Gold and Freedom by Jacob
G. Hornberger - Lewrockwell.com November 2, 2009
Among
the major threats facing the American people today is out-of-control
spending at the hands of the U.S. government. It is a grave
danger that people have faced throughout history from their
own governments. After all, let’s not forget the oft-repeated
claim by U.S. officials about how they brought down the Soviet
Union – by causing the Soviet government to spend itself into
bankruptcy and ruin.
When the Framers were deliberating over the
Constitution, they were fully aware of the dangers to people’s
freedom and well-being posed by a profligate government. As
British subjects, they had experienced firsthand the ever-increasing
taxes imposed by their king to finance his ever-growing expenditures.
As revolutionaries, they had also experienced the ravages
that come with the inflation of a currency to finance government
expenditures. That’s what “Not Worth a Continental” referred
to. As citizens living under the Articles of Confederation,
they knew the damage that irredeemable paper money can bring
to a society.
The first thing to keep in mind about the
Constitution was its dual purpose: to bring into existence
the federal government while, at the same time, protecting
the nation from it. While the Framers understood the need
for government, they also understood that that same government
constituted the greatest danger to their freedom and well-being.
Thus, by its own terms the Constitution limited
the powers of the federal government to a small number of
powers that were enumerated in the document. To make certain
that U.S. officials got the point – that the federal government
was considered to be the greatest threat to the freedom and
well-being of the American people – our ancestors demanded
quick passage of 10 amendments to the Constitution. Naming
the federal government as the primary threat to their freedom,
the Bill of Rights expressly prohibited U.S. officials from
infringing fundamental rights and expressly guaranteed important
procedural protections as a prerequisite to searching, arresting,
incarcerating, or otherwise punishing people.
Our ancestors realized that not only was the
U.S. government the primary threat to such fundamental rights
as free speech, freedom of religion, peaceable assembly, and
gun ownership, it was also the major threat against personal
wealth or private property. That’s why, for example, the Bill
of Rights expressly prohibits U.S. officials from taking people’s
property without due process of law or without just compensation.
The threat of inflation
The Framers also understood that there was
an insidious, even fraudulent, way that government officials
could seize people’s privately acquired wealth – through an
indirect monetary method known as inflation. To protect themselves
from that threat, they again used the Constitution.
First, while the enumerated powers that the
Constitution granted the federal government included the power
to borrow money, they did not include the power to issue paper
money or to make paper money legal tender.
Second, the Constitution expressly prohibited
the states from issuing paper money (i.e., “bills of credit”)
and from making anything but gold and silver coin legal tender.
Thus, from the inception of our nation our
American ancestors intended for the United States to operate
under a precious-metals monetary system or, more specifically,
under a monetary system in which people used gold and silver
coins rather than paper money as the media of exchange.
What is vitally important to keep in mind
is the reason our American ancestors did this: to protect
the nation from the federal government and, specifically,
from the ravages of out-of-control federal spending financed
by ever-increasing amounts of freshly printed paper money.
Historically, among the most effective ways
that governments have plundered their own citizens has been
inflation. Directly taxing people gets them upset and even
angry. Such anger can be threatening to government officials,
especially when it spills over into rebellion or revolution.
Long ago, government officials figured out
that it was much easier to seize people’s property through
inflation, in large part because people lacked the astuteness
to figure out what the government was doing to them. Even
better, when the effects of inflation would begin manifesting
themselves through rising prices, government officials knew
that the propensity of people was to blame the problem on
private businesses that were raising prices rather than on
public officials who were inflating the currency. Best of
all, government officials knew that as prices began rising,
they could appear as saviors to the people by imposing price
controls on those greedy businesses.
The inflation scheme had been going on long before the invention
of the printing press. Here’s how the process worked:
As people engaged in the process of trading
with one another, they found that barter could be a less-than-satisfactory
mechanism. For example, suppose John is selling a bushel of
wheat that Joe wants to purchase. Joe offers John a bushel
of apples in exchange for the wheat but John isn’t interested
in apples. He wants oranges. So Joe has to go out and find
someone who has oranges before he can trade with John to acquire
his wheat. But there’s no guarantee that the person who has
oranges is going to be interested in Joe’s apples either.
Thus, over time people began using commonly
traded items not only for their substantive use but also as
a medium of exchange. Consider, for example, tobacco, an item
that has sometimes served as money. Joe would go trade his
apples for a bundle of tobacco, not with the intent of using
the tobacco but solely as a way to purchase John’s wheat.
While John wasn’t interested in Joe’s apples, he would be
willing to accept the tobacco because he knew that other people
would be willing to accept it in exchange for purchases he
wished to make.
Gradually, people began turning to precious
metals for this purpose. Businesses would be willing to sell
an item for an ounce of gold because they knew that everyone
else would be willing to do the same. Although gold supplies
could increase owing to new discoveries, thereby lowering
the purchasing power of gold, people felt that, by and large,
the commodity held its value. Other advantages of gold were
that it was easily transportable and easy to hide.
But weighing out a quantity of gold each time
a trade took place was cumbersome. In response, private minters
began minting coins with a fixed amount of gold in them. To
facilitate trades, various gold coins would be minted, each
one containing a different quantity of gold – e.g., 1 ounce,
1/2 ounce, or 1/4 ounce. For smaller transactions, silver
coins were used, and even copper ones.
As in any other business, people turned to
those minters who developed a reputation for honesty and integrity.
Coins minted by those minters would be more readily accepted
in the marketplace as containing the amount of gold represented
to be in the coin.
