A Plan to Renew the Promise of American Life, Plank 6
Plank 6. Restore sound money.
6.1. To secure the blessings of sustained and robust health in the economy, and fiscal common sense in government, restore constitutional money and popular control of the money supply through a system of free banking, free minting, and free choice of currency.
6.2. Scrupulously adhere to the Constitution’s five monetary rules: 1) The basic unit is the dollar, a silver coin containing 371.25 grains of pure silver. 2) Only gold or silver coins, or currency backed by the same, are legal tender. 3) No state may issue coins or currency. 4) No one may counterfeit U.S-government-issued coins or currency. 5) Fiat money is forbidden.
6.3. Abolish all taxes and penalties on gold and silver coins and currency, regardless of issuer or denomination.
6.4. Resume the issuance of constitutional money, that is, United States gold and silver coins, as set forth in the Coinage Act of 1792, and currency notes backed by the same, taking care to set the exchange rate between constitutional and fiat money at a stable, nondeflationary price. Over a period of years, gently remove all fiat money from circulation, replacing it with constitutional money.
6.5. Revise the federal legal-tender statute (31 U.S.C. 5103) to declare that gold and silver coins and currency, regardless of issuer or denomination, are sufficient for the payment of all private debts, and that United States gold and silver coins and currency are sufficient for the payment of all public charges, taxes, and dues. “Currency” here means banknotes that are fully backed by, and readily redeemable in, specie.
6.6. Revise the federal gold-clause statute (31 U.S.C. 5118) to restore the enforceability of valid private contracts that require payment in gold or silver coins or currency.
6.7. Permit the public to freely exchange bullion for specie at the Mint on demand. And likewise, specie for specie-backed notes, and vice versa, at the Treasury.
6.8. Allow any bank, not just a privileged central bank, to issue specie-backed notes that may lawfully circulate as currency.
6.9. Regulate banks lightly and promote free competition between banks. Make market entry easy. While allowing fractional reserve banking, take care never to provide taxpayer bailouts or guarantees for banks that overextend themselves. Keep the bankruptcy laws just, as between creditors and debtors. Eliminate federal deposit insurance.
6.10. To keep both gold and silver in continuous circulation, amend the Coinage Act from time to time to alter the precious-metal content of United States gold coins.
6.11. To keep the coinage honest, mark all United States gold and silver coins to show the coin’s actual precious-metal content, both in terms of weight in troy ounces and purity in parts per thousand.
6.12. Overturn, by statutory and judicial means, the mischievous doctrines of the Legal Tender and Gold Clause Cases, which erroneously attribute to the U.S. Government “plenary” economic powers alleged to be “inherent” in national sovereignty, but which are in fact antithetical to the constitutional text and to the spirit of free republican government.
The purpose of this plank is to protect our liberty and promote our prosperity by protecting our property—to end the government’s ability to meddle with the value of our money. That would be the greatest of blessings.
The plank does this by following the Constitution. Read in conjunction with the Ninth and Tenth Amendments, the Constitution’s seven money clauses establish the following five monetary rules for the United States:
- The basic unit is the dollar, a silver coin containing 371.25 grains of pure silver.
- Only gold or silver coins, or currency backed by the same, are legal tender.
- No state may issue coins or currency.
- No one may counterfeit U.S-government-issued coins or currency.
- Fiat money is forbidden.
The term “dollar” in the Constitution refers to a specific silver coin of a fixed weight and fineness, namely, the Spanish milled dollar, which on average contained 371.25 grains of pure or 416 grains of standard silver. That coin, a specific measure of silver, is the basic unit of the U.S. economic system. As we shall see, to alter the definition of “dollar” would require a constitutional amendment.
The term “currency,” as I use it here, means banknotes that are freely redeemable in and fully backed by gold or silver coins.
“Legal tender” is whatever the government requires creditors to accept in payment of debts, public or private or both. Under the Constitution, gold and silver coins are the only things that may be required to be used as legal tender.
