The origin of the U.S. dollar as legal tender and its link to Depression

Submitted by Edward Harrison of Credit Writedowns

I have been very interested in the concept of legal tender of late because of the revelation this summer that the State of California was issuing I.O.U.’s to honour its debts instead of paying in U.S. Dollars, which are legal tender and I.O.U.’s from the U.S. government (see posts here and here). What I found most interesting about the California case was how the I.O.U.’s allowed a state experiencing a depression and prohibited from printing money to settle debts.  Given the similarities between California and Ireland, I felt this could be a model for that state (see post here).

The question was: how can a government without the levers of the money printing press use money as an escape-hatch in a depressionary environment? So to answer that question, I wanted to look at the origins of legal tender laws in the U.S.. When the United States was established, the U.S. Constitution outlined the basic framework through which government – both state and federal – could act on behalf of America’s citizens.  Nowhere in the U.S. Constitution was legal tender mentioned, and this is a bone of contention still amongst those who see the Federal Reserve as an illegitimate institution. Below, I want to outline a brief (and hopefully non-ideological) history of how the greenback became legal tender in the United States. I have some related comments at the end on Depressions and their lasting consequences on politics and history.

The Constitution

The Constitution mentions the word money in three sections, 8, 9 and 10.  Below are the individual citations as they pertain to Congress acting on behalf of the federal government:

Section. 8. The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

  • To borrow Money on the credit of the United States;
  • To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
  • To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;

Section 9 is no longer applicable, but here it is.

Section. 9. The Migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the Year one thousand eight hundred and eight, but a Tax or duty may be imposed on such Importation, not exceeding ten dollars for each Person.

  • No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

In Article 1, Section 10 of the Constitution, the authorities regarding money and taxation for individual states are outlined. It states:

Section. 10. No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it’s inspection Laws; and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.

No State shall, without the Consent of Congress, lay any Duty of Tonnage, keep Troops, or Ships of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.

You have probably noticed that nowhere in here was the term ‘legal tender’ used. Why? The intention was to allow anyone to issue coins and notes backed by gold or silver. In fact, foreign coins backed by gold and silver were accepted in the U.S. because 80 percent of money in circulation in the U.S. pre-1800 was foreign.

Centralisation or de-centralisation?

But, when the United States was created, there were factions. One faction led by Alexander Hamilton, a U.S. Constitution signatory and the first Treasury Secretary, favoured a strong central government.  The other, headed by Thomas Jefferson, favoured states’ rights and a more de-centralised government and were more in favour of the Articles of Confederation, which was the original constitution that created the United States. One reason the term Confederacy was used for government in the south during the Civil War was opposition to a strong central government, which was seen to favour money interests over farming interests and thus the North over the South.

(Hamilton is one of two non-Presidents on circulated paper money. His face is on the front of the ten-dollar bill.  Read the sordid details of his death at the hands of a sitting Vice President. The other non-President is Benjamin Franklin, on the face of the hundred-dollar bill. Since the 100 is the highest circulating U.S. bill, Benjamin Franklin has gained a certain notoriety as a result.)

As a result of the Civil War and the large costs associated therewith, the factions favouring more centralisation gained sway on money matters. Basically, the government was broke and needed to control the money supply in order to alleviate these debts. Heavy taxation was the only other alternative, not something likely to get one re-elected.  So Abraham Lincoln created the Legal Tender Act for the United States.

However, in 1870, the U.S. Supreme Court ruled these laws unconstitutional in a 4-3 decision in the case Hepburn v. Griswold.  What was peculiar about the ruling was that Salmon P. Chase was the chief justice presiding and voted against the greenback as legal tender. He was also Treasury Secretary at the time the legal tender law was enacted. He also happens to appear on the face of the 10,000 dollar bill, a denomination not in circulation today.

