THE CREATURE FROM JEKYLL ISLAND
A Second Look at the Federal Reserve
by G. Edward Griffin
..
Section IV
A Second Look at the Federal Reserve
by G. Edward Griffin
..
Section IV
A TALE OF THREE
BANKS
It has been said that those who are ignorant of
history are doomed to repeat its mistakes. It may
come as a surprise to learn that the Federal
Reserve System is America's fourth central bank,
not its first. We have been through all this before
and, each time, the result has been the same.
Interested in what happened? Then let's set the
coordinates of our time machine to the colony of
Massachusetts and the year 1690. To activate, turn
the page.
Chapter Fifteen
THE LOST
TREASURE MAP
The bitter experience of the American colonies
with fiat money; the resolve of the founding
fathers to prohibit the new nation from resorting
to paper money without backing; the drafting of
the Constitution to that end; the creation of a true
American dollar; the prosperity that followed.
In the golden days of radio, on the Edgar Bergen Show, the
ventriloquist would ask his dummy, Mortimer Snerd, "How can
you be so stupid?" And the answer was always the same. After a
moment of deep thought on the part of Mortimer, he would drawl
his reply, "Well, it ain't easy!"
When we look at the monetary chaos around us today—the
evaporating value of the dollar and the collapsing financial institutions—we
are compelled to ask: How did we get into this fix? And,
unfortunately, Mortimer's response would be quite appropriate.
To find out how we got to where we are, it will be necessary to
know where we started, and a good place to begin that inquiry is
with the Constitution of the United States. Article I, Sections 8 and
10 say:
Congress shall have the power —
To borrow money ... to coin money, regulate the value thereof,
and of foreign coin, and fix the standard of weights and measures;...
[and] to provide for the punishment of counterfeiting....
No state shall ... coin money; emit bills of credit; [or] make
anything but gold and silver coin a tender in payment of debts.
The delegates were precise in their use of these words.
Congress was given the power to "coin money," not to print it.
Thomas M. Cooley's Principles of Constitutional Law explains that "to coin money is to stamp pieces of metal for use as a medium of
exchange in commerce according to fixed standards of value."
What was prohibited was to "emit bills of credit" which, according
to the speeches and writings of those who drafted the document,
meant the printing of paper IOU's which were intended to be
circulated as money—in other words, the printing of fiat money
not backed by gold or silver.
At first, it would seem that nothing could be more clear. Yet,
these two simple clauses have become the basis for literally
thousands of pages of conflicting interpretation. The crux of the
problem is that, while the Constitution clearly prohibits the states
from issuing fiat money, it does not specifically prevent the federal
government from doing so. That was truly an unfortunate oversight
on the part of the document's framers, but they probably
never dreamed in their wildest nightmares that their descendants
"could be so stupid" as to not understand their intent.
Furthermore, "it ain't easy" to miss their intent. All one has to
do is look at the monetary history that led up to the Constitutional
Convention and to read the published letters and debates of the
men who affixed their signatures to that founding document.
As one reads through the debates on the floor of the convention,
one is struck by the passion that these delegates held on the
subject of money. Every one of them could remember from his
personal experience the utter chaos in the colonies caused by the
issuance of fiat money. They spoke out against it in no uncertain
terms, and they were adamant that it should never be tolerated
again in America—at either the state or federal level.
PAPER MONEY IN THE COLONIES
The first colonial experience with fiat money was in the period
from 1690 to 1764. Massachusetts was the first to use it as a means
of financing its military raids against the French colony in Quebec.
The other colonies were quick to follow suit and, within a few
years, were engaging in a virtual orgy of printing "bills of credit."
There was no central bank involved. The process was simple and
direct, as was the reasoning behind it. As one colonial legislator
explained it:
Do you think, gentlemen, that I will consent to load my
constituents with taxes when we can send to our printer and get a
wagon load of money, one quire of which will pay for the whole? 1
The consequences of this enlightened statesmanship were classic.
Prices skyrocketed, legal tender laws were enacted to force the
colonists to accept the worthless paper, and the common man
endured great personal losses and hardship. By the late 1750s,
Connecticut had price inflated by 800%, the Carolinas had inflated
900%, Massachusetts 1000%, Rhode Island 2300%.2
The situation was so out of hand that, beginning in 1751, the
British Parliament stepped in and, in one of those rare instances
where interference from the mother country actually benefited the
colonies, it forced them to cease the production of fiat money.
Henceforth, the Bank of England would be the only source.
What followed was unforeseen by the promoters of fiat money.
