6. Restore Honest Money

A Plan to Renew the Promise of American Life, Plank 6

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Plank 6. Restore honest money

Specific Recommendations

6.1. To secure the blessings of economic health and fiscal common sense, restore honest, constitutional money and popular control of the money supply through an enlightened 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 and currency (specie-backed banknotes) can be 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 notes (‘bills of credit’) are forbidden.

6.3. Allow gold and silver coins and currency to resume their natural role as money. Re-monetize specie and specie-backed banknotes, regardless of issuer or denomination, as follows: 1) lift all restrictions on private ownership of them, 2) abolish all taxes and penalties on them, 3) permit them to serve as legal tender for all private debts and all public charges, taxes, and dues, 4) restore the enforceability of gold-clause contracts, 5) restore the automatic convertibility of specie coins into specie-backed banknotes and vice versa at the Treasury, and 6) resume the issuance of constitutional money (i.e., United States Government-issued gold and silver coins and currency as defined in the Coinage Act of 1792).

6.4. Over a period of years, gently remove fiat money (including Federal Reserve Notes and base-metal coins) from circulation, replacing it with honest, constitutional money in a non-disruptive manner.

6.5. Permit the free exchange of bullion and specie for constitutional money at the Treasury on demand.

6.6. Allow any bank, not just a privileged central bank or the Treasury, to issue notes, backed by specie or other assets, that may lawfully circulate as currency.

6.7. Uphold the right of private parties, in face-to-face transactions, to use physical money (legal-tender coins and currency) rather than digital or checkbook money. Eschew the idea of a ‘cashless’ society.

6.8. To keep the coinage honest, mark all United States Government-issued 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.

6.9. When necessary, amend the Coinage Act to adjust the precious-metal content of United States gold coins, in order to keep both gold and silver in continuous circulation (counteract Gresham’s Law).

6.10. Promote free competition between banks. Make market entry easy, allow branch banking, and permit fractional reserve banking. Never provide taxpayer guarantees for banks that overextend themselves, and resist the urge, in a crisis, to provide taxpayer bailouts to insolvent or illiquid banks. Keep the bankruptcy laws just as between creditors and debtors. To reduce moral hazard, phase out government deposit insurance.

6.11. Transform the quasi private Federal Reserve System into a fully public independent treasury system, similar to the one that existed and worked quite well from 1846 to 1914. Restore to the Treasury Department the Fed’s current functions as federal fiscal agent, lender of last resort, and national bank regulator.

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.


An apology: this explanation is long. Like, embarrassingly long. Why? Because the topic is complex. And confusing. And because, in this subject-area, it is easy to prescribe remedies that are misguided or counterproductive. One must take care to get it right.

The purpose of this plank, arguably the most fundamental of them all, is to protect our liberty and promote our prosperity by protecting our property. It seeks to end forever the government’s ability to monkey with the value of our money — which would be the greatest of blessings.

The plank achieves these blessings by following the Constitution and by respecting our natural rights and natural liberty.

Let’s begin with the constitutional text. Properly interpreted, its seven money clauses establish the following five monetary rules for the United States:

  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 (specie-backed banknotes) can be 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 notes (‘bills of credit’) are forbidden.

Thanks to these five rules, the Constitution puts the country on a bimetallic system of both silver and gold, measured in dollars, with the term ‘dollar’ defined as a specific amount of silver, and without need for much government oversight or intervention. Silver and gold coins can float freely against each other in the marketplace. Private banks and the Treasury can issue gold- and silver-backed banknotes that circulate as money, and the money supply can naturally expand and contract as needed in line with market forces (primarily fractional-reserve banking and market-determined interest rates). Congress can adjust the metallic content of U.S. Government-issued gold coins from time to time, to ensure both metals remain in circulation. /1

This system is both simple and ingenious. It requires no centralized control of the money supply, no central planners to manipulate the price of money (i.e., interest rates), no central bank. Rather, it leaves money under the control of the people acting freely in the marketplace.

