Bad Paper—How the Fed Bailed on the Constitution
Since the Truman administration, Democrats have called for the nationalization of the health-care industry. The Democratic Party’s position, stressed more strongly at some times than at others, has been that the average Joe should not have to sacrifice much to pay his family’s medical bills.
For Republicans, this has been sacrilege. And a threat. As William Kristol famously explained of the Clinton Administration’s effort in this line, a new federal entitlement to medical care would create a vast new constituency for the Democratic Party. He counseled that it must be defeated at all costs, lest the Republicans remain in the congressional minority for another generation.
Sometimes, Republicans explained their hostility to socialized medicine economically: Government control would mean higher prices and lower quality. Sometimes, they explained it in terms of inefficiency—recall Arlen Specter’s flow chart of Hillary Care. And sometimes, the Republican opposition was couched in constitutional terms: “We can’t do this,” they said, “because there’s nothing in the Constitution that says we can.”
Democrats insist that this last argument is really just a mask for class interests. Republicans, they say, don’t really care about the Constitution, which even the rubes know hasn’t bound us since the 1930s (at least) anyway.
Comes now the team of George W. Bush, Ben Bernanke, and Henry Paulson to prove once and for all that at least in the case of New York and New England Republicans (as an adopted Texan, I insist that the Bushes are from Connecticut), the cynics are right. It is about class interest.
How do we know? Because George W. Bush and Company have pulled out all the stops for the Billionaire Bailout. They have no problem whatsoever nationalizing liability for hundreds of thousands of home mortgages gone sour and passing along the costs to … well, to the same taxpayers as would pay for socialized medicine.
Yes, you might say, but I don’t want the smiling, friendly service I receive at the local post office when I go to the doctor. Oh, really? But you don’t mind that service when you want a loan?
How did we come to have such a mess in the mortgage market in the first place? It results from two of the unconstitutional innovations of the 20th century: the Federal Reserve System and government-spurred mortgages.
Search it thoroughly, and you’ll find nothing in the U.S. Constitution that authorizes the Federal Government to create an institution like the Federal Reserve, let alone to encourage home lending. Yet, no one seems much to care.
In fact, the question is rather an uncomfortable one. Ron Paul recently asked Ben Bernanke where he got constitutional authority to create money out of thin air, and Bernanke said that Congress had delegated to the Fed Congress’s constitutional power to coin money.
But of course, the Fed doesn’t coin money—it prints paper. And the Constitution doesn’t empower Congress to delegate its powers. (But that’s another battle that supporters of the Constitution lost long ago.)
Why would the Philadelphia Convention have created a government without power to print money? After all, isn’t the power to print money one of the chief elements of sovereignty?
In short, no. Paper was not regarded as money in 1787. There had been experience with paper currency in the Revolution, but this was seen as a stop-gap measure. The typical note said something like “Good for 10 pounds sterling within six months of the end of the war.” It was to be redeemable, in other words, for a metallic commodity.
All thirteen states and Congress printed the stuff—and printed it, and printed it… Just as the American dollar’s value has declined by over four-fifths since the inception of the Federal Reserve System a century ago, so paper currency’s value declined rapidly in the 1770s and ’80s. So severe was the inflation that if you wanted to say something was worthless, you might say it was “not worth a Continental” (a congressional “dollar,” that is, meaning a congressional paper dollar).
James Madison listed hyper-inflationary printing of paper money as one factor precipitating “the crisis of republican government.” So badly had Congress and the states performed economically, he said, that their record threatened to disgrace republicanism worldwide.
We need not buy into Madison’s version of Federalism to understand the constitutional consequences of the Revolutionaries’ revulsion with paper money. It seems to have been one reason that Madison, unable to prevent the Old Dominion from printing paper money, opted for federal constitutional reform: If he couldn’t defeat paper money men in his home state, he would go around them.
Yet, by the time the Philadelphia Convention met in 1787, Patrick Henry — Madison’s chief Virginia political adversary — had joined in a House of Delegates resolution against any future printing of paper money. No one significant objected.
The U.S. Constitution, in Article I, Section 10, bans the states from printing paper money. In Article I, Section 8, it empowers Congress to coin money, but that list of powers says nothing about a power to print paper money. As James Wilson, Pennsylvania’s leading Framer and Federalist spokesman, explained, Congress would have only the powers that were listed; omission of a power to print paper money amounted to a ban on congressional paper.
In other words, the U.S. Constitution meant that neither the states nor the Federal Government would have power to print paper money. But surely that was unreasonable. People must have ignored this decision from the inception of the Federal Government.
