How Ben Franklin's Plan for Seignorage Without Inflation Could Have Forestalled the American Revolution
s Ben Franklin the Father of Electronic Money?
The illustration, above, that I know from Noah Smith’s @noahpinion Twitter homepage, appears to be the work of Aaron Jasinski. See this link. This is one of the few illustrations I love so much I have used twice. The other time was in my post “Niklas Blanchard Defends Me from the Wrath of Paul Krugman, Despite My Lack of Nuance.” It is fully appropriate here, since Ben Franklin’s plan for negative interest rates anticipated modern electronic money proposals for generating seignorage without inflation, as detailed in “Paul Romer on the Cashless Society.”
The 1765 Stamp Act the British parliament levied on the American colonists (to help pay the debt incurred by Britain to fight the French and Indian War) was one of the key steps leading to the American Revolution. Conrad Black’s book The Flight of the Eagle: The Grand Strategies That Brought America from Colonial Dependence to World Leadershiptold me a story about the Stamp Act that I had never heard before: Ben Franklin had an alternative to the Stamp Act that just might have averted the American Revolution. Intriguingly, Ben Franklin’s plan can be seen as a cross between Silvio Gesell’s proposal for stamped currency and the proposal for generating seignorage without inflation detailed in “Paul Romer on the Cashless Society.” But Ben Franklin’s proposal preceded Silvio Gesell’s 1891 book Die Reformation des Münzwesens als Brücke zum sozialen Staat (The reformation of the monetary system as a bridge to a social state)–his first book on reforming the monetary system–by 126 years!
To understand the following passage, the Wikipedia definition of bill of credit is helpful: “a document similar to a banknote that is issued by a government and designed to circulate as money.” From pp. 39-40;
Shortly after Franklin’s return to London in 1764, debate began on the Stamp Act, which imposed a tax on printed and paper goods in the colonies, including even newspapers and decks of cards, and was so called because payment of the tax was certified by a stamp on the article taxed. Britain already had such a tax domestically. Pitt’s brother-in-law, George Grenville (not to be confused with Lord Granville), was leader of the government in the House of Commons. In presenting the measure, Grenville claimed the right of Parliament to levy taxes anywhere in the Empire, which was not contested by his fellow legislators, but he gave the colonies a year to propose alternatives. None did so, although Franklin himself did. Franklin achieved prodigies of diplomatic access and advocacy, but he had no legitimate status at all, and was merely an information service from Pennsylvania and other colonies that engaged him, to the British government establishment, and public. Franklin’s proposal was to have Parliament establish a colonial credit office that would issue bills of credit in the colonies, and collect 6 percent for renewal of the bills each year, and these could be used as currency. Gold and silver currency were scarce in the colonies, as all transactions with Britain had to be paid in cash, and Parliament had forbidden the issuance of paper money in America. Franklin’s theory was that this would be an adequately disguised tax, and would not be unpopular in American because of the desire there for paper money to replace an inordinate mass of informal IOUs. It isn’t clear how the interest would have been collected, or how inflation would have been avoided, but at least it was creative thinking, and a start.