Category):
1) Gonzalo Schwarz, M.A. Student, Department of Economics, George Mason University
“Can Money Exist Outside the State?: The Virtues of Monetary Rules and Frameworks”
2) Jesse Gastelle, Ph.D. Student, Department of Economics, George Mason University
“The Root of All Money”
3) Jered Piepenbrink, Ph.D. Student, Department of Economics, George Mason University
“Regulated vs. Free Banking Systems”

Winners (Undergraduate Student Category):
1) Michael Cohen, Cornell University
“A Monetary System for the Free Society: The Need for Sound Money Now”
2) Andrew McManimon, Winona State University
“The Ethical Implications of Monetary Manipulation”
3) Kyle Latham, Grove City College
“Concerns for the Utilitarian and Ethical Characteristics of Money”

Congratulations to the winners!

Reprinted with permission.

More Book Reviews: Good Money

The Freeman from the Foundation for Economic Education published an excellent book review of Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775–1821 (2008) by George Selgin. The reviewer is George Leef, book review editor of The Freeman.

From the review (February 24, 2010):

"Good Money has an intriguing origin. While reading a book by nineteenth-century British economist William Stanley Jevons, Selgin came across a passage taking issue with Herbert Spencer’s argument that the production of money could be entrusted to the free market. Jevons wrote that in his view “there is nothing less fit to be left to the action of competition than money,” adding that the nation’s experience with privately minted coins in the late eighteenth century “amply confirmed” his opinion. Selgin wanted to know just what that experience was and investigated: 'What I discovered amazed me, not the least because, instead of confirming Jevons’s position, it did just the opposite.'"

Where Have All the Monetary Cranks Gone?

By Lawrence W. Reed
The Freeman
Monday, February 22, 2010

http://www.thefreemanonline.org/headline/monetary-cranks/

“Monetary crank” was never exactly a household phrase, but I know for certain it was much more widely used and understood a century ago than it is today. If you had nutty ideas about money (such as: “cranking out lots of it will make us wealthy”), you were a monetary crank. We don’t hear the term much these days even though the world is full of people — some in high places — whose pictures ought to be in the dictionary right next to the term.

There must have been some monetary cranks around as early as ancient Israel, at the time of the prophet Isaiah, who took his people to task for allowing the depreciation of their money. “Thy silver has become dross, thy wine mixed with water,” admonished the prophet.

John Law of Scotland ranks as one of history’s more colorful monetary cranks. When Louis XIV died in 1715, he left the French treasury flat broke and a five-year-old successor on the throne. It wasn’t hard for the snake-oil salesman Law to secure an audience with the toddler king’s regent, Philippe d’Orléans. Philippe embraced Law’s recommendation, which was to simply print the money the regime needed. The regent then appointed Law the official controller general of finances, a perch from which he orchestrated a massive hyperinflation that ruined the currency in a mere five years.

The French did it all over again during the 1790s, when Robespierre and the revolutionaries argued that the recipe for a currency of reliable value was paper and ink mixed with guns, bayonets, and confiscated Catholic Church property. That little ride took about five years too — and ended in a similar wreck.

Monetary cranks appeared in America in the nineteenth century but President Ulysses S. Grant’s treasury secretary, Benjamin Bristow, was not one of them. In his annual message of 1874, Bristow declared:

The history of irredeemable paper cur­rency repeats itself whenever and wher­ever it is used. It increases present prices, deludes the laborer with the idea that he is getting higher wages, and brings a fictitious prosperity from which follow inflation of business and credit and excess of enterprise in ever-increasing ratio, until it is discovered that trade and commerce have become fatally diseased, when confidence is de­stroyed, and then comes the shock to credit, followed by disaster and depres­sion, and a demand for relief by further issues. . . . The universal use of, and reliance on, such a currency tends to blunt the moral sense and impair the natural self-dependence of the people, and trains them to the belief that the Government must directly assist their individual fortunes and business, help them in their personal affairs, and ena­ble them to discharge their debts by partial payment. This inconvertible paper currency begets the delusion that the remedy for private pecuniary dis­tress is in legislative measures, and makes the people unmindful of the fact that the true remedy is in greater pro­duction and less spending, and that real prosperity comes only from individual effort and thrift.

Bristow’s warning was not enough to prevent Congress in the last quarter of the nineteenth century from buying into the nostrums of the monetary cranks of that era, the “silverites.” Here’s that story:

The paper greenback inflation of the Civil War era left many Americans suspicious of plans to revive a policy of deliberate paper-money ex­pansion on behalf of any special interest. In 1875 Congress passed the Specie Resumption Act, declaring that the gov­ernment would redeem the greenbacks at par in gold on January 1, 1879. To protect the redemption of the green­backs, it was thought that the Treasury would have to maintain a minimum of $100 million in gold on reserve. The most that the inflationist cranks got was a government pledge not to cancel the greenbacks once redeemed but to reissue them so that the total num­ber outstanding would remain the same.

Hi Yo Silver!

The inflationists’ attention then turned to another medium: silver. The greenbackers became “silverites,” and their rallying cry be­came “Free Silver at 16 to 1,” meaning they wanted the federal government to buy as much silver as was available and stand ready to redeem 16 ounces of it for an ounce of gold. They also wanted legal tender paper silver certificates printed as well. They had enough influence to secure passage of the Bland-Allison Act in February 1878 — the first of the acts putting the government in the busi­ness of purchasing silver for coinage.

Bland-Allison passed over President Rutherford B. Hayes’s veto. In his veto message Hayes noted that “A currency worth less than it purports to be worth will in the end defraud not only creditors, but all who are engaged in legitimate busi­ness, and none more surely than those who are dependent on their daily labor for their daily bread.”

The silverite cranks were dissat­isfied with Bland-Allison because it did not go far enough. It did not provide for free and unlimited government purchase and coinage of silver at 16 to 1. The only silver to be coined would be the two to four mil­lion dollars’ worth that the govern­ment purchased each month, and the Treasury, while the law was on the books, rarely bought more than the minimum amount.

Silver producers in particular had a vested interest in the matter, for the market price of silver had begun a long-term decline in the 1870s. Securing a government pledge to buy silver at a higher price than could be obtained in the free market was an obviously lucrative arrangement. As the market ratio of silver to gold steadily rose above 16 to 1, the profit potential became enormous.

The silverites’ drive for favorable legislation culminated in the Sherman Silver Purchase Act of 1890, which replaced Bland-Allison. The Sherman Act stipulated that the Treasury had to purchase 4.5 million ounces of silver per month, or roughly twice the amount under Bland-Allison. The silver purchases mandated by the law represented almost the entire output of American silver mines.

An inflationary boom yielded to panic and a deflationary bust in 1893. President Grover Cleveland led the successful fight to repeal the silver legislation, an indispensable step toward restoration of a sound currency.

The monetary cranks didn’t disappear, however. Their chief intellectual supporter, William “Coin” Harvey, continued to agitate for silver and paper-based inflation. Cleveland’s own party nominated a monetary crank, William Jennings Bryan, for president in 1896. The silver issue didn’t go away until the Gold Standard Act of 1900 settled it.

Maybe we don’t hear the words “monetary crank” these days because the culprits truly have vanished and everybody has smartened up when it comes to money. But wait a minute! If that were the case, how do we explain a dollar that’s now worth about a nickel of its 1913 value, the year something called the Federal Reserve was created?

Hmm. Maybe the only people who have smartened up are the monetary cranks themselves. They’re now wearing pinstripe suits and instead of selling inflation per se, they’re hawking “stimulus” and “full employment.”

Lawrence Reed is the president of the Foundation for Economic Education. Reprinted with permission.