People would use such coins not only to purchase
goods and services but also to pay their taxes. They were
the money that people used in their day-to-day transactions.
Clipping the coin
Ever-increasing government expenditures and
ever-increasing resistance to high taxes caused government
officials to look for other ways to raise revenues. The most
effective method they came up with was inflation or what was
called “clipping the coin.”
What government officials first did was take
over the business of minting the coins. It wasn’t enough for
government to simply enter the gold-minting business in competition
with the private minters. That would obviously leave people
free to choose between coins minted by private businesses
and those minted by the government.
So the government would decree a monopoly
on the minting of coins. That meant that only the government
– or a private business appointed by the government – could
mint coins. Every other minter was required by law to close
down his operations, and new entrants into the minting business
were prohibited.
As people paid their taxes with the government’s
coins, government officials began shaving off a slight bit
of gold around the edges of the coin before returning it into
the marketplace in payment for goods and services. The total
amount shaved off the coins added significant amounts of money
to the state’s coffers.
Obviously, as government officials shaved
off the edges of the coins, what was represented to be a 1-ounce
gold coin was no longer a 1-ounce gold coin. As a result of
shaving, the coin contained less than 1 ounce. Gradually,
people began figuring that out, especially as the coins became
smaller and smaller in size.
At that point the coin would begin trading
at a discount in the marketplace. That is, a businessman selling
an item for a 1-ounce gold coin would require not only the
shaved coin but also, say, a couple of silver coins to compensate
for the smaller amount of gold in the gold coin.
Needless to say, government officials didn’t
like their coins’ being treated in such a shabby manner. It
was an affront to the king. It was questioning his honor and
integrity. The solution was to make the king’s coins legal
tender, regardless of how much gold they contained. What that
meant was that people were required by law to accept the government’s
coins at face value for all economic transactions, including
the payment of debts and the purchase of goods and services.
Inflation and the printing press
The invention of the printing press greatly
facilitated the ability of government officials to seize people’s
wealth through inflation. Here’s how the process worked. Let’s
say the government needed an additional one million gold coins
to finance its ever-growing expenditures. Reluctant to tax
the citizenry, the government went into the marketplace and
borrowed the gold coins from the citizenry. The loan would
be evidenced by a promissory note, or “bill of credit,” promising
to pay a fixed quantity of gold, e.g., a 1-ounce gold coin.
So far, so good, at least insofar as inflation
was concerned. The government might be spending wildly but
the money being spent was coming from either taxes or borrowing.
People began realizing that the government’s
notes could be used as easily as gold coins to facilitate
trade. That is, sellers would be willing to accept a government
note promising to pay a 1-ounce gold coin because they were
certain that the note was as good as gold. All that anyone
had to do was demand that the government redeem the note by
paying him the gold coin, and it would be done.
Then the problem started. Government officials,
ever in need of more money to finance their ever-growing expenditures,
figured out that only a certain percentage of people holding
the notes would appear and demand their gold at any one time.
Most of the notes would continue to circulate as money.
So government officials began cranking up
their printing presses and printing lots of government notes
that they then used to pay for goods and services in the marketplace.
They had little concern that everyone would show up at the
same time demanding redemption of all the outstanding notes.
For example, let’s say that on December 31
the government plans to receive tax revenues of one million
1-ounce gold coins. On January 1, it goes out and borrows
one million gold coins, evidenced by the delivery of one million
notes with a maturity date of one year, each one promising
to pay the bearer a 1-ounce gold coin. On the following December
31, the government receives the million gold coins in tax
revenue and the following day is prepared to pay off all the
notes it issued when it borrowed the money.
However, on the maturity date government officials
notice something important. On the maturity date, only 10
percent of the notes are offered for redemption. The other
90 percent continue being used to facilitate trade in the
marketplace, with everyone’s having the assurance that he
can cash in the note whenever he wants.
Realizing this, the government issues, say,
100,000 additional notes that it uses to pay contractors and
suppliers. Those notes begin circulating in the marketplace
just like the other ones. But there is now a significant difference:
If everyone appears at the gold window and demands redemption,
the government can’t make good on its promises. It has only
the 1 million in gold that it collected from the taxpayers,
not the 1.1 million that it has issued in notes.
As people begin discovering that there are
more notes in circulation than the government is able to redeem,
there is a rush for the gold window. Everyone wants his gold.
No one wants to be stuck with a promise to pay gold if the
promise cannot be fulfilled.
Moreover, the government’s notes start trading
at a discount in the marketplace. That is, suppose a seller
is selling an item for 1 ounce of gold. When a buyer offers
him a government note promising to pay 1 ounce of gold, the
seller demands the note plus a bit more to compensate him
for the risk of default.
Just like the regimes of old, modern-day governments
become outraged when people question their integrity and honor.
Refusing to accept government notes at face value is considered
a grave insult, one even akin to treason. That’s where legal-tender
laws came into play. Under threat of severe punishment, government
officials require people to accept their notes at face value,
without any discount, no matter how many notes have been issued
and no matter how serious the risk of default.
That sets the stage to examine the monetary
system of the United States, a system that began with precious
metals and has ended up with irredeemable paper money known
as Federal Reserve Notes, a process that endangers the well-being
of the American people and that threatens their nation with
bankruptcy and ruin.
The Framers had experienced the ravages of
paper money during the Revolutionary War and under the Articles
of Confederation, and they were fully aware of how governments
had plundered and looted their own citizenry with inflation
throughout history. Therefore, the Framers used the Constitution
to ensure that neither the states nor the federal government
could ever do that to the American people.