Note: While it is not necessary to have a legal tender statute, most countries do so, as a convenience to debtors and tax collectors. Typically governments declare their own official coins and currency to be legal tender, for both private and public debts (i.e., taxes). Many governments also establish a monopoly central bank to issue legal tender notes, though this too is not necessary.
The term “fiat money,” as I use it here, means banknotes or paper money with legal-tender status but which are not backed by anything of value.
The term “bills of credit,” as used in the Constitution, means the same thing as “fiat money,” that is, worthless paper. To be clear, the Constitution does not forbid paper money. It does forbid worthless paper money. The states are explicitly forbidden to “emit bills of credit,” and implicitly, under the principle of enumerated powers, so is Congress.
Thanks to the five rules, the Constitution requires the country to use the historically favored and natural bimetallic, silver-and-gold system, measured in terms of dollars.
This system is both simple and ingenious. It requires no centralized control of the money supply, no central bank, no central planners to manipulate the price of money (interest rates). Rather, it leaves money under the control of the people acting freely in the marketplace.
That is our policy. It is a wise and just policy—and, I would argue, the only policy consistent with economic prosperity and political freedom.
Why Sound Money?
Sound money, meaning money that holds its value over time, is an essential prerequisite for stable prices, a smoother business cycle, and real economic health.
Sound money promotes fiscal discipline, balanced budgets, and low taxes. Sound money is necessary for free trade. Sound money helps the poor escape poverty. Sound money helps ensure a large and stable middle class.
The blessings of sound money are not just economic but also political. It safeguards our freedom. In the words of Austrian School economist Ludwig von Mises:
It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.
Sound money is the best friend of the workingman, the saver, the taxpayer, the family breadwinner—in short, all of us.
Why Not Unsound Money?
Unsound money, meaning money that does not hold its value over time, is the primary cause of inflation and a major contributing factor to economic bubbles and financial panics (deflation). Unsound money cheats savers of their wealth and causes unemployment. It hurts the poor.
Unsound money is the enemy of the worker, the saver, the retiree, the breadwinner, the taxpayer. Unsound money weakens social trust, burdens old age, and takes food from the family table.
Unsound money is a tax on the poor. Restoring sound money amounts to giving the poor a pay raise. Incidentally, restoring sound money means never having to raise the compulsory minimum wage or give cost-of-living adjustments.
What Is Money?
Money is traditionally defined as whatever thing most people in a given place have agreed to use as a medium of exchange and which also serves as a handy unit of account and a reliable store of value. Money arises naturally, out of private transactions. Just about any commodity can be enlisted to serve as money, but gold and silver have traditionally been the favorites, because, compared to most other candidates, they have in the greatest measure the most desirable qualities of money: they’re durable, portable, malleable, divisible, easily recognizable, and naturally limited in quantity. They may go out of fashion in some places and times, but they never really go away. Their popularity is perpetual. That’s because in good times and bad they tend to hold their value relative to all other goods. Gold and silver are not terribly good investments, but they are great hedges against both inflation and deflation. They can weather anything. Basically, they’re Mother Nature’s answer to the question, “What is money?”
Why should money be “sound”? Because money is an economy’s lifeblood, part of every transaction. When the currency loses some of its value, everyone who relies on it becomes poorer. When money sneezes, the economy catches cold.
Governments love to cheapen the currency, to cheat their creditors and raise taxes without a vote. But no good purpose is served by government control of money. There is no need for a central authority to “manage” the money supply. There is no need to centrally dictate what shall serve as the common currency, no need to tell private individuals what they may and may not use as a medium of exchange in private transactions. Government’s only role, really, is to say what currency or currencies shall be used in payment of taxes. Wise governments require only silver and gold, or notes backed by the same, to be used for this purpose.
A free society needs both separation of church and state and separation of money and state. No state church. No central bank. (About the latter, more anon.)
Three Kinds of Money
The three main kinds of money are: 1) commodity money (e.g., gold and silver coins); 2) representative or fiduciary money (e.g., bank notes that are redeemable for commodity money); and 3) fiat money (e.g., bank notes not redeemable for anything of value). My nicknames for these are: sound money, trust-me money, and funny money. Only a system based on sound money is truly sound.
