The Need for a Sound Monetary System
Fed chairman Alan Greenspan, prior to his 1987 appointment to head the Federal Reserve, said:
“The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit….
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold…. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
“This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.” [Alan Greenspan, “Gold and Economic Freedom,” in Capitalism: The Unknown Ideal, ed. Ayn Rand (New York: Signet Books, 1967), p. 101; as quoted by Griffin, p. 148-9.]
In his study guide called, “THE UNHINGING OF AMERICA,” Dr. W. Cleon Skousen says, Congressmen pushing for passage of the Federal Reserve Act in 1913 made many promises to the American people. We are now cataloging them for perhaps the first time. Although many provisions appear to violate the Constitution by giving total control of our money system to a consortium of bankers, these and many more promises helped convince enough Congressmen to pass the act.
A source is given for each promise and is only an example of many from various proponents. For instance, Congress was promised at least fifty times that inflation would be nothing to worry about under the new system.
These documented promises constitute a summary of several hundred that were made in a tremendous push to ram this legislation through in time for the Christmas recess. The Federal Reserve Act passed the House on December 22, 1913 and was approved by the Senate on December 23, 1913. President Woodrow Wilson signed the act into law later the same day.
- Interest rates will always be low.-Congressman Oscar W. Underwood (D-Ala.).
- Financial panics will be impossible.-Senator Claude A. Swanson (D-Va.).
- The Federal Reserve system will destroy the powerful “Money Trust” on Wall Street so that it will no longer control American finance.-Con. Claude Weaver (D-Okla.).
- America will have permanent prosperity.-Congressman William A. Cullop (D-Ind.).
- The Federal Reserve Board will prevent depressions.-Sen. C. A. Swanson (D-Va.).
- All Federal Reserve notes can ultimately be redeemed in gold.-Congressman Finly Gray (D-Ind.).
- The Federal Reserve automatically prevents inflation, but only if a gold reserve is maintained.-Congressman Adolph J. Sabath (D-Ill.).
The record shows that Woodrow Wilson was one of the first to recognize what a horrendous mistake had been made with the passage of the Federal Reserve Act. In 1916, just three years after it went into operation, President Wilson seems to have suddenly realized what a virtually uncontrollable power monopoly had been vested in the nation’s new Federal Reserve System. He wrote: “A great industrial nation is controlled by its system of credit. Our system of credit is concentrated (in the Federal Reserve System). The growth of the nation, therefore, and all our activities are in the hands of a few men…. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world-no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of small groups of dominant men.” (Quoted in “National Economy and the Banking System,” Senate Documents Co. 3, No. 23, Seventy-sixth Congress, First session, 1939.)
President Wilson’s protest against the “duress” of a few dominant men is especially interesting in view of the dozens of articles he had written, as head of the political science department at Princeton, criticizing the thinking of the Founding Fathers and calling for stronger centralized power in Washington.
In fact, these men from whom President Wilson was feeling such duress and domination in 1916 were the very ones he had been praising a few years earlier.
It would seem that the superior wisdom of the Founding Fathers had become increasingly apparent, even to Wilson.
Early Americans Learn a Bitter Lesson in How Not to Issue Money
Following the Declaration of Independence, the American Congress began issuing paper money again, but without any particular limitation. The states did the same. None of this money was tied to precious metal, nor was it limited in quantity. Naturally, these “Continental” dollars soon inflated out of sight, eventually becoming useless-worth less than a penny. Even after winning the Revolutionary War, this fatal monetary system almost resulted in the destruction of the United States as a nation. There was not only skyrocketing inflation, but a deep depression and rioting. The New England states became so antagonistic toward developments that at one point they threatened to secede. This was the critical situation when the Constitution was finally put into operation to save the country.
With the adoption of the Constitution, Jefferson hoped the nation would go back to the earlier procedure with government issuing its money based on a precious metal standard. The treasury could then set up branches for loaning money as was done prior to 1720. And as before, all payments of interest would go to the general funds of the nation, thereby greatly reducing the required taxes.
Alexander Hamilton Makes a New Proposal
The first of Jefferson’s hopes was realized when the gold and silver standard was explicitly written into the Constitution (Article I, section 10). However, his second hope was shattered when Alexander Hamilton was appointed Secretary of the Treasury and came up with a plan to monetize the nation’s mammoth war debt by issuing bonds and selling them to private banks. He also urged the President and Congress to allow these bankers to temporarily (for twenty years) establish a private bank in the name of the United States and be responsible for issuing money, controlling the amount, fixing its value, and financing the United States government. It was this last factor which appealed to President Washington.
There was, of course, no Constitutional authority to have the federal government set up such a bank, but Hamilton persuasively argued a theory of “implied powers” which has seriously damaged the whole concept of “limited powers” government ever since. Although the argument was sufficiently strong to impress Congress, Washington was uncomfortable with it. In fact, he was actually contemplating a veto of the banking act when Hamilton drew him aside and filled his mind with such glowing promises of stability and prosperity under this “temporary” expediency, that Washington finally overrode his professional instinct as one of America’s most successful farmers and signed the bill.
