NO QUARTER FOR CORRUPTION (Focussing on The Fed./FRBS)

[Vexari]

The Constitutional Imperative In Reform Of The Monetary And Banking Systems Of The United States

by
Edwin Vieira, Jr.
http://home.hiwaay.net/~becraft/ConstitutionalImperative.pdf


Foreword

Dr. Edwin Vieira, Jr., presented the original version of The
Constitutional Imperative in Reform of the Monetary and Banking
Systems of the United States to the Ludwig von Mises Institute's
Seminar Series in Public Policy, at the Heritage Foundation's
Lehrman Auditorium, Washington, D.C., on 8 December 1988. His
purpose, then and now in this expanded monograph, was to
explain that:
Monetary and banking reform in the United States must be
appreciated and approached as a matter of law, as well as a
matter of economics.
• The most important—indeed, the controlling—law in the
United States is the Constitution.
• The Constitution, rightly understood and applied, provides
an unequivocal mandate for a particular monetary and
banking system. And, therefore,
• Debate over monetary and banking reform that does not
begin with a clear statement and acceptance of this
constitutional imperative is not only uninformed, but also
subversive of the uniquely American system of political
economy.1
As the inexorable events of the present banking crisis in the
United States finally compel the political establishment to face the
necessity of basic reform of the monetary and banking systems,
the insights set out in The Constitutional Imperative will become
1 See Edwin Vieira, Jr., Approaching the Crossroads: The American System or
the Corporate State?, National Alliance for Constitutional Money Monograph
No. 2 (1990).
2
ever more important, if real reform is to be achieved. For, as Dr.
Vieira points out, the leading authorities on economic reform of
these systems recognize that the key to correction of contemporary
problems is the enforcement of a "monetary constitution" to
confine the discretion of government within narrow limits.
These experts disagree among themselves, however, on exactly
what the principles of this "monetary constitution" should be. In
The Constitutional Imperative, Dr. Vieira argues that, if the
experts would focus on what the Constitution prescribes now, they
would largely have the solution to the problem of reform in their
hands obviating further discussion, debate, and dissention; and
placing the inestimable moral, political, and legal force of the
Constitution squarely behind their efforts.
Hopefully, The Constitutional Imperative will cause people to
comprehend that the Founding Fathers already foresaw the
United States' obvious need for a "monetary constitution,” and
took the necessary steps to guarantee that "constitution" in the
Constitution.
Richard L. Solyom, Chairman,
Sound Dollar Committee
Introduction
The potentially key role of the Constitution of the United States in
returning this country, and ultimately the entire free world, to a
system of sound money and honest banking was but little
perceived and almost never debated as few as ten years ago. To a
very great degree still, the constitutional imperative in reform of
America's monetary and banking arrangements remains largely
unappreciated and certainly unarticulated. However, a growing
awareness does exist today among free-market economists,
political scientists, and particularly students of "public-choice"
theory that
• the Federal Reserve System—a domestic cartel of private
banks specially licensed to emit legal-tender fiat paper
3
currency and create "deposit-credit money"—is both
intellectually indefensible and economically unworkable;
• the increasingly unstable international monetary and
banking system can no longer rely on the chronically
depreciating Federal Reserve Note as the "world reserve
currency,”
• new domestic and international monetary and banking
arrangements must soon be implemented, based on some set
of enforceable political and legal restraints on governmental
action—what public-choice theorists call a "monetary
constitution"; and
• in the United States, this "monetary constitution" can arise
from the imposition of limitations on the government's
powers that derive from either: (a) our domestic Constitution
as it now exists or may be amended hereafter; or (b) a new
supranational monetary and banking regime that effectively
supersedes the Constitution and subordinates to a scheme of
globalist controls America's national sovereignty over money
and banking.
The rapidly increasing attention being paid in both academic and
political circles to the necessity of some kind of monetary
constitution" is encouraging, as far as it goes. More to the point in
a country that prides itself on the "rule of law,” however, would be
for those promoting a purportedly "new" constitutional order in
money and banking first to investigate what the monetary and
banking powers and disabilities of the United States Constitution
are now. For such an investigation would uncover how the proper
interpretation and rigorous implementation of the present
Constitution could largely solve America's contemporary monetary
and banking crises, and secure her national sovereignty against
inroads by new supranational institutions.
Analysis
I. That most people concerned with establishing a "monetary
constitution" in the abstract overlook the United States
Constitution in particular as a possible solution to the problem is
4
paradoxical. The United States, after all, is a legally constrained
political economy. It is a political economy because the
government exercises political power to affect economic
interrelationships among individuals and groups. But it is also a
legally constrained political economy because the Constitution
grants only certain defined powers to the government, denies all
other powers, and confines and qualifies the exercise of even the
granted powers with various substantive and procedural
limitations and requirements. Ours, then, is a political economy
characterized by both governmental powers and disabilities, by
both governmental authority to act and individual immunities (or
rights to be free) from governmental action in the economic sphere.
The set of all governmental powers and disabilities in that sphere
defines America's "economic constitution.” The extensive sub-set of
these powers and disabilities that deal with money, credit, legal
tender, and banking defines America's "monetary constitution.”
The proper construction and application of these monetary powers
and disabilities may be debatable. But that this country does have
some kind of a "monetary constitution" de jure is unquestionable.
Also beyond serious dispute is the defective nature of the present
de facto monetary and banking arrangements of the United
States, and the undesirable political-economic outcomes that have
emerged as consequences of those arrangements from the actions
of the government, the markets, the banks, various interestgroups,
individuals, and so on. The demerits of the present regime
are distressingly manifest on every level of inquiry:
Intellectually, America suffers from the radically nominalistic
conception that treats circulating "credit" as "money,” that
disconnects the creation of credit from the production or even the
existence of any tangible medium of exchange, and that asserts
the possibility of creating "new purchasing power out of nothing.”2
This currently fashionable monetary wisdom forgets that nothing
can be created out of nothing, least of all credit—which rests on
the belief by the lender that the borrower will in fact repay what
he has borrowed. If the government (or a specially privileged
2 J.A- Schumpeter, The Theory of Economic Development (1961), at 73.
5
bank) truly tries to fashion credit "out of nothing" that is, without
a reasonable anticipation that its promises to pay can be fulfilled,
it generates only uncertainty and mistrust.
Legally, America suffers from the abusive procedure violently at
odds with any rational conception of the obligation of contracts—
that the government or its clients can discharge pre-existing debts
merely by substituting for them new promises to pay and
declaring the original promises "paid" thereby. This shell-game
disguises the gradual real abrogation of all debts by calling a
privileged category of bank-debts "money" and "legal tender" for
all other debts.
Morally, America suffers from the elevation of deceit to the level of
acceptable—indeed, routine—"public policy.” The monetary and
banking apparat of the Department of the Treasury and the
Federal Reserve System systematically gulls individuals into a
false sense of security, implementing policies the consequences of
which the authorities know or expect to be quite different from
what they announce to the general public—in particular,
diminishing the objective exchange-value of currency while
pretending to fight "inflation.”
Socially, America suffers from massive redistributions of wealth—
primarily from households to the national government—as a
result of manipulations of legal-tender currency and credit by the
government and its client-banks.3
Economically, America suffers from hypervolatile markets in
which recurrent speculative raids are the response to the
realization that "the value [of American currency] has been
separated to an unknown degree from market forces and is being
influenced by government operations whose standards and
3 See, eg., Bach, "The Economic Effects of Inflation,” in Inflation: Long- Term
Problems, 31 Proc. Acad. Pol. Sci. (No. 4, 1975), at 20, 2528 (from $500 billion
to $1.6 trillion in creditors' claims wiped out by inflation from 1946 to 1974).
6
objectives have never been made public and whose continuation
for more than a few months at a time cannot be counted on.”4
Politically, America suffers from a thoroughgoing default of the
government on its responsibility to maintain a sound and honest
monetary and banking order, and its decision instead to employ
the old "money-illusion" of inflation as a hidden tax and to connive
with special-interest groups to subvert monetary laws for their
own predatory purposes.
And developmentally, America suffers from an historical
devolution and degeneration in which the national medium of
exchange has been radically primitivized and politicized, through
the transformation from commodity money (silver and gold coins)
to fictitious "credit money" (irredeemable Federal Reserve Notes).
A true "credit" (or fiduciary) money functions as an honest
surrogate for an ultimate, real medium of payment: typically,
specie coinage which the holder of the fiduciary money can
demand by legal right in redemption thereof. What is the
"payment" the holder of contemporary fiat Federal Reserve Notes
can (at least for the moment) demand by legal right "dollar" for
"dollar"? Other than token, base-metallic ("clad") coinage, only the
set-off of a nominally equal "dollar"-denominated tax liability he
owes to the national government.5 And this set-off is possible only
because Federal Reserve Notes are statutory "obligations of the
United States.”6 Thus, contemporary American currency amounts
to a "credit" against governmental exactions, and that alone.
Contrast this to the situation when silver and gold coins were the
legally mandated media of payment of debts and redemption of
fiduciary currencies. At that time, money was distinct from, and
4 Stein, "Don't Be Spooked by the Market's Moves,” Wall Street Journal, 22
November 1988, Editorial Page.