Five Bad Things
Governments seem to meddle with real money in five main ways: 1) They issue fiat money, which has no connection to anything of value. 2) They require fiat money be used as legal tender in all transactions, public and private, in order to confiscate wealth without formally levying taxes. 3) They debase or cheapen the currency by declaring it to have a value greater than its actual market value. 4) They tax rival currencies, to drive sound money out of circulation (because it competes with their fiat money). And 5) they authorize a central bank to exercise monopoly control over the banking system so they can print fiat money out of thin air.
What is the path to sound money? Eschew these five bad things. How many of the five bad things do we do nowadays? You guessed it. All of them.
Metallic Standard or Central Bank?
What’s a “gold standard”? (I will refer to it here as a metallic standard.) It’s basically a policy that requires the government to exchange pieces of paper for pieces of metal and vice versa. That’s it. A metallic standard shifts control of money from the government to the people. There is nothing dangerous or difficult about following a metallic standard, unless your goal is to do one of the five bad things. None of the arguments against a metallic standard is persuasive, in my opinion. (For a succinct refutation of them, see James G. Rickards’s book, The New Case for Gold.)
People who dismiss reliance on a precious metal like gold as a “barbarous relic” are, whether they realize it or not, advocating for deficits, inflation, and the confiscation and redistribution of wealth via monetary policy. Countries that switch from a metallic standard to exclusive reliance on fiat money do so precisely to achieve deficits, inflation, and the confiscation and redistribution of wealth. They want to spend and borrow beyond their means, and a precious metal stands in their way.
A metallic standard produces price-stability and superior employment outcomes for everyone because it imposes a limit on the total money supply. The government can’t easily expand the amount of money, which is another way of saying it can’t inflate prices, including the price of money itself, which is the interest rate. The market sets these things, and the result is superior efficiency and better outcomes, i.e., more goods for everyone.
Under a metallic standard, significant inflation is rare, and hyperinflation is essentially impossible because the money supply can only grow at the rate that the supply of the precious metal increases. It is possible, of course, for a government to follow a metallic standard and also issue fiat money. But the market will always have more confidence in sound money than unsound. So precious metals are an effective constraint on government, provided the government doesn’t impede people’s free access to, and use of, those metals.
As I noted at the outset, the U.S. Constitution puts the United States on a bimetallic system of silver and gold, with silver as the base. It does not impose a gold standard, per se, nor a silver standard. Rather, it imposes the historically favored and natural bimetallic, silver-and-gold system, a system controlled by the people rather than by politicians and bureaucrats.
As I see it, there are only three ways for a government to “manage” a currency: a) a metallic standard, b) a central bank that mimics a metallic standard, or c) a central bank that prints money. The United States currently employs the last option, a central bank that prints money. We would be better off with the second option, a central bank that mimicked a metallic standard. But we would be still better off with the first option: a metallic standard, pure and simple. Happily, the Constitution requires that very thing.
So the remedy is pretty obvious. Since our central bank, the Federal Reserve System, prints money, we should replace it with the constitutionally required bimetallic system. I am wiling to indulge the proposition that we might, as a transitional step, constrain the Fed to mimic a metallic standard. But that approach would have to be clearly transitional and kept brief. The Fed itself might be kept around, but it could not be permitted to deviate from the Constitution’s requirements.
The alleged purpose of the Fed when it was created in 1913 was to help prevent the economy from freezing up during a national credit shortage. The Fed would serve as a clearinghouse that could shift credit from one local region of the country to another and act as a lender of last resort, meaning a bailout mechanism should a credit crunch threaten the whole system. Being the lender of last resort means being the guy who can drum up needed cash and assets and keep the system liquid, when everyone else is fresh out.
Needing a lender of last resort is perhaps inevitable. But the lender of last resort does not have to be the federal taxpayer. It could be private banks or extremely wealthy individuals. The Federal Reserve Act shifted the job from the private sector to the American taxpayer.