No, they didn’t. Martin Van Buren’s administration (1837-41) may be seen as paradigmatic. Van Buren came to office just as a severe recession set in. He was constantly castigated by his Whig opponents for not adopting spend-thrift, constitutionally dubious “solutions” — protective tariffs, public works, and federal chartering of a new Bank of the United States — to the problem.
Rather than be seen “doing something” (as George W. supposedly faulted his father for not doing in the face of 1991’s mild recession), Van Buren counseled that the market would work the matter out, and that the government should not add to the problem by favoring a few well-connected rich over the poor.
Van Buren was not alone in this position. Rather, it was Jeffersonian, then Jacksonian, dogma virtually from the beginning of the Jeffersonian Republican Party in 1792 until the New Deal of 1933.
For Van Buren, any other position threatened a resuscitation of Alexander Hamilton’s anti-constitutional Federalism of the 1790s. Freedom in America meant living under the Constitution, and so he would have none of Federalism. Opposition to Hamiltonian measures was the reason that Van Buren had joined John C. Calhoun and Thomas Ritchie in organizing the Democratic Party in the first place.
One manifestation of this view was the Jacksonian campaign against the Second Bank of the United States, which finally died at Jackson’s hand in 1836. Jackson counseled in his Bank Bill Veto Message of 1832 that the Bank should be resented by the common man. Rather than showering its blessings on rich and poor alike, the Federal Government through the Bank was favoring the wealthy and well-connected.
Opulence in 1832 didn’t extend to billions, but you can see the resemblance of the Bush-Bernanke Bailout to Nicholas Biddle’s bank charter. The Bank was the statutory depository of federal tax revenue, which it then was entitled to loan out at interest. Its notes formed what Hamilton had called a “circulating medium.” Besides that, the government used the Bank as lender of choice in case of war; this had been the prime reason for its creation.
In other words, people had to put their money in a private bank, which then had the right to lend it at interest. In essence, it was guaranteed to make money, unless its lending policies were simply incompetent.
Sound familiar?
No relevant section of the Constitution has changed since the death of the second federally-chartered bank in 1836. What has changed is American culture, as Tom Woods and I explore in Who Killed the Constitution?.
Where once Ron Paul would have stood at the head of a majority of Jeffersonian Republicans or Democrats in decrying the elite’s attempt to fleece the public through legislative gifts to bankers, he now stands alone. Virtually no one adheres to any serious constitutionalism — to a reading of the Constitution that sometimes prevents him from doing things that he really wants to do. No one seems to care to point to a constitutional provision authorizing bank legislation (read: Federal Reserve legislation or $700B bailouts).
So, the next time an avowed socialist proposes nationalization of health care, if you hear anyone who voted for the Bush-Bernanke Billionaire Bailout say that it’s unconstitutional, be wary. His “constitutionalism” is highly selective.
Besides which, the long-term positive economic effect of this latest outrage against the Constitution will be virtually non-existent, if not absolutely negative. But that is grist for another mill.
Kevin R. C. Gutzman is co-author, with Thomas E. Woods, Jr., of Who Killed the Constitution? The Fate of American Liberty from World War I to George W. Bush.
Comments
Just another perfect example of how a loose interpretation of the Constitution can lead to tyranny.
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So according to strict constitutionalists, we should only have coins and no paper money? Or we could have paper money but no one responsible for printing it?
The “good” thing about the Bush bailout is that it won’t last but a couple of months. Then Paulson will have get on his knees again and the administration will give him another trillion. And so on. What Americans can’t seem to realize that the credit system cannot continue as is. That means that the idea that everyone must be a his own boss / a business-owner with borrowed money is not tenable. At some point Americans will have to get tired of the boom/bust financial cycles which are getting shorter and more bombastic.
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Article I, Section 8’s “coin money” refers to specie—gold and silver. Paper money, which means inflation, was banned by the Constitution.
This isn’t a pie-in-the-sky idea. There was no federal paper money until the Civil War, and there was no Fed until a half-century after that. Government subsidies of mortgages came still later, and purchase of hundreds of thousands of mortgages is an innovation of our own day.
The boom-bust cycles of which you complain result from Federal Government intervention in the economy—virtually all of which is unconstitutional.