5 Compare 31 U.S.C. § 5103 with Lane County v. Oregon, 74 U.S. (7 Wall.) 71,
76-77 (1869). Other than regulated public utilities, no one is required by law
to offer for sale any fixed amount of goods or services at predetermined prices
in Federal Reserve Notes.
6 12 U.S.C. § 411.
7
superior to, "credit.” "Credit" could not be money, because
ultimately money gave credit to "credit.” To be sure, a holder of
specie money enjoyed no guarantee that market prices in that
money would not fluctuate from day to day. However, he already
had in his possession a real and valuable commodity—a known
weight of precious metal—not a mere, perhaps unenforceable,
promise to deliver.
Today, a holder of Federal Reserve Notes also remains uncertain
about the course of market prices in that currency (although he
may be fairly confident that they will continue to rise). But, unlike
the holder of specie coinage, the holder of fiat paper currency
possesses no valuable commodity and has no statutory right to
obtain any known, fixed amount of any commodity in exchange for
that currency—only a power to set off a liability the government
unilaterally assesses against him in overt taxes. One must
emphasize "overt" taxes, because the instrument of set-off (the
Federal Reserve Note) is also—perhaps, even predominantly these
days—an instrument of hidden taxation through managed
depreciation of its purchasing power.7
Thus, by reducing money to central-bank "credit,” and centralbank
"credit" to the license to set off the substanceless "money
units" against tax liabilities, money has been primitivized—in the
sense of being stripped of much of its usefulness and value as a
medium of exchange for all transactions within society. And
money has been politicized in the sense of serving first and
foremost as the means of locking the individual into a relationship
with his government that smacks of economic serfdom.
However, simply cataloging these (or other) serious defects in
America's present monetary and banking arrangements leaves
unanswered the most important question: Do these defects reflect
an institutional problem of inadequacy of the Constitution—
7 The Federal Reserve Note is a depreciating asset both in its role as money
and in its role as a medium of tax set-off. By holding Federal Reserve Notes
in anticipation of future market exchanges, the holder loses purchasing
power. And by holding those notes in anticipation of paying taxes, the holder
is surreptitiously taxed!
8
namely, that the Constitution itself, correctly construed, allows,
encourages, or even compels these outcomes? Or do they mirror an
operational problem of failure of political personnel—namely, that
legislators or judges are not implementing or enforcing the
Constitution? The importance of determining whether the very
design of the machinery, or simply the unreliability of the
particular men temporarily at the controls, is at fault cannot be
over-emphasized. For, as a practical political matter, analysis of
the malfunction will dictate the likely repair.
Yet, notwithstanding the importance of ascertaining whether the
United States is the victim of a basic institutional breakdown or
merely adventitious operational errors, vanishingly few people
exhibit any even apparent concern with ferreting out the answer
by first—and logically foremost—establishing the true content of
this country's "monetary constitution.”
II. Certainly profound ignorance of the basic principles of money
and banking among the general public and the political
establishment explains, in part, this disinterest. Those
academically trained in economics may flatter themselves that
they understand, along with Professor James Buchanan, why no
one can "intellectually defend" America's present monetary and
banking systems, why "we could not conceivably have a worse
regime,” or why no one could "dream up a worse situation than we
have now" in terms of monetary unpredictability.8 But such people
are a distinct minority.
A. The average man-in-the-street or in the public service has no
conception of the crucial difference between a "dollar bill" that is
merely exchangeable in the marketplace for unpredictably varying
amounts of goods and services (generally less and less, as time
goes on), and a "dollar bill" that is redeemable by law for a fixed
amount of precious metal (that is, in fact, a note that must be paid
on demand with a dollar). Neither does he suspect that what he
8 "Prospects for a Monetary Constitution,” Proceedings of the 1988 Progress
Foundation International Conference (27 May 1988), American Institute for
Economic Research Econ. Educ. Bull., Vol. XXVIII, No. 6 (June, 1988), at 34.
9
considers his money in his bank-"deposit" is, in contemplation of
law, really a loan he has made to the bank and the bank's money.9
Nor does he fathom the operations and complexities, if he even
realizes the existence, of the "fractional-reserve" system on the
basis of which his misnamed "deposits" are manipulatively
managed.10 Rather than pondering such matters, or their
economic and especially their political implications, the average
man naively swallows the propaganda-line of the Treasury
Department and the Federal Reserve that money and banking are
"technical" areas "too complicated" for voters and politicians to
understand, better left to the "experts" for management in
accordance with the arcane theories of contemporary
mathematical economics, and certainly "too important" to become
issues in the superficiality and buffoonery of electoral campaigns.
The depth of popular ignorance in this field satisfactorily explains
recent monetary history. The last fifty or so years have witnessed
three major monetary and banking collapses in this country: in
1933, with the seizure of the people's gold and termination of
redemption of Federal Reserve Notes in gold domestically; in
1968, with the termination of redemption of all United States
paper currency in silver; and in 1971, with the termination of
redemption of Federal Reserve Notes in gold internationally.
9 This has long been recognized. See, eg., Davis v. Elmira Savings Bank, 161
U.S. 275, 288 (1896); Scammon v. Kimball, 92 U.S. 362, 36971 (1875); Society
for Savings v. Coite, 73 U.S. (6 Wall.) 594, 609 (1867); Thompson v. Riggs, 72
U.S. (5 Wall.) 663, 678 (1866); Bank of the United States v. Bank of Georgia,
23 U.S. (10 Wheat.) 333, 340-42 (1825). However, the courts have not
addressed the problems that the vast majority of "depositors" in banks have
no inkling of this legal rule, and that the banks generally avoid informing
them of the true state of affairs.
10 For a classical historical example, when President Franklin Roosevelt
declared a "bank holiday" in 1933, he felt it politically necessary to use his
very first "Fireside Chat" radio-address to inform the American people about
"the mechanics of banking, and why the banks could not lay their hands on
cash to meet runs [on their 'demand deposits'].” S.E. Kennedy, The Banking
Crisis of 1933 (1973), at 180. Self-evidently, Roosevelt had no illusions about
the ignorance of the public in this area.
10
Yet notwithstanding how radically destructive of the monetary
system each one of these events (and, certainly, their cumulative
effect) has been, neither any one of them nor all of them together
triggered a constitutional, or even a political, or electoral, crisis
over money and banking comparable to those that occurred, with
massive participation by the general public, in the late 1700s (over
ratification of the Constitution and its "hard-money" provisions),
in the 1830s (over the recharter of the Second Bank of the United
States), in the 1870s (over resumption of specie payments for the
Civil-War "greenbacks"), or in the 1880s and 1890s (over the socalled
"gold standard" and "bimetallism"). But if few people now
understand money and banking at all, the majority can hardly be
faulted for not being conversant with and demanding enforcement
of America's "monetary constitution.”
B. In fairness to the general populus, one should recall that printmedia
pundits such as Alfred Malabre, author of the best-seller
Beyond Our Means, show little-greater appreciation of the
problem—not, to be sure, because they are ignorant of basic
economics, but precisely because they know so much about the
peculiarities of economic theory that they crowd out of
consideration the special realities of America's uniquely political
economy.
Although, by any competent evaluation, the United States now
faces a monetary and banking crisis as serious as any that
convulsed the polity to its constitutional roots in the 1800s, in the
chapter of his book entitled, ominously, "Nothing Works,” Malabre
surveys every possible solution but the Constitution, in concluding
that "today's -predicament is beyond the means of any economic
theory”.11 Malabre may be correct to dismiss Keynesianism,
monetarism, and "supply-side" theory as solutions to
contemporary problems. But he is hardly justified in despairing
that "nothing works,” without having first closely scrutinized the
reforms that would arise out of consistent application of the
monetary powers and disabilities of the Constitution.
11 A.L. Malabre, Jr., Beyond Our Means. How America's Long Years of Debt,
Deficits and Reckless Borrowing Now Threaten to Overwhelm Us 1(1987), at
83.
11
C. If disinterest in "monetary constitutionalism" can be explained
in the case of the general public by ignorance and in the case of
pundits by tunnel vision, in the case of high-level public officials a
more sinister reason is not without evidentiary support. For a
prime example, Professor Buchanan recounts how in 1980
President-elect Reagan's staff solicited suggestions as to what
Reagan could do "to give an indication that [his] was going to be
an administration with a policy thrust.” Buchanan advised
Reagan to
appoint a presidential commission that would look into
the whole structure of our monetary authority, the
whole structure of the Federal Reserve authority * * *.
And it seemed to me high time that that might be
looked into.
What we have now is a monetary authority that
essentially has a monopoly on the issue of fiat money,
with no guidelines to amount to anything; an authority
that never would have been legislatively approved, that
never would have been constitutionally approved, on
any kind of rational calculus, no matter what the
political system. * * * So I thought it would be a good
idea * * * to get a discussion going about the legitimacy
of this authority.
In response to further inquiries from Reagan's staff, Professor
Buchanan delivered "a short position paper" to Reagan. But,
described Buchanan,
[n]othing happened. Absolutely nothing happened. I
never heard a word, not one word, from them. I found
out months later, that they did seriously consider the
idea, but Arthur Burns shot it down. Arthur Burns
totally and completely rejected it, and would not have
anything to do with any proposal that would challenge
the authority of the central banking structure—you
don't even * * * raise it as an issue to be discussed.