When the Fed was created in 1913, the United States was on what amounted to a monometallic gold standard. In subsequent decades, the Fed evolved into a central bank that prints fiat money with no connection to real money. Today the Fed nominally pursues two main goals, laid down for it by Congress, namely, to ensure stable prices and to ensure full employment. In reality, its true goals are first, to benefit its member banks and the banking industry generally, and second, to benefit its masters in Congress by, in effect, monetizing their debts.
Government living within its means is deemed unthinkable by the political class, and the Fed’s one true job, at the end of the day, is to debase the currency. In doing so, it has to navigate between two shoals: it must keep the politicians happy, without making the people restive. Congress needs inflation to cheat its creditors. Inflation makes voters cranky.
This is a big reason why the political class instinctively insists on shielding the Fed from criticism or accountability. It tells us the Fed is independent of politics, and that this “independence” is essential. But it’s all a myth. The Fed follows the election returns. In practice it tends to bend to the will of the incumbent president, because of his ability to appoint Fed governors and his other fiscal powers, as well as his bully pulpit. An old saying has it that “The president gets the dollar he wants.” If he wants a weak dollar, the Fed accommodates him. If he wants a strong dollar, the Fed accommodates him. The trouble with this fact is there is no constitutional authority for the president to dictate the value of the dollar.
When the Fed was still working within a metallic standard, between 1913 and 1933, there was no inflation. At that time, the budget was balanced. Congress didn’t need inflation. Between 1933 and 1971, the Fed operated within a partial gold standard. Inflation was low, and so were deficits. Since 1968, when Uncle Sam cut the last ties to silver, and 1971, when it cut the last ties to gold, inflation has been chronic, which has been great for the politicians and bankers and bad for the rest of us. The political class uses inflation to cheat its creditors. The Fed, on behalf of Congress, tries to produce enough inflation to please the spenders but not so much that it triggers a public backlash. It basically tries to keep interest rates below inflation, which makes it simultaneously easier for the government to keep borrowing on the cheap while cheating its creditors (through the hidden tax of inflation). Economists call this strategy “financial repression.” Because savers naturally seek the best interest rate they can find, the government, to enforce financial repression, must suppress people’s economic freedom. For example, it will make it illegal for people to remove their money from the country (capital controls), or even from their own bank accounts (ATM freezes, etc.). Schemes to promote a “cashless” society, by the way, are simply attempts to improve the efficiency of financial repression.
Taken to its logical conclusion, financial repression leads to devaluation or hyperinflation, that is, to a massive increase in the money supply. Which enables the government to wipe out its debts. Which also means wiping out a lot of people’s wealth.
By and large, over the decades, the Fed has done its job of inflating and repressing more or less well. It has avoided devaluation and hyperinflation. In recent years, however, it has found its old toolkit—money-printing, quantitative easing, forward guidance, etc.—seemingly ineffectual when it comes to goosing inflation. The economy has been sluggish for years now, with no end in sight. In my opinion, it is depressed. I think we’re in a kind of economic funk or depression, regardless of what the employment statistics might suggest.
Since inflation is low at the moment, the Fed is forced to try to drive interest rates to zero, to keep them below inflation. Some foreign central banks have even tried a policy of negative interest rates, which is basically where the banks charge savers for the privilege of holding their money. The idea is to drive money out of the banks and into circulation, where it can then generate inflation. But so far, the only result of negative interest rates, it seems, has been hoarding—money going into the mattress.
Now, when all of the foregoing strategies fail, as eventually they will, there will be two possible resorts left for getting the government’s debts under control: a) fiscal common sense (meaning spending cuts and tax hikes—sometimes disparaged as “austerity”) or b) repudiation (meaning just what it sounds like: the government refuses to repay some or all of its debt). While both approaches reduce debt, austerity enhances, and repudiation diminishes, the government’s credit, meaning its ability to borrow. Lenders understandably demand a higher interest rate for lending any more money to a government that welshes on its debts. Higher interest rates, in turn, force the government to tighten its belt, through fiscal common sense. Repudiation turns out to be “austerity the hard way.” By far the best policy, as always, is real spending cuts.
I should mention that sometimes repudiation is accompanied by confiscation: the government simply seizes people’s bank deposits and/or their gold. That’s what happened in 1933. The government declared it illegal to own gold and seized most of it.