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What is really special about this debate is watching the Demoweenies of the House caving to the Executive toot sweet while some Republicans actually come to their senses ....4 years too late...well, scotch that, 20 years too late and decide Socialism is not in everyone’s best interests. Funny thing though, they were all part and parcel of the general program to mortgage us out to Foreign Interests and now it is a little late to tell those offshore interests who happily facilitated our descent into fiscal idiocy to take the new found belligerent principle and pound salt. Congress may feel anyone’s word is passe but we might not want our many creditors to think the word of the United States is no good......even though the FED, the Treasury, the Executive and the Congress has done everything in their power to make sure we could not back up our debt.
Everyone should get used to the fact that THERE IS NO GOOD, NOR EASY ANSWER and this current government has crafted, with the aid of the financial industry, the delusions of the militant neo-cons and a gullible citizenry...... a serious auto-ass kicking of historic proportions. EVERYONE should come to their senses and realize that their government is incapable of planning a beneficial outcome to the current challenge.
China invented paper currency, catching the eye of European traders in the 17th century and now they are involved in a perfect storm of why paper currency is hazardous when not administered by sober and conservative people.
Such are the wages of the kind of Transvestite Socialism these boys and girls are intent upon diving into.
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I say this with respect: I’m amazed at how stupid people in Congress can be for not recognizing the ill effects of the Federal Reserve system. Or perhaps, I’m ashamed at how sinister they may be. I hope that they are more stupid than sinister. Could it be that those who read this message are smarter that 99% of those who serve in Congress?
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How like Ron Paul that he uses Q&A;time to mainly make a speech, or perhaps a rant, depending on your POV. But Kevin’s statement that paper currency wasn’t considered money in 1787 is absolute nonsense, and betrays an woeful ignorance of American history in general, and the history of the Revolution in particular. The British had denied the colonies both coinage and scrip, and this was one of the major causes of the Revolution, according to Ben Franklin. Franklin went on to remark to his British hosts:
We have no poor houses in the Colonies; and if we had some, there would be nobody to put in hem, since there is, in the Colonies, not a single unemployed person, neither beggars nor tramps.
“Why was this” he was asked? Franklin replied,
We issue our own money. ...We make sure it is issued in proper proportions to make the goods pass easily from the producers to the consumers....In this manner, creating for ourselves our own paper money, we control its purchasing power, and we have no interest to pay to no one. You see, a legitimate government can bothy spend and lend money into circulation, while banks can only lend significant amounts of promissory bank notes, for they can neither give away nor spend but a tiny fraction of the money people need. Thus, when your bankers here in England place money in circulation, there is always a debt principal to be returned and usury to be paid.
Franklin wrote in “Busybody #8” that Experience, more prevalent than all the logic in the world, has fully convinced us all, that [paper money] has been and is now the greatest advantages to the country.” He also wrote the pamphlet The Nature and Necessity of Paper Money.
There were goldbugs in Franklin’s day to be sure. But to say that paper wasn’t considered money flies in the face of the facts.
One can debate whether the power granted to coin money extends to scrip. But one cannot debate that the constitution does not limit the coinage to precious metals. And if base metals can be coined into money, then there is really no difference between that and scrip.
There are legitimate debates about money, then as now. But those who take one side or the other do their side no good by pretending that there was no debate, that the issue was settled, or that the constitution says what it manifestly does not say.
The real debate about paper money (for those who no anything about money) is whether it should be (as it is now) a power of the banks or a power of the gov’t. It is misleading to say that the gov’t prints money. Yes, they do the printing, and then sell it to the banks at four cents/bill, the printing cost. But currency is only a small part of the money supply in any case, and few of us use very much of it. Most money is created by bank lending, and this--and not whether it should be gold--lies at the heart of the issue.
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Finally, some meaningful discussion. Mr. Gutzman has done a service in touching on the history, politics, and economics of money in the Constitution. And Mr. Medaille’s points are well taken.
The real heart of the issue was exposed in last night’s (corporate) media panic over the heroic rejection of the bailout plan. A talking head on Nightly (Keynesian) Business Report whined, “Credit is the key to the economy.” No, it’s not. Saving has been and always will be the foundation of economic well-being. That the Fed and the government collude to discourage savings, stimulate false liquidity, and tax through inflation are criminal, regardless of what kind of money is involved.
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That’s a great point, Mr. Medaille: Ben Franklin wrote an essay defending paper money in 1729, so there wasn’t a consensus against it in 1787. Yes, someone’s argument “betrays an woeful [sic] ignorance of American history in general, and the history of the Revolution in particular,” but it isn’t mine.