12
From this experience, Buchanan concluded that "the barrier of
bureaucratic interest in maintaining [the present monetary and
banking system] * * * is * * * extremely strong.”12 The perhaps
more telling lesson on the state of the Republic is that, in the
secrecy of the highest councils of an administration that openly
prided itself on its commitment to the "original intent" of the
Constitution, the filibustering of an agent of the Federal Reserve
System stifled even a discussion "about the legitimacy" of the
corporativistic central bank and its decaying fiat currency.
III. Those who do ponder this problem, however, are not (one can
hope) the victims of economic ignorance, tunnel-vision, or narrow
self-interest. Yet, for the most part, even such people have not
been serious students, let alone zealous advocates, of America's
special "monetary constitution,” either. Not, of course, because
they reject "monetary constitutionalism" in the abstract. They all
generally concur that a "monetary constitution" is necessary,
whatever their differences as to its precise content. They all agree
that constitutionalism with respect to money and banking is as
obviously important as—perhaps in the long run more important
than—constitutionalism with respect to speech, criminal
procedure, property-rights, and so on. And even those who propose
a radical "de-governmentalization" of money and "free banking" as
solutions to today's problems recognize the unavoidability of a
controlling governmental role in the creation of such new
arrangements, a role that must be constitutionally constrained if
such changes are to achieve political permanence.13
Nevertheless, discussions of "monetary constitutionalism" among
such people—be they economists, political scientists, historians, or
even lawyers by training—almost invariably neglect any careful
consideration of what the United States' "monetary constitution"
specifically provides and how it can be implemented or enforced.
12 "Prospects for a Monetary Constitution,” ante note 7, at 32-34.
13 See, eg., Rothbard, "The Case for a Genuine Gold Dollar,” in The Gold
Standard.- An Austrian Perspective (1985), at 7-9. Rothbard's case for
"degovernmentalization" of money should be carefully distinguished from the
untenable theories of "private money" now gaining favor in certain circles.
13
This state of affairs would be generally acknowledged as peculiar,
perverse—indeed, intellectually improper and indefensible were
the debate on "constitutionalism" to focus on such matters as
speech, criminal procedure, or property-rights. In those domains,
no one would ever presume to address the question of
"constitutionalism" in America without first or at least very
quickly consulting the Constitution itself. Yet where "monetary
constitutionalism" is the subject of inquiry, the Constitution is
conspicuous by its absence.
Why?! The answer, apparently, is that far too many of the
erstwhile friends of sound money and honest banking are
unconsciously ruled by an unwarranted assumption engendered
by the undesirable state of present-day monetary and banking
arrangements and encouraged by their unfamiliarity with the
particulars of constitutional law and history and their
unwillingness to fight an unpleasant political battle on uncommon
terrain. So, unthinkingly, they act as if no United States
"monetary constitution" now exists.
IV. Baldly stated, the notion that no United States "monetary
constitution" now exists contradicts itself—If there is no
"monetary constitution"—that is, no ultimate source of legal power
over money and banking—under exactly what authority are
Congress, the Treasury, and the Federal Reserve System now
operating? Can America's monetary and banking systems be the
products of mere anarchy or blatant usurpation? No; the
assumption that no "monetary constitution" rules this country
today really implies that the Constitution affirmatively grants the
government (or the private parties behind the Federal Reserve
System) unlimited power over money and banking.
A. Certainly this is the consensus implicit in the contemporary
literature. For one example, Brennan and Buchanan report that
[m]ost national governments * * * possess monopoly
franchises in the creation of money * * *. To our
knowledge, no country allows a totally free market in
money, and none limits the governmental role to the
definition of value of a monetary unit in support of a
14
pure commodity standard. * * * Almost universally,
national governments hold the authority to issue paper
or fiat currency, either directly through governmental
treasuries * * * or indirectly through governmentallycontrolled
central banks.14
Murray Rothbard affirms that
each nation-state, since 1933, and especially since the
end of all gold redemption in 1971, has had the
unlimited right and power to create paper currency
that will be legal tender in its own geographic area.15
And, under the heading "the chaotic state of monetary law,”
James Dorn tells us that
[p]resent U.S. monetary law incorporates neither the
"convertibility theory" of monetary control nor the
"responsibility theory" * * * there is no constitutional
limit binding the central bank to a noninflationary
path of money growth; there is no legislative mandate
to achieve a stable value of money. * * * [T]here is no
firm commitment to achieve long-run price stability.
Current law specifies no single objective for monetary
policy and lacks an enforcement mechanism to achieve
monetary stability * * *.
The lack of any effective constraint on the
discretionary powers of the central bank reflects
Congress's failure to safeguard the value of money, as
intended in Article I, section 8 of the Constitution, and
14 "Monopoly in Money and Inflation: The Case for a Constitution to
Discipline Government,” Institute for Economic Affairs, Hobart Paper No. 88
(1981), at 29.
15 “The Case for a Genuine Gold Dollar,” ante note 12, at 1. Of course,
Rothbard is correct if by the phrase "has had the unlimited right" he means
"has claimed the unlimited right.” Laymen often incorrectly assume that
governmental claims of rights or powers evidence the constitutional existence
of those rights or powers.
15
has led to a monetary system characterized by
significant uncertainty about the future value of
money.16
Observations of this kind—that the fundamental law of the
United States permits no free market in money, does not confine
the "governmental role [over money] to the definition of a
monetary unit in support of a pure commodity standard,” extends
to the government "the unlimited right and power to create paper
currency which will be legal tender,” incorporates no intelligible
principle of monetary control or responsibility, specifies no
objective for monetary policy, leaves the Federal Reserve System
unrestrained, and lacks "an enforcement mechanism to achieve
monetary stability"—are shocking indictments. For, if true, they
describe a literally totalitarian money monopoly exercised by a
legally uncontrollable corporative-state banking cartel: a species
of fascistic dictatorship over money run amok!
But should one seriously entertain the pernicious thesis implicit
in these and similar statements that the ultimate collective effect
of the numerous, precisely worded monetary provisions of the
Constitution is simply to delegate all conceivable power to a
"monetary soviet" of self-interested private bankers? And, if one is
willing to suffer that strange supposition for purposes of
argument, should he meekly accept it as fact, without the very
clearest proof possible?
B. The current literature also abounds with descriptions of various
hypothetical "monetary constitutions" to "discipline unconstrained
monetary monopoly.” For example, Brennan and Buchanan offer
four possible regimes: First,
a totally free market in money, with no direct moneycreating
government role at all. * * * The government
would not define the medium of exchange; it would not
print money; it would not regulate private printing of
money or bank notes; it would not regulate banking or
16 "Introduction: Reform the Monetary Regime,” Cato Journal, Volume 5, No.
3 (Winter, 1986), at 675-76.
16
credit. Money would emerge * * * with no government
guarantees or repurchase arrangements. Government
could choose to collect taxes in the money of its choice *
* *.
Second,
government may be empowered to issue domestic
money, in whatever quantities it may choose. In this
sense it would possess a monopoly franchise and it may
be totally restrained in size of issue. The restraints
present here, however, would emerge from the
guarantee of free entry. The Constitution would
guarantee that individuals could hold balances, make
private contracts, including the incurring of debts, and
conduct ordinary transactions in any money of their
choosing. * * * The forces of competition would act as
the restraint on the government money-issue monopoly
* * *.
Third,
[t]he government role is limited to the definition of the
monetary value of a physical unit of a * * * commodity
* * *. [The government] does not create money on its
own account; and if there is paper money it is
convertible at a fixed price into the base commodity at
the governmental money window.
And fourth,
[g]overnment may be empowered to issue money, and
allowed a monopoly in it. But the Constitution may
subject the grant of the monopoly to specially-defined
rules that limit the powers of the money-creation
authority.
17
All of these, say Brennan and Buchanan, are "monetary
arrangements to meet constitutional tests"—"constitutional tests,”
impliedly, that are not being met now.17
Should one blithely assume, though, that the Framers of the
Constitution were not concerned with and successful in meeting
stringent "constitutional tests" of this kind through the
painstakingly precise language in which they framed our country's
"monetary arrangements"—language such as
• "The Congress shall have Power * * * To coin Money,
regulate the Value thereof, and of foreign Coin";18
• "No State shall * * * emit Bills of Credit; [or] make any
Thing but gold and silver Coin a Payment in Tender of
Debts”;19
• "The Congress shall have Power to borrow Money on the
credit of the United States",20 which deletes the power to
"emit bills" (issue paper money) that appeared among the
cognate powers of the Continental Congress under the
Articles of Confederation;21 and
• the explicit references to the "dollar" as the unit of monetary
valuation?22
Surely, such an assumption would be without legal historical
support—indeed, would fly in the face of a proper construction of
the Constitution's monetary powers and disabilities. For such a
construction shows conclusively that the Founders did embrace
the principles of Brennan and Buchanan that "[t]he government
would not define the medium of exchange,” but would instead
17 “Monopoly in Money and Inflation,” ante note 13, at 58-62.