So the ways that government can get rid of debt are: a) inflation/ devaluation, b) repudiation/confiscation, and c) taxation/spending limitation. And the greatest of these is spending limitation.
If our government continues on its current path, the result is entirely foreseeable: there will be another financial collapse. Or perhaps a series of collapses, each one more severe than the last. At some point, the cycle will reach its logical end and Uncle Sam’s options will be down to one: sound money.
Then, our profligate government, in order revive the economy, will be constrained to agree to the restoration of dollar-gold convertibility.
But the exchange rate won’t be at the old, pre-1971 price ($35 an ounce). To avoid being deflationary—to avoid tanking the economy—it will have to be much higher: say, $10,000 an ounce.
Free financial tip: Hoard a little physical gold somewhere safe. (Not where the government can seize it.)
The Fed may do its “job” well, but it is also, in another sense, quite incompetent. And its incompetence is, occasionally, destructive.
I think it is not going too far to say that misguided Fed monetary policy decisions—abetted by bad fiscal and regulatory policies—caused and prolonged the crashes of 1929 and 2008.
What goes up must come down. Two and two make four. The Fed will have to end. We will always be better off with a metallic standard and market-determined interest rates.
The Founders understood the absolute necessity of sound money to the preservation of political liberty. And they made that understanding the law of the land.
Free banking is a system that leaves banks mostly regulation-free, lets competing private banks issue notes that may circulate as currency, and lacks any government-sponsored ‘lender of last resort.’ In other words, free banking is a decentralized, monopoly-free system that leaves control of the money supply to the people.
The goal of monetary policy reform should be to replace monopoly central banking with free banking. In this country, the path to that goal necessarily includes following the Constitution’s five monetary rules, listed above.
Yes, End the Fed
Do we need to end the Fed as we know it? Yes.
The modern movements to “end the Fed” and “go back to the gold standard” are essentially the same movement. Each logically entails the other. Sound money is impossible without something like a metallic standard, that is, without limiting government’s ability to print money out of thin air.
Does the Fed need to go away completely? Not necessarily.
We could keep the Fed’s building and employees, if we wished, though I’m not sure I really see a need to. I imagine we could redefine the Fed to serve as a credit clearinghouse only, operating under the constitutional bimetallic system, and perhaps continue its rule as a bank regulator, though I’d drastically reduce the amount and burden of regulation and let markets disciple banks instead. But what is essential is to curb the Fed’s monetary powers. Don’t make it the lender of last resort. Don’t let it set interest rates or monetize Congress’s debts. In short, replace the Fed’s monopoly with free banking.
Necessarily, we should also end the Fed’s pretense of independence. Make it part of the executive branch, answerable to the Secretary of the Treasury. After Andrew Jackson succeeded in killing the Second Bank of the United States in 1836, this country had no national bank for 77 years, without the world coming to an end. The Treasury took care of “managing” the currency, which isn’t much of a job under a metallic standard.
How Constitutional Money Was Overthrown
The Supreme Court, in its famous Legal Tender Cases and Gold Clause Cases, ruled that Congress has “plenary power” to issue fiat money and dictate its value, pursuant to its power to “regulate the value” of foreign and domestic coin. That’s erroneous. The power to regulate the value of gold and silver coins is limited to the purpose of ensuring that both kinds remain in circulation (i.e., to counteract Gresham’s Law). In these cases, the Court makes the incorrect assumption that the federal government is endowed with attributes of “national sovereignty” like those found in European governments. That assumption has no grounding in the constitutional text and turns the American Revolution on its head. The whole point of the Revolution, and its greatest achievement, was to deny the existence of “sovereignty” in the “rulers” and recognize it in the people, considered as individuals. “All men are created equal”—even you, King George! From which it follows that government must be by the consent of all the people. That consent is reflected in our Constitution, a voluntary yet binding act of “We the People.” The Constitution places limits on the powers of our “rulers.” Congress’s monetary powers, too, are limited. They are by no means “plenary.”