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Mr. Gutzman wrote: “...the Republican opposition (to nationalized health care) was couched in constitutional terms: “We can’t do this,” they said, “because there’s nothing in the Constitution that says we can.”...Democrats insist that this last argument is really just a mask for class interests. Republicans, they say, don’t really care about the Constitution, which even the rubes know hasn’t bound us since the 1930s (at least) anyway.”
It just shows how disingenuos the “Libertarian”: arguments on behalf of “freedom” are. It’s all bull-toss. We can’t “Nationalize” the health care industry---but we have to bail out foreign banks, hedge funds and other elements of finance capitalism. It just goes to prove that “libertarianism” is a philosopy that picks and chooses what it believes in, we can have socialism for the rich, as long as we preserve the “free market’ for folks that work for a living, live off the income from their labor.
In point of fact, the arguments for single payer health care are NOT the nationalization of
health care, but the consolidation of the insurance risks by the federal government. It not that much different then the current system, in which rates are set locally by an independent “private” agency..the
free market would exist in that private interests would be “free” to compete to provide
health care services…
Mr. Gutzman wrote: “The U.S. Constitution, in Article I, Section 10, bans the states from printing paper money. In Article I, Section 8, it empowers Congress to coin money, but that list of powers says nothing about a power to print paper money.”
A mere technicality. The constitution does NOT specify a gold standard either. The FED isreally the
privatization of money, as the FED is completely private organization, with the Federal government
“privatizing” the function, much as you so-called “conservatives” and “libertarians” woudl
“privatize” all governmet functions..."outsourcing" would be a way of describing it.
There is a distinction to be made between the FED and the old “Greenbacks” system...that
was the printing press as the Continental Congress did to finance the Revolutionary War, and
later the “Greenbacks” issued to finance the Civil War.
The FED replaced the old system of private banks issuing money, which caused a lot of problems
as “private” unregulated banks would issue paper money based on assets they didn’t have...much like the
current crisis that we are experiencing now...where private banks issued credit based on assets that
were not worth what the banks claimed on their books.
This is an old argument that has been deconstructed and debunked long ago...it is based on the
differences in the theory of what money should be--a store of value or a medium of exchange.
The gold standard failed as a medium of exchange, which is why private banks issued their own
certificates of exchange because the supply of gold did not keep up with the growth of the economy.
Gold was popular after the Civil WAr because after the Civil War because the deflation that
is inherent in the gold standard increased the value of the debt they loaned the Federal Government to finance the Civil War. Deflation benefits creditors, and is a tax on debters. It is as simple as that.
Andrew Jackson’s populist revolt against a National Bank is similar to the current resentment
against the FED, as the National Bank was working on behalf of finance capitalism, and againnsst the
interests of farmers and laborers.
The endless arguments on behalf of the gold standard are really just silly...the problem with the FED is that we have turned over the management of the money supply to a private organization that represents the interessts of finance capitalism, and all of the decisions it makes about the money supply are outside fo teh
scrutiny of the Congress, and the people.
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Paper money financed the Revolutionary War...that is where the old saying, “Not worth a
Continental” came from. The Civil War was financed by the printing of paper money, the old
“Greenbacks”...the Confederacy also printed money.
Mr. Gutzman misses the whole argument against the FED, it is a private organization, the
outsourcing of the management of the money supply from the Federal Government to a private
organization composed of finance capitalists, in which all decisions it makes are outside fo teh
democratic system, all decisions made behind closed doors without public scrutiny.
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Here is a great documentary on money, central banking (Euro and US) and the Fed. It’s long, but worth watching.
http://video.google.com/videoplay?docid=-515319560256183936&ei=UXjiSMekKYGE_AGUhOQE&q=the+money+masters
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That paper money financed the Revolutionary War would have surprised Louis XVI, who ultimately lost his head as a result of his inability to service the debts he ran up in support of George Washington’s forces. It would have surprised the Dutch bankers who loaned Congress real money. It would have surprised Alexander Hamilton, who proposed that the First Congress under the current Constitution assume responsibility for the states’ Revolutionary debts, and the Congress that adopted his proposal.
That the Revolutionary War was financed with paper would have surprised the Western Massachusetts farmers who supported Daniel Shays in his uprising against the Commonwealth of Massachusetts; they thought their problem was a shortage in the Berkshire counties of specie required to pay the new taxes levied to repay the Revolutionary debt. It would have surprised James Madison, who believed that the paper currency issued by the states and Congress during and after the Revolution, far from “financing” the Revolution, had actually unjustly put off the reckoning.
In short, paper did not finance the Revolutionary War.