18 U.S. Const., art. I, § 8, cl. 5.
19 U.S. Const., art. I, § 10, cl. 1.
20 U.S. Const., art. I, § 8, cl. 2.
21 Arts. of Confed'n, art. IX.
22 U.S. Const., art. I, § 9; amend. VII.
18
adopt "a physical unit of a designated commodity" as its monetary
unit; "would not print money"; "would not regulate private
printing of money or bank notes" and "would not regulate banking
or credit" (except, presumably, to prohibit and punish fraud); and
would allow individuals to "hold balances, make private contracts
and conduct ordinary transactions in any money of their
choosing.”
And, even if one does entertain, for the purposes of argument, the
hypothesis that the Founders might have failed in some respects
to construct what contemporary economists argue is a proper set
of constitutional boundaries to monetary and banking power,
should he accept as fact, without the clearest proof possible, that
the relevant constitutional provisions the Founders did enact
exercise no meaningful constraint whatsoever on the alleged
powers of today's government to define the medium of exchange,
to emit redeemable or irredeemable paper currency, to prohibit
competition in money, to delegate discretionary monetary
authority to a private banking-cartel, and so on?
V. These questions, of course, are rhetorical only. The answers,
self-evidently, are "No.” Unfortunately, many people have never
posed the questions to themselves, let alone thought about the
answers. For that reason, a lack of basic knowledge about the
"monetary constitution" and even about the monetary statutes
and judicial decisions—of the United States is altogether too
common. For pertinent examples:
Numberless are those, especially including economists and others
among the noisy new claque touting "private money" as a panacea
for all monetary ills, who erroneously believe that the legal-tender
act requires individuals to use Federal Reserve Notes as their
medium of exchange and, in conjunction with the Supreme Court's
decision in Norman v. Baltimore & Ohio Railroad Company,23
23 294 U.S. 240 (1935).
19
prohibits so-called "gold-clause contracts.” Such, of course, is not
the law.24
Equally large is the number of individuals who erroneously fear
that disestablishment of the Federal Reserve System would be
prohibitively costly, because of the purported requirement that the
government "buy back" the System's gold certificates or otherwise
compensate the private banks in the cartel for dispossession of
their "vested property rights.” People who frighten themselves
with this hobgoblin are obviously unaware of Congress' sweeping
reservation of power in section 30 of the original Federal Reserve
Act of 1913, and how this obviates any serious problem with
liquidating the Federal Reserve System.25
And again, essentially no one with whom the present author has
discussed the matter was initially aware that, in Perry v. United
States,26 the Supreme Court held unconstitutional Congress'
24 31 U.S.C. § 5118(d)(2). Equally naif and uninformed is the assumption of
these advocates of private "alternative currencies" that, were the legal-tender
act repealed and "gold-clause contracts" allowed, people would rapidly choose
forms of money other than Federal Reserve Notes in which to conduct their
transactions. In fact, "gold-clause contracts" were statutorily legalized in
1977. Act of 28 October 1977, Pub. L. 95-147, § 4(c), 91 Stat. 1227, 1229. In
the supervening years, however, the public has evidenced next to no interest
in such contracts. Evidently, something more than the mere legal availability
of an "alternative currency" is necessary to render its use economically
expedient to a significant degree.
25 Compare Act of 23 December 1913, ch. 6, § 30, 38 Stat. 251, 275
(congressional reservation of "[t]he right to amend, alter, or repeal" the
statute), with Trustees of Dartmouth College v. Woodward, 17 U.S. (4
Wheat.) 518, 627-31 (opinion of the Court), 712 (opinion of Story, J.)(1819);
Sinking-Fund Cases, 99 U.S. 700, 720 (1879); Meriwhether v. Garrett, 102
U.S. 472, 511 (1880); Covington v. Kentucky, 173 U.S. 231, 238-40 (1899);
and National Passenger Railroad Corp. v. Atchison, T. & S.F. Ry., 470 U.S.
451, 456-57 (1985). Cf. the analogous interpretation of Congress' reserved
"right to alter, amend, or repeal any provision" of the Social Security Act.
Fleming v. Nestor, 363 U.S. 603, 608-12 (1960).
26 294 U.S. 330, 348-58 (1935).
20
attempt to repudiate the promise of the United States to pay its
obligations in gold coin or an amount of other currency equivalent
in purchasing power to such coin. It remains to be seen how this
highly significant, but generally unappreciated decision may apply
to Federal Reserve Notes—which are "obligations of the United
States"27 that on their faces at least implicitly (if duplicitously)
promise to pay certain sums in "dollars,” but have been repudiated
in terms of redemption in gold or silver coin, and certainly provide
to their holders purchasing power far lower than an equivalent
nominal value of such coin.
But the most telling example of "lost knowledge" in the area of our
"monetary constitution" is the definition of the "dollar"' itself.
Everyone talks about the "dollar,” usually referring to the Federal-
Reserve-Note "dollar bill.” But this very implicit reference proves
that the speakers know not what they say. The Federal-Reserve-
Note "dollar bill" is not, has never been, and could not be a
"dollar.” Historically it originated as, and even in its present
fraudulent form continues to mimic, a promise to pay a "dollar,”
not the "dollar" that is the subject of the promise. And no statute
of the United States has ever even purported to declare, in
Orwellian fashion, that a Federal Reserve Note is a "dollar.” But,
then, precisely what is a "dollar"'?
People sophisticated enough to recognize that a Federal Reserve
Note statutorily redeemable "in lawful money"28—that is,
"dollars"—cannot be that money as well, generally describe the
"dollar" as a fictional unit of account without any fixed content
that, from time to time through American history, has been reified
in silver, gold, base-metallic ("clad") coins, and paper United
States Notes of widely varying purchasing powers.29 People with
27 12 U.S.C. § 411.
28 12 U.S.C. § 411.
29 This description is as pernicious as it is erroneous, because it assumes that
the "dollar" (in the form of a United States Note or token coin) is or may be a
"bill of credit,” or mere promise to pay some amount of specie—thereby
conceding that a "dollar" inherently suffers from all the liabilities attaching
21
greater historical acumen, such as Richard Hofstadter, may
describe the "dollar" as "[t]he original monetary unit" of the
United States, authorized by the Coinage Act of 1792 and
"circulated in a variety of pieces of both gold and silver. The dollar
was defined as having a certain weight of silver and a certain
weight of gold.”30 But definitions of this kind are easily proven
wrong.
The Constitution—which preceded the Coinage Act of 1792 and
every other monetary statute of Congress—explicitly refers twice
to the "dollar": in the so-called "slave tax provision" of Article 1,
Section 9, Clause 1; and in the guarantee of jury trial in the
Seventh Amendment.31 When the Constitution and the Bill of
Rights were ratified (1788 and 1791, respectively), the word
"dollar" had a single meaning: not a paper currency (and surely
not an irredeemable note of a central bank!), not a fictional unit of
monetary account, not a gold coin, not a base-metallic coin—but a
silver coin, the "Spanish milled dollar,” which the Continental
Congress had earlier adopted as "the money unit of the United
States" in 1785.32
to politicians' promises and all the dangers deriving from their greed. The
advocacy of a "dollar" that is "redeemable in" or "backed by" silver or gold
may sound laudable where the alternative is the irredeemable Federal
Reserve Note. But such a "dollar" remains a form of "debt money" that is, as
history shows, a long distance removed from payment of the specie coins that
"back" it and a short distance away from the repudiation of payment that
converts it into a fiat currency.
30 Introduction to W.H. Harvey, Coin's Financial School (1894, reprinted.), at
37 (footnote omitted).
31 Article I, Section 9, Clause 1: " * * * but a Tax or duty may be imposed on
such Importation, not exceeding ten dollars for each Person.” Seventh
Amendment: where the value in controversy shall exceed twenty dollars, the
right to trial by jury shall be preserver.
32 See E. Vieira, Jr., Pieces of Eight. The Monetary Powers and Disabilities of
the United States Constitution (1983). at 16-17, 66-70.
22
In the Coinage Act of 1792, Congress statutorily implemented the
constitutional adoption of the "dollar": (i) by finding as an
historical fact that a Spanish milled dollar “as the same is now
current" contained 371-1/4 grains (troy) of fine silver; (ii) by
fixing—or, perhaps more properly, recognizing—the constitutional
"dollar" as of [that] “value"; and (iii) by creating a new, theretofore
unknown gold coin, called the "eagle,” that was to have a "value of
ten dollars,” which Congress regulate[d] or computed on the basis
of the coin's weight (247-1/4 grains troy of fine gold) and the thenprevailing
market exchange ratio between silver and gold (15:1).33
In short, the silver "dollar" of 371-1/4 grains is the constitutional
standard. The construction given the constitutional term "dollar"
by the first Congress in 1792 fixed this definition of the "dollar"
33 Act of 2 April 1792, ch. XVI, §§ 9, 11, 1 Stat. 246, 247-28.
The Act defined "DOLLARS OR UNITS" as "of the value of a Spanish milled
dollar as the same is now current, and to contain [3711/4 grains] silver.” Thus,
the Act construed the noun "dollar,” as used in the Constitution to refer to the
monetary unit of the United States, in terms of an historically fixed fact
ascertained by Congress: viz., the fine-silver content, or "value,” of the
Spanish milled dollar "as the same is now current,” that is, as it actually
existed in 1792.