That is our policy. It is wise and just. And it is the only monetary policy consistent with economic prosperity and political freedom.

Note: I am not saying that this is our current practice!

Some Definitions

Now, before we move on, let’s pause to define some of those terms for purposes of this discussion.

The term ‘dollar,’ in the U.S. Constitution, refers to a silver coin of the same weight and fineness as the Spanish milled dollar. There were no U.S. dollars at the time the Constitution was drafted and ratified. When the Framers use the word ‘dollar’ in the constitutional text, they are referring to the famous Spanish milled dollar (and any silver coin modeled on it), which on average contained 371.25 grains of pure or 416 grains of standard silver. This measure of silver is the basic unit of the U.S. economic system. And as we shall see, to alter the constitutional definition of the ‘dollar’ would require a constitutional amendment.

The term ‘currency’ means banknotes — pieces of paper intended to be used as money and exchangeable for something of value, usually precious metals (such as dollars). In this discussion, unless otherwise specified, I specifically limit the term ‘currency’ to mean banknotes readily redeemable in gold or silver coins (specie). /2

‘Legal tender’ is whatever the government requires creditors to accept in payment of debts. Under the U.S. Constitution, gold and silver coins are the only things that may be required to be used as legal tender. This rule restricts state and federal governments alike. /3

The term ‘fiat money,’ as I use it here, means legal-tender banknotes not backed by anything of value: worthless paper.

The term ‘bills of credit,’ as used in the Constitution, means the same thing as ‘fiat money.’ In forbidding bills of credit, the Constitution is not forbidding paper money. It is forbidding worthless paper money. It does so explicitly with respect to state governments, and implicitly with respect to Congress (via the principle of enumerated powers, which is made explicit in the Ninth and Tenth Amendments).

Why Honest Money?

Honest money, also called sound or stable money, is money that holds its value over time and is not easily debased. It is an essential prerequisite for stable prices, a smoother business cycle, and economic health. Honest money encourages fiscal discipline, balanced budgets, and low taxes. Honest money is necessary for free trade. Honest money helps the poor escape poverty and promotes a large and stable middle class. The blessings of honest money are not just economic but 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.

Honest money is the best friend of the workingman, the saver, the taxpayer, the family breadwinner — everyone.

Why Not Unsound Money?

Unsound money — money that does not hold its value over time, or is easily debased — is the primary cause of inflation and a major contributing factor to economic bubbles and financial panics (harmful deflation). Money that cannot be relied on to hold its value 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 lifts the poor up and gives them a chance to thrive. /4

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 are 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 go away. Their popularity is perpetual. In good times and bad they tend to hold their value relative to all other goods. Admittedly, gold and silver are not terribly good investments, but they are great hedges against inflation and harmful deflation. They can weather anything. Basically, they are 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, in order 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 is to 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 may and may not be used in payment of taxes. Wise governments require only silver and gold, or specie-backed banknotes, to be used for this purpose. Beneficent governments eschew a monetary monopoly, and allow taxes to be paid in any gold and silver currency, regardless of issuing authority.

A free society needs both separation of church and state and separation of money and state. No state church. No central bank. 

The Three Kinds of Money

The three main kinds of money are: 1) commodity money (for example, gold and silver coins), 2) representative or fiduciary money (banknotes that are redeemable for commodity money), and 3) fiat money (banknotes not redeemable for anything of value). This last kind the Constitution disparages as ‘bills of credit.’ In our system, the first two kinds of money are legally permitted. The third is not.

The 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 metallic money by declaring it to have a value greater than its actual market value. 4) They tax rival currencies, to drive honest 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.

A wise government will avoid these five bad things like the plague. Can you guess how many of the five bad things Uncle Sam does nowadays?

Yep. All five.

Metallic System or Central Bank?

What’s a gold standard? A metallic system based on gold. What’s a metallic system? A policy in which the government readily exchanges bullion and banknotes for coins on demand. /5

A metallic system shifts control of money from the government to the people. There is nothing dangerous or difficult about a metallic system, unless your goal is to do one or more of the five bad things.