The Fed is unconstitutional because Congress has no authority to delegate its power over money to anyone. Its operations are unconstitutional because the Constitution does not empower Congress to issue paper money. In short, the Constitution contemplated a specie standard, not “money” with no fixed value at all. Money with no fixed value was Madison’s, Hamilton’s, Morris’s, and many other Federalists’ BAIN, not their antidote.
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Mr. Gutzman wrote: In short, paper did not finance the Revolutionary War...The Fed is unconstitutional because Congress has no authority to delegate its power over money to anyone. Its operations are unconstitutional because the Constitution does not empower Congress to issue paper money. In short, the Constitution contemplated a specie standard, not “money” with no fixed value at all.”
Well, your assertion that paper money didn’t win the revolution would have surprised that patriots that volunteered in Washington’s Army..they were paid in CONTINENTALS...paper money. As were most of the merchants supplying food and material. Ditto with the Civil War…
If it is unconstitutional for the federal government can’t “outsource” the management of the money supply to a private organization---the fed---then all of the “privatization” schemes for any public services must also be unconstitutional. According to YOUR rationale, then the federal government cannot outsource computer services, police and military support functions, nothing to outside private contracters. It’s a silly argument.
Your entire argument rests on the term, “coin” in “to coin money”...which doesn’t necessarily preclude paper money at all...since paper money existed since the Continental Congress.
I would agree that outsourcing the management of the money supply to the FED is wrong, but not for the reasons you state...but because it is outside of the democratic process...the Board of Governors of the FED is composed of
Jewish finance capitalists, with a single exception, which is a Rockefeller.
Again, you have to make a distinction between the 2 theories of what function money has---to be a store of value
or a medium of exchange. As a medium of exchange, it has a long history of failure and dysfunction. Even with the gold standard, the ultimate value of anything is based on the productivity of the economic system. You can’t eat your gold...if there is nothing to buy, it is worthless as paper money. While you are correct, that reckless management of the money supply can be a problem, but only when the creation of credit and cash greatly exceeds the
productive growth of the economy.
Also, in point of fact, the supply of money has not really grown relative to economic growth...the money supply is stable really. What is being created “out-of-thin-air” is CREDIT. Often when you “Libertarian” types grip about
“printing presses” creating money, everyone looks at you like you are out-of-your-minds. If you define money supply as the actual dollars in circulation, there is no inflation. But if you define money as cash in circulation PLUS credit, then yes, you are right, the money supply is growing faster then then the economic system is producing goods and services.
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The fact that something was done during the Revolution is not proof that it is constitutional. The Constitution was written after the Revolution, in large part to correct what were understood by its advocates to be shortcomings of the federal Union made evident during and immediately after the Revolution.
In fact, to ban paper money was one of the chief motives driving Federalists, such as Madison, Hamilton, Morris, and Wilson, to push for a new federal constitution. (Onuf and Sloan, for example, noted this fact decades ago.) Thus, Article I, Section 10 says the states may not print paper money. Article I, Section 8 says the Congress can coin money. Your point, that there is no distinction between the two, and that the power to coin money includes the power to print money, is novel. You should publish it.
State notes issued during the Revolution were i.o.u.s. They said so on their faces. They weren’t money. Continental dollars were printed, yes, and became increasingly worthless; by war’s end, the Continental Army was seizing civilians’ property and issuing them i.o.u. notes. The dollars were worthless.
The Federal Government doesn’t have constitutional authority to have a police force. Have you ever read the Constitution? You might try taking a look at _The Documentary History of the Ratification of the Constitution_, and at Liberty Fund’s collection of other Federalist writings, in case you want to know what you are talking about. Federalist proponents of ratification insisted, over Antifederalist objections, that the Federal Government would have only the powers it was “expressly delegated.”
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Gold isn’t necessarily “money”, neither are strips of paper, sea shells, beads, et cetera.
“Money” is whatever a community of people are willing to accept for other goods and services.
A gold coin is “money” only as long as the community is willing to accept it as “money”, or it can be used as “money”. At the point the community no longer accepts it, or it is not used as “money” (for example, melted down and used as a filling for a tooth), it loses it’s status of “money”. The same can be said for any and all other “moneys”.
Since here in the real world, gold has been accepted universally as “money”, I’m sure the men who wrote and ratified the US Constitution intended on Congress running a mint to create gold (and silver and copper) coins for circulation, and, particularly, for the payment of tax debts. That government can, by fiat, make something like a slip of paper “money” is preposterous. Congress can no more repeal the Law of Gravity than repeal any of the laws of Economics.