The result was that from the founding of the
nation and for more than a century, the money that the American
people used was coins consisting of gold, silver, nickel,
and copper. People became accustomed to transacting business
with such coins. It was that type of monetary system – one
in which people used coins made of precious and non-precious
metals – that became known as “the gold standard.”
It wasn’t a purely free-market standard. The
U.S. government was in charge of minting America’s coins and,
therefore, of defining the weight and fineness of the coins.
Moreover, the government established a policy of defining
the exchange ratio between gold and silver, a price control
that would inevitably be out of sync with changing market
conditions and that often led people to hoard one metal or
the other.
What was important, however, was that the
monetary standard for the United States was a metallic one,
not one based on paper money. It’s important to conceptualize
what the “gold standard” meant. It did not mean some exchange
ratio between paper money and gold. Instead, the “gold standard”
meant that gold coins, silver coins, nickel coins, and copper
coins were the money that the American people had chosen to
use in their society.
Liberty, power, and the Constitution
Let’s examine how the Framers used the Constitution
to establish a government of limited powers and then examine
how it protected Americans from the ravages of inflation with
the establishment of a gold standard.
First of all, keep in mind the overall political
philosophy that was guiding the Framers and the Americans
during the founding of the nation. While Americans believed
that a federal government was necessary, they also believed
that it would nonetheless constitute the greatest threat to
their freedom and well-being. Unlike so many Americans today,
who view the federal government as their provider and caretaker,
our American ancestors looked upon the federal government
as a very dangerous entity, one that needed to be watched
very carefully.
One can see this mindset most clearly in the
Bill of Rights, which actually should have been called the
Bill of Prohibitions. Behind every one of the prohibitions
and guarantees in those Amendments was the conviction held
by the people that in the absence of such express prohibitions
and guarantees, the federal government would engage in the
conduct that was prohibited or proscribed.
The reason that the First Amendment prohibited
Congress from enacting any law abridging freedom of speech
and freedom of the press, for example, was that in the absence
of such an amendment, Congress would enact laws that would
infringe such freedoms.
The reason the Second Amendment guarantees
the right to keep and bear arms was that in the absence of
such an express guarantee, federal officials would confiscate
weapons from the citizenry in order to maintain order, stability,
and obedience.
The same goes for criminal cases in which
the government seeks to incarcerate and punish people. Express
guarantees prohibiting unreasonable searches and seizures
and cruel and unusual punishments, and relating to due process
of law, right to counsel, and right to bail were included
because our ancestors knew that federal officials would ignore
the people’s rights and liberties in the absence of express
restrictions.
The cornerstone of American society was private
property, whose protection was guaranteed in the original
Constitution as well as in the Due Process Clause and the
Just Compensation Clause in the Bill of Rights. Realizing
that the institution of private property was a necessary prerequisite
for a free society, the Constitution and the Bill of Rights
prohibited federal officials from arbitrarily confiscating
people’s money, land, and other property. There was also an
express restriction prohibiting the states from impairing
private contracts.
All those enumerated powers and express prohibitions
and guarantees reflected the mindset of the Framers. Since
they viewed the federal government as the greatest danger
to the freedom and well-being of the American people, they
decided to use the Constitution not only to call the federal
government into existence but also, at the same time, to limit
its powers to those that were expressly enumerated.
In other words, one option would have been
to delegate to the federal government general, unlimited powers
to take whatever actions federal officials deemed to be in
the best interests of the American people. That’s not the
option the Framers chose, because they knew that such a government
would inevitably oppress the citizenry.
What they did instead was to make it clear
that the government the Constitution was calling into existence
would be one with very few, limited powers. The federal government’s
powers would be limited to those expressly enumerated in the
Constitution. If a power wasn’t enumerated, the federal government
couldn’t exercise it, even if federal officials deemed it
to be in the best interests of the citizens.
The Constitution and gold
How did the Framers protect the American people
from the ravages of inflation, which had beset people for
centuries?
First, the Constitution granted the federal
government the power to coin money and to regulate its value
in accordance with a fixed standard of weights and measures.
Second, it did not grant the federal government
the power to issue paper money or the power to debase the
currency.
Third, while the Framers did grant the federal
government the power to borrow, they refused to grant the
power to make bills and notes legal tender. In other words,
the government lacked the power to force people to accept
its bills and notes in ordinary transactions or in payment
of debts.
Fourth, the Framers expressly prohibited the
states from issuing paper money, or what was commonly called
“bills of credit.”
Fifth, the Framers expressly prohibited the
states from making anything but gold and silver coins legal
tender.
Thus, it was clear that the Framers intended
the United States to operate on a precious-metals standard,
one in which gold coins, silver coins, and copper coins were
the money in society.
In fulfillment of that intention, Congress
enacted the Coinage Act of 1792, which established the U.S.
Mint and provided for the minting of coins that would be based
on a dollar unit of value. For example, there were silver
dollars and silver half-dollars and $10 gold Eagles and $5
Half-Eagles.
A heritage of economic liberty
While statists love to regale us with stories
of how horrible the Industrial Revolution was, the truth is
that compared with what had gone on before, the Industrial
Revolution was providing people with the means to escape death
by starvation. Before long and as wealth began being accumulated,
people were not only surviving, they were actually prospering.
Part of the reason for this remarkable outburst
in economic prosperity was the fact that our Americans ancestors
had rejected income taxation. Thus, through most of the 19th
century, Americans could keep everything they earned and there
was nothing the federal government could do about it.
It was also a society in which there was a
lack of economic regulation on the part of the government.