The Act also defined this, and only this, United States "DOLLAR" as the
"UNIT" of the monetary system. The Act did define the "eagle" as "of the
value of ten dollars or units.” The Act did not say, though, that the "eagle" is
"ten dollars or units,” but that it is "of the value of ten dollars,” calculated
according to the market exchange-ratio of 15:1. That is, the Act set the price
of an "eagle" (or the price of the weight of pure gold struck in an "eagle") at
"ten dollars,” because that was the market price of so much gold, calculated
in silver, at that time. The “eagle" was thus priced in units of silver. This did
not mean, however, that the "eagle" was itself ten units, any more than a
statute setting the price of (say) bread at "one dollar per pound" could be
construed impliedly to define the "dollar" as a pound of bread, or a pound of
bread as the monetary "unit"!
In short, the Act clearly recognized the (silver) "dollar" as the unique "unit,”
and the gold coinage as "valued" in terms of this "unit.” And as late as the
Civil War, no one seriously doubted this statutory structure. See, eg., Bronson
v. Rodes, 74 U.S. (7 Wall.) 229, 247-48 (1869).
23
beyond the power of Congress to alter it thereafter by any
statute.34 All gold coinage, base metallic coinage, and paper
currency of any kind are, at best, mere statutory creations of
Congress, the legitimacies of which as constitutional "Money" rests
on their relationships to the "dollar.” Furthermore, there can be no
constitutional "gold dollars,” no "base-metallic dollars,” and least
of all no "paper dollars,” in the sense of a monetary unit different
from the silver "dollar.”
Consider now two further examples of "lost constitutional
knowledge" that address very contemporary concerns.
First, the emerging cult of "private money,” which has advanced
into the public view as far as such magazines as Forbes.35 In the
contemporary world in which money performs not only an
economic but also a legal function in relation to government,
advocacy of "private money" is of doubtful coherence—because it
begs the painfully obvious question of whether a form of money
can be truly "private" if a government adopts that money as its
medium of taxation and spending (and, presumably therefore, its
unit of account), which the exponents of "private money" assume
not only will but must occur. (Indeed, this assumption alone would
seem to render the "private-money" thesis self-contradictory.)
Advocates of "private money" also leave unaddressed the issue of
whether any government adopting a "private money" would not
impose some regulations on its character—such as, for instance,
accepting for taxes a “private money" only to the extent it
consisted of coins containing known amounts of silver or gold,
remained redeemable in so much specie, maintained a certain
purchasing power as against a "basket of commodities,” and so on.
These and other glaring weaknesses of the theory of "private
money" aside, the question here remains: "May Congress
34 Compare Myers v. United States, 272 U.S. 52, 150-52, 174-76 (1935), with
Eisner v. Macomber, 252 U.S. 189, 206 (1920).
35 Brimelow, "Do you want to be paid in Rockefellers? In Wristons? Or how
about a Hayek?,” Forbes (30 May 1988), at 243.
24
constitutionally adopt a 'private money' as the United States' unit
of account?"
Article 1, Section 10, Clause 1 and Article I, Section 8, Clause 5
answer that question in the negative. In Article 1, Section 10,
Clause 1, the States absolutely surrendered their preconstitutional
powers to "coin Money,” to "emit Bills of Credit"
(what Americans today would call "redeemable paper currency"),
and to "make any Thing but gold and silver Coin a Tender in
Payment of Debts.” Thus, the States subjected themselves to a
strict gold-and-silver-coin economy, in which they could not be the
source of the only coinage that could function as "a Tender in
Payment of Debts.”
Article I, Section 8, Clause 5 transferred the coinage-power to
Congress alone.36 The surrender of the States' primordial
sovereign power to "coin Money,” coupled with the exclusive grant
of that power to Congress, implies a right on the part of the States
to demand that Congress affirmatively exercise the coinage-power
and a duty on the part of Congress to do so. This constitutional
duty arising from a fundamental structural element in the federal
separation of powers—may never be delegated, especially to
private parties.37 For that reason, the adoption of a "private
money" as the unit of account of the United States is
unconstitutional.
The second example relates to budget deficits of the national
government. The ease with which deficits accrue traces to the
ability of Congress to "monetize debt"—that is, to borrow into
36 Congress also received in this clause the power "to regulate the Value * * *
of foreign Coin,” a power that the States did not explicitly surrender.
Apparently, the States retain a power concurrent with that of Congress to
"regulate the Value * * * of foreign Coin"—and thereby create a pool of "gold
and silver Coin" that they can declare "a Tender in Payment of Debts,” except
insofar as their "regulat[ions]" conflict with "regulat[ions]" in pari materia
made by Congress. See U.S. Const., art. VI, cl. 2.
37 See A.L. Schechter Poultry Corp. v. United States, 295 U.S. 495, 537
(1935). Accord, Carter v. Carter Coal Co., 298 U.S. 238, 311 (opinion of the
Court), 318 (Hughes, C.J., concurring)(1936).
25
existence through the Federal Reserve System repudiated "bills of
credit" in the form of irredeemable, legal-tender Federal Reserve
Notes or deposit-credits denominated therein. Now Article I,
Section 8, Clause 2 empowers Congress to "borrow Money on the
credit of the United States" only. However, when Congress
borrows even a "bill of credit" fully redeemable in silver or gold
money from some other entity (say, a bank), it "borrow[s] Money"
not only on the "credit of the United States" (as to repayment of
the loan itself) but also on the credit of the lender (as to
redemption of the "bill of credit").
How is this to be constitutionally justified? Even more legally
problematic is how Congress can borrow an already repudiated—
and therefore discredited—"bill of credit" the issuer of which (as in
the case of the Federal Reserve System) refuses to redeem it in
precious metal, and has historically followed a policy of
diminishing the purchasing power of the bill as against all
commodities.
No: Congress can borrow solely "on the credit of the United States"
only by borrowing "Money"—in the constitutional sense of coin,
the medium of payment—and never by borrowing "credit
instruments" of some other entity, even if those promise to pay
"Money" on demand. This construction of Article I, Section 8,
Clause 2, though, would as a practical matter strikingly
circumscribe if not curtail altogether deficit-spending—by
confining to silver and gold coin all borrowing, and therefore all
repayment and the taxation necessary to generate the means of
repayment.
VI. The loss of this and other knowledge of America's true
"monetary constitution" has confused and corrupted contemporary
discussion about monetary and banking reform. For examples,
Many people advocate that the "dollar"—by which they mean the
Federal Reserve Note—be permanently tied to a fixed weight of
gold, and redeemable at that weight. This wrongly assumes that
the "dollar" is a monetary unit without historical definition, that it
may exist as a gold coin or as a "bill of credit" (a paper currency
26
redeemable in gold), and that the Federal Reserve Note is a
legitimate form of this disembodied "dollar.”
Other people contend that no legal or moral obligation supervenes
in defining the "dollar" in whatever way best suits the monetary
system reformers deem most desirable. This wrongly assumes that
the "dollar" lacks a fixed legal definition, or at most is the empty
name the statutes of the United States give to the medium of
exchange that serves as the government's unit of account,
whatever that may be from time to time.
With these and similar attitudes as widespread as they are
warrantless, it is no wonder that the present-day debate over
monetary and banking reform is a literal Tower of Babel, with no
common linguistic ground even as to the supposed main subject of
discussion: the "dollar.” With alleged "dollars" of silver, gold, basemetal,
paper, and even electronic computer-entries available for
purposes of argument, all of supposedly equivalent legal status in
the minds of the disputants, but of widely disparate economic
values in the marketplace, it is also no wonder that there are as
many mutually incompatible suggestions for reform as aspiring
monetary gurus.
The basic problem here, of course, is that too many otherwise wellintentioned
people are thinking empirically, not normatively. They
are, perhaps naturally, tempted to ask: "What now functions as
the monetary system?,” "What do the people use as money?,” or
"Who in fact issues the money?"—uncritically assuming that what
is, is right. They do not ask: "What should be,” or "What ought to
be,” or "What by right is the monetary system of this country?"
They fail to pose these questions—ultimately, the only ones worth
answering—because they too-often forget that an
"unconstitutional law" is a legal impossibility, not simply an
inconvenience.
For "[a]n unconstitutional act is not a law; it confers no rights; it
imposes no duties * * * ; it is, in legal contemplation, as
27
inoperative as though it had never been passed.”38 Thus, people
may colloquially call a Federal Reserve Note a "dollar.” But it has
never been and cannot be legally such. And people may be
unaware that a "dollar" is a coin containing 371-1/4 grains fine
silver. But it has been so determined since 1792, and can never be
anything else under the outstanding law.
In a similar vein, too many friends of sound money tend to think
economically, and not legally. They tend to ask: "Is monetary
system X better than monetary system Y?,” without bothering to
ask: "Does our legal system permit us to exchange monetary
system X for monetary system Y.?" For they tend to assume—in
harmony with Justice Holmes' fallacious quip in Lochner v. New
York that "a constitution is not intended to embody a particular
economic theory,”39—that the Constitution is sufficiently "elastic"
to tolerate any monetary arrangements with which a political elite
may want to experiment.
This assumption forgets, however, that the Constitution embodies
a highly structured legal system incorporating defined and limited
powers, specific disabilities, guarantees for individual rights, a
complex separation of powers, "checks and balances,” and so on.