People accept strips of paper as money today because there is a rather sizable community that accepts them as “money”, but that may be quickly collapsing.
If the US government were “playing by the rules”, it would be turning gold into coins at some cost, and private banks would be issuing deposit slips to their customers to relieve them of carrying around enough gold to purchase day-to-day items.
All of this is really elementary economics, I really shouldn’t have to be explaining this…
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Patrick sed: “Since here in the real world, gold has been accepted universally as “money”, I’m sure the men who wrote and ratified the US Constitution intended on Congress running a mint to create gold (and silver and copper) coins for circulation, and, particularly, for the payment of tax debts.”
Gold is accepted a store of value, not necessarily a medium of exchange. The thing about the
constitution is that it means whatever you want it to mean..."to promote the general welfare...” is interpreted
by liberals as justification for all sorts of government interventions, while conservatives rail and rant that
the constitution didn’t specifically mention anything of the sort. Ditto, YOUR contention that “coin” money means
GOLD. But paper money has been used by the government, by private banks, and so on.
As a store of value, gold is great, but so are diamonds and your investment in your home. But as a medium of exchange, gold has lots of problems. So does paper money, when it is not used prudiently. The problem with the FED is that it is privatized or outsourced the management of the money from the treasury to a private organization of Jewish international finance capitalists.
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Gutzman sed: “Your point, that...the power to coin money includes the power to print money, is novel. You should publish it...Federalist proponents of ratification insisted, over Antifederalist objections, that the Federal Government would have only the powers it was expressly delegated.”
I guess you support the idea of a national bank as well, since the Federalists wanted a national bank.
Look, there is nothing in the constitution that “specifically” requires the gold standard. The problem with all these arguments over the constitution is that everyone can read between the lines and “interpret” the constitution to suit the tenor of your own ignorance, in this case the confusion over whether “money” means store of value or medium of exchange.
The gold coin supply doesn’t grow with the economy, and thus causes deflations, which benefit debt holders at the expense of debtors. If you take out a loan for $100, but the price of gold goes up by the time you pay back the loan then you are paying back extra interest on this debt that you orginally did not contract for.
It is simple economics, which I shouldn’t have to explain to you. In the scheme of things, the value of anything is always based on what it can buy, and what it can buy is dependent on the economy. When the supply of money is mismanged, and grows faster then the productivity it supports, you have inflation. But this is not necessarily an argument on behalf of gold, but an argument against imprudient management of the money supply. On the other hand, the argument on behalf of gold, is also disingenuous, as it was always the argument that benefits the debt holders
at the expense of debtors.
After the civil war, for instance, the finance capitalists demanded the gold standard because as gold value
increased, it made them richer if debts were paid back in gold. But the deflation that the gold standard caused made hard times for farmers and laborers.
All this is irrelevant, since the US dollar (paper money) is the reserve currency of the world, of course, maintained by US military power and the vassel states we maintain in the Mideast. OF course, the vassel states now control the destiny of our economy, but that is another story.
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You are confusing the Federalists of the Revolution and of ratification days (1776-91)—the people who first advocated a stronger central government generally, then advocated ratification of our current Constitution specifically—with Alexander Hamilton’s Federalist Party of the 1790s. The former group’s explanation of the Constitution is binding, since it’s the one the people agreed to in ratifying it; the latter group’s explanation of the Constitution is largely facetious, designed to give them, as the incumbents, the power to do anything they wanted to do.
Since you are unfamiliar with this distinction, which is basic to anyone passingly familiar with the writing and ratification of the Constitution, you should cease to deign to instruct me about this question. You cannot know what the Constitution was intended to mean if you do not know what the word “Federalist” means.
Your silly Introductory Macroeconomics discussion of the definition of money has nothing to do with the question what the Federalists told the people they were going to be getting if they ratified the Constitution. Several leading Federalists favored creating a new federal Constitution in part because they wanted an Article I, Section 10-type ban on state paper money. Their use of the word “coin” in relation to the Federal Government’s money power was an alternative to a grant of a power to print money. Disbelieve this if you like; note, however, that the Federal Government didn’t undertake to print money for generations after ratification.
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Kevin’s claim that the Revolutionary war wasn’t financed with scrip is simply untenable. Without scrip, there would have been no revolution. It worked well enough, even with the British counterfeiting ten times (at least) the amount printed by the Congress. The troops were not paid with sous, nor were the merchants. France went broke not over the revolution, but in the context of its overall struggle with England.