Amid great gloom about "insufficient money," a miracle boom of
prosperity occurred. The forced use of fiat money had compelled
everyone to hoard their real money and use the worthless paper
instead. Now that the paper was in disgrace, the colonists began to
use their English and French and Dutch gold coins once again,
prices rapidly adjusted to reality, and commerce returned to a solid
footing. It remained so even during the economic strain of the
Seven-Years War (1756-1763) and during the period immediately
prior to the Revolution. Here was a perfect example of how an
economic system in distress can recover if government does not
interfere with the healing process. 3
WARTIME INFLATION
But all of this came to a halt with the onset of colonial rebellion.
Not only did open hostilities throw England deeper into the cogs
and wheels of the central-bank mechanism, it also was the compelling
motive for the colonies to return to their printing presses. The
following figures speak eloquently for themselves:
• At the beginning of the war in 1775, the total money supply for
the federated colonies stood at $12 million.
• In June of that year, the Continental Congress issued another
$2 million. Before the notes were printed, another $1 million
was authorized.
• By the end of the year, another $3 million.
• $19 million in 1776.
• $13 million in 1777.
• $64 million in 1778.
• $125 million in 1779.
• A total of $227 million in five years on top of a base of
$12 million is an increase of about 2000%.
• On top of this "federal" money, the states were doing the same
in an approximately equal amount.
• And still more: the Continental Army, unable to get enough
money from Congress, issued "certificates" for the purchase of
supplies totalling $200 million.
• $650 million created in five years on top of a base of $12 million
is an expansion of the money supply of over 5000%.4
Although the economy was devastated by this flood of fiat
money, most victims were totally unaware of the cause. In 1777, the
sentiment of a large segment of the population was expressed by
the words of one patriotic old lady who said: "What a shame it is
that Congress should let the poor soldiers suffer when they have
power to make just as much money as they choose."5
The immediate result of this money infusion was the appearance
of prosperity. After all, everyone had more money and that was
perceived as a very good thing. But this was quickly followed by
inflation as the self-destruct mechanism began to roll. In 1775, the
colonial monetary unit, called the Continental, was valued at
one-dollar in gold. In 1778, it was exchanged for twenty-five cents.
By 1779, just four years from its issue, it was worth less than a
penny and ceased to circulate as money at all. It was in that year
that George Washington wrote: "A wagon-load of money will
scarcely purchase a wagon-load of provisions."6
The saying "Not worth a Continental" has its origin in this
gloomy period.
The true nature of the inflation effect has never been more
accurately perceived or more vividly described than it was by
Thomas Jefferson:
It will be asked how will the two masses of Continental and of
State money have cost the people of the United States seventy-two
millions of dollars, when they are to be redeemed now with about six
million? I answer that the difference, being sixty-six millions, has been
lost on the paper bills separately by the successive holders of them.
Every one, through whose hands a bill passed, lost on that bill what it
lost in value during the time it was in his hands. This was a real tax on
him; and in this way the people of the United States actually
contributed those sixty-six millions of dollars during the war, and by a
mode of taxation the most oppressive of all because the most unequal
of all.7
PRICE CONTROLS AND
LEGAL-TENDER LAWS
It was natural that people struggled to find ways to escape the
destruction of their savings, and the two most obvious methods
were (1) to regularly adjust prices upward as the value of the
money went downward or (2) exchange their goods and services
only for gold coins. In response, the colonial legislatures and the
Continental Congress did what governments always do to prevent
it. They resorted to wage and price controls and to legal-tender
laws with harsh penalties for non-compliance. Under one such law,
those who refused to accept worthless money were even described
as traitors. It declared:
If any person shall hereafter be so lost to all virtue and regard for
his Country as to refuse to accept its notes, such person shall be
deemed an enemy of his Country. 8
Rhode Island not only leveled a substantial fine for nonacceptance
of its notes but, upon a second offense, an individual
lost his citizenship. When this was declared unlawful by a panel of
judges, the legislature reacted by dismissing the judges from
office.9
Then, as now, those who suffered the most from fiat money
were those who held the most trust in government. In 1777 these
were mostly the Whigs, for it was they who patriotically held paper
money and, as a result, lost their livelihoods and their life savings.
The Tories, on the other hand, mistrusting both government and its
paper money, passed the bills as quickly as possible in trade for
real assets, especially gold. Consequently, as a group, they weathered
the storm fairly well. But they often were derided by their less
prudent neighbors as "Torie speculators," "hoarders," and even
"traitors."
All of this was painfully fresh in the memories of the delegates
to the Constitutional Convention and, as the opening session
convened in Philadelphia in 1787, there were angry mobs in the
streets threatening the legislators. Looting was rampant. Businesses
were bankrupt. Drunkenness and lawlessness were everywhere to
be seen. The fruit of fiat money had ripened, and the delegates did
not enjoy its taste.