None of the arguments against a metallic system is persuasive. 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 in favor of government deficits, government-caused inflation, and the confiscation and redistribution of wealth via government policy.

Countries that switch from a metallic system to exclusive reliance on fiat money do so precisely to achieve deficits, inflation, and the confiscation and redistribution of wealth. They want, among other things, to spend and borrow beyond their means, and a precious metal stands in their way.

A metallic system produces price-stability and superior employment outcomes for everyone because it imposes a limit on the total amount of money that can exist at any one moment. A bimetallic system provides greater stability than a monometallic system.

The money supply is ultimately going to be determined by the amount of production in an economy. More production, more money. So long as no one can easily generate new money on a whim, and the price-signaling system is allowed to function freely, the system will naturally maximize the efficient use of resources. Adhering to the discipline of a metallic system ensures the government cannot easily expand the amount of money at any given point in time, which is another way of saying it can’t easily inflate prices, including the price of money itself, which is the interest rate. The market determines these things. The result? Superior efficiency and better outcomes: more goods and better services for everyone.

Under a metallic system, significant inflation is rare, and hyperinflation is essentially impossible, because the amount of the metal imposes a salutary constraint on the growth of the money supply.

Is it possible for a government to follow a metallic system and also issue fiat money? Yes. But the market will always have more confidence in sound money than unsound. Precious metals are an effective constraint on government, provided the government does not impede people’s free access to, and use of, those metals.

As far as I can see, there are only three ways for a government to ‘manage’ a currency: a) a metallic system, b) a central bank that mimics a metallic system, or c) a central bank that ‘prints’ worthless money (’emits bills of credit’). The United States currently employs the third option, unconstitutionally, but it would be better off with the second (a central bank that mimics a metallic system) and still better off with the first (a metallic system). Happily, the Constitution requires the first.

So the remedy is pretty obvious. Since our central bank, the Federal Reserve System, prints worthless money, we are obligated by both prudence and law to replace it with the constitutionally required bimetallic system.

The first job of any central bank is to act as the government’s principal or exclusive fiscal agent. In this role, it buys, sells, and holds interest-bearing government bonds and potentially other forms of property.

The government’s exclusive fiscal agent is well-situated to carry out a second function: to serve as the nation’s lender of last resort. That is, during economic crises, it can make credit available temporarily in parts of the country where credit is scarce.

A central bank that serves as both fiscal agent and lender of last resort will be well-situated, in turn, to take on a third job: managing the national money supply, by lending to other banks at interest, and setting the interest rates on those loans, which can affect interest rates elsewhere.

Fourthly, the central bank can be authorized to serve as the nation’s chief regulatory agency, overseeing the banking sector. This function usually accompanies lender of last-resort status. A lender of last resort has an inherent interest in discouraging excessively risky lending by the other players in the system.

So again, the central bank can wear four possible hats: fiscal agent, lender of last resort, money-supply manager, and national bank regulator. How many of these hats does our central bank, the Federal Reserve System, wear? Yep. All four.

The idea of making the federal government the lender of last resort arose in the wake of the financial panic of 1907. During that crisis, one man, J. P. Morgan, took on the role of being the lender of last resort. To prevent a recurrence of that situation, the banking interests began pushing to transfer the lender-of-last-resort burden to the federal taxpayer.

The Fed was first proposed principally for that purpose. But as the concept began to move through the legislative process, it evolved into a Treasury fiscal agent and national money-supply manager as well — a traditional European central bank. In 1913, the Fed was finally established — our first true central bank. Later, unsurprisingly, it was also made the national bank regulator. 

But is the Fed a good idea? Do we need it? Let’s think about that.

Do we need the Fed as fiscal agent? Well, the Treasury does need to interact with private financial institutions. But is there anything essential about having a single, monopoly fiscal agent that is also a private or quasi private bank? Nope. From 1846 to 1914, under the independent-treasury system, the Treasury was its own fiscal agent with branches around the country. That arrangement worked fine. So the answer to this question is clearly no.