That’s what “free enterprise” meant – economic activity that
was free of government control.
There was no socialism – no Social Security,
Medicare, Medicaid, public schooling, education grants, foreign
aid, or welfare.
There was no large standing army, no foreign
aid, no foreign wars, no entangling alliances, and no overseas
empire.
There were no controls on immigration, except
for a cursory health inspection at Ellis Island.
All those factors contributed to the unbelievable
rise in the standard of living of the American people. People
were going from rags to riches in one, two, or three generations.
They included the thousands of penniless immigrants who were
fleeing the lands of taxation, regulation, socialism, conscription,
militarism, and empire to come to the land of self-reliance,
independence, voluntary charity, and limited government.
Savings, capital, and gold
Another critically important factor in the
economic prosperity, however, was the gold standard. For the
first time in history, people felt safe from the threat that
had besieged people throughout history – the threat that government
officials would take away their wealth by debasing their currency.
Equally important was the positive effect
that the gold standard had on capital markets. Companies were
issuing bonds with a 100-year maturity date, with the proviso
that the loan had to be paid back in a specified amount of
gold or the same unit of value as when the bond was issued.
In other words, no repayment in debased, inflated paper currency.
Thus, people were willing to buy such long-term bonds because
they didn’t fear being paid back in depreciated currency.
The massive accumulation of capital, brought about by the
absence of an income tax, the propensity of people to save,
and the existence of sound money, were among the critical
factors that brought about an enormous increase in real wages
in the 19th century.
Since America’s money consisted of gold coins,
silver coins, and copper coins, people knew that the federal
government couldn’t easily inflate the currency. After all,
it’s much more difficult to arbitrarily increase the supply
of gold, silver, and copper than it is to increase the supply
of paper money. Mining for precious metals can be expensive,
while simply printing money off a printing press is much less
onerous.
Of course, the federal government could have
“clipped the coins,” as regimes of old had done, leaving the
coins with less gold and accumulating the shavings for government
use. But the federal government didn’t do that. While there
were sometimes controversial adjustments in the weight or
fineness of U.S. coins as well as in the exchange ratio between
the coins, by and large U.S. coins were renowned for their
quality and trustworthiness.
That’s not to say that there weren’t periodic
increases in the supply of money, but at least they were localized
or brought about by unusual market conditions rather than
by government policy. A new gold discovery in California,
for example, would increase the supply of gold overnight,
causing prices of everything to go up in relationship to gold.
It was the gold and silver coins that were the money, not
the federal government’s dollar bills.
By and large, the American people had confidence
in the ability of their coins to hold their value. The consequence
was that people were saving vast amounts of money, oftentimes
passing it from one generation to the next. Thus, not only
could people leave their children large sums of money that
had been accumulated from the fact that there was no income
tax, but they knew that federal officials lacked the power
to ravage those savings with inflation.
Borrowing and gold
What about the federal government’s power
to borrow, which was among the enumerated powers granted in
the Constitution? In principle, the power entailed nothing
different from ordinary citizens’ borrowing money. For example,
people would lend gold coins to the government.
To evidence the debt, the government would
issue a promissory note, which promised to repay the lender
the gold that was being borrowed. Everyone understood that
it was the gold and silver coins that were the money, not
the government’s notes. The notes were promises to pay money,
not money itself.
Of course, there was nothing to prevent the
federal government from simply printing an excess number of
notes and using them to pay for goods and services in the
marketplace, except that by doing so, it would run the risk
that everyone would show up at the government’s gold window
and demand to have the promissory notes redeemed in gold coin.
Thus, an excess issue of notes would, at some point, result
in the bankruptcy of the government. That possibility operated
as a very real constraint on excessive government spending.
All this is like ancient history to today’s
Americans. They’ve heard of the “gold standard” but it’s a
vague concept in their minds. They might be somewhat aware
that gold coins, silver coins, and copper coins once circulated
in American society, but most of them have no idea of the
integral part the gold standard played in the lives of our
American ancestors.
Most Americans today have no idea why a gold
standard was important to our ancestors. The notion that a
gold standard was established to protect them from the federal
government is an alien notion to most people.
To most people today, the gold standard was
a system in which the federal government’s paper bills and
notes were the real money, which was “linked” to some fixed
amount of gold.
When people pull out a Federal Reserve Note
from their billfolds or wallets, it never occurs to them to
ask why it’s called a “note,” given that it’s not promising
to pay anything. They have no idea that the “note” is a cruel
reminder of a bygone era in which the American people once
had a monetary system based on sound money rather than on
irredeemable notes issued by the Federal Reserve.
What happened to the gold standard on which
the United States was founded? What happened to all those
gold and silver coins that Americans used to use in their
day-to-day transactions? Why do people use irredeemable paper
money today instead of coins made of precious metals? What
happened to bring about such a monumental, even revolutionary,
change in America’s monetary system? Why do so few Americans
know what happened and why it happened?
The answers to those questions require an
examination into the economic policies of two presidents:
Abraham Lincoln and Franklin D. Roosevelt.
Abraham Lincoln and Franklin Roosevelt were
the two presidents most responsible for the abandonment of
sound money in the United States. These two U.S. presidents
opened the floodgates to the monetary debauchery under which
today’s Americans have suffered for their entire lives.
In waging war to prevent the Southern states
from leaving the Union, Lincoln was faced with the age-old
problem that rulers have faced throughout history: how to
pay for the war’s ever-increasing military expenditures. One
answer, of course, was taxation, but Lincoln was no fool.