In October of 1785, George Washington wrote: "The wheels of
government are clogged, and ... we are descending into the vale of
confusion and darkness."10 A year later, in a letter to James
Madison, he said: "No day was ever more clouded than the
present. We are fast verging to anarchy."11
In February of 1787, Washington wrote to Henry Knox: "If any
person had told me that there would have been such formidable
rebellion as exists, I would have thought him fit for a madhouse."12
Just three months prior to the opening of the convention,
Washington voiced his reasons for rejecting the notion of fiat
money. In answer to the complaint that there was not enough gold
coin (specie) to satisfy the needs of commerce, he replied:
The necessity arising from a want of specie is represented as
greater than it really is. I contend that it is by the substance, not the
shadow of a thing, we are to be benefited. The wisdom of man, in my
humble opinion, cannot at this time devise a plan by which the credit
of paper money would be long supported; consequently, depreciation
keeps pace with the quantity of the emission, and articles for which it
is exchanged rise in a greater ratio than the sinking value of the
money. Wherein, then, is the farmer, the planter, the artisan benefited?
An evil equally great is the door it immediately opens for speculation,
by which the least designing and perhaps most valuable part of the
community are preyed upon by the more knowing and crafty
speculators.13
THE CONSTITUTIONAL CONVENTION
This was the prevailing view held by the great majority of
delegates to the Convention. They were adamant in their resolve to
create a constitution which would prevent any state, and especially
the federal government itself, from ever again issuing fiat money.
And they said so in unmistakable terms.14
Oliver Ellsworth from Connecticut, who later was to become
our third Chief Justice of the Supreme Court, said:
This is a favorable moment to shut and bar the door against paper
money. The mischief of the various experiments which have been
made are now fresh in the public mind and have excited the disgust of
all the respectable parts of America.
George Mason from Virginia told the delegates he had a
"mortal hatred to paper money." Previously he had written to
George Washington: "They may pass a law to issue paper money,
but twenty laws will not make the people receive it. Paper money is
founded upon fraud and knavery."
James Wilson from Pennsylvania said: "It will have the most
salutary influence on the credit of the United States to remove the
possibility of paper money."
John Langdon from New Hampshire warned that he would
rather reject the whole plan of federation than to grant the new
government the right to issue fiat money.
George Reed from Delaware declared that a provision in the
Constitution granting the new government the right to issue fiat
money "would be as alarming as the mark of the beast in
Revelation."
Thomas Paine, although not a delegate to the Convention, had
written the previous year that he was strongly opposed to fiat
money, which he called counterfeiting by the state, and he especially
abhorred legal tender laws which force people to accept the counterfeit. He said: "The punishment of a member [of a legislature]
who should move for such a law ought to be death."
An interesting thought.
If any further evidence is needed that the Founding Fathers
intended to prohibit the federal government from issuing "bills of
credit," consider this. The first draft of the Constitution was copied
in large measure from the original Articles of Confederation. When
it was taken up for consideration by the delegates, therefore, it
contained the old provision that had caused so much chaos. It
stated: "The legislature of the United States shall have the power to
borrow money and emit bills of credit." But, after a lively discussion
on the matter, the offending provision was voted to be removed
from the Constitution by an overwhelming margin.15 Voicing the
sentiment of the majority of the delegates, Alexander Hamilton
said: "To emit an unfunded paper as the sign of value ought not to
continue a formal part of the Constitution, nor ever hereafter to be
employed; being, in its nature, repugnant with abuses and liable to
be made the engine of imposition and fraud."16
The journal of the Convention for August 16 contains this
notation:
It was moved and seconded to strike out the words "and emit bills
of credit," and the motion ... passed in the affirmative. [The vote
cleared by a margin of better than four to one.]17
The Tenth Amendment states: "The powers not delegated to
the United States by the Constitution, nor prohibited by it to the
States, are reserved to the States respectively, or to the people." The
power to issue bills of credit is definitely not delegated to the
United States, and it is specifically prohibited to the States. Therefore,
if any power to issue fiat money legally exists at all, it is
reserved for the people. In other words, individuals and private
institutions, such as banks, have the right to issue lOUs and hope
that the public will use them as money, but government, at any level,
is clearly prohibited by the Constitution from doing so.
A SUGGESTION FOR
YOUR CONGRESSMAN
Incidentally, the Constitution has never been amended on this
point, nor has the provision that only silver and gold can be used as
lawful money. It would be interesting if each reader of this book
would send copies to his or her elected representatives in Washington,
or at least a photocopy of this section. Every member of
Congress has sworn to uphold the Constitution, and you might
attach a short note asking them when they intend to begin.
Do not be disappointed if your reply is less than satisfactory.