Do we need the Fed as lender of last resort? Only if no one else can do the job just as well. We know from history that the job can be done, not just by wealthy individuals, but also by individual banks and coalitions of banks. Can these players do it just as well as the feds? Sure, so long as the banking sector is not over-regulated. Given sufficient maneuvering room, private-sector banks and baking coalitions can certainly assume the lender-of-last-result role without difficulty. They did so before the advent of central banking.

Do we need the Fed as national bank regulator? To answer this question, let’s put it the other way around: Should federal bank regulation be carried out by a government agency? The answer has to be yes. The functional is inherently governmental. And isn’t the Treasury Department the most obvious place to house this regulatory function? Again, yes. So the answer to our question is: The Fed does not have to be the regulator. Another consideration: The Fed as currently constituted is a quasi private bank. One of a bank regulator’s customary duties is to set minimum reserve requirements for private banks, meaning how much money they must keep on hand, to back their notes. Should a quasi private bank have the power to dictate other banks’ reserve requirements, banks that are, after all, its competitors? Ideally, no. 

So long as the federal taxpayer is the lender-of-last-resort, we can leave this basic regulatory function to an ordinary, accountable public agency, namely, the Treasury Department. It need not be delegated to a quasi private bank.

Do we need the Fed as national money-supply manager? If we don’t need it for the other three functions, then we don’t need it for that one, either. So again: no.

So to sum up, the answer to ‘Do we need the Fed?’ is simply no.

When the Fed was created in 1913, the United States was on what amounted to a monometallic gold standard. Silver had been demonetized in 1873, contrary to the Constitution’s five rules — the so-called ‘crime of ’73.’ In subsequent decades, as we’ve seen, the Fed evolved into a central bank that emits ‘bills of credit’ with no connection to constitutional (that is, to metallic) money. Today the Fed nominally pursues two main goals, laid down for it by Congress: ensure stable prices and ensure full employment. In reality, its real mission is, first, to benefit its twelve member banks (and the banking industry more generally), and second, to benefit Congress by monetizing the national debt. The Fed’s primary job, at the end of the day, is to debase the currency for its masters in our political class, which might also be called our extractive class. In doing this job, it has to navigate between two shoals: it must keep the politicians happy, but it must also avoid making the voters restive. It must inflate, but not too much.

This is a big reason why, for the political class, government having to live within its means is not just inconvenient, it is unthinkable. And it’s why that class insists on shielding the Fed from criticism or accountability. The Fed is independent of politics, we are told, and this ‘independence’ is essential. Sigh. Talk about an unhelpful myth. In reality the Fed follows the election returns. It tends to bend to the will of the incumbent president, because of his ability to appoint Fed governors, and because of the bully pulpit. There’s an old saying, ‘The president gets the dollar he wants,’ and it’s basically true. If the president wants a weak dollar, the Fed accommodates him. If he wants a strong dollar, the Fed accommodates him. The problem is there’s no constitutional authority for the president to dictate the value of the dollar!

At the risk of prolonging an already overlong discussion, let’s take a brief look at the Fed’s record.

There was little inflation during the first two decades of the Fed’s existence (1913 to 1933), except for the period of U.S. involvement in the First World War (1917-1919). The Fed was still working within a metallic system. The budget was balanced. Congress didn’t need inflation. (The war-time, government-generated inflation of the late teens was quickly extinguished in the short, sharp recession of 1920 to 1921.)

Between 1933 and 1971, the Fed operated within a limited or partial gold standard. Americans were prohibited from owning gold, except in very small quantities, and gold clauses in contracts were legally unenforceable. Despite these problems, foreigners could still trade gold for dollars and vice versa at the external gold window. Under the Bretton Woods system, the dollar was pegged to gold at $35 an ounce and most other major countries pegged their local currency to the dollar. So gold continued to be a source of stability and prosperity. Inflation was low, and so were government budget deficits.