Chase was concerned that the legal tender law was legalizing theft through inflation (the government was printing so many greenbacks that they had plummeted in value vis-a-vis gold). In his opinion, Chase wrote:

We confess ourselves unable to perceive any solid distinction between such an Act and an Act compelling all citizens to accept, in satisfaction of all contracts for money, half or three-quarters or any other proportion less than the whole value actually due, according to their terms. It is difficult to conceive what act would take private property without process of law if such an act would not.

We are obliged to conclude that an Act making mere promises to pay dollars a legal tender in payment of debts previously contracted, is not a means appropriate, plainly adapted, really calculated to carry into effect any express power vested in Congress, that such an act is inconsistent with the spirit of the Constitution, and that it is prohibited by the Constitution.

However, President Ulysses S. Grant expanded the size of the court to the present nine, adding two members who favoured legal tender laws.  So, fifteen months after Hepburn came Knox v. Lee. And this case decided in favour of the Legal Tender Act in a 5-4 decision. And this is still the law of the land

Knox v. Lee led indirectly to Jim Crow

I don’t have an opinion on this issue. You will see why below.  But I do have an opinion about the effects of the Legal Tender Act and Knox v. Lee.

First, the purpose of legal tender is to centralise the creation of money by creating monopoly control of the money printing press.  This might be done to reduce the chaos associated with allowing anyone to issue bank notes. But it also might be done to inflate and increase leverage for taxation purposes. There are competing ideas on this issue but it boils down to a centralisation versus de-centralisation/States’ Rights versus Federalist argument.

More crucially to me, the Legal Tender Act did lead to inflation after the Civil War and an artificial boom Railroad investment created by this inflation. The inflation ended when Grant signed into law a bill restricting money growth by making greenbacks redeemable in gold. The boom turned bust in the Panic of 1873 when Jay Cooke & Company, a bank that was highly leveraged to the railroad industry, was brought down.  The period that followed was known as the great depression before 1929 ushered in another Depression.

The economic downturn created a backlash against the Republican Party of Grant, which was also the party of Reconstruction and black politicians in the south. As a result, the Democrats swept the 1874 Congressional elections and almost eked out a win in 1876 for the Presidency. To keep the democrats happy, the Compromise of 1877 was made, which effectively ended reconstruction and threw millions of southern blacks into a near-century of humiliation, disenfranchisement and subjugation known as Jim Crow. It was an abomination, the legacy of which stains America to this day.

I am no fan of States’ Rights as a result.  I see increased States’ Rights and de-centralisation as likely to lead to explicit measures of disenfranchisement. So when I look back to the history of legal tender laws, my point of view is very much biased by this fact.

What should also be clear from this Great Depression and the one after 1929 is that booms which turn into extraordinary busts lead to populist outcomes and the rise of populist leaders which have unpredictable negative long-term consequences.


A book that I like on this issue and Money and Banking more generally is called “A History of Money and Banking in the United States” by Murray Rothbard.  the view presented is a relatively anti-central bank, anti-legal tender one. Rothbard is a Libertarian of the Austrian School variety, so read his book keeping his biases in mind.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. edwardo

    Edward Harrison wrote:

    To keep the democrats happy, the Compromise of 1877 was made, which effectively ended reconstruction and threw millions of southern blacks into a near-century of humiliation, disenfranchisement and subjugation known as Jim Crow. It was an abomination, the legacy of which stains America to this day.

    This is certainly a narrative that is accepted in some, perhaps even most, historical circles, and while I am not inclined to take issue with it, I do wonder what you have in mind with your statement that States’ Rights advocates desire to “re-institute explicit measures of disenfranchisement.” Are you actually suggesting that those who are in favor of a rebalancing of power between Federal and State authorities have in mind a recrudescence of discriminatory practices against, for example, African Americans? What sort of “disenfranchisement” do you have in mind?

    1. Edward Harrison Post author

      This reminds me of a conversation I had with Aaron Krowne of the Implode-O-Meter sites a few months ago in DC. Aaron is pro-states’ rights. I am not trying to say that belief in states’ right means one is in favor of Jim Crow. What I am trying to say is that the subject evokes memories of Jim Crow for me and I suspect that de-centralization would lead to outcomes that disenfranchised. One example would be the Indiana Driver’s License to vote controversy. Older people and poor people are likely to lose out were a driver’s license required for voting.