Politicians have a similar problem to that which judges have. It is
permissible to rock the boat from time to time, but they are not
supposed to sink it. Suits against the government challenging the
constitutionality of our monetary system seldom get to court. It is
safer for the justices to decline to accept these cases or to dismiss
them as supposedly "frivolous." Otherwise they would face a
difficult choice. Either they would have to mutilate logic in order to
uphold the present inconsistencies—thus, opening themselves to
possible ridicule—or they would have to declare in favor of the
Constitution and literally cause the collapse of the entire deficit spending,
central-bank mechanism. Such an act would take a
considerable amount of courage. Not only would they suffer the
wrath of the Establishment that is nourished by that mechanism,
they also would have to face a bewildered public which, because of
lack of knowledge about the Constitution or the nature of money,
could easily be convinced that the judges had lost their minds.
Likewise, it is safer for politicians to respond to inquiries of this
kind merely by quoting some self-serving government document
which makes our fiat monetary system sound quite legal and
marvelously constitutional.
Unfortunately, that is reality. Until the public becomes considerably
better informed than it is at present, we cannot expect too
much from the courts or from Congress. Bringing this matter to the
attention of your elected representatives, however, is still well
worth the effort, because the process of education has to start
somewhere, and Washington is an excellent place to begin.
Returning to the point of this digression, however, it is important
to know that the federal government was given a precisely
limited monetary function: "to coin money" and to "regulate the
value thereof." In view of the fact that gold and silver coin was specifically defined as the only kind of money to be allowed, there
can be no doubt of what was meant by the first half of that power.
To coin money meant to mint precious-metal coins. Period.
The second half is equally clear. Both in the Constitution and in
the discussions among the delegates, the power to regulate the
value of gold and silver coin was closely tied to the power to
determine weights and measures. They are, in fact, one and the
same. To regulate the value of coin is exactly the same as to set the
nationally accepted value of a mile or a pound or a quart. It is to
create a standard against which a thing may be measured. The
wording of this section of the Constitution can be traced to the
original Articles of Confederation which further clarifies the meaning
that was generally understood at that time:
The United States in congress assembled shall... have the sole and
exclusive right and power of regulating the alloy and value of coin
struck by their own authority, or by that of the respective
states—fixing the Standard of Weights and Measures throughout the
United States.
The intent, therefore, was simply for Congress to determine the
exact weight of a precious metal that would constitute the national
monetary unit.
THE ORIGIN OF THE DOLLAR
At the time of these deliberations, Spanish silver coins, called
pieces of eight, had already become the de facto monetary unit. An
official commission had been established by the Continental Congress
to sample the circulating coins in the country and determine
their average value by weight and purity. Charts were published,
and all coins of various origin were listed by comparative value.
Congress was already "regulating the value of" the nation's money
by the time the Constitution was drafted. How these coins became
dollars is an interesting story. Edwin Vieira tells us:
Monetary historians generally first associate the dollar with one
Count Schlick, who began striking such silver coins in 1519 in
Joachim' s Thai, Bavaria . Then called "Schlicktenthalers" or
"Joachimsthalers," the coins became known simply as "thalers," which
transliterated into "dollars." Interestingly, the American colonies did
not adopt the dollar from England, but from Spain. Under that
country's monetary reform of 1497, the silver real became the Spanish
money-unit, or unit of account. A new coin consisting of eight reales
also appeared. Variously known as pesos, duros, piezas de ocho ("pieces of eight"), or Spanish dollars (because of their similarity in weight and
fineness to the thaler), the coins quickly achieved predominance in
financial markets of the New World because of Spain's then-important
commercial and political position.18
In 1785, Thomas Jefferson urged the adoption of the Spanish
silver dollar as the nation's official monetary unit. In a pamphlet
submitted to the delegates of the Continental Congress, he said:
Taking into our view all money transactions, great and small, I
question if a common measure, of more convenient size than the
dollar, could be proposed.... The unit or dollar is a known coin, and
the most familiar of all to the minds of people. It is already adopted
from south to north; has identified our currency, and therefore happily
offers itself as an unit already introduced.19
On July 6, 1785, Congress unanimously voted to adopt the
Spanish dollar as the official monetary unit of the United States.
Jefferson realized, however, that this was not sufficient. Although
the coin had been one of the most dependable in terms of weight
and quality, it still varied in content between issues, and a way had
to be found to rate one coin in value against another. That was,
after all, the service that Congress was required to render when it
was given the power to "regulate the value" of money. Jefferson
came directly to the point when he said: "If we determine that a
dollar shall be our unit, we must then say with precision what a
dollar is. This coin as struck at different times, of different weight
and fineness, is of different values."20
The logic voiced by Jefferson could not be ignored. Two years
later, after carefully examining the actual weight and fineness of
the Spanish dollars currently in circulation, Congress defined the
dollar. After ratification of the Constitution, a dollar would contain
371.25 grains of fine silver, and all items in commerce, including
other coins, were to be measured in value against that standard.
