On 2 January 1879 the United States returned to the gold standard. Specie payments had been quietly suspended in 1861 to meet the costs of the Civil War, with Congress authorising the issuance of $450 million in 'greenbacks'--legal tender treasury notes--that greatly increased commercial liquidity and triggered an economic boom. But with wartime exigencies over, banking interests demanded a return to financial propriety and redeemable hard money. 'Though the Civil War had been fought with fifty-cent dollars', historian Lawrence Goodwyn explained, 'the cost would be paid in one-hundred-cent dollars. The nation's taxpayers would pay the difference to the banking community holding the bonds' (Goodwyn, 1978, 11). What followed was one of the most extraordinary and creative episodes in the history of popular democratic understanding of money.
The constriction of the US money supply caused a deflationary spiral; as population and production increased but the availability of money was held constant, prices fell. Farmers were hit particularly hard. The narrow organisation of capital markets around an inflexible gold-based currency meant annual panics during the financial squeeze prompted by the autumn harvest. The brutal crop-lien system delivered increasing numbers over to the furnishing merchants and chattel mortgage companies, as farmers were forced to take on ever more debt that would have to be paid off in an appreciating currency.
Their initial response was the creation of co-operatives through the Farmers' Alliance, so as to buy and sell collectively and obtain better prices on both ends. In Texas in 1887, cotton farmers embarked on the remarkable 'joint-note plan' by which they would all sink or swim together, buying supplies on credit and then marketing their crop in one giant transaction at year's end. New bonds of solidarity were fostered, including across racial lines (Zinn, 1995, 280-9).
Ultimately, however, the co-ops foundered due to inadequate credit, as banks refused to make loans against Alliance notes except at impossible discounts. Finance capital won out, but in so doing it provided its victims with a powerful education in the nature of the system. By 1892 the People's Party had been formed, bringing together the Farmers' Alliance, the Knights of Labor and others around a platform of unity between poor whites and blacks, public ownership of the railroads and other key infrastructure, abolition of the private banking system, and a radical land, loan and monetary system known as 'the sub-treasury plan'.
Broadened from co-operativism into a systemic critique, Populism swept like a prairie fire across the Great Plains and parts of the South and Southwest, electing forty-five members to Congress between 1891 and 1902, including six US senators. Although ultimately defeated--co-opted and drowned in the swamp of Democratic Party politics, leaving the South to fall back into reaction and racial terror Populism briefly became the largest mass democratic movement in American history as well as 'the last substantial effort at structural alteration of hierarchical economic forms in modern America' (Goodwyn, 1978, 264).
Along the way, leading movement thinkers developed a profound understanding of soft money economics and the power of fiat currency, generating radical monetary proposals that went far beyond the Federal Reserve system eventually created in 1913 or later New Deal banking reforms. Their demand was for a flexible 'people's currency': cheap, elastic, expandable with the growth of population and commerce, and operating outside of East Coast banking establishment control. Looking back, the degree of sophistication with which a hardscrabble alliance of farmers and workers smashed through the imaginative limits set by financial orthodoxy and Gilded Age cultural assumptions to penetrate America's national consciousness is impressive. The representative fictional work of the period, The Wonderful Wizard of Oz, with its yellow brick road and emerald city, is often read as a Populist-inspired monetary allegory; in L. Frank Baum's original story Dorothy's ruby slippers were actually made of silver in a nod to bimetallism (Brown, 2012, 17).
With the ebbing of the Populist tide, the 'money question' was to pass out of American politics--the last time it was effectively communicated to a mass popular movement anywhere. Given today's self-defeating austerity and rule by technocratic elites, we could use Populism's impulse to radical heterodoxy and imaginative audacity. And yet, in many ways we are already over the rainbow. Since 15 August 1971, when Richard Nixon unilaterally terminated the convertibility of the US dollar to gold, bringing to an end the Bretton Woods regime of fixed exchange rates, countries issuing their own sovereign currency have had in place something approximating to the democratic monetary system for which the nineteenth-century Populists struggled. The difficulty lies in the fact that we have yet to comprehend this fully--and to demand that it is used properly.
The secret temple
Few matters of economic importance are as woefully misunderstood as modern money. It can seem a fiendishly complicated subject, even to economists. Schumpeter confessed to never having understood money to his own satisfaction, while Keynes claimed to know of only three people who really grasped it: 'A Professor at another university; one of my students; and a rather junior clerk at the Bank of England' (Ingham, 2004, 5). If production is capitalism's 'hidden abode' (Marx, 1974, 172), then money is its secret temple. Shrouded in mystery and obfuscation, inscribed with arcane language and symbolism, its functions largely obscured from view, it is almost as if the public is not meant to understand money or the basic monetary operations of the economy. 'The study of money, above all other fields in economics', John Kenneth Galbraith wrote, 'is the one in which complexity is used to disguise truth or to evade truth, not to reveal it ... The process by which banks create money is so simple that the mind is repelled' (Galbraith, 1976, 15-29).
Orthodox neo-classical economics, as Geoffrey Ingham has noted, 'does not attach much theoretical importance to money', seeing it simultaneously as one more commodity subject to standard microeconomic analysis and as a pure medium of exchange, a 'neutral veil' (2004, 7). So complete is this discounting that the foundational models of neo-classical economics drop money altogether, replacing it with simple acts of barter (Keen, 2011, 357). Following the onset of the 'great inflation' in the 1970s, monetarism was to demonstrate an obsession with the money supply and price stability, but this can be traced back to the inadequacies of neo-classical macroeconomics and 'the idea that it is, in principle, possible, by means of an apolitical search for the most technically efficient means, to arrive at an optimum supply of neutral money--that is to say, a supply of money that does no more than express the values of the 'real' economy' (Ingham, 2004, 35-6).
While orthodox economics has struggled to account for monetary instability and disorder, dissenters are often to be found inhabiting the discipline's wilder shores; the 'money question' has long been a magnet for cranks and crackpots of every hue. Stray far, Dan Hind warns, and 'you will find yourself in a wilderness of goldbugs and Bitcoin enthusiasts' (Hind, 2014). However, money theory has also spawned a distinguished heterodox tradition, with a pedigree traceable back to Smith and Marx and continuing through the work of Knapp (The State Theory of Money), Schumpeter and the Keynes of the Treatise on Money to Abba Lerner's 'functional finance' and the 'endogenous money' of Hyman Minsky and the neo-chartalists (Wray, 1998, 18-37). For theorists in this tradition, money, while also a unit of account, a medium of exchange, and a means of payment, originates as debt and should thus be understood as a social relation, expressing the balance of power among contending social and political forces.
Money, it is argued, is by its very nature political--who has it, how much, and at what price. From this vantage point many of the issues quickly come into focus. The screamingly obvious problem in today's economy is not that most people have too much money to spend but that they have too little. And yet, all across the advanced industrial world, the prescription is the same: cuts, retrenchment...