    2. Edward Harrison Post author

      One more thing: I have to admit bias and understand the other point of view, which is why I have the comment about bias. I also just altered the phrasing to try to better reflect what I was trying to convey.

  2. Edwardo

    Thanks, for the clarification. With respect to the Indiana driver’s license issue, I will offer following: the apparent flaws in such a prescription should have been obvious to all concerned, but despite the obvious flaws, The U.S. Supreme Court, in what seems a bit of bitter irony, upheld the state of Indiana’s idiocy.

  3. Bruce Wilder

    The ill-advised and deflationary return to the gold standard, engineered by Grant, might have had something to do with the depression that followed the Panic of 1873, as well as the depression that followed the Panic of 1893.

    1. Edward Harrison Post author

      Fair enough. I understand that Grant re-established a gold backing for greenbacks and this ended the inflation and will amend the post to reflect this. But, it was the inflation which created the need to restrict the money supply.

  4. Lance Schultz

    No research into the history of the United States currency and the disastrous effects of the central banking fiat currency cabal can be complete without reading G. Edward Griffin’s The Creature from Jekyll Island. Highly advise.

  5. joe c


    Don’t stop reading in 1877, try Lawrence Goodwyn’s “The Populist Moment,” which was the last time the people of this country had a democratic discussion about money — quite a story.

    As far as states rights, it certainly is unfortunate that a major component of the American system was used first to protect slavery and then segregation, though I’d suggest we’re all beginning to find out it can be easily as problematic to rely on the federal government for freedom

  6. DownSouth


    Powerful central government was first proposed by the Founding Fathers to protect economic (creditors and the rich) and religious minorities. Slavery was not a part of the social question for the Americans, Hannah Arendt observes, “so that the social question, whether genuinely absent or only hidden in darkness, was non-existent for all practical purposes.”

    So when Madison said that whenever “a majority are united by a common interest or passion the rights of the minority are in danger,” he was referring to the rights of economic and religious minorities, not racial minorities. “Much of the American elite shared Madison’s alarm with the ‘abuses of republican liberty practiced in the states,’ “ Lance Banning writes in Madison, the Statute, and Republican Convictions. “Many, maybe most, defined the problem as a classic crisis of relationships between the many and the few, creditors and debtors, rich and poor: a crisis generated by what Elbridge Gerry called ‘an excess of democracy.’ “ Madison’s remedy was to “enlarge the sphere” of republican government

    and thereby divide the community into so great a number of interests and parties that, in the first place, a majority will not likely at the same moment to have a common interest separate from that of the whole of the minority, and in the second place, that in case they should have such an interest, they may not be apt to unite in the pursuit of it.

    The interests of blacks and the economic elite, both being minorities, were thus favored by a powerful central government, and Madison’s democratic vision (though almost certainly not formulated with slavery or blacks in mind) was proved correct when it was the Federal government, and not state or local governments, that eventually enacted measures that first abolished slavery and then later attempted to assure civil rights.

    With the advent of an interventionist federal government and the federal welfare state that came about in the 1920s, however, the economic elite no longer saw its interests as being favored by a strong central government. Blacks, on the other hand, still depended on a strong central government for protection. So the interests of blacks and the economic elite were no longer in alignment with a strong central government.

    The interests of the economic elites, on the contrary, became aligned with those of the Southern racists who had always clamored for “states rights,” unbridled individual liberty to do as they pleased and a disemboweled federal government. These goals fit perfectly with those of an economic elite anxious to escape being under the thumb of a powerful federal government that interfered with its rights to do business as it pleased. This realignment was to result in the Southern Strategy devised by the Republican Party, where the interests of racists and the economic elite came together in the anti-government and libertarian stance the party was to pursue.