As the Spaniards continued to reduce the silver content of their
coins, the pressure for the minting of an American dollar of
predictable value began to mount. Secretary of the Treasury,
Alexander Hamilton, in his 1791 report to Congress, urged the establishment of a federal mint and also presented a powerful case
for maintaining an inviolable standard for the coins to be produced
by that mint. He said:
The dollar originally contemplated in the money transactions of this country, by successive diminutions of its weight and fineness, has sustained a depreciation of five per cent, and yet the new dollar has a currency in all payments in place of the old, with scarcely any attention to the difference between them. The operation of this in depreciating the value of property depending upon past contracts, and ... of all other property is apparent. Nor can it require argument to prove that a nation ought not to suffer the value of the property of its citizens to fluctuate with the fluctuations of a foreign mint, or to change with the changes in the regulations of a foreign sovereign
The quantity of gold and silver in the national coins , corresponding with a given sum, cannot be made less than heretofore without disturbing the balance of intrinsic value, and making every acre of land, as well as every bushel of wheat, of less actual worth than in time past.... [This] could not fail to distract the ideas of the community, and would be apt to breed discontent as well among those who live on the income of their money as among the poorer classes of the people to whom the necessities of life would ... become dearer.21
Note in the preceding quotation that Hamilton referred to both
gold and silver coins, not merely silver. That is because it was
precisely at this time that Congress began to consider a bimetallic
coinage. In retrospect, this was a mistake for, throughout history,
bimetallism has never worked well very long. It always has led to
confusion and, ultimately, the disappearance as money of one of the
metals. This is because there is always a subtle shifting of the
relative values between gold and silver—or any other two metals
for that matter—depending on constantly changing supply and
demand. We may set a value ratio of one to the other that is quite
acceptable today but, eventually, that ratio will no longer reflect
reality. The metal which grows in value over the other will be
hoarded or possibly even melted down because it will bring a
higher price as metal than it will as money.
That is precisely what happened in the early days of our Republic. It was determined after careful analysis of the free market that the value of gold at that time was approximately fifteen times the value of silver. The Coinage Act of 1792 accordingly set the relative value of gold-to-silver at fifteen-to-one. It then authorized the federal government to mint gold coins called Eagles, and it specified that their value was ten dollars. In other words, the gold coins would be equal in value to ten silver coins. Ten silver coins, each of 371.25 grains of fine silver, would contain a total of 3,712.5 grains. The content of the Eagle, therefore, was one-fifteenth that amount, or 247.5 grains of fine gold.
Contrary to popular misconception, Congress did not create a "gold dollar." (It didn't do that until fifty-seven years later in The Coinage Act of 1849.) In fact it reaffirmed that "the money of account of the United States shall be expressed in dollars or units" and again defined those units as coins containing 371.25 grains of pure silver. What Congress did do was authorize the minting of a gold coin and arbitrarily fix the value of the gold in that coin at fifteen times the value of the dollar. And it also stated that all silver and gold coins produced in the federal mint were to be legal tender in accordance with their value, based on weight and purity, relative to the standard of the silver dollar.
Oh yes, another thing. It set the death penalty for anyone who debases the nation's coinage; a law which, if enforced today, would wipe out the House of Representatives, the Senate, the managerial level of the Treasury Department, and the Presidency as well.