His interpretation of the Constitution is idiosyncratic, to say the least; to read “gold” into a document that doesn’t mention it--but could have, if that’s what they had meant--seems to be mere ideology.
The fetish about gold makes no economic or rational sense. The idea that there exists one commodity that can purchase all the other commodities is simply nonsense on every level. Further, the gold standard only “worked” (to the extent that it worked at all) when the price of gold was fixed by the government, a simple fact that undercuts every argument in favor of a gold standard.
We had a gold standard; prices fluctuated erratically. When a new gold strike was found, there was inflation, in-between there was deflation. Gold isn’t money, unless the gov’t (or the community) says it is. And only then if it is stamped with an arbitrary value, a unit of account. And that’s what money is: an accounting system with visible markers for credits. You work, they give you some credits; you spend, your “account” get debited and somebody else’s gets credited. In these days of computer money, no visible token is needed at all, and in fact the tokens form only a small part of the money supply.
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Actually, the Continental Congress’s dollars purported, on their faces, to be redeemable in silver. Ultimately, the Federal Congress assumed the liability. I never said that the money had to be gold.
Your argument about the wisdom of a hard-money policy is dubious, besides utterly irrelevant to my point: Congress was given power to “coin money” by the Constitution, not power either to print it or to charter a bank, let alone to delegate power to print it.
Apparently we disagree about the meaning of the word “finance.” Of course people were paid in scrip; this stuff would have been worthless, however, had the scrip-passing behavior not been financed by loans, not to mention outright gifts, from Louis XVI, the Dutch, et al.
Your description of my explanation of the original understanding of the coinage clause as “idiosyncratic” flies in the face of literally generations of interpretation of the clause. Only in the Civil War, when the Republican majority generally put aside the Constitution in the name of winning the war, did Congress begin to print paper money.
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Kevin says, Actually, the Continental Congress’s dollars purported, on their faces, to be redeemable in silver.
Not true. Or rather, only true for higher denominations issued later in the war. The scrip was not backed by any metal, nor were the pre-war Pennsylvania or Massachusetts issues.
If the Congress has a power, then they may delegate that power. That is not the problem with the FED. The problem is not so much that they have delegated the power to the Fed but that they have relinquished it; Congress has no further control of the actions of the Fed, a quasi-governmental body that serves the interests of the banks.
It is surprising for you to appeal to “common interpretation,” as if that were a fixed thing. And if it were, it would certainly argue against your position, since “generations of interpretation” have permitted the current corrupt system. We agree that the system is corrupt; we disagree on where that corruption lies.
The problem goes back to the foundation of the Republic and the First Bank of the United States in 1790. This was the first time (but not the last) that the money-creation power would be delegated to private banks.
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Here’s an image of a 1775 Continental $2 bill. Note that it’s redeemable in specie:
http://www.associatedcontent.com/image/111264/index.html?cat=37
Unless you think that a 1775 $2 note is what you referred to as a higher-denomination note issued later in the war, it’s very difficult to discuss this matter with you, as your assertions seldom seem tied to fact.
If Congress has a power, it can delegate it? Really? Can it delegate me the power to legislate regarding piracy? Can it delegate Queen Elizabeth II the power to ratify treaties? I think it has no constitutional authority even to delegate the legislative authority it has delegated to administrative agencies.
I didn’t say “common interpretation” was fixed. What I say is that absent formal amendment, the meaning of the Constitution is fixed, and that meaning was liquidated at the time of ratification; as Jefferson said, the Constitution has the meaning its advocates laid out at the time the People were ratifying it. This approach is now called “originalism” or “constitutionalism.” It underlay the American invention of written constitutions ratified by the People.
The first Bank of the United States was founded in 1791, not 1790.
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I’m looking at the 1/3, the 1/2, and the 2/3rds dollars, none of which are redeemable in gold. But you’re right, the larger denominations were supposedly redeemable in Spanish Milled Dollars or gold or silver. Not that anybody believed this.
Kevin, you seem to think that your rather odd interpretations are beyond question. Now, you may be right or you may be wrong on any particular point of constitutional law. But to pretend that these matters, not specifically addressed in the Constitution, cannot be mooted by reasonable men and that you have access to the true and only constitutional religion is a bit arrogant, to say the least.
I could not say whether “meanings” are fixed; I can say, with little fear of contradiction, that our understanding of the meaning is not fixed. Perhaps you have better access to the true mind of the founders. The problem I see is that the founders themselves were not of one mind.
And you have yet to explain to me how one commodity, relatively fixed in quantity, can purchase all other commodities. I don’t think that is mathematically possible without great gyrations in the “value” of that commodity. And even if it were mathematically possible, what possible reason could there be for wanting it to do so?