    That’s why this post, coming on the heels of your declaration that you are a libertarian, smacks of cognitive dissonance. But I suppose you have conflicting interests, just like the rest of us:

    The founders’ fear of too much power in government was checked by their great awareness of the enormous dangers of the rights and liberties of the citizen that would arise from within society. Hence, according to Madison, ‘it is of great importance in a republic, not only to guard the society against the oppression of its rulers; but to guard on part of the society against the injustice of the other part,’ to save ‘the rights of individuals, or of the minority…interested combinations of the majority.’
    –Hannah Arendt, On Revolution

    1. Edward Harrison Post author

      Down South, I like your interpretation of events. As for my Libertarian label, there is no cognitive dissonance for me. I am a knee jerk Libertarian because I have an independent streak. However, I don’t buy into free market ideology because I am cognizant of the need to protect citizens from those who would use the state to further their own aims at the expense of others. There is a word called Liberalterian that seems more appropriate in my case.

  7. Rodger Malcolm Mitchell

    Money = debt

    Interestingly, the definitions of money affect our attitude about federal debt. Although official money measures have changed over time, the U.S. government arbitrarily has defined the following measures as money:

    Coins, currency held by the public, traveler’s checks, checking account balances, NOW accounts, automatic transfer service accounts, balances in credit unions, savings deposits, overnight repos at commercial banks, non-institutional money market accounts, large time deposits, repos of maturity greater than one day at commercial banks, institutional money market accounts, savings bonds, T-bills, banker’s acceptances, commercial paper.

    These types of money, all of which are forms of debt, were lumped into four official measures: M1, M2, M3 and L (M3 and L have become obsolete). All the official measures mature in a year or less. Why a year or less? Again, it’s arbitrary. The government could have chosen two, ten or a hundred years. T-bonds are not included in the official definition, but T-bonds with one year left to maturity are identical to T-bills, which are included.

    Savings bonds are included, but arbitrarily, corporate and municipal bonds are not. You’ll find no bright line between financial debt that is counted as money vs. financial debt that is not.

    The official government measures account for only about 1/4 of the debt in America. The most inclusive measure is Domestic Nonfinancial Debt, which covers all of the above plus mortgages.

    Is a dollar bill debt? Yes, a dollar bill is a federal reserve note. “Bill” and “note” are words describing debt (as in T-bill and T-note). The collateral for a dollar bill collateral is “full faith and credit.” This may sound vague, but it is quite valuable, because it means:

    1.The government will accept U.S. dollars in payment of taxes.
    2.It will pay it’s debts (T-bills et al) and its bills with dollars.
    3. It will force your domestic creditors to accept U.S. dollars, if you offer it, to satisfy your debt.
    4. It will not require domestic creditors to accept any other money
    5. It will maintain a market for U.S. dollars.
    6. It will continue to use U.S. dollars and will not change to another currency.
    7. All forms of U.S. dollars will be reciprocal, that is five $1 bills always will equal one $5 bill and vice versa. A $1,000 T-bill equals 1,000 $1 bills at maturity.

    When we say the federal debt is $12 trillion, we mean the federal government has created $12 trillion in T-securities out of thin air and sent them into the economy. To redeem those $12 trillion (aka “pay the debt”), the government merely creates a different $12 trillion and exchanges them for the outstanding $12 trillion. As T-securities are money, the government acquires “old” money in exchange for new money. No taxes are necessary, because “paying the debt” is an even exchange.

    Rather than referring to “federal debt,” we should refer to “federal money created.” Then concerns about paying the debt and spending taxpayers’ money would disappear.

    See more about this at:

  8. DownSouth

    correction: That last paragraph should read

    The founders’ fear of too much power in government was checked by their great awareness of the enormous dangers of the rights and liberties of the citizen that would arise from within society. Hence, according to Madison, ‘it is of great importance in a republic, not only to guard the society against the oppression of its rulers; but to guard one part of the society against the injustice of the other part,’ to save ‘the rights of individuals, or of the minority…from interested combinations of the majority.’
    –Hannah Arendt, On Revolution

  9. pebird

    When you get done with the readings suggested above, I recommend the following – A Short History of Paper Money and Banking in the US.

