A Plan to Renew the Promise of American Life, Plank 6
Plank 6. Restore honest 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. 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.
6.9. 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.
6.10. Allow any bank, not just a privileged central bank, to issue notes, backed by specie or other assets, that may lawfully circulate as currency.
6.11. Return to the independent treasury system that worked well from 1846 to 1914. End the Federal Reserve’s monopoly status as Treasury fiscal agent and lender of last resort, and return its regulatory powers to the Treasury Department. In short, end the Fed’s quasi-private status, making it either fully private or fully governmental.
6.12. Regulate private banks lightly and promote free competition between banks. Make market entry easy, allow branch banking, and tolerate fractional reserve banking, but never provide taxpayer bailouts or guarantees for banks that overextend themselves. Keep the bankruptcy laws just, as between creditors and debtors. To reduce moral hazard, phase out federal deposit insurance.
6.13. 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. **
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’: worthless paper. To be clear, the Constitution does not forbid paper money. It forbids worthless paper money. The states are explicitly forbidden to ’emit bills of credit,’ and implicitly, under the principle of enumerated powers (as made explicit in the Ninth and Tenth Amendments), 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, or as I sometimes call it, honest 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 real economic health.
Honest money promotes fiscal discipline, balanced budgets, and low taxes. Honest money is necessary for free trade. Honest money helps the poor escape poverty. Honest money helps ensure a large and stable middle class.
The blessings of honest 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, honest 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, or is easily debased, is the primary cause of inflation and a major contributing factor to economic bubbles and financial panics (deflation). When intentionally debased, unsound money may better be called dishonest money. Whether dishonest or merely unsound, 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 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). Some of my nicknames for these are: unsound money, dishonest money, trust-me money, and funny money. Only a system based on sound, honest 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 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.
What is the path to sound, honest money? Eschew these five bad things. How many of the five bad things do we do nowadays? You guessed it. All of them.
Metallic System or Central Bank?
What’s a ‘gold standard? It’s basically a policy that requires the government to exchange pieces of paper for pieces of metal and vice versa. The term ‘gold standard’ often also denotes a system whereby the currencies of nations are linked to each other by way gold using fixed exchange rates. In effect, two countries that are both on a gold standard have the same currency (gold). For our purposes, I will disregard the international aspects of the issue and focus the domestic aspects of a gold standard. For extra clarity I’ll refer to it here as a ‘metallic system.’
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 of the five bad things. None of the arguments against a metallic system 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 system 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 system 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 system, 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 system 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 or 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 system, b) a central bank that mimics a metallic system, 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 mimics a metallic system. But we would be still better off with the first option: a metallic system, pure and simple. Happily, the Constitution requires that very thing.
So the remedy is obvious. Since our central bank, the Federal Reserve System, prints money, we should replace it with the constitutionally required bimetallic system.
A central bank’s most basic job is to act as the government’s principal or exclusive fiscal agent, for example, buying, selling, and holding government bonds, and paying interest on them. In this role, a central bank is well situated to carry out a second function: serving as the nation’s lender of last resort during economic crises, that is, making credit available temporarily in parts of the country where credit is scarce. A central bank that has both of the forgoing functions will also have the potential to carry out a third, namely, regulating the national money supply by setting interest rates. Fourthly, and optionally, it can also be authorized to serve as the national regulatory agency overseeing state and private banks.
The purpose of the Fed when it was created in 1913 was to serve as the nation’s lender of last resort, in order to help prevent the economy from freezing up during a national credit shortage as had happened from time to time, most recently in 1907. The Fed would also act as the government’s fiscal agent and sole depositary of government money (an extension of the Treasury). Later, it also became the national regulatory agency overseeing most banks.
Does the lender of last resort have to be the federal taxpayer? Nope. It could be private banks or a group of extremely wealthy individuals, or, as in the 1907 panic, one individual (J. P. Morgan).
Do we need the Fed-as-fiscal agent? Nope. The Treasury certainly needs to interact with private financial institutions, but there is nothing essential about having a single, monopoly fiscal agent. 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.
Do we need the Fed-as-national-bank-regulator? Nope. Federal bank regulation can and should be carried out by a federal agency, not a quasi private bank like the Fed. The Treasury Department is the natural place to house that function. One of a bank regulator’s customary duties is to set minimum reserve requirements for private banks, that is, how much money they must keep on hand, to back their notes. Should a quasi private bank have such a vital power over other banks, who are, after all, its competitors, at least on paper? Nope!
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: 1) to ensure stable prices, and 2) to ensure full employment. In reality, its true goals are first, to benefit its twelve 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 today’s political class, and the Fed’s primary 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, but 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. That’s a myth, and unhelpful. 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 the Treasury Secretary, 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 is there’s no constitutional authority for the president to dictate the value of the dollar.
Except during our intervention in the Great War (1917 to 1919), there was little inflation during the first two decades of the Fed’s existence (1913 to 1933), because the Fed was still working within a metallic system. (The war-time, government-generated inflation was quickly extinguished in the short, sharp recession of 1920-21.) The budget was balanced. Congress didn’t need inflation. Between 1933 and 1971, the Fed operated within a limited or partial gold standard. Inflation was low, and so were deficits. 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. Which has 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 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 rapid circulation of money 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 ATM freezes limiting how much they can withdraw from their own bank accounts. Schemes to promote a ‘cashless’ society, by the way, are really just 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. But that, of course, also means wiping out a lot of people’s wealth. So 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. Since the 1930s it has avoided devaluation and hyperinflation. But in recent years, it has found its old toolkit—money-printing, quantitative easing, forward guidance, etc.—seemingly ineffectual when it comes to driving up inflation 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. 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, there are two possible resorts left for getting the government’s debts under control: a) fiscal common sense (meaning 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 debt).
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 any 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 money supply. So now we know the answer. Honest money is the answer. It paves the golden path to prosperity. Follow the yellow brick road!
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 government declared it illegal to own gold and seized most of it. It later relaxed this policy, but even today it still tries to prevent private individuals from owning large amounts of gold.
So to sum up, 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 in the next decade or so, and with it a major currency devaluation. Collapses will keep recurring until the money