He knew that taxes were not popular among the citizenry, especially
when they’re continually going up.
Thus, he resorted to another revenue-raising
device, one that historically did not engender the same amount
of animosity among people that taxes did. He simply borrowed
the money through the issuance of government notes.
Keep in mind an important point here: The
notes promised to pay dollars, which everyone understood were
simply units of value reflecting the value in gold coins and
silver coins. Ever since the country’s founding, the money
that people used in their everyday transactions was gold coins
and silver coins, along with copper coins for smaller transactions.
Since the Constitution permitted the federal
government to borrow money, there was nothing unconstitutional
about Lincoln’s decision to employ that method to finance
the war. The problem arose when the federal government took
one additional fateful step: It made the federal notes “legal
tender.” That action converted the notes from simple evidence
of a loan into “paper money.”
Why was a legal-tender law important to Lincoln
and the Congress? They knew that when profligate governments
borrow excessive amounts of money, their notes ultimately
begin losing value in the marketplace compared with everything
else. As more and more notes promising to pay gold are issued,
the chances of default increase. If everyone appears at the
government’s gold window at the same time and says, “I wish
to redeem this promissory note for 10 gold Eagles,” there
is a chance that the government will be able to pay off, say,
only 70 percent of the note-holders before running out of
gold.
Inflation and the Constitution
Thus, as more and more notes are issued, their
relative value in the marketplace begins to drop. Suppose,
for example, a federal agent walks into a dry-goods store
and selects merchandise having a price of 10 gold Eagles.
He hands the clerk a federal promissory note promising to
pay 10 gold Eagles. The storeowner, however, knows that such
promissory notes are trading at a discount. So he tells the
federal agent, “Sorry, that’s not satisfactory. Either pay
me 10 gold Eagles, or give me the note plus an additional
2 gold Eagles in exchange for the merchandise.”
Lincoln’s legal-tender law avoided that problem
by simply dictating that every American had to accept federal
notes at face value.
Yet that was precisely the reason that the
American people had established a sound-money system in the
Constitution. They knew that throughout history rulers had
plundered and looted their own citizenry through inflation,
first through such devices as “clipping the coin” and later
through the issuance of paper money. Through the Constitution,
the Framers intended to establish a monetary system by which
the American people would forever be protected from the ravages
of inflation. Lincoln’s legal-tender law effectively removed
that protection.
Let’s assume that in 1860 Peter lends Paul
the sum of $1,000 in gold coins. The loan is evidenced by
a promissory note in which Paul promises to repay the sum
of $1,000 in gold coins. The loan, principal and interest,
is due three years from the date of issuance.
When the loan comes due in 1863, Peter demands
his money. Paul tenders to Peter federal promissory notes
totaling $1,000 and cites Lincoln’s legal-tender law, which
permits him to use federally issued paper money to pay his
debts. Paul refuses the tender of the notes because in the
marketplace the notes are trading for only $700 in gold coins.
He demands payment in the money standard that the loan originally
called for.
The Legal Tender Cases
That was the issue in the Legal Tender Cases,
which are among the most significant cases in the history
of U.S. Supreme Court. When Lincoln’s legal-tender law came
before the Supreme Court in the case of Hepburn v. Griswold
(1870), the Court held that the law was unconstitutional.
However, because of a change in the makeup
of the Court – two new justices were named by President Grant
(!) within two years of the Hepburn decision – the ruling
was overturned and the constitutionality of Lincoln’s legal-tender
law was upheld in the cases of Knox v. Lee and Parker v. Davis.
The thrust of the argument sustaining the
constitutionality of Lincoln’s legal-tender law was that since
the Constitution granted Congress the power over the nation’s
monetary system, it was the prerogative of Congress to use
such power to issue paper money and force people to accept
it with a legal-tender law.
It was, however, a spurious argument, as the
justices who voted against the constitutionality of the legal-tender
laws pointed out.
Recall, first of all, that the Constitution
expressly prohibited the states from making anything but gold
and silver coin legal tender. The Constitution also expressly
prohibited the states from issuing “bills of credit,” a term
that meant paper money.
Obviously, restrictions on the power of the
states do not operate as restrictions on the powers of the
federal government. But those specific restrictions on the
states do provide a clear expression of the type of monetary
system that the Framers intended for the United States – one
based on gold coins and silver coins.
Why didn’t the Framers use the Constitution
to expressly restrict the federal government in the same way
as they did the states?
Recall that the Constitution brought into
existence a government of limited powers that were expressly
enumerated in the Constitution. Therefore, there was no need
for the Framers to impose specific restrictions on federal
power. To determine whether the federal government could exercise
a particular power, all that people had to do was simply examine
the list of enumerated powers. If a power was not listed,
then the power could not be legally exercised.
Thus, since the Constitution did not give
the federal government the power to issue paper money or bills
of credit, such power couldn’t be constitutionally exercised,
even though there was no express prohibition against issuing
paper money or bills of credit.
By the same token, while the Constitution
did give the federal government the power to borrow money,
it did not give it the power to make its promissory notes
legal tender. Therefore, under the doctrine of limited, enumerated
powers there would have been no need to include an express
restriction on the power to enact legal-tender laws.
We should also note the importance that the
Framers placed on the sanctity of contracts, as reflected
by the Constitution’s express restriction on the states from
impairing contracts and their decision to not delegate the
power to impair contracts to the federal government. That
would be especially important to a person who had lent money
pursuant to a loan contract that provided for repayment in
the same standard of money under which the money had been
lent.