This kind of system cannot plausibly be "neutral" with regard to
competing economic theories, in the monetary field or any other at
least insofar as the various legal powers, disabilities, and
individual rights have economically operational consequences.
Certainly the Constitution is not effectively "neutral" with regard
to money. To the contrary, it defines a monetary system that relies
on market principles as much as any governmentally based
system could. First, pursuant to Article 1, Section 8, Clause 5 and
Article 1, Section 10, Clause 1, the Constitution adopted the type
of money the world market historically favored in the late 1700s
38 Norton v. Shelby County, 118 U.S. 425, 442 (1886)(emphasis supplied).
Accord, Huntington v. Worthen, 120 U.S. 97,101-02 (1887); Fay v. Noia, 372
U.S. 391, 408-09 (1963).
39 198 U.S. 45, 75 (1905)(dissenting opinion).
28
(and still ultimately favors today): commodity money, money
capable of being "coin[ed]" or tendered as "Coin.”
Second, as made clear in Article I, Section 10, Clause 1, the
Constitution adopted as money the commodities the quality of
which the international market historically recognized (and still
recognizes today) as pre-eminent: silver and gold, with base
metals such as copper in a strictly subsidiary role. Third, as
explicitly indicated in Article 1, Section 9, Clause 1 and the
Seventh Amendment, the Constitution adopted the very unit of
money the American market had found most convenient during
the 1700s: the dollar of 371-1/4 grains fine silver. And fourth,
through the system of "free coinage" implicit in Article 1, Section
8, Clause 5, the Constitution left the ultimate supply of money to
the market, too.40
40 This final point requires some elaboration. Under the system of "free
coinage,” individuals are privileged to increase the money-supply by bringing
silver or gold bullion (or foreign coins) to the mints to be coined into "Money"
of the United States at cost. And individuals may also decrease the moneysupply
by reducing coined specie in their possession to bullion (in order to
employ it in industrial arts, for example). In these instances, the market
obviously determines the supply of money extant. Of course, the government
as well may coin bullion it has collected through taxation or amassed through
the operation of silver or gold mines owned by the public, or may reduce coin
in its possession to bullion for legitimate-purposes. But the market-system as
traditionally understood in this country presupposes a government capable of
taxing the citizenry and owning and managing property on behalf of the
public. Therefore, governmentally initiated increases or decreases in the
supply of coinage of this sort—undertaken, presumably, "to pay the Debts
and provide for the common Defence and General Welfare of the United
States,” as authorized in Article I, Section 8, Clause 1—would constitute
changes in the supply of money no more incompatible with marketdetermination
of that supply than taxation is incompatible with marketdetermination
of the distribution of income, or than a fully compensated
governmental taking of land is incompatible with market-determination of
the distribution of real property. Under Article 1, Section 8, Clause 5,
Congress also has authority to "regulate the Value * * * of foreign Coin,”
either increasing the supply of money by declaring such coins officially
"Money" of the United States at their intrinsic values in silver or gold, or
decreasing that supply by removing the official status previously granted.
Although legally distinct from the power to strike domestic coin, this power to
29
Moreover, even while denying certain monetary powers to the
States (in Article 1, Section 10, Clause 1), and investing such
powers in Congress (in Article 1, Section 8, Clause 5), the
Constitution left unchanged and guaranteed (in Amendments V,
IX, and X) the traditional right of the people of the United States
to adopt whatever media of exchange they desire in their own
private commercial transactions. Thus, Congress may adopt a
national money-system; but except when individuals come to the
courts for redress of non-contractual injuries, or pay their taxes, or
enter into contracts with the government, or receive "just
compensation" for property taken through eminent domain,
Congress may not require them to recognize or employ that money
system in their private affairs. Or, in practical effect, the
Constitution imposes on the people a governmental monetary
system only to the extent that they interact with the government
in the exercise of its other constitutional powers.
In short, to the extent compatible with the existence of any
government at all, the Constitution "degovernmentalized" money in
its most important particulars. Thus, one could without
exaggeration describe the Constitution as profoundly Austrian in
its necessary economic effect.41 However, this apparent
constitutional support in practice for one economic theory over

adopt foreign coin exhibits the same economic effect. Under the system of
"free coinage,” after all, all foreign coins not “regulate[d]" constitute potential
domestic coins, even if the market were not already using them as media of
exchange without any congressional declaration to that effect. (A
congressional declaration "regulat[ing] the Value of foreign Coin" is necessary
only to render that coin officially part of the money-system employed by the
government, not to allow private parties to use it for their own purposes.) And
"regulate[d]" coins can be reduced to bullion as easily as domestic coinage.
Any congressional "regulat[ion] * * * of foreign Coin,” then, would amount
merely to coinage of domestic money from the mass of bullion the foreign
coins contained (without the minting-cost, however); or, where Congress
denied certain foreign coins an official status, to reduction of those coins to
bullion.
41 Compare the description of the constitutional money-system given above to
the recommendations in L. von Mises, The Theory of Money and Credit (new
ed., H.E. Batson trans., 1971), at 413-57.
30
another—for Austrian monetary freedom as against a "state
theory" of money—rests, not on the particular economic merits of
the Austrian view (which, in any event, was unknown as such in
the late 1700s), but on the Constitution's political presuppositions
in favor of personal liberty and private property.
In sum, both the empirical and the economic approaches fail
because they excise from consideration the centrality of law to
monetary and banking reform. There can be no reform of the
monetary and banking systems without enactment of new laws and
the amendment and repeal of old laws and statutes. However, in
this country, the Constitution controls all such enactments, and
even the validity of existing statutes, regulations, and judicial
decisions. Therefore, the unavoidably first step in reform is to
determine precisely what the Constitution commands, allows, and
prohibits in the fields of money and banking.
VII. Curious is the absence of any widespread realization among
monetary reformers that, by first historically and legally defining
the "dollar" and the other salient features of America's "monetary
constitution,” the debate over monetary and banking reform can
be immensely simplified, in at least three ways:
First, by impressing on the academic and political communities
that there is an uniquely American "monetary constitution" which
constrains governmental authority in a very specific manner,
particularly in terms of the unit of account (the "dollar") and the
permissible governmental media of exchange and legal tender
(silver and gold coin).
Second, the debate over reform can be simplified by invoking this
"monetary constitution" to determine which monetary and
banking statutes enacted since 1792, and which statutes proposed
for enactment tomorrow, are lawful vel non. No rational change in
the present monetary and banking systems is possible without
changes in the nation's laws. But before they can be changed, the
laws themselves must be identified strictissimi juris—and
separated from mere congressional enactments (and judicial
"precedents" that many people mistakenly identify as "laws") that
fail the test of constitutionality.
31
Surely there are both profound intellectual and practical
differences between reforms based on the assumed
constitutionality of the Federal Reserve System and reforms based
on its proven unconstitutionality ab initio—in terms, for example,
of the status of Federal Reserve Notes as "obligations of the
United States" subject to redemption "in lawful money,” of the
legal-tender character of Federal Reserve Notes, of the ownership
of the gold title to which is evidenced by the gold certificates held
by the Federal Reserve, of the enforceability of loans based on the
monetization of governmental debt, and so on.
Third, recourse to America's "monetary constitution" can narrow
the debate over monetary and banking reform by immediately
ruling out of order the vast majority of proposals that are
themselves unconstitutional—such as schemes to generate fiat
United States Notes to replace Federal Reserve Notes.
Indeed, systematic constitutional analysis of the present monetary
and banking systems results in two specific agendas for action.
Under destructive reformation, the Constitution requires that the
government:
• declare unconstitutional the Federal Reserve Act of 1913,
the seizure of gold coin and outlawry of "gold clause
contracts" in 1933, and such parts of decisions of the
Supreme Court that erroneously license Congress to emit
legal-tender paper currency and otherwise depart from its
true constitutional powers and disabilities;
• disestablish the Federal Reserve System and "privatize" its
legitimate functions under section 30 of the Federal Reserve
Act of 1913;
• decry Federal Reserve Notes as "obligations of the United
States" under 12 U.S.C. section 411;
32
• terminate the "legal-tender" status of Federal Reserve Notes
and base-metallic ("clad") coinage under 31 U.S.C. section
5103;42
• cancel all gold certificates held by the Federal Reserve
System, in favor of a trusteeship over the gold to be executed
by the United States on behalf of the people;
• hypothecate to restoration of the constitutional money
system all unclaimed gold unconstitutionally seized in 1933
and now in the custody of the United States;
• declare voidable all contracts between member banks of the
Federal Reserve System and any other parties, where the
consideration for the contracts on the part of the banks was
unconstitutional "monetization" of debt;43
• revalue all innocent private contracts denominated in
Federal-Reserve-Note "dollars" and not involving memberbanks
of the Federal Reserve System under the rule of the
Confederate Note Cases;44 and
• conduct searching and scrupulously impartial civil and
criminal investigations and prosecutions of the Federal
Reserve System and its operations, domestic and
international.
Under constructive reformation the Constitution requires that the
government:
• begin the coinage of silver "dollars" and fractional "dollar"
coins, with a unit of 371-1/4 grains (troy) fine silver;
42 See especially as to use of Federal Reserve Notes for payments of taxes,
Taylor v. Thomas, 89 U.S. (22 Wall.) 479 (1875).