Goldbuggery has never made sense, not economically and certainly not mathematically. The excuse is that this somehow (in an unexplained--and unexplainable) way, “fixes” values. It doesn’t, and any glance at a 19th century price chart shows how prices gyrated in a way that would simply be unacceptable in any rational economy.
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“We agree that the system is corrupt; we disagree on where that corruption lies.
“The problem goes back to the foundation of the Republic and the First Bank of the United States...”
Mr. Medaille, for those like myself favorably inclined toward the Austrian School, can you provide a brief sketch of money and banking from the distributist position?
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Chuck, ignoring the claim that money ought to be some commodity, and therefore falls to the benefit of whomever happens to own that commodity, we can say that money is a social convention, called into being by the community. This was the view of Aristotle, This is why it has the name money (nomisma) because it exists not by nature but by law (nomos).
Law or custom can create money in two ways: by debt or by production. In our current system, all money is debt (except coins); this is why the currency is a Federal Reserve Note. However, this places the control of the money supply in private hands, and requires a quasi-public agency, the Federal Reserve System and the 12 Federal Reserve Banks. These are supposed to act on as a brake on the system (otherwise, the supply would be potentially infinite), but does not seem to work all that well, and serves mainly the needs of its own constituents, and especially its larger constituents. The Fed System is owned by the 12 Fed Banks, with the New York bank owning 53% of the system, and the major stockholders of the New York Fed are Citibank and JP Morgan-Chase. This makes the entire monetary system overly sensitive to the needs of two New York banks. The smaller banks--and the general public--get short shrift in such a system.
Since all money is debt, it creates the “impossible contract.” If you borrow $1,000 at 10%, you pay back $1,100. But, while the banks create the principle, they cannot create the interest. Somebody else must make a loan of $100 to create the interest, but this loan needs $10 to service it. But the $10 must be created by lending, which requires $1 to service it, etc. In other words, constant lending is required to service the existing loans, which eventually means that credit must be extended beyond the limits of the economy, and a credit crises results. This is why they occur at regular intervals.
The other method is to simply print the money and both spend and lend it into circulation for productive purposes. This ensures that money and production are linked. Some will object that public bodies will simply print too much money, but it is the current system which lacks an adequate check. Further, it means that public bodies must borrow money from banks and then pay interest on it, interest which now consumes $430B of the Federal budget, plus borrowing at state and local levels, all of which form a significant portion of the tax burden; we tax ourselves to feed the banks, who create money for free at will.
Banks lend money not only for productive purposes, but for speculative ones as well. For playing the market or speculating in commodities, or for derivatives, or what have you. Thus they create funds of money for which there is no corresponding production. Now, if people want to speculate, that’s fine, but banks should not be able to create money for these purposes. Let the speculators use money that they have saved from productive purposes, or borrow from people who have saved.
Money is a power of the community, and should not be turned over to a small group, for whoever controls the money controls the community to a large extent. And this control is contrary to everything the Distributists believe.
See also http://distributism.blogspot.com/2008/09/ususry-wealth-without-work-and-why-it.html
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Mr Médaille, you strike out on one pitch:
“ignoring the claim that money ought to be some commodity, and therefore falls to the benefit of whomever happens to own that commodity”
Commodities come from natural resources. That natural resources can be own outright, without paying rent to the community, is an error of “Neoclassical” Economics, and should not be accepted by anyone; the fact that Distributists accept it shows they do not have a full grasp on the culmination of Classical Economics, specifically the writings of Henry George, and the relationship between Labor and Capital, and their common enemy, the “Landlord”.
The “owner” of land that has gold in it would simply pay more money in Rent to the community based upon how easily, and how much gold could be extracted from the land. After paying his Rent, mining the gold, and having it sent to the mint to be made into money (at a cost, of course), whatever profit he has is deserved. He has not simply created any money out of thin air, but has paid dearly for it; mining gold is not cheap, nor the fee to mint the gold.
Yes, owning Land without paying Rent to the community is paramount to theft, but it is not the only alternative.
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Patrick, I certainly agree with you that a land tax would, in effect, appropriate the gold from the private “owners” of it. But I do not think that would solve the problem with a commodity money system. Money out to represent the goods and services in circulation, and there is no reason to believe that gold, silver, or any other commodity will be able to do this. In fact, it defies mathematics because it presumes that the value of one circulating commodity will be equal to the value of all other circulating commodities.
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