    This was written in 1833 by William Gouge, an adviser to President Jackson (another great period in the history of US finance).

    Good explanations on differences between northern and southern banking (for example, most custom duties were collected in the north – and deposited with northern banks – also, southern banks did not have as much access to treasury notes).

    Some of the more interesting explanations revolved around how some banks capitalized themselves – a group of directors would obtain a state charter, raise a small amount of capital, then use their own bank notes to complete the capitalization!

    I guess things don’t change all that much.

  10. edwardo

    Edward wrote:

    “I don’t buy into free market ideology because I am cognizant of the need to protect citizens from those who would use the state to further their own aims at the expense of others.”

    If markets were actually managed properly such that the tendency against competition and towards monopoly inherent in capitalism was corralled, things would probably work quite well. But “free markets” are most definitely not part of the program.

  11. DownSouth


    One other follow-up point.

    Everyone brands the demonstrators at the health care town hall meetings and the tea party protests as populists. Then they lump them together with other populist movements that have occurred in the US, which were racist in nature. We saw this yesterday in the NY Times letters-to-the-editor page:

    But as I pointed out, the battle lines are drawn differently now. Before it was:

    Populists (anti-banking and anti-finance) + racists vs. Elite (banking and finance) + blacks

    Now it is:

    Elite (banking and finance) + racists vs. Poor, working class and blacks

    I’m just thinking out loud here, but I wonder if the current demonstrators even fit the definition of populist. Perhaps what we’re seeing here is more of a manifestation of protest politics rather than populist politics:

    James Q. Wilson defines protest as “a process whereby one party seeks by public display or disruptive acts to raise the cost to another party of continuing a given course of action.” The highly committed individuals who engage in protest politics may, like practitioners of organization and elite-network politics, address specific issues, but they typically do so in a manner that subordinates them to the articulation of a broader cause, vision of the world, or ideology. Such encompassing, intangible goals are of course quite unlike the material rewards—favors, payoffs, jobs—evident in friends –and-neighbors, organization, even elite-network politics.

    Moreover, protest politics in California is less concerned with bargaining to achieve concrete objectives than with venting frustrations and moral outrage. Wilson refers to such activities as “pseudo-protest”, and distinguishes them sharply from the kind of protest that seeks to induce bargaining. In Texas, Mexican Americans protested because they felt excluded from the social, economic, and political system, and they wanted in. (The same said about blacks: “The American racial revolution has been a revolution to ‘get in’ rather than to overthrow,” Martin Luther King, Jr. wrote in “Nonviolence: The Only Road to Freedom”. “We want a share in the American economy, the housing market, the education system, and the social opportunities.”) Their efforts toward this goal have met with considerable success, and protest has virtually disappeared. But in the much more favorable setting of California, Mexican Americans have already gotten “in”—compared, at least, to their Texas counterparts. Deprived of the obvious barriers upon which their ideology nevertheless continues to fixate, Chicano activists in California have pursued more expressive, symbolic concerns. Lacking concrete objectives, their protest endures as dramaturgy, deriving considerable sustenance from California’s political institutions and culture.

    If the current bunch of demonstrators resemble more the California Chicano activists than they do to those that participated in the Civil Rights movement or earlier populist movements, both in demeanor and objectives, do they even fit the definition of populists? Or could their politics be more accurately described as that of pseudo-protest?

    I also wanted to share this video clip from CNN News with you:

    I found it absolutely fascinating.

    1. Siggy

      Thank you for the video.

      I found it frightening in that I see it as being fairly representative of an inchoate rable forming. This video provides a remarkable insight as to the susceptability of a semi literate population to demagoguery.

      These people are mad and it seems that they don’t quite know why they are mad. Call it populism, call it political protest, call it what you will, this is the stuff that breeds a very bad outcome.