43 See Craig v. Missouri, 29 U.S. (4 Pet.) 410, 436-37 (1830).
44 Thorington v. Smith, 75 U.S. (8 Wall.) 1, 11-14 (1868); Confederate Note
Case, 86 U.S. (19 Wall.) 548, 555-58 (1873); Wilmington & W.R.R. v. King, 91
U.S. 3,3-4 (1875); Stewart v. Salamon, 94 U.S. 434, 435-36 (1876); Cook v.
Lillo, 103 U.S. 792, 792-93 (1880); Rives v. Duke, 105 U.S. 132, 140-41 (1881);
Effinger v. Kenney, 115 U.S. 566, 571-74 (1885).
33
• begin the coinage of gold "eagles" and fractional “eagle"
coins, denominated only in troy ounces of fine gold;
• establish a system of "free coinage" for "dollars,” "eagles,”
and fractional silver and gold coins;
• adopt all monetarily viable foreign silver and gold coins as
"Money" of the United States;
• "regulate the Value" of domestic and foreign silver and gold
coins relative to the "dollar,” with the silver-to-gold
exchange-ratio set by the free market;
• redeem outstanding United States token coinage "dollar" for
"dollar"; and,
• outlaw undisclosed or otherwise fraudulent "fractionalreserve"
banking and cognate improper commercial
practices.
VIII. The advocates of sound money and honest banking have
already won the intellectual battle in terms of economics. They
have proven that: (i) governmental money must be based on a
commodity standard; (ii) there must be a "free market in money,”
in which each individual is entitled to choose for himself—through
"gold-clause contracts" and other devices—what form of money he
will use in exchange, unfettered by abusive legal-tender laws; and
(iii) the government must not interfere with nonfraudulent "free
banking.”
And the friends of sound money have also won the intellectual
battle in political science. They have proven that an economically
sound system of money and banking is impossible in the long term
without an enforceable "monetary constitution" legally
constraining the "rent-seeking" actions of public authorities and
their predatory special-interest-group clients.
In addition, circumstances are now suddenly propitious for the
success of these proposals. For, in the last decade, conditions of
deepening monetary and banking crises have developed, in which
the economic and political-scientific critique of the proponents of
sound money and honest banking has gained a new credibility,
34
urgency, and even prophetic character. Two situations of crisis are
distinguishable, as a result of both of which meaningful monetary
reform could occur.
In the first possible case, looming governmental debt and chronic
budget deficits play a crucial role. The hard fact is that the
present generation must finance the governmental budget and pay
the governmental debt by ordinary taxes, by voluntary lending, or
by the extraordinary, hidden tax and forced loan of inflation
through the emission of fiat currency.45 Assume—as seems not
unlikely—that over the next several years Congress finds the
"inflation tax" the most politically palatable means to transfer real
wealth from society to the government and other politically
privileged drones. Also assume inflation accelerates enough to
increase the real budget deficit. Then, as Bernholz points out,
it can easily happen that the real budget deficit cannot
be maintained once it has, at least partly, to be
financed with the inflation tax and if the rate of
inflation has crossed a certain threshold. The tendency
towards higher real budget deficits is strengthened by
the fact that the real demand for money decreases with
the rate of inflation. This means that the base of the
inflation tax shrinks so that the government has to
increase the tax rate, namely the rate of inflation, by
issuing more money to obtain the same real revenue
from the inflation tax.
What happens in such circumstances? * * * [C]urrency
substitution takes place, i.e., * * * good money drives
out bad money in spite of all governmental regulations
trying to prevent this. The lower real demand for the
inflating money is compensated for by a rising real
demand for good money * * *. It follows that under
conditions of advanced or hyperinflation, the
45 See Knox v. Lee, 79 U.S. (12 Wall.) 457, 560-1 (1871) (Bradley, J.,
concurring) (Civil-War "greenbacks" are constitutional exercise of the
Borrowing Power as "forced loans").
35
government has either strongly to cut back inflation or
even to erase it with a monetary reform. Otherwise the
increasing rate of inflation would not only lower real
revenues from ordinary taxes but also from the
inflation tax to insignificant amounts. Since the "good
money" is nowadays foreign exchange or indexed
domestic money, and has often been in former times
gold and silver coins, the government would also lose
its control of the money supply.
If the government is politically unable to undertake the
necessary reforms or if the reforms falter, it can
happen, and has happened that the bad national
money is driven out totally by the good money * * *.
Then the government has finally to legalize the good
money to receive tax revenues again.46
Thus, one can predict that constitutional monetary reform could
come about during a period of rapidly accelerating inflation in
which "currency substitution" involving silver and gold coins has
become widespread in the private economy. Emphasis on
constitutional reform and silver and gold coinage as the new
media of exchange is necessary because, under the conditions
Bernholz hypothesizes, the "currency substitution" could involve
foreign exchange or a new supranational currency use of which by
the populus would mean, not only that the government lost control
of the money supply (which it would in any event under the
constitutional monetary system) but also that the United States
lost her monetary sovereignty to the entity issuing the substituted
currency.
In the second case, the economic unsustainability of the total
public and private debt assumes the key role in promoting—or,
perhaps more descriptively, forcing—monetary reform. If the
government and the Federal Reserve System are unable to
support the ballooning domestic "debt pyramid" through inflation,
46 "Prospects for a Monetary Constitution,” ante note 7, at 28.
36
because interest rates rise to prohibitive levels,47 an international
"run" on the Federal Reserve Note may occur, ultimately leading
to "a worldwide rush out of paper currencies into the most liquid
asset of all—gold.”48 Self-evidently, a "run" of this kind would
amount to a thoroughgoing "currency substitution,” again
pressuring the authorities to reform the monetary and banking
systems in a constitutional direction.
But if conditions are potentially ripe for monetary reform, much
work remains to be done. To congratulate one’s self for having won
the intellectual battles in economics and political science is not
enough. Now is the time to fight the war of the markets: to
educate people on the possibility, practicality, and desirability of
re-ordering their daily economic affairs around "gold-clause
contracts" and similar devices that can drive the anticipated
process of "currency substitution" in the direction of real
constitutional money, silver and gold coin—or at least offer them
significant personal protection against the financial storms to
come. And now is the time to fight the war of constitutional
politics: to convince people and honest public officials that the
Constitution provides the only legally sound foundation on which
to erect the monetary and banking reforms necessary for
America's economic rehabilitation.
To accomplish the latter task, proponents of sound money and
honest banking must overcome public attitudes towards
constitutional reform as strongly negative and widely held as they
are substanceless:
First, the self-styled "worldly wise" will scoff that constitutional
reform is a hopeless delusion, inasmuch as present-day politicians,
legislators, judges, and bureaucrats have supposedly "set aside"
the Constitution entirely for all practical purposes. The only
delusion here rests in the minds of the cynics. Contemporary
47 See Sperandeo, "The U.S. Government 'Whoppers',” The Sound Money
Investor (May/June 1989), at 39.
48 Interview of John Exter in Blakely's Gold Investment Review, Vol. I, No. 1
(1989), at 9.
37
government functions, for the most part, according to defined
procedures, in the service of supposedly knowable public and
private rights, powers, privileges, and immunities. Public officials
act according to "constitutional" rules, and say that they are
performing "constitutional" duties. Observers who understand the
Constitution may deny that these rules or duties are what the
Constitution actually prescribes—but no one, office-holder or
critic, openly gainsays the controlling nature of the Constitution,
whatever their ostensible disagreements about its meaning or
application.
Moreover, if (as the cynics allege) the political establishment has
permanently "set aside" the Constitution (except as a ritualistic
talisman rhetorically trotted out to rationalize this or that
imposition of arbitrary power on the country), what rational hope
have advocates of "competing currencies,” "private money,” "free
banking,” or other market-driven paths to reform of the monetary
and banking systems that any of these plans can succeed? Each of
these alternatives depends for its very existence on the legal
sanctity of private contracts and private property—that is,
ultimately, on constitutional restraints on the power of
government to annul contracts through "legal-tender" (actually,
forced currency-substitution) laws, or to confiscate property such
as gold or silver coin from innocent individuals.
If a political oligarchy has emasculated the Constitution; and if
the oligarchy has done this (at least in part) precisely to
institutionalize the present corrupt system of fiat currency,
inherently fraudulent "fractional-reserve" central banking
through the Federal Reserve cartel, "monetization" of
governmental debt, and so on; and if an electorate with proper
education, motivation, and leadership cannot restore, through
constitutional political channels, a return to constitutional money
and banking—then precisely how, other than through political
revolution or economic collapse followed by political revolution, can
sound money and honest banking ever be restored?.'
More specifically, how can sound money and honest banking be
imposed on the government (which, after all, the proponents of
38
"alternative currencies" and "private monies" somewhat naively
castigate as the unique source of contemporary monetary and
banking problems) without creating and enforcing some kind of
clear constitutional limitation on governmental discretion in the
monetary field? How, in what every sophisticated observer must
admit is a political economy, can meaningful and lasting economic
reforms be implemented without accompanying political reforms?
But these questions answer themselves.
