The deafening roar of political leaders for a piece of the “bailout” is nearing unbelievable proportions. All levels of government seem to be willing to feed at the federal trough because it seems to have an endless supply of money. School districts, cities and towns, counties, and states all have their hands out. It seems that the very fact that local politicians are asking for the federal money is an indication that they would promise the same thing if they were federal office holders.
But only very faintly do we occasionally hear the more basic question: Where is the federal government going to get these huge amounts of money it is promising?
Our Founding Fathers had a near disastrous experience with a faulty money system. It gave them the frame of reference to correct their mistakes and lay the foundation for a whole new system as authorized in the Constitution-a system that, if followed, would forever avoid the pitfalls caused by fiat money and power-hungry politicians.
The Founders learn valuable lessons about money
During the Revolutionary War two things almost led to the defeat of the struggle for American independence. One was the inadequate system of constitutional government and the other was unsound money.
Congress issued about $240 million in “Continentals” — referring to money of the Continental Congress. It was understood that this money would be redeemed in gold or silver by the states after the war.
The states thought this was a great way to manufacture money so they issued vast quantities of their own paper currency.
Even the enemy, the British, saw what was happening so they printed up bales of counterfeit “Continentals” and used them to buy supplies from Americans.
Before long confidence in the Continentals had sunk so low that by 1780 they were not even worth one cent. No further paper money was issued by the United States for over eighty years.
The American market had already accepted the Spanish dollar as its basic unit of value. It was minted in Mexico and called a “piece of eight,” or a peso. To make change, they would cut it into eight pieces or bits and small change began to be called two bits for a quarter, four bits for fifty cents, and six bits for seventy-five cents.
In 1785, two years before the Constitution was written, the Congress accepted the Spanish dollar as the official unit of value for the United States and determined that all foreign coin would be evaluated in terms of the Spanish dollar.
In 1786, the year before the Constitution was adopted, the Board of Treasury fixed the silver weight of the adopted dollar at 375 and 64/100s grains of fine silver. The value of gold coins or any other coins was to be calculated in terms of the silver dollar of this weight and fineness.
It will be noted that three things had been established before the Constitution was adopted:
- That the official money of the United States would be precious metals-silver and gold.
- That the basic unit of value would be called a “dollar” and consist of 375 and 64/100s grains of fine silver.
- All other coins, both foreign and domestic, would be evaluated in terms of this official silver dollar.
All of this was already part of the law of the land when the Constitution was adopted. Therefore the Founders wrote the following provisions in the Constitution concerning money based on the above statutes which had previously been adopted as the official monetary system. They wrote:
“Congress shall have the power ‘to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.'” (Article I, section 8, clause 5.)
Paper Currency
There are two kinds of paper currency which are not “money” but circulate as such: the first is debt money, which can be redeemed in silver or gold on demand, and the other is fiat (paper) money, which is designated by law as “legal tender” but cannot be redeemed for anything.
The first draft of the Constitution during the Convention authorized Congress to “emit bills of credit.” This meant Congress could print debt money or currency which would be redeemed with gold or silver. After an extensive discussion the Founders decided it was too risky to give Congress the power to print any money even if it were redeemable in gold and silver, so they struck out the power to “emit bills of credit.” There would be no United States debt currency or bills of credit. As for fiat money, this was so abhorrent to the Founders they didn’t even discuss it.
The Founders knew that people do not like to conduct business — except for minor transactions — with precious metal. Metal money is too heavy, too bulky, and in substantial amounts is dangerous to transport. It is much more convenient and safe to use paper currency. The Founders realized this, but expected the banks to issue notes (redeemable in gold or silver) which would fill this need.
By the time of the Civil War there were thousands of banks issuing thousands of different kinds of bank notes. Furthermore, many banks had succumbed to the temptation of issuing far more notes than they had reserves. There was also a tremendous amount of counterfeiting. Before long the whole system began to falter.
When the Civil War required vast new expenditures, the banks wanted extremely high rates of interest on any loans to the Union (15 to 36 percent), and so Congress felt compelled to issue fiat money. These “greenbacks” could not be redeemed in gold or silver and were limited somewhat in the things for which they could be spent. Their value soon dropped to around 35 cents.
Finally, in 1878, Congress promised to redeem the greenbacks in gold. This changed the greenbacks from cheap fiat money to debt money, redeemable at face value. At first there was a run on gold as people traded in their greenbacks, but when they found they really could get the gold, then people didn’t want it. They returned the gold to the bank and took back paper money instead. This left the United States on the gold standard until 1933.