Free coinage was to become an important part of the American success story, and it lasted until the Gold Reserve Act of 1934 which, not only terminated it, but even made it illegal for citizens to possess gold. We shall take a closer look at that dismal period in a later section but, for now, it is important to recall the greatness of our monetary system as it once was. Elgin Groseclose explains:
The principle of free coinage has proved its practical worth as a deterrent to debasement and depreciation. Where coinage is on private account there is no profit to the state in tampering with the standard, and there is no opportunity for such practice by the individual. The circulation of coins of similar appearance and denomination but of uncertain standard, the arbitrary and unpredictabl e modifications in the standard by autocrati c government, the temptations to profit which were constantly dangled before despotic rulers—these were evils which had perplexed and harassed society and hindered the natural growth of economy since the days when coined money first appeared. By a stroke they were swept away. At the same time, the institution of free coinage, by giving stability and character to one of the chief instruments of organized economy, made possible a more vigorous and healthy commercial life and gave prestige and increased substance to the government adopting it.22
George Washington watched this economic miracle with great satisfaction and, in correspondence to his friend, LaFayette, the French statesman and former General in the Continental Army, Washington commented: "Our country, my dear sir,... is fast progressing in its political importance and social happiness." In a letter to Catherine Macaulay Graham, he said: "The United States enjoys a sense of prosperity and tranquility under the new government that could hardly have been hoped for." And in a letter to the American poet and diplomat, David Humphreys, Washington exclaimed: "Our public credit stands on that high ground which three years ago it would have been considered as a species of madness to have foretold."26
On the specific subject of paper money without backing by gold or silver, Washington wrote:
We may one day become a great commercial and flourishing nation. But if in the pursuit of the means we should unfortunately stumble again on unfunded paper money or any similar species of fraud, we shall assuredly give a fatal stab to our national credit in its infancy. 27
This, then, was the monetary blueprint laid down by the men who drafted our Constitution. In retrospect, about the only flaw one can find was the attempt to set a fixed ratio between the value of gold and silver. Rather than placing a dollar value on a gold coin, the mint should have imprinted the gold value in terms of weight and fineness. The free market then would have assigned it an exchange value in terms of goods and services, and that automatically would have determined its correct monetary value as a ratio to the silver dollars which were bidding for the purchase of the same items. It was inevitable, therefore, that soon after the "ten-dollar" Eagle was created, the value of gold over silver began to climb higher than the prescribed ratio of fifteen-to-one, and the Eagles ceased to circulate. In later years, with the discovery of the great gold fields in California and Australia, the process reversed itself, and silver dollars disappeared from commerce. But, even though this bimetallism led to a discrepancy between the actual conversion ratio and that which the government had prescribed, nevertheless, it took place in the open market and no one was greatly injured by the inconvenience. Throughout it all, there was just one standard:
the defined silver content of a dollar. Furthermore, both the silver and gold coins were of intrinsic value and totally honest in their measure. No nation could do more for the prosperity of its citizens than that.
The monetary plan laid down by the Founding Fathers was the product of collective genius. Nowhere in history can one find so many men in one legislative body who understood the fraud inherent in fiat money and the hidden-taxation nature of inflation. There was never such an assembly of scholars and statesmen determined to set a safe course for the nation of their own creation. Literally, they handed us a treasure map. All we had to do was follow it to economic security and national prosperity. But, as we shall see in the following sections, that map was discarded when the lessons of history died out with those who had lived it.
The dollar originally contemplated in the money transactions of this country, by successive diminutions of its weight and fineness, has sustained a depreciation of five per cent, and yet the new dollar has a currency in all payments in place of the old, with scarcely any attention to the difference between them. The operation of this in depreciating the value of property depending upon past contracts, and ... of all other property is apparent. Nor can it require argument to prove that a nation ought not to suffer the value of the property of its citizens to fluctuate with the fluctuations of a foreign mint, or to change with the changes in the regulations of a foreign sovereign
The quantity of gold and silver in the national coins , corresponding with a given sum, cannot be made less than heretofore without disturbing the balance of intrinsic value, and making every acre of land, as well as every bushel of wheat, of less actual worth than in time past.... [This] could not fail to distract the ideas of the community, and would be apt to breed discontent as well among those who live on the income of their money as among the poorer classes of the people to whom the necessities of life would ... become dearer.21
BIMETALLISM
That is precisely what happened in the early days of our Republic. It was determined after careful analysis of the free market that the value of gold at that time was approximately fifteen times the value of silver. The Coinage Act of 1792 accordingly set the relative value of gold-to-silver at fifteen-to-one. It then authorized the federal government to mint gold coins called Eagles, and it specified that their value was ten dollars. In other words, the gold coins would be equal in value to ten silver coins. Ten silver coins, each of 371.25 grains of fine silver, would contain a total of 3,712.5 grains. The content of the Eagle, therefore, was one-fifteenth that amount, or 247.5 grains of fine gold.
Contrary to popular misconception, Congress did not create a "gold dollar." (It didn't do that until fifty-seven years later in The Coinage Act of 1849.) In fact it reaffirmed that "the money of account of the United States shall be expressed in dollars or units" and again defined those units as coins containing 371.25 grains of pure silver. What Congress did do was authorize the minting of a gold coin and arbitrarily fix the value of the gold in that coin at fifteen times the value of the dollar. And it also stated that all silver and gold coins produced in the federal mint were to be legal tender in accordance with their value, based on weight and purity, relative to the standard of the silver dollar.
Oh yes, another thing. It set the death penalty for anyone who debases the nation's coinage; a law which, if enforced today, would wipe out the House of Representatives, the Senate, the managerial level of the Treasury Department, and the Presidency as well.