Hamilton Repudiates His Original Banking Project
Jefferson later accused Hamilton of complicating the whole scheme with such elaborate trappings that it had confused the President. It turned out that Washington’s original instinctive anxieties concerning the dangers of the bill were fully justified.
By 1798, even Hamilton admitted that the whole thing had been a serious mistake. He actually wrote a letter to Oliver Wolcott, the Secretary of the Treasury, urging that the United States abandon the plan he had concocted and return to the original idea expressed at the Constitutional Convention. He wrote that the government should “rise up a (money) circulation of its own” which would require, of course, that the government no longer allow this important task of issuing money to be assigned to a private banking system. (Letter to Oliver Wolcott dated August 22, 1798; Henry Cabot Lodge, ed., The Works of Alexander Hamilton, 12 vols. [New York: G.P. Putnam’s Sons, 1904], 10:317.)
The First Bank of the United States
Even though most of the stock in Hamilton’s bank was privately owned by some of his associates in New York, it was called the Bank of the United States. This led people to assume it was a government bank. This same trick was used in 1913 when a group of bankers called their consortium of financial power the Federal Reserve System.
The advantage of the new bank was that it provided immediate credit resources for the nation, which was otherwise bankrupt. This practical reality is what appealed to Washington first and foremost. He also recognized the dangers involved, but felt these could be circumvented by the fact that the charter for the bank would end in twenty years.
The disadvantages of the bank were vigorously protested by Jefferson, and his dispute with Hamilton became so heated that it finally led to Jefferson’s resignation as Secretary of State. Critics of the new bank pointed out that
- There was no Constitutional authority to issue the bank a charter. In other words, the bank was unconstitutional.
- The bank was authorized to issue bank notes or paper money, which was an unauthorized delegation of Constitutional authority.
- The charter allowed this private central bank to loan out its bank notes for interest.
- This private central bank was made exempt from paying any taxes.
- It was unconstitutionally designed to collect taxes and serve as the depository of government funds instead of the U.S. Treasury.
- The banking act also held the U.S. government responsible or liable for the fiscal transactions of the bank.
- Only one-fifth of the stock was owned by the government, so policies and decision making would always be in the hands of the private banks.
Jefferson considered the whole scheme an unconstitutional threat to the basic fabric of the American civilization. He prophesied:
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. (Quoted in Olive Cushing Dwinell, The Story of Our Money, 2nd ed. [Boston: Forum Publishing Company, 1946], P. 84)
What Are the Characteristics of a Sound Money System?
Here are some of the most important characteristics of a sound and honest money system which the Founders had in mind when they wrote the Constitution:
- Money should be recognized as nothing more than a unit of value designed to facilitate the exchange of goods and services. The right to create such a symbol therefore belongs to those who create the goods and services, meaning the people themselves. It is an inherent and unalienable right which they alone can delegate. In the Constitution the right to create the people’s money was delegated to Congress.
- Once the right to create money is delegated to the people’s representatives-the Congress-it is completely unlawful for the Congress to give that right to a group of private bankers or “money managers.”
- It is the responsibility of the Congress to create a healthy dollar or unit of value which will maintain the same relative value from generation to generation.
- It is also the responsibility of the Congress to set up appropriate machinery to monitor the money supply so that it will remain in balance with the amount of goods and services being produced by the people. As productivity increases, the money supply should be increased, but only to the same extent. Congress has never provided the machinery needed to fix and maintain the value of money by regulating the supply in relation to goods and services.
- Machinery should also be provided so that no powerful group of private money manipulators could suddenly drain off large portions of the money supply so as to cause a depression, or suddenly add to the money supply and thereby create skyrocketing inflation. Either of these developments violates the responsibility of Congress to “fix” and maintain the “value” of the dollar as provided in the Constitution.
- It was also the intention of the Founders that the issue of the dollar be locked into a designated amount of gold or silver. Throughout the history of modern man, precious metal has always been the “money of last resort.” Of course, people will ordinarily prefer to use paper money because it is so much more convenient to handle, but as Jefferson and others pointed out, it should be redeemable in gold or silver. And experience has taught us that U.S. notes should be redeemable in gold and silver at the prevailing market price rather than some arbitrary price fixed by statute. A statutory price allows speculators to play havoc with our currency.
- To safeguard the value of money against the manipulation of speculators, it is essential that the nation have such a large supply of precious metal in storage that no group of private speculators, either at home or abroad, can get a corner on the market and seriously alter the stability of the paper money which has been issued.
- When a certain unit of value (the dollar) has been declared the official legal tender, no bank or individual should be allowed to make loans except in terms of monetary assets which are in actual possession or readily available. Fractional banking or loaning on “credit” backed by merely a fraction of the loan is inherently fraudulent and should be outlawed.