Coins versus paper
Was the Constitution silent on federal power
with respect to money? Absolutely not. The Constitution expressly
gave Congress the power “to coin money, regulate the value
thereof, and of foreign coin.” That power made it clear that
the intent of the Framers was to bequeath a monetary system
to the American people based on gold coins and silver coins.
Obviously “to coin money” means to make coins
out of metal, not out of paper. “To regulate the value thereof”
obviously means to define how much gold and silver each coin
will comprise.
Thus, given the express restrictions on the
states prohibiting them from making anything but gold and
silver coin legal tender and prohibiting them from issuing
paper money, and given no delegation of power to the federal
government to do those things, and given the expressly granted
power to Congress to coin money and regulate the value therefore,
how in the world could anyone rationally arrive at the conclusion
that the Framers intended to permit Congress to establish
a paper-money system, especially one in which people would
be forced to accept devalued or even irredeemable paper notes
as money?
Yet that’s precisely what the Supreme Court
held after the addition of the two new justices appointed
by President Grant. The dissenting justices in Knox and Parker
correctly pointed out that the result was that the American
people would now be subject to being ravaged by the very inflationary
measures that the Framers intended to protect them from. As
dissenting Justice Stephen J. Field put it,
Speaking of paper money issued by the states
– and the same language is equally true of paper money issued
by the United States – Chief Justice Marshall says, in Craig
v. State of Missouri, “Such a medium has been always liable
to considerable fluctuation. Its value is continually changing,
and these changes, often great and sudden, expose individuals
to immense loss, are the sources of ruinous speculations,
and destroy all confidence between man and man. To cut up
this mischief by the roots, a mischief which was felt through
the United States and which deeply affected the interest
and prosperity of all, the people declared in their Constitution
that no state should emit bills of credit.”
After the Civil War, the American people continued
operating under a monetary system based on gold and silver
coins (as well as copper coins and nickel coins), which was
the monetary system that the Framers had brought into existence
through the Constitution. Since Lincoln’s legal-tender law
applied only to a select group of federal notes issued during
the Civil War, its impact was limited in scope. Nonetheless,
it set the stage for what would come 70 years later – the
nationalization of gold, the repudiation of gold clauses,
irredeemable paper money, ever-increasing federal spending,
financial chaos and crises, and never-ending inflationary
plunder of the citizenry.
On April 5, 1933 – about a month after taking
office – President Franklin Roosevelt issued an executive
order commanding every American to turn in his gold to the
federal government. The order was soon ratified by Congress,
which made it a felony offense for Americans to own gold.
The Congress also nullified clauses in both private and public
contracts that required payment to be made in gold coin.
Roosevelt’s actions rank among the most horrific
abuses of government power in history. For 150 years, the
American people had been accustomed to using gold coins as
money. Their gold was their property. They were the owners
of it. It belonged to them as much as their homes, their automobiles,
and their personal effects. It did not belong to Franklin
Roosevelt, nor to the members of Congress, nor to any other
public official. It was privately owned property.
Nonetheless, the Roosevelt administration
simply declared that everyone’s gold suddenly belonged to
the federal government. Everyone, including individuals and
banks, was required to surrender his privately owned gold
to the federal government. Anyone caught failing to do so
was subject to being indicted by a federal grand jury and
faced a possible jail sentence of 10 years and a fine of $10,000.
Imagine: In 1787 the Framers used the Constitution
to establish a system whereby people were going to use gold
and silver coins, rather than paper, as money. The reason
they did that was to enable people to protect themselves from
what governments throughout history had done – plunder and
loot people through inflation – e.g., by printing ever-increasing
amounts of paper money to finance ever-increasing governmental
expenditures. For the next 150 years, Americans used such
coins in their everyday transactions.
Then, one day federal officials suddenly made it a felony
for Americans to do what they had been legally and constitutionally
doing for 150 years.
In fact, the Roosevelt administration’s confiscation
of privately owned gold was no different from the nationalization
of privately owned property that had taken place at the hands
of the communist regime in the Soviet Union. And Roosevelt’s
criminalization of gold ownership was no different, in principle,
from the types of economic crimes that the Soviet communists
were creating and enforcing.
What was Roosevelt’s rationale for this revolutionary
action? He claimed that since the Great Depression was a national
“emergency,” the federal government had the authority to exercise
emergency powers, including the power to confiscate gold,
to make gold ownership a felony, and to nullify gold clauses
in contracts.
One big problem, however, was that the Constitution
didn’t provide for the exercise of emergency powers. In fact,
the Framers understood that emergencies are the time that
liberties are most at risk. Therefore, it was during emergencies
that constitutional restraints were most important.
Nazi admiration
Constitutional restraints, however, didn’t
present a problem for Roosevelt. After all, this was the man
who would later come up with an infamous Court-packing scheme
when the Supreme Court was declaring many of his socialistic
and fascistic New Deal programs unconstitutional. He had no
intention of letting constitutional restraints stand in the
way of his aims and objectives.
Thus, it’s not surprising that one of Roosevelt’s
greatest admirers was none other than Adolf Hitler, who was
adopting many of the same types of measures to deal with the
economic emergency in Germany that Roosevelt was employing
in the United States. Here’s what Hitler wrote to U.S. Ambassador
Thomas Dodd on March 14, 1934, about a year after the Roosevelt
administration had nationalized gold and nullified gold contracts:
The Reich chancellor requests Mr. Dodd to
present his greetings to President Roosevelt. He congratulates
the president upon his heroic effort in the interest of
the American people. The president’s successful struggle
against economic distress is being followed by the entire
German people with interest and admiration. The Reich chancellor
is in accord with the president that the virtues of sense
of duty, readiness for sacrifice, and discipline must be
the supreme rule of the whole nation. This moral demand,
which the president is addressing to every single citizen,
is only the quintessence of German philosophy of the state,
expressed in the motto “The public weal before the private
gain.”