      1. Skippy

        Truly a slow burn, massive amounts of disinformation supplied to a unable or unwilling population to inform them selves, save favorite feeder tubes used by the elites, religion, corporate sponsored polis, MS. Their false pride fueled by American specialism, striped bare with out comfort to see through the next day with out it, vanity’s mirror cracked.

        Personally I fear apathy before rage, more malleable me thinks.

        Skippy…Wasn’t gluttony a fine replacement for brotherhood.

      2. DownSouth


        When you say “susceptibility to demagoguery” you verbalize very well the point I’m trying to make.

        I dislike talking in broad generalizations, but this current movement strikes me as being more like National Socialism than it does the Civil Rights movement or prior populist movements in the US. In the latter the participants were operating in their own best self-interest trying to correct existing injustices. They were trying to get something. In the current case, it’s more like the participants are being cynically manipulated by the oligarchy, not to gain something palpable for themselves, but to deprive other people from something. They believe that by making somebody else’s life miserable, they will somehow make their own life better. It reminds me of something Martin Luther King said in his speech “Give us the Ballot: We Will Transform the South.” “[T]he leadership of the white South stems from closed-minded reactionaries,” he said, who “gain prominence and power…by deliberately appealing to the deepest hate responses within the human mind.” And indeed I think there’s substantial evidence that the organization, funding and ideologies of these most recent protesters are not organic, but come from without, either directly from business interests or indirectly from the think tanks and other organizations that business interests support.

        An incompetent leadership class will never assume responsibility for its failures. It prefers scapegoating. An excellent example of this was the expulsion of the Moors from Spain, as J.H. Elliott explained in Imperial Spain: 1469-1716:

        Perpetually living on expedients, and anxious only for a smooth passage, the passive and negative regime of the Duke of Lerma was more remarkable for what it left undone than for what it actually did… [T]he actions of his Government were ill advised and unfortunate…

        One action, however, the Government was to push through with a most uncharacteristic resolution: the expulsion of the Moriscos from Spain… By the use of skilful timing, the humiliation of peace with the Dutch would be overshadowed by the glory of removing the last trace of Moorish dominance from Spain, and 1609 would be ever memorable as a year not of defeat but of victory.

        A similar phenomenon happened in Germany, where the Nazi Party–actually an instrument of the oligarchy but masquerading as a champion of the people–touted a Master Race. It used racist ideology and the science of eugenics to project the failures of the leadership class onto racial and ethnic minorities, the mentally and physically infirm and anyone else in the society that was perceived as being weak. As Reinhold Niebuhr wrote in “The Children of Light and the Children of Darkness:”

        The success of the Nazi diplomacy and propaganda in claiming the poor in democratic civilization as their allies against the “plutocrats” in one moment, and in the next seeking to ally the privileged classes in their battle against “communism,” is a nice indication of the part which the civil war in democratic civilization played allowing barbarism to come so near to a triumph over civilization.

        This is why I react so vehemently to the polemics of defenders of the plutocracy, persons like Satyajit Das

        or Luigi Zingales

        It is not so much that they get into the scapegoating game, but they perpetuate the fiction that the leadership class is blameless. So instead of pointing out the failures of a leadership class that is so obviously and utterly incompetent (and immoral to boot) they concoct lies and distortions to defend it. Thus we get claptrap like this from Das: “The sheer importance and size of derivative profits means that it will continue to attract the best and the brightest who will continue to play these time honoured games.” And here’s an example of the same sort of self-serving boosterism from Zingales: “So starting in the late 1970s, state bank regulations were relaxed or eliminated, increasing the efficiency of the banking sector and fostering economic growth. .. The apex of this process was the 1999 passage of the Gramm-Leach-Bliley Act, which repealed the restrictions imposed by Glass-Steagall. “

        1. Siggy

          The last two sentences expose the lie that Zingales is perpetrating. Efficiency is not found in the relaxation of regulation. As experience has clearly demonstrated, the repeal of Glass-Steagell, the refusal to regulate derivatives and host of other government failures are the critical contributors to our distress.