Mission: Financial Repression

Since 1968, when Uncle Sam cut the last ties to silver, and 1971, when he cut the last ties to gold, inflation has been endemic. That’s been great for the politicians and bankers, and bad for the rest of us.

In a time of high and growing debt, the Fed basically tries to keep interest rates below the level of inflation. The low interest rates make it possible for the government to keep borrowing on the cheap. Inflation, as we’ve seen, makes it easier for the government to repay its debts in debased currency. But to generate inflation, you need economic activity (to generate higher demand for goods and services and to fuel what the economists call ‘velocity,’ the speed with which money circulates through the economy). To keep economic activity high, the government will sometimes try to keep people from hoarding their money. They want to force it out into the marketplace. And so the government pursues what economists call ‘financial repression.’

Sometimes the government will also impose capital controls limiting how much money people can legally send abroad, or even withdrawal freezes limiting how much savers can withdraw from their own bank accounts. /6

Taken to its logical conclusion, financial repression leads to hyperinflation, or to a government devaluation of the dollar versus gold, a la 1934. Hyperinflation means a massive increase in the money supply without any accompanying increase in production. Which drives up prices and (after a lag) wages, and also enables the government to wipe out its debts without actually making its creditors whole. Now hyperinflation, of course, means wiping out a lot of people’s wealth. And those people never seem to care for that. So again, central banks walk a fine line.

By and large, over the decades, the Fed has done its ‘job’ (of inflating and repressing) more or less ‘well.’ Except for the major devaluations of 1934 and 1971, the Fed has more or less avoided the twin evils of outright devaluation and hyperinflation. But in recent years, the Fed has found its toolkit — money-printing, quantitative easing, forward guidance, etc. — increasingly ineffectual when it comes to driving inflation up to the desired level.

When inflation is very low, the Fed is forced to try to drive interest rates to zero, to keep them below inflation. Some central banks have actually pursued a policy of negative interest rates, inducing private banks to charge savers for the privilege of holding their money. This, they hope, will 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 — people hiding money in mattresses.

Another idea sometimes floated by pro-inflation economists: ‘self-depreciating money,’ i.e., fiat money that by law shrinks in value at some statutorily predetermined rate, say, 5 percent a month. The idea behind such ‘hot potato money’ is to increase monetary velocity and thus to boost economic activity. People spend the money as quickly as possible, before it loses additional value. This idea has been tried, and it works to counteract money-hoarding. But it’s also madness. Why should we let politicians and bureaucrats dictate the value of our savings? This idea just highlights the logical absurdity inherent in pro-inflationism.

Danger: Devaluation Ahead

Now, when all of the foregoing strategies fail, there are two possible resorts left for getting the government’s debts under control: a) fiscal common sense (that is, spending cuts, tax hikes, balanced budgets, and modest surpluses — sometimes disparaged as ‘austerity’) or b) repudiation (meaning just what it sounds like: the government refuses to repay some or all of its debts).

While both approaches reduce debt, they have opposite effects on the government’s credit, and thus on its ability to borrow. Austerity enhances the government’s credit. Repudiation diminishes it. Understandably, lenders will demand a higher interest rate for lending more money to a government that has failed to repay its debts on time and in full. Higher interest rates, in turn, force the government to tighten its fiscal belt. So repudiation turns out to be nothing more than austerity the hard way.

As always, the best policy is to limit spending. And the best way to limit spending is to limit debt. And the best way to limit debt is to limit the government’s ability to monetize its debts via money-printing. And so, at long last, we come to the answer to every (monetary and fiscal) puzzle: honest money.

Honest money paves the golden path to prosperity. Follow the yellow brick road!

Over the course of American history, the U.S. Government has launched five major devaluations of the dollar, relative to gold, in 1834, 1862, 1934, 1942, and 1971. As a result, the value of the dollar, relative to gold, is today just a tiny fraction of one percent of its value pre-1834 value.