FREE COINAGE
Perhaps the most important provision of this Act, however, was
the establishment of what is called free coinage. Under free coinage,
any citizen may take raw silver or gold to the mint and, for a
nominal fee, have it converted into coins for personal use. The
government merely performs a technical function of creating the
coin and stamping it with its insignia to certify the correct weight
and purity. The state's role in this is exactly the same as inspecting
the scales in a grocery store or the meter on a gasoline pump. It is
merely fulfilling the Constitutional requirement to set standards
and verify the accuracy of weights and measures.
Free coinage was to become an important part of the American success story, and it lasted until the Gold Reserve Act of 1934 which, not only terminated it, but even made it illegal for citizens to possess gold. We shall take a closer look at that dismal period in a later section but, for now, it is important to recall the greatness of our monetary system as it once was. Elgin Groseclose explains:
The principle of free coinage has proved its practical worth as a deterrent to debasement and depreciation. Where coinage is on private account there is no profit to the state in tampering with the standard, and there is no opportunity for such practice by the individual. The circulation of coins of similar appearance and denomination but of uncertain standard, the arbitrary and unpredictabl e modifications in the standard by autocrati c government, the temptations to profit which were constantly dangled before despotic rulers—these were evils which had perplexed and harassed society and hindered the natural growth of economy since the days when coined money first appeared. By a stroke they were swept away. At the same time, the institution of free coinage, by giving stability and character to one of the chief instruments of organized economy, made possible a more vigorous and healthy commercial life and gave prestige and increased substance to the government adopting it.22
SOUND MONEY AND
ECONOMIC PROSPERITY
This was, indeed, an auspicious beginning for the new nation,
and the result was immediately observable in an upsurge in
prosperity. The December 16, 1789 edition of the Pennsylvania
Gazette declared: "Since the federal constitution has removed all
danger of our having a paper tender, our trade is advanced fifty per
cent."23 But that was just the beginning. Historian Douglass North
says that "the years 1793-1808, were years of unparalleled prosperity."24 Louis Hacker describes the period as one "of unexampled
business expansion, one of the greatest, in fact, the United States
has had.... The exports of the country mounted from $19 millions
in 1791 to $93 millions in 1801."25 Furthermore, the federal deficit,
which amounted to twenty-eight per cent of expenditures in 1792,
dropped to twenty-one per cent in 1795. By 1802, the deficit had
disappeared altogether and had been replaced by a surplus that
was almost as large as the government's total spending. George Washington watched this economic miracle with great satisfaction and, in correspondence to his friend, LaFayette, the French statesman and former General in the Continental Army, Washington commented: "Our country, my dear sir,... is fast progressing in its political importance and social happiness." In a letter to Catherine Macaulay Graham, he said: "The United States enjoys a sense of prosperity and tranquility under the new government that could hardly have been hoped for." And in a letter to the American poet and diplomat, David Humphreys, Washington exclaimed: "Our public credit stands on that high ground which three years ago it would have been considered as a species of madness to have foretold."26
On the specific subject of paper money without backing by gold or silver, Washington wrote:
We may one day become a great commercial and flourishing nation. But if in the pursuit of the means we should unfortunately stumble again on unfunded paper money or any similar species of fraud, we shall assuredly give a fatal stab to our national credit in its infancy. 27
This, then, was the monetary blueprint laid down by the men who drafted our Constitution. In retrospect, about the only flaw one can find was the attempt to set a fixed ratio between the value of gold and silver. Rather than placing a dollar value on a gold coin, the mint should have imprinted the gold value in terms of weight and fineness. The free market then would have assigned it an exchange value in terms of goods and services, and that automatically would have determined its correct monetary value as a ratio to the silver dollars which were bidding for the purchase of the same items. It was inevitable, therefore, that soon after the "ten-dollar" Eagle was created, the value of gold over silver began to climb higher than the prescribed ratio of fifteen-to-one, and the Eagles ceased to circulate. In later years, with the discovery of the great gold fields in California and Australia, the process reversed itself, and silver dollars disappeared from commerce. But, even though this bimetallism led to a discrepancy between the actual conversion ratio and that which the government had prescribed, nevertheless, it took place in the open market and no one was greatly injured by the inconvenience. Throughout it all, there was just one standard:
the defined silver content of a dollar. Furthermore, both the silver and gold coins were of intrinsic value and totally honest in their measure. No nation could do more for the prosperity of its citizens than that.
SUMMARY
The Constitution prohibits both the states and the federal
government from issuing fiat money. This was the deliberate intent
of the Founding Fathers who had bitter experience with fiat money
before and especially during the Revolutionary War. In response to
the need to have a precisely defined national monetary unit,
Congress adopted the Spanish dollar then currently in use and
defined the content of that dollar to be 371.25 grains of pure silver.
