In 1931 F. A. Hayek wrote that although the quantity theory of money as such is an oversimplification, “it would be one of the worst things which could befall us if the general public should ever again cease to believe in the elementary propositions of the quantity theory.” His point was that the fundamental idea—that any increase in the supply of money will raise commodity prices in general—is good enough to guide the voting publics of Western nations, even if the unalloyed quantity theory lacks important Austrian insights into the behavior of relative prices. If only the voters understood even that much today!
The lively and colorful memoirs of Noah Smithwick, nonagenarian, ex-North Carolinian, early Texas pioneer, and eventual Californian, take us back to a time when Americans could grasp essential truths about the nature of money. His book, The Evolution of a State or Recollections of Old Texas Days, reflects the original value system of the mobile and ambitious Americans of the early nineteenth century. Sometime in 1827 Smithwick set off down the Mississippi River on his way to Texas. Owing to some complication arising on the riverboat, he lost his grubstake and had to take a temporary job as a “mechanic” or “finisher” in an industrial concern in New Orleans. He immediately became the object of resentment on the part of the older, established workers for being too productive. Cautioned to go slower, he responded, “Our employer pays me for my time: do I not owe him all that I am capable of doing in that time?” The other workers’ attitude was that “‘No sprig of a boy must presume to set the pace for us,’ and so I was forced to slow down and drift with the tide. This was Labour Unionism in its incipiency.”
Smithwick, born in 1808 in North Carolina, went on to Texas—then part of Mexico—as soon as he could save enough money in New Orleans. He lived through the tumultuous days of the Texan Revolution, the Texas Republic, the Mexican-American War, and the secession crisis of 1861. At that time, the “integral nationalism” that he shared with Governor Sam Houston led him to leave Texas for the more favorable climate of California, where he remained. His eyesight failing him, he dictated his recollections to his daughter in 1899. Smithwick died the next year.
Willingness to Work
Noah Smithwick’s life may well stand as an example of what is rapidly disappearing from the American character. Willing to work hard and with a natural mechanical ability, he tried numerous enterprises: blacksmith, gunsmith, soldier, mill owner, critic of land fraud (perhaps the first big “industry” in Texas), independent inventor of the circular saw, and diplomat. (He negotiated an Indian treaty, promptly violated by both sides.) He would undertake any kind of honest work, which probably explains why he was never much of a politician.
As an active and ambitious pioneer, Smithwick calls to mind the “venturesome conservatives” of the Jacksonian period (to use Marvin Meyer’s phrase). A canny observer of, and participant in, the economic life of early (Anglo) Texas, he makes sharp comments on many of its aspects. Alongside his interesting passages on ethnic and cultural groups he came to know of (Mexicans, Indians, blacks, Germans, and Mormons), some of his best material and most amusing stories focus on the nature of money.
Smithwick describes the crisis caused in the Texas Republic by the government’s issue of inflationary “scrip” (a sort of constant with new regimes). In a textbook demonstration of Gresham’s Law, coin (that is, real money) disappeared. He recalls: “I received a hatful of new, crisp, one-dollar bills in payment for a horse lost in the San Saba Indian fight, which I immediately turned over to a creditor , without ever having folded them. People would almost rather have anything else than the commonwealth paper.”
In Travis County, people came up with an alternative: “Under those circumstances, we established a currency of our own, a kind of banking system as it were, which though unauthorized by law, met the local requirements. Horses were generally considered legal tender: but owing to the constant drain on the public treasury by the horse-loving Indian, that kind of currency became scarce, so we settled on the cow as the least liable to fluctuation.” Private bills were written against cows (valued at $10 per animal in real money). The system apparently worked well enough as long as it was needed. (Yearlings were also used as a medium of exchange.)
Meet “John Doe”
An even better example of Smithwick’s empirical Texan monetary views is found in his discussion of counterfeiting in the Redlands just before Texan independence. In 1831 he ran afoul of the law in San Felipe. Texas was still part of Mexico, and Smithwick thought it best to shove off to the Redlands, which bordered on the American state of Louisiana. There he came to know the local counterfeiter, on whose premises he worked, although he never took part himself in the counterfeiting portion of “John Doe’s” business. Doe’s product was a copper-sandwich version of the Mexican silver dollar, calling vividly to mind the “Lyndon Johnson” dimes and quarters introduced sometime in the mid-1960s.
Smithwick says of Doe: “There was nothing of the desperado about him. On the contrary, he was pleasant and peaceable and generally liked, and, so far from being looked upon as a malefactor, was considered a public benefactor, in that he furnished the only currency to which the people had access. The country could not be said to be on either a gold or silver basis, copper being the basis of Doe’s coinage. . . .”
Doe would occasionally call in his worn sandwich dollars and restamp them with a veneer of silver. He made doubloons as well. Clearly in touch with the policy debates of his last years, Smithwick remarks: “Doe’s currency furnishes a good example of the practical working of the populist idea: it was all right in domestic transactions, but when they attempted to discharge foreign [that is, non-East Texan] obligations with it, it got them into trouble.”
Doe did not do well when he extended his operations into western Louisiana. On one occasion, however, he won a sizeable bet by stamping a pure silver coin with the same cracked die he used for his copper-sandwich coins and sending a crony into a saloon to spend it. A skeptical bartender announced that the coin was clearly counterfeit, but put to the test, this coin of course proved to be unadulterated silver. (Doe won $500 on the bet.) With this windfall, Doe removed himself west of the Sabine River, where, as Smithwick puts it, “his efforts were more appreciated.”
As a moneysmith, says Smithwick, Doe “added materially to the wealth of the colonies . . . by restamping the old hammered dollars, a single blow of the hammer adding 25 cents to the value of each. There were thousands of them thus rehabilitated.” (There was apparently no debasing with copper in this operation.) Doe was finally put out of business by counterfeiters in Louisiana, who printed up fake U.S. bank-notes and floated them in East Texas. Smithwick observes: “Paper and ink being cheaper even than copper, Doe’s currency was given the go-by.” Copper, after all, was fairly valuable and Doe, at one time, had to break up a still to keep his copper-sandwich undertaking going.
Smithwick’s experience with the counterfeiter suggests a corollary to Gresham’s Law: worse money drives out merely bad money. It is refreshing to read the memoirs of a pioneer who could grasp an essential point about the nature of money and use it to cast light on his times.