I should mention that sometimes repudiation is accompanied by confiscation: the government simply seizes people’s bank deposits or their gold. That happened in 1933. The U.S. Government declared it illegal to own gold. Most privately held gold was seized and melted down into heavy bars (not easily usable as money), and hidden away in Fort Knox. Today those gold bars remain locked away (mostly in the Federal Reserve Bank of New York, in Manhattan), but owning small amounts of gold is no longer illegal. At the same time, Congress abrogated the obligation of gold clauses (contractual provisions promising payment in gold) and imposed taxes on private gold holdings, thus paving the path to a fiat currency. All of which amounted to repudiation via confiscation.

In 1934 President Roosevelt formally devalued the dollar by unilaterally reducing the government’s dollar-gold exchange rate from $20.67 per ounce to $35 per ounce. This was repudiation via devaluation.

So to summarize, the three main ways that government can get rid of debt are: a) inflation and/or devaluation, b) repudiation and/or confiscation, and c) taxation and/or spending limitation.

And the greatest of these is spending limitation.

In my opinion, on our current path there will be a major financial collapse, probably in the next decade or so, and possibly preceded by high inflation, culminating in a major currency devaluation. Inflation may happen first, or the financial collapse may happen first. The decline of the dollar may be slow or rapid. No one knows exactly when or how it will happen. But it will happen. And the end result will be the same: millions will be impoverished.

And now for the kicker. Collapses of this sort, in varying degrees of severity, will keep happening, again and again, until the money supply is finally brought into line with actual wealth and productive capacity.

At some point, the negative cycle will bottom out, and our political system, like a desperate drunkard, will be forced to make a choice: get off the sauce or die. We will have to return to honest money. We will have to restore dollar-gold convertibility. Folks, this is inevitable.

In that event, the exchange rate will not be at our old, pre-1971 level of $35 per troy ounce, nor the pre-1934 level of $20.67 an ounce, nor our original, pre-1834 level of $19.75 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: Squirrel away a little physical gold somewhere (and 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. The Fed’s money-printing will come to an end. The only question is how much disruption and pain will accompany that transition back to normalcy.

We will always be better off with a metallic standard and market-determined interest rates — with honest money. The Founders understood the necessity of honest money to the preservation of political liberty. And they made that understanding the law of the land.

Honest money. It’s not just a good idea. It’s the law.

Free Banking

An after-thought. We need to restore free banking. What’s that? It’s a system that leaves banks mostly free and allows competing private banks to issue asset-backed notes that may circulate as currency. In such a system, there’s no need for a government-sponsored lender of last resort. Free banking is a decentralized system that leaves control of the money supply with the people. To get there, we must resume following the Constitution’s five monetary rules.

In a nutshell, the goal of monetary policy reform in our time should be to replace monopoly central banking with free banking.

How Constitutional Money Was Overthrown

One of the obstacles to restoring honest, constitutional money is the Supreme Court. In its famous — I should say infamous — Legal Tender and Gold Clause Cases, the high Court 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 interpretation is erroneous. The congressional power to regulate the value of gold and silver coins is limited to the purpose of ensuring that both kinds remain in circulation (that is, to counteract Gresham’s Law). In the aforementioned rulings, the Court made the incorrect assumption that the federal government is endowed with attributes of ‘national sovereignty’ like those found in governments with monarchical backgrounds. 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 instead 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 the whole people, each individual solemnly covenanting with every other individual to recognize the equality of all and to follow the rules that all have together made and agreed to abide by. The Constitution places limits on the powers of our ‘rulers,’ so that they become our servants in practice as well as theory. Congress’s monetary powers, too, are limited. They are by no means ‘plenary.’

Can Paper Money Be Legal Tender?

The Constitution does not ban ‘paper money.’ It merely bans ‘bills of credit’: paper money unbacked by gold or silver coin. Congress cannot make anything but gold and legal coin a legal tender. At the same time, it is granted no power to prohibit the use of banknotes backed by legal tender coin. Therefore, representative paper money (banknotes) may serve as legal tender. But in order to be legal tender, the notes must represent commodity money and specifically gold and silver coin. And to be honest money, it must be readily redeemable in legal tender coin. The issuer must be held strictly accountable for any failure to honor a redemption demand. /7

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.