With the establishment of a federal mint, American silver dollars
were issued in accordance with that standard, and gold Eagles also
were produced which were then equal in value to ten silver dollars.
Most importantly, free coinage was established wherein Americans
were able to convert their raw silver and gold into national coins
officially certified by the government as to their intrinsic value. The
product of these measures was a period of sound money and great
economic prosperity, a period that would come to an end only
when the next generation of Americans forgot to read their history
and returned to the use of paper money and "bills of credit." The monetary plan laid down by the Founding Fathers was the product of collective genius. Nowhere in history can one find so many men in one legislative body who understood the fraud inherent in fiat money and the hidden-taxation nature of inflation. There was never such an assembly of scholars and statesmen determined to set a safe course for the nation of their own creation. Literally, they handed us a treasure map. All we had to do was follow it to economic security and national prosperity. But, as we shall see in the following sections, that map was discarded when the lessons of history died out with those who had lived it.
Notes Chapter 15
1. See William M. Gouge, A Short History of Paper Money and Banking in the United
States (Philadelphia: T.W. Ustick, 1833), Part II, p. 27.
2 Paul and Lehrman, p. 23.
3-Roger W. Weiss, "The Colonial Monetary Standard of Massachusetts," Economic
History Review 27 (November 1974), p. 589.
4. For an overview of expenditures, see Paul and Lehrman, pp. 26-27.
5. Gouge, p. 28. The naivete of this lady may be humorous, but are Americans any
more enlightened today? Would she not feel at home among our modern-day
electorate who clamor for legislation to pump Federal-Reserve fiat money into
projects to alleviate hardship among the poor and unemployed?
6. Quoted by Bolles, Vol. I, p. 132.
7-Thomas Jefferson, Observations on the Article Etats-Unis Prepared for the
Encyclopedia, June 22,1786, Writings, Vol. IV, p. 165.
8.F. Tupper Saussy, The Miracle on Mainstreet (Sewanee, Tennessee: Spencer Judd,
1980 P-12. Also see Anthony Sutton, The War on Gold (Seal Beach, Calif.: '76 Press,
1977), pp. 47,48.
9. Jensen, p. 324.
10. Quoted by Atwood, p. 3.
11. Ibid., p.
12. Ibid., p. A.
13. Washington to Stone, 16 February, 1787. Quoted by Bancroft, pp. 231-32.
14. For the context of this and the following statements expressing a similar
sentiment see Bancroft, pp. 30,43-44,82; also Paul and Lehrman, p. 168
15. For an excellent summary of the interplay of ideas between the delegates, see
Edwin Vieira, Jr., Pieces of Eight: The Monetary Powers and Disabilities of the United
States Constitution (New Jersey: Sound Dollar Committee, 1983), pp. 71-76.
16. Alexander Hamilton, Works, Part II, p. 271, as cited by Bancroft, p. 26.
17. Quoted by Bancroft, pp. 39, 40.
18. Vieira, p. 66.
19. Propositions Respecting the Coinage of Gold, Silver, and Copper (printed pamphlet
Presented to the Continental Congress on May 13,1785), pp. 9-10. Cited by Vieira,
P. 68.
20. Ibid., p. 11.
21. The Debates and Proceedings in the Congress of the United States (J- Gales, compil. 1834), Appendix, pp. 2059,2071-73. Cited by Vieira, pp. 95,97.
22. Groseclose, Money and Man, p. 167.
23. Quoted by Saussy, p. 36.
24. Douglass C. North, The Economic Growth of the United States (New York: W.W Norton, 1966), p. 53.
25. Louis M. Hacker, American Capitalism (New York: Anvil, 1957), p. 39.
26- These letters were written in 1790 and 1791, quoted by Atwood, pp. 5-6.
27. Written in 1789, quoted by Louis Basso, A Treatise on Monetary Reform (St. Louis, Missouri: Monetary Realist Society, 1982), p. 5.
21. The Debates and Proceedings in the Congress of the United States (J- Gales, compil. 1834), Appendix, pp. 2059,2071-73. Cited by Vieira, pp. 95,97.
22. Groseclose, Money and Man, p. 167.
23. Quoted by Saussy, p. 36.
24. Douglass C. North, The Economic Growth of the United States (New York: W.W Norton, 1966), p. 53.
25. Louis M. Hacker, American Capitalism (New York: Anvil, 1957), p. 39.
26- These letters were written in 1790 and 1791, quoted by Atwood, pp. 5-6.
27. Written in 1789, quoted by Louis Basso, A Treatise on Monetary Reform (St. Louis, Missouri: Monetary Realist Society, 1982), p. 5.
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