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Now that the Fed's semantic parsing and adjective bingo are behind us with respect to considerable, lengthy, patience, etc., I thought it would be an apropos time for a little look back. After all, if the Fed's efforts to fit a fat man through the eye of the "considerable" needle don't make you feel, well, uneasy, about the state of monetary policy in the United States in 2004, then you have a much thicker skin than I.

You already know how I feel about the nonsense around the parsing of considerable in the Fed's communiqué; and you know that I think the Fed has backed themselves into a monetary policy corner with these policies, the same ones that are now forcing them to their thesaurus for a word that balances just so the needs of the domestic economy with the needs to keep international stock, bond, forex, and commodity markets stable.

Having said that, it's important to view the Fed's policies as part of a larger (much larger) continuum. Ever since the Civil War, US authorities - under the aegis of Treasury officials, Wall Street banks, or the Federal Reserve itself after its creation, have pursued a policy of, what's the opposite of laissez faire? -- a policy of intervention in the economic cycle, through the manipulation of the cost of money. Sometimes that intervention has gotten officials into real trouble; the law of unintended consequences often does that when dealing with complex systems like a free market economy. I tried to describe the most recent self-created trouble when I referenced the relative cost of capital vs labor.

But US economic history is full of this stuff, and sometimes intervention leads to some even worse things happening in the economy than having a net 7 million jobs NOT produced since the turn in the economy in 2001. Enter Salmon Chase, Secretary of the Treasury in 1861-1864.

In February 1862, Congress authorized the printing of $150mm of United States Notes, the first fiat-currency, called Greenbacks to pay for the growing deficits generated by the Civil War. Congress resolved to the hard-money Jacksonians still in Congress that this would be the first and last issue of fiat money. Needless to say, another $150mm tranch was printed in July and then another $150mm in early 1863. They couldn't resist; who could when making yourself rich was simply a matter of turning on the printing press (does the name "Bernanke" come to mind yet)?

These new Greenbacks immediately began to depreciate in value in relation to circulating silver and gold coins. Secretary Chase, hoping to stop the depreciation, made greenbacks inconvertible into government bonds (which could be redeemed in gold or silver at par). The Greenbacks, of course, only depreciated further.

Not to be deterred, Chase then publicly blamed the Greenback depreciation on anonymous "gold speculators" and began a campaign to stop the depreciation of Greenbacks by assaulting the gold market and these "speculators". Over the next 2 years, he attempted successive policies (months apart) aimed at halting the depreciation of the Greenback against gold by: (1) levying a restrictive tax on gold sales, (2) forbidding loans on gold, (3) making customs duties payable only in Greenbacks, (4) selling the then-massive amount of $11 million in gold on the US market that the Treasury held to decrease the value of gold relative to the Greenback, and (5) selling a like amount of gold on the London gold market. None of these things worked: after each policy enactment, the price of Greenbacks only fell further against gold and other specie (silver).

Finally, backed into a corner of his own making, Chase decided to take the gloves off. He drove a bill through Congress that would prohibit under civil and criminal penalties all futures contracts in gold as well as prohibit all sales of the gold bullion outside of a broker's own office. Congress passed the law and the result was, predictably, disaster: the gold market went into disarray and the depreciation of the Greenback against gold began an even faster plummet, declining from $0.51 to $0.40 in a matter of weeks (from $0.59 when Chase first starting fighting the Greenback depreciation). The bill was repealed several months later and Chase was fired from his post.

Trying to control free markets has a downside. Let's hope the folks at the Fed are reading their history books.

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