Second, some people will object that a new constitution is
necessary to overcome the unwillingness of officeholders and
judges to enforce the present Constitution. But a new constitution
cannot by itself guarantee a return to constitutionalism. Public
officials and judges who knowingly refuse to obey the monetary
commands of the original Constitution are not likely to honor
similar commands in a new one. A return to constitutionalism
requires replacement of those officials and judges with individuals
of higher moral character.
Third, other people will object that the present Constitution does
not embody certain particular powers and especially disabilities
crucial to reform, and that therefore a new constitution is needed
after all. Correct construction of the Constitution and an
understanding of American monetary and banking history answer
this objection decisively.
Fourth, still other people will object that the constitutional
monetary and banking systems are not the very best regimes
imaginable, economically. Although perhaps true, this contention
is irrelevant to the fundamental issue of which is to rule: law or
politics, the Constitution (whatever its faults may prove to be) or
politicians and bureaucrats (the faults of whom are already all too
obvious, and apparently ineradicable).
Fifth, other people will complain that the constitutional monetary
and banking systems are too "inflexible" for modern times, and
provide little leeway for "experimentation”. The short answer to
this lament of the pragmatists is that the Framers adopted the
monetary powers and disabilities as legal guarantees they thought
essential for the protection of private property and individual
39
liberty, guarantees with which the government "is not entitled to
dispense in the interest of experiments.”49
Sixth, yet other people will predict the political impracticality or
futility of trying to implement America's highly idealistic
"monetary constitution" through a corrupt and cynical Congress or
the State legislatures, or to enforce it through the kangaroo courts
these bodies have created. Yet the history of the United States is
replete with examples of proper implementation of the monetary
powers and disabilities by less-than-perfect legislatures, even in
the face of terrific political pressures and after episodes of
unconstitutional actions—for examples, the coinage acts of 1792
and 1843, the refusal to recharter the Second Bank of the United
States in the 1830s, the resumption of redeemability in gold coin
for the Civil-War "greenbacks" in 1875, and the restoration of
individuals' rights to own gold and to make “gold-clause contracts"
in 1973 and 1977, respectively. And American history also records
important judicial decisions favorable to the "monetary
49 New State Ice Co. v. Liebman, 285 U.S. 262, 280 (1932). Accord, Truax v.
Corrigan, 257 U.S. 312, 338 (1921); Pointer v. Texas, 380 U.S. 400, 413 (1965)
(Goldberg, J., concurring). The somewhat longer answer from historical
experience is that governmental "experimentation" in the monetary and
banking field has almost invariably exacerbated the very problems it claimed
to cure. For example, after the panic of 1907, Kansas, Nebraska, and
Oklahoma enacted acts "guaranteeing" private bank-deposits. In the face of
serious criticisms of the workability of the acts, the Supreme Court sustained
them against constitutional challenge. Noble State Bank v. Haskell, 219 U.S.
104, 575 (1911); Shallenberger v. First State Bank, 219 U.S. 114 (1911);
Assaria State Bank v. Dollery, 219 U.S. 121 (1911). In the event, the acts
proved worthless. See, eg., Robb, "Guarantee of Bank Deposits,” in 2
Encyclopaedia Soc. Sci. 417 (1930). However, because no constitutional
prohibition existed in Supreme-Court precedents, in 1933 Congress created
the Federal Deposit Insurance Corporation, foisting the unsound deposit-
"guarantee" scheme on the nation as a whole, with predictably disastrous
consequences. See Sen. Rep. No. 77, 73d Cong., lst Sess. 9-13; H.R. Rep. No.
150, 73d Cong., lst Sess. 5-7.
40
constitution"—such as Lane County v. Oregon,50 Bronson v.
Rodes,51 and Perry v. United States,52 to name but three.
Moreover, if it is naif to hope that Congress, the States, or the
courts will obey the Constitution in service of the public interest in
the rule of law, sound money, and honest banking, can it be even
minimally rational to expect the Federal Reserve System to serve
the general welfare in preference to the special interests of its
constituent banks?!
And seventh, many other people will characterize today's
monetary and banking problems as simply "insoluble,” whatever
the purely theoretical adequacy of the monetary powers and
disabilities of the Constitution and the presumed willingness of
virtuous and competent public officials to exercise those powers.
This is the final counsel of despair. No problems can be deemed
"insoluble" by the application of constitutional power until that
power has actually been applied without success.
Defeatists should remember that at every major negative turningpoint
in America's monetary history, from the emission of the first
legal-tender paper currency in 1862, through the establishment of
the Federal Reserve System in 1913, to the purported
"demonetization" of gold in 1933 (domestically) and 1971
(internationally) and of silver in 1968—at every major point at
which the degenerate seeds of the noxious weeds of fiat currency
and oligarchical central banking were sown in America's monetary
soil, politicians unwisely turned away from the Constitution.
Whereas, at every major positive turning-point in the chronicle of
American money and banking, the Constitution has (more or less)
provided the inspiration, the command, and the blueprint for
governmental action. In the light of this experience, an assumed
impotence is not only unbecoming but unhistorical.
50 50 74 U.S. (7 Wall.) 71 (1869).
51 74 U.S. (7 Wall.) 229 (1869).
52 294 U.S. 330 (1935).
41
If the past provides any guidance, the Constitution remains the
most powerful legal, political, and moral device available at
present to accomplish the goal of sound monetary and banking
reform—if Americans have the knowledge, and the courage, to use
it. Until the friends of sound money at least try to enforce the
Constitution, in good faith to the very best of their abilities, they
should recall the old adage that "It is a poor workman who blames
his tools!”
Conclusion
Current events cannot fail to impress on the cautiously reflective
that the United States—indeed, the developed nations of the
entire world—are on the brink of a perhaps terrible monetary and
banking crisis. Theory teaches the utter unworkability of fiat
paper currency in the long run. And history is now openly
recording what may be the final, fatal chapter in the dolorous
worldwide experiment with "fractional-reserve" central banking
among sovereign nation-states—and the commencement of a new,
and perhaps darker chapter of "fractional-reserve" banking under
the auspices of a supranational cartel of private bankers
exercising political power without political accountability. Yet
most Americans, in public office or private station, are either
deluding themselves that no danger threatens, or hoping that the
very institutions and persons which and who created the
conditions conducive to catastrophe can somehow muddle through
to safety.
Old habits of belief and behavior die hard, especially the
alchemists' dream of transmuting base-metal into gold, or (in the
modern-day formulation) the bankers' fantasy of creating real
capital out of deposit-"credits" and real wealth out of paper
currency. Those who profit from "fractional reserve" banking,
"monetization" of debt, and the other paraphernalia of modern
monetary manipulation are unlikely to concern themselves with
the long-term injuries the rest of society suffers to underwrite
their short-term benefits or to be at a loss for rationalizations of
the status quo, for denials of the dangers the advocates of sound
money predict, and for personal disparagements of the exponents
42
of constitutional monetary reform. Others perhaps not as keenly
self-interested nevertheless may believe the "fractional-reserve,”
paper-currency system to be as essential to successful commerce
as it has become ensconced as a political-economic institution. To
them, the government and its client banks are the only
conceivable sources of "money,” without which the country would
be bereft of wealth. And even those who understand the evils
inherent in contemporary "credit"-money often resign themselves
to suffer these evils in silence and inaction, despairing of a remedy
for the cancer that has so long and so thoroughly ravaged the
economic and political body of the nation.
However, neither the self-interest of some, nor the ignorance of
others, nor even the defeatism of others still will, in the final
analysis, be responsible for the perpetuation of America's
contemporary monetary and banking systems until their
inevitable collapse. That responsibility lies with the blindness of
the American people. The potential tragedy of our situation is that
what many pretend cannot happen, and what many others
perceive as an inescapable disaster, may be largely avoidable, if
Americans timely employed the means so obvious it goes
unnoticed: the Constitution.
"Fractional-reserve" banking and paper "credit"-currency have
insinuated themselves into every important economic and political
relationship in American life, creating a quasifeudal system of
distinct classes—some even specially privileged by law—and
impressing upon society a peculiarly corrupt system of
materialistic (anti)morals that elevates pursuit of a "quick buck"
above love of family or duty to country. Yet, for all that, the new
economic feudalism of "fractional-reserve" banking and "credit"-
currency is no more ineradicable than the original feudal
parasitism of openly titled nobility, which the Constitution swept
away in two short, but complete and unequivocal prohibitions.53
In those prohibitions, the Constitution abolished a well entrenched
political, economic, and social system designed to commandeer the
first places in the state, that the history of centuries had proven
53 U.S. Const., art. 1, § 9, cl. 8 and art. I, § 10.
43
pernicious. In as few words, the Constitution outlawed a newer
system designed to commandeer the real wealth of the state, and
the dangers of which the Founding Fathers themselves
experienced firsthand, foresaw, and sought to forefend. The
history of almost two centuries has, not surprisingly, proven their
fears prophetic—and given the monetary powers and disabilities
they fashioned an urgent relevance and unprecedented potential
to establish Justice, insure domestic Tranquility, provide for the
common defence, promote the general Welfare, and secure the
Blessings of Liberty to ourselves and our Posterity.”54
©1993—National Alliance for Constitutional Money, Inc.
54 U.