          I agree that the ‘ruling class’ needs to be held accountable. But then how shall we do that? Our Congress has embraced every manner of pandering so as to support the moneyed class who rule indirectly.

          My view is that by saving the ‘primary dealer’ banks from bankruptcy, Mr Bernanke and Mr. Geithner have not done us a service. They have, in fact, commited us to the destruction of the middle class. Moreover, the failure to prosecute in the case of AIG is evidence of incredible ineptitude. I am befuddled as to why the monstrous fraud of AIG’s CDS sales has not been tabled as such. Name any recent financial failure and on examination you find fraud, nonetheless, no one’s going to jail. Except maybe Bernie Madoff who made it easy by effectively turning himself in.

          If one believes that ‘financial’ wizards of Wall Street were simply stupid, and no law proscribes being stupid; well, if you believe that then you deserve what you have elected. The moral and ethical corruption in which we are mired is beyond my comprehension. It is conditions like this that make possible such events as the rise of a Hitler who is/was supported by monied class. To me, the video clearly gives evidence that potential for Nazi state is more than marginal.

      3. DownSouth


        To further make my point, contrast Das and Zingales to David Colandeer (from yesterday’s Links):

        The global financial crisis has revealed the need to rethink fundamentally how financial systems are regulated. It has also made clear a systemic failure of the economics profession. Over the past three decades, economists have largely developed and come to rely on models that disregard key factors… Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon. In our hour of greatest need, societies around the world are left to grope in the dark without a theory. That, to us, is a systemic failure of the economics profession.

        Or this:

        This makes the theoretical foundations of all these products highly questionable – the equivalent to building a building of cement of which you weren’t sure of the components. The dramatic recent rise of the markets for structured products (most prominently collateralized debt obligations and credit default swaps – CDOs and CDSs) was made possible by development of such simulation-based pricing tools and the adoption of an industry-standard for these under the lead of rating agencies. Barry Eichengreen (2008) rightly points out that the “development of mathematical methods designed to quantify and hedge risk encouraged commercial banks, investment banks and hedge funds to use more leverage” as if the very use of the mathematical methods diminished the underlying risk.

        Or this:

        The most recent literature provides us with examples of blindness against the upcoming storm that seem odd in retrospect. For example, in their analysis of the risk management implications of CDOs, Krahnen (2005) and Krahnen and Wilde (2006) mention the possibility of an increase of ‘systemic risk.’ But, they conclude that this aspect should not be the concern of the banks engaged in the CDO market, because it is the governments’ responsibility to provide costless insurance against a system-wide crash.

        Or this:

        A second, more likely explanation, is that they (economists) did not consider it their job to warn the public. If that is the cause of their failure, we believe that it involves a misunderstanding of the role of the economist, and involves an ethical breakdown. In our view, economists, as with all scientists, have an ethical responsibility to communicate the limitations of their models and the potential misuses of their research. Currently, there is no ethical code for professional economic scientists. There should be one.

        Imagine that! An economist talking about ethics and morality! Someone in the field of finance and economics that is willing to accept accountability for their actions. And compare that to the sophistry of, as George Orwell put it, “paid liars and bumsuckers” like Das and Zingales.

      4. DownSouth

        Here’s another important quote from Colander’s congressional testimony:

        This approach is mingled with insights from Walrasian general equilibrium theory, in particular the finding of the Arrrow-Debreu two-period model that all uncertainty can be eliminated if only there are enough contingent claims (i.e., appropriate derivative instruments). This theoretical result (a theorem in an extremely stylized model) underlies the common belief that the introduction of new classes of derivatives can only be welfare increasing (a view obviously originally shared by former Fed Chairman Greenspan). It is worth emphasizing that this view is not an empirically grounded belief but an opinion derived from a benchmark model that is much too abstract to be confronted with data.

        1. Skippy

          I concur DS.

          Over the last 40 years for *convenience sake*, that the American people at large (poor people the most, as their desire to rise above it is the strongest ) have been groomed via financial pedophiles ie: illusory wealth through SIVs and a gloves off approach to markets were the path to greatness as Individuals and as a Nation.