Meanwhile, Congress phased out the bank notes issued by state banks by putting a tax on them, thereby discouraging their use. In 1863-64 the Congress passed a series of national bank acts which set up a system of privately owned banks chartered by the federal government. These national banks issued notes backed by U.S. government bonds, and these national bank notes became the country’s chief currency. When the greenbacks received gold backing in 1878 they also moved up to a par value with the national bank notes.
In 1913 the Federal Reserve replaced the national bank system, and Federal Reserve notes were issued with a promise to redeem them in gold on demand. From 1914 to 1973 American currency went through the following erosion:
- From 1914 to 1934 every Federal Reserve note was redeemable in gold and silver. In 1934, Congress declared that Federal Reserve notes could no longer be redeemed in gold, only in silver.
- Between 1934 and 1963 all Federal Reserve notes promised to pay (or be redeemed) in “lawful money,” which meant silver. Then the wording on the Federal Reserve notes began to be changed to somewhat obscure language, which should have given Americans a warning that the government was planning something.
- In 1964 the government went off the silver standard, and Federal Reserve notes, which could no longer be redeemed in gold or silver, became fiat legal tender.
- By August 1971 many of the European countries had collected so many billions in Eurodollars (foreign aid, money spent by the U.S. military abroad, etc.) that European banks had begun to get nervous about redeeming their money in gold. A threatened run on the U.S. Treasury resulted in the American gold window being slammed shut. This resulted in a collapse of the dollar on the world market. Since then it has fluctuated on the world market like any other commodity, since it is no longer redeemable in precious metal and therefore has no intrinsic value.
- The world market immediately reflected serious erosion in the value of the American dollar. To buy an ounce of gold it took not $42.23 but $100, then $200. After that, it moved higher and higher until it required over $800 to buy an ounce of gold. Today the price of an ounce of gold is close to $1000 of paper or fiat money.
Today the American economy operates under a monetary system which is completely outside the Constitution. Its fiat money is continually manipulated both in value and in quantity. This has had a devastating impact on its purchasing power, which is now down to about 3 percent of its 1933 value. It has eroded the value of savings, insurance policies, retirement funds, and the fixed incomes of the elderly.
Why politicians ignore the Founders wisdom
Requiring money to have a gold and silver standard is a protection for the people. It is meant to keep a check on profligate spending by politicians. If politicians want to create a welfare or bailout program that costs, say $100 billion, and if our currency were still redeemable in gold and silver, they would have to come up with $100 billion of precious metal in order to generate the money needed. But if our currency has no redeemable value, all they need to do is to crank up the printing presses and print the money. As it pours out into the hands of the people, the people think they are really getting something and so they will remember the generous politician at the next election. But what they are really getting is devalued fiat money, but the people don’t immediately know the difference. It is one of the oldest banking tricks around. It is stealing the value of the people’s money.
Warnings of the Founders who foresaw our day
As we witness the government printing hundreds of billions of dollars of new fiat money today, we cannot help but recall the strong feelings of the Founders during the Constitutional Convention about the government power to “emit bills of credit” (meaning to print paper money.)
Gouverneur Morris : “Moved to strike out ‘and emit bills on the credit of the United States.’ If the United States had credit, such bills would be unnecessary; if they had not, unjust and useless.”
Oliver Ellsworth : “Thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made were now fresh in the public mind, and had excited the disgust of all the respectable part of America. By withholding the power from the new government, more friends of influence would be gained to it than by almost anything else. Paper money can in no case be necessary. Give the government credit, and other resources will offer. The power may do harm, never good.”
James Wilson : “It will have a most salutary influence on the credit of the United States to remove the possibility of paper money. This expedient can never succeed whilst its mischiefs are remembered. And as long as it can be resorted to, it will be a bar to other resources.”
Pierce Butler : “Remarked that paper was a legal tender in no country in Europe. He was urgent for disarming the government of such a power.”
George Read : “Thought the words, if not struck out, would be as alarming as the mark of the beast in Revelations.”
John Langdon : “Had rather reject the whole plan than retain the three words ‘and emit bills.'” (See The Making of America , pp. 419-426)
It was felt that the people would regain their confidence in American money if the Congress authorized the issue of only gold and silver coins as legal tender.
In fact, they felt so strongly about it that they required all states to be on a gold and silver standard also. Article I, section 10, clause 1, which has never been amended, states that “No state shall … emit bills of credit [or] make anything but gold and silver coin a tender in payment of debts.”
No greater protest concerning money manipulation by powerful private interests is that lodged by forward thinking Thomas Jefferson. His warning can be heard across the vista of two whole centuries:
“If the American people ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied. The issuing power of money should be taken from the banks and restored to Congress and the people to whom it belongs.” (Skousen, The 5000 Year Leap , p. 188)
We are no doubt going to be eye-witnesses to the economic calamity which will follow if we continue to ignore this wise counsel from the Founders.