In his excellent book, Three New Deals: Reflections on Roosevelt’s
America, Mussolini’s Italy, and Hitler’s Germany, 1933–1939,
Wolfgang Schivelbusch points out,
On May 11, 1933 [one month after Roosevelt’s
gold decrees], the main Nazi newspaper, the Volkischer Beobachter,
offered its commentary in an article with the headline “Roosevelt’s
Dictatorial Recovery Measures.” The author wrote, “What
has transpired in the United States since President Roosevelt’s
inauguration is a clear signal of the start of a new era
in the United States as well.” The tone on January 17, 1934,
was much the same, “We, too, as German National Socialists
are looking toward America.... Roosevelt is carrying out
experiments and they are bold. We, too, fear only the possibility
that they might fail.”... Just as National Socialism superseded
the decadent “bureaucratic age” of the Weimar Republic,
the Volkischer Beobachter opined, so the New Deal had replaced
“the uninhibited frenzy of market speculation of the American
1920s.” The paper stressed “Roosevelt’s adoption of National
Socialist strains of thought in his economic and social
policies, praising the president’s style of leadership as
being comparable to Hitler’s own dictatorial Führerprinzip.”
Plundering and looting
Why did Roosevelt nationalize gold? Why were
gold clauses nullified?
The answer is simple: to enable the federal
government to do what governments throughout history had done
– plunder and loot people through inflation in order to pay
for ever-increasing government programs and projects.
Let’s review the process to understand what
Roosevelt was doing.
The reason the Framers established gold and
silver coins as the money that Americans would use was to
protect them from the inflationary ravages of paper money.
The Constitution permitted the federal government
to borrow money – e.g., gold and silver coins – and issue
notes promising to repay the loans. Such notes customarily
contained gold clauses requiring repayment in the same gold-coin
standard in effect when the loan was made.
Let’s assume that I lend the federal government
a gold coin containing 1 ounce of gold. Before the loan is
repaid, the government lowers the quantity of gold in coins
of that same denomination to ½ ounce. When the loan becomes
due, the government tries to repay me in the devalued coin.
But the gold clause protects me. It requires the government
to repay me in the standard that was in effect when the loan
was made – or its equivalent. Because of the gold clause,
the government would have to pay me two of the new gold coins
containing ½ ounce of gold each.
What constrains the government from issuing
too many short-term paper notes – or bills? The fact that
people might start demanding gold in payment of such notes!
And that’s exactly what was happening by the time Roosevelt
assumed office. Americans were doing what people throughout
history had done – they were putting their savings into gold
coins rather than in the ever-increasing numbers of bills
and notes that the federal government was issuing. That’s
what Roosevelt called the “hoarding” problem.
Moreover, people continued doing what Americans
had done since the start of the Republic – relying on gold
clauses in contracts, both government and private, to ensure
that their loans would not be repaid in debased, depreciated
currency.
Yet, within just a few weeks of taking office,
Roosevelt extinguished 150 years of sound money. From the
day his executive orders were issued, Americans could no longer
use the media of exchange on which their country had been
founded and which Americans had used ever since. In fact,
while Roosevelt billed his actions as “emergency” measures,
most people knew that that was a lie. Everyone knew that the
criminalization of gold ownership and the nullification of
gold clauses would continue long after the Great Depression
ended.
Also remarkable is the fact that this revolutionary
and permanent transformation of America’s monetary system
occurred without even the semblance of a constitutional amendment.
Beyond Lincoln
Why didn’t Roosevelt simply do what Lincoln
had done during the Civil War? Recall that Lincoln had enacted
a legal-tender law that required people to accept paper money
at face value, even though it had depreciated against gold
in the marketplace. While Lincoln’s actions violated fundamental
moral principles, not to mention constitutional principles,
at least Americans still had the freedom to continue owning
and using gold, and the gold standard was eventually restored
after the end of the war.
Why did Roosevelt go so much further than
Lincoln? Why did he actually seize people’s gold? Why did
he convert millions of peaceful and law-abiding gold-owning
Americans into potential felons? Why were gold clauses nullified?
The reason for Roosevelt’s actions was simple:
He knew that the federal government was moving in a new direction
– in the direction of a socialistic welfare state and an interventionist
economy, a direction that he knew would entail massive federal
spending in the decades ahead. Obviously, that type of revolutionary
change would be impossible under a gold standard. The only
thing that would enable the welfare-and-interventionist state
to operate, decade after decade, would be the ability to print
unlimited amounts of paper money.
Thus, Roosevelt and the statists surrounding
him knew that they needed to do much more than simply enact
a legal-tender law, as Lincoln had done. They knew they had
to smash the concept of gold as money from the consciousness
of the American people. It was absolutely necessary, they
felt, that people totally forget that Americans once used
gold coins as their money as normally and naturally as people
today use dollar bills. It would, of course, take a few generations
but gradually people would forget the past and just accept
the new order of things.
Consequences of debasement
And so it has been. Decade after decade, inflationary
debasement was accompanied by periods of panicky constraints
on money growth, bringing about the traditional boom-bust
cycle. Over time, the primary engine of the monetary debasement
became the Federal Reserve, one of the most powerful government
agencies in history, an agency whose supposed mission, ironically,
had been to stabilize America’s monetary system.