          Furthermore that ethics/morals were bastardized in broad day light through sophisticated means via advertising and group/peer-pressure and as a means to enslave the American people, goosing them into massive amounts of debt and when it blew up stuck them (the lower classes) with the bill whilst making them selves hole again (or *realizing in the now* the illusionary wealth with government backstops).

          The financial elites will tell average Joe that they are endeavoring to offset wealth destruction (deflation) whilst they concoct a magic bullet *marginal wealth creation* (inflation) with the caveat, that this is an ongoing process which is to complicated for them to explain in simple English and could take decades to sort out, how bloody convenat…eh.

          Skippy…The financial elites are both ravenous, as well as blood thirsty and will use all means at their disposal to insure their family’s lineages in perpetuity.

          PS. I really do see this as an aristocratic problem, unfortunately only one solution presents itself and that is my greatest fear.

  12. Hugh

    The national debt is currently $11.8 trillion. $7.5 trillion is debt held by the public and $4.3 trillion is in the form of intragovernmental holdings, principally IOUs to Social Security. As far as I know, it is only on the $7.5 trillion that there are Treasuries. SS cycles through its portfolio of government debt obligations exchanging the older ones out to cover day to day gaps in expenses but that’s about it.

  13. teapartyfan

    “…this current movement strikes me as being more like National Socialism…” Unbeluckin’feebable! I call Godwin’s Law. If one has to resort to the reductio ad Hitlerum form of argumentation, the argument, if there is one hidden in all the verbiage above, is lost. The only thing that is clear is that the elites, including these commenters, are just going to stick their fingers in their ears and stamp the floor in response. Is that the best way to address what is troubling the middle class taxpayer? Occasionally, there are interesting non-ideological/partisan posts at this site, but the comments are almost invariably meanderings into phony-baloney pseudo-intellectualism. This thread is a near perfect example.

    1. DownSouth


      You say that “If one has to resort to the reductio ad Hitlerum form of argumentation, the argument, if there is one hidden in all the verbiage above, is lost.”

      The cognitive dissonance and the hypocrisy inherent in this statement, coming as it does from the lips of a fan of the tea parties, is mind boggling.

      Is it possible that you are so blind as to be unaware that it is the tea partiers and town hall meeting protesters that have made spectacles of themselves by sporting signs of President Obama in Nazi drag? Such as this:

      Or this:

      Probably no one has done a better job of elucidating America’s grotesque crybaby culture and the ironies it inheres than Robert Hughes. “Since our new-found sensitivity decrees that only the victim shall be the hero, the white American male starts bawling for victim status too,” he observed in his book, Culture of Complaint: A Passionate Look into the Ailing Heart of America.

      Could Huges have imagined that only some 15 years after he published his book that millionaire traders and Wall Street executives would also join the orgy of victimization by bearing their souls on the pages of the NY Times and the Wall Street Journal? Poor fellows, they might have to forego one of their vacation homes or give up the Gulfstream for a lowly Lear.

      Much lower down in the victim hierarchy, but certainly far from the bottom, are the tea party and town hall protesters, whining about how they’re being victimized by that “Nazi” in the White House. The vulgarity of all this is stupefying. But, as Hughes went on to explain:

      [V]ulgarity has ceased to matter in America: it is no longer a term of rebuke, since it is now completely identified with democracy. The classic definition of vulgarity was inappropriate self-exposure. It contrasted the “mob”–the vulgus, all emotion and no reason, easily manipulated and cheaply satisfied–to the reserved patrician who maintained power through distance and an unshakeable code. “I could be well moved, if I were you,” says Shakespeare’s Julius Caesar, reflecting on his inferiors, men who are “flesh and blood, and apprehensive”–

      “Yet in the number I do know but one
      That unassailable holds on his rank
      Unshaked of motion; and that I am he
      Let me a little show it…”

      This idea of distinction is long gone; no American would admit to it, even if he or she secretly yearned for it.

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