The term ‘dollar’ in the Constitution refers not to a U.S. coin, but to a Spanish coin, the famous Spanish milled dollar, more commonly known as ‘pieces of eight,’ 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 honest, constitutional 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 issue 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 that definition is part of the constitutional text, and since Congress has no power to change it, it can only be changed by a 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. /8

In the old days, when the Treasury issued U.S. gold and silver certificates fully backed by and easily exchangeable for gold and silver coin, 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, as often as it likes? No!

What the ‘power to regulate the value thereof’ means is simply this: Congress can adjust the amount of metal in gold coins from time to time, and can adjust the Mint exchange rate between foreign specie coins in relation to their U.S. equivalents, in order to keep both gold and silver coins in circulation (i.e., to counteract Gresham’s Law). (This power is also a duty, because of the Legal Tender Clause.) Congress may not redefine the value of the dollar any way it pleases.

So what should we do? We should enact the specific recommendations of this plank. The result will be the return of honest, constitutional money, and with it, an exponential increase in freedom and prosperity and their attendant blessings.


1/ Historically, bimetallism has been the rule and monometallism the exception. Gold and silver are natural complements. Wherever one finds gold in use as money, one tends to find silver in use as well.

2/ Nothing in this ‘pocketbook’ definition of ‘currency’ prevents people from using digital or checkbook money. Nor does it prevent fractional-reserve banking. Under fractional-reserve banking, banks create money whenever they make bank loans, and borrowers destroy money whenever they repay such loans. The system is self-regulating. Where allowed to operate freely, without undue distortions (for example, government bailout guarantees and deposit insurance), fractional reserve banking is harmless and indeed helpful.

3/ 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 (taxes). Many governments also establish a monopoly central bank to issue legal tender notes, though this too is not necessary. 

4/ Incidentally, restoring honest money means never having to raise the compulsory minimum wage or hand out cost-of-living adjustments.

5/ The term ‘gold standard’ often also denotes a system whereby the currencies of two nations are linked to each other by way gold, using fixed exchange rates. In effect, the two countries agree to have the same currency (gold). It is possible for a nation to have a metallic system but not be on a gold standard. For our purposes, I am disregarding the international aspects of the issue and focusing only on the domestic aspects of a gold standard. By the way, for extra clarity, I am referring to it here as a metallic ‘system’ rather than a ‘standard.’

6/ Side note. Government schemes to promote a ‘cashless’ society are usually motivated by a desire to improve the efficiency of financial repression. Private-sector entities also like the idea of ‘cashless’ retail. Credit-card companies like it, for example, because it forces consumers and small businesses to pay exorbitant transaction fees. Banks like it because it’s next to impossible to have a credit card without also having a bank account.

7/ 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 more prudently, amended to reflect the Constitution’s original meaning. For example, it might be changed to:

Gold and silver coins and currency, regardless of issuer or denomination, are legal tender for all debts, public charges, taxes, and dues. For purposes of the preceding sentence, the term ‘currency’ means banknotes readily redeemable in specie.

8/ 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 a fixed amount of silver, nothing more. The same amount as it was in 1787. What has changed is our understanding of the word ‘dollar.’ We’ve become confused, because we’ve forgotten the correct definition. Once we recover that, it becomes a relatively simple matter 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 of this, see my post on the Constitution’s seven money clauses.

Constitutional Amendments

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: November 6, 2019.

Published: June 21, 2013.

Author: Dean Clancy.

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One Reply to “6. Restore Honest Money”

  1. So since I do not see congress changing us back to a metallic system anytime soon…a question: If the supreme court were to reverse/revise those two decisions you talk about would that force the government back to a metallic system? Originalist/Textualist Justices (like soon to be Justice ACB) would be inclined to do that right? But what kind of case would have to be brought, and who would have standing to bring such a case, to try to make that happen?

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