In fact, the most terrible irony is that it
was the Federal Reserve itself whose policies had brought
about the 1929 stock-market crash and the Great Depression,
notwithstanding Roosevelt’s pronouncement that it was all
the fault of free enterprise, speculation, and greed. After
decades during which public schools and state-supported colleges
and universities had deceived students as to the cause of
Great Depression, one of most remarkable admissions in U.S.
history was made by Bernard Bernanke, the Federal Reserve
official who would go on to become its chairman. At a dinner
in 2002 in honor of Milton Friedman, who, along with Ludwig
von Mises, Friedrich Hayek, and the Austrian school, had long
pointed out that the Federal Reserve was the culprit behind
the Great Depression, Bernanke stated,
Let me end my talk by abusing slightly my
status as an official representative of the Federal Reserve
System. I would like to say to Milton and Anna [Schwartz]:
Regarding the Great Depression. You’re right: we did it.
We’re very sorry. But thanks to you, we won’t do it again.
Americans who are 55 or older remember that
as children they used dimes, quarters, and half-dollars made
of silver, and nickels made of nickel. As such coins gradually
disappeared from circulation, Americans just scratched it
off to “progress” or “the natural order of things.” The last
thing Americans wanted to do was accuse their government of
some sort of monetary wrongdoing. After all, as the federal
government began playing an ever-increasing paternalistic
role in people’s lives with its welfare state and interventionist
system, Americans placed ever-increasing faith in their government.
But the reason that those coins disappeared
from circulation is the same reason that gold coins were starting
to disappear from circulation when Roosevelt took office.
The federal government was printing such vast quantities of
money, decade after decade, to finance its welfare-state operations
that the value of the silver in dimes, quarters, and half-dollars
began to exceed the face value of the coins. In other words,
it was worth more to people to sell the silver to be melted
down than it was to use the silver coins to make purchases
at the face value of the coins.
Over the years, the federal government prosecuted
Americans caught owning gold, but none of those cases ever
reached the Supreme Court. The cases that did reach the Supreme
Court were ones that challenged Roosevelt’s nullification
of the gold clauses. Those four cases have become known as
the Gold Clause Cases.
In 5–4 rulings, the Court ruled in favor of
Roosevelt’s actions and against the victims of his policies.
The damages suffered by those victims were not small. While
people were being paid for the gold they were sending to the
federal government, they were being paid in depreciated paper
money, for Roosevelt had increased the price of gold, and
so had devalued the dollar by some 40 percent. The financial
losses suffered by private lenders who had relied on gold
clauses to protect them and by private holders of government-issued
gold certificates were incalculable.
Not everyone rolled over. One of the finest
expressions of opposition to Roosevelt’s monetary horror,
from a legal standpoint, appears in the dissenting opinion
in the Gold Clause Cases. Writing for the group of justices
who would become known in judicial history as the Four Horsemen,
Justice James Clark McReynolds wrote,
Just men regard repudiation and spoliation
of citizens by their sovereign with abhorrence; but we are
asked to affirm that the Constitution has granted power
to accomplish both. No definite delegation of such a power
exists, and we cannot believe the far-seeing framers, who
labored with hope of establishing justice and securing the
blessings of liberty, intended that the expected government
should have authority to annihilate its own obligations
and destroy the very rights which they were endeavoring
to protect. Not only is there no permission for such actions,
they are inhibited. And no plenitude of words can conform
them to our charter....
Under the challenged statutes, it is said
the United States have realized profits amounting to $2,800,000,000....
But this assumes that gain may be generated by legislative
fiat. To such counterfeit profits there would be no limit;
with each new debasement of the dollar they would expand.
Two billions might be ballooned indefinitely to twenty,
thirty, or what you will.
Loss of reputation for honorable dealing
will bring us unending humiliation; the impending legal
and moral chaos is appalling.
Restoration of gold ownership
In 1974 – 40 years after Roosevelt confiscated
people’s gold and made it illegal for Americans to own gold
– and three decades after the “emergency” of the Great Depression
had ended, Congress made it legal for Americans to once again
own gold. By this time, of course, the notion of gold as money
had been wiped from the consciousness of most Americans. After
decades of being taught economics in public schools and state-supported
colleges, their understanding, at best, was that America once
had a paper-money standard that was somehow linked to gold.
Over the past 30 years many Americans have
rediscovered the value of owning gold, even if it isn’t being
used as official money in society. They discovered what people
throughout history discovered – that placing their savings
in gold, rather than bills and notes, is more likely to protect
the value of their savings, especially if the government intends
to continue printing the necessary paper money to fund its
ever-growing operations.
Today, there is increasing awareness of what
the Federal Reserve has done to destroy what was once one
of the soundest monetary systems in the world, one based on
gold and silver coins. There are even calls, especially among
young people, to abolish the Fed and restore sound money to
the nation. More and more people are recognizing that a system
of sound money is a necessary prerequisite to a free society.
Yet, there is now the specter of another monetary
horror, one in which President Obama decides to mimic the
actions of the president he so admires, Franklin Roosevelt.
As Obama embarks on one of the biggest federal spending sprees
in U.S. history, continued monetary debasement has become
a certainty. The risk, of course, is that Obama will resort
to the same method employed by Roosevelt and the Soviet communists.
To replenish the coffers of the federal government in order
to fund his ever-growing socialistic, interventionist, and
imperial programs, Obama may well decide to re-confiscate
people’s gold in another massive assault on the freedom, private
property, and economic well-being of the American people.