As a constitutional matter, representative paper money may serve as legal tender, but it must represent commodity money, specifically gold and silver coins, and it must be freely redeemable in such coins and fully backed by them. To qualify as legal tender in the U.S., a note must represent the full amount of ready coin held in reserve by the issuer. For legal-tender purposes, fractional reserve notes aren’t good enough.
How to Restore Constitutional Money
To serve its liberty-protecting function, a national currency needs to have a fixed, stable value.
The Founders understood this and gave the dollar a fixed, stable value by placing the term “dollar” in the Constitution, even though there was no such thing as a United States dollar at the time the Constitution and the Bill of Rights were framed and ratified. That’s right. There was no U.S. dollar.
The term “dollar” in the Constitution refers not to a U.S. coin, but to a Spanish one, the Spanish milled dollar, which circulated widely in the American colonies in the seventeenth and eighteenth centuries. The constitutional definition of “dollar” is thus fixed—a fact that has, alas! been suppressed by the opponents of sound money and forgotten by nearly everyone.
The first U.S. dollars were produced pursuant to the Coinage Act of 1792, which created a United States Mint to coins U.S. dollars, according to the following definition:
DOLLARS OR UNITS–each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.
In terms of weight, that’s about 24 grams of pure silver or 27 grams of standard silver. A dollar is a unit of measure, nothing more. And since it is part of the constitutional text, it can only be changed by constitutional amendment. The Federal Reserve Note in your pocket is only a “dollar” in an analogous and inertial sense—it’s a term we use out of habit. It’s not a dollar in the constitutional sense.*
In the old days, when the Treasury issued U.S. gold and silver certificates freely redeemable in and fully backed by gold and silver, we had constitutional paper money. Those pieces of paper were dollars in the true sense. Today’s Federal Reserve Notes are—well, I don’t know what they are. Sometimes I call them “greenbacks,” to distinguish them from dollars. They have nothing of value standing behind them except a promise to pay in cheap base-metal coins.
But wait. Doesn’t Congress have the “power to regulate the value” of “coined” money? Yes, it does. So doesn’t that mean Congress can redefine the dollar any way it likes, at any time? No!
What the “power to regulate the value thereof” means is Congress can adjust the value of gold coins in relation to silver coins, from time to time, in order to keep both in circulation (i.e., to counteract Gresham’s Law). It does not confer on Congress a power to arbitrarily redefine the value of the dollar any way it pleases.
So what should we do? Enact the specific recommendations of this plank, pronto. The result will be the return of sound money, and with it, an exponential increase in freedom and prosperity and their attendant blessings.
* One of the Constitution’s references to the “dollar” is in the Seventh Amendment, which declares: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved.” Modern courts, amazingly, profess not to know what the Seventh Amendment’s twenty-dollar rule means in practice, because, they claim, the dollar’s value has “changed” since the eighteenth century. But the dollar’s value has not changed. It is still a fixed amount of silver, nothing more. What has changed is our understanding of the word “dollar.” We’ve become confused, because we’ve forgotten the original definition. Once we recover it, it becomes very easy to apply the twenty-dollar rule today. All a judge has to do is take the current troy-ounce-price of silver in terms of Federal Reserve Notes and multiply it by 77.344 percent and multiply the result by twenty. If the result is less than the amount in controversy, the plaintiff is entitled to jury trial, and if it’s more, then he’s not. For a more detailed explanation, see my post on the Constitution’s seven money clauses.
** Here is the text of the current legal tender statute (31 U.S.C. 5103):
United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.
This language is both unnecessary and contrary to the Constitution. It should either be repealed or (perhaps even better) amended to reflect the Constitution’s original meaning. For example:
United States gold and silver coins and currency are legal tender for all public charges, taxes, and dues.
Gold and silver coins and currency, regardless of issuer or denomination, are legal tender for all private debts.
This plank requires no constitutional amendments.
Will greatly increase personal financial security and incentives to work, save, and invest.
Will end government-created inflation and produce a smoother business cycle, with fewer economic panics and shallower contractions.
Will provide a powerful check on the growth of government.
Revised: April 18, 2016.
Published: June 21, 2013.
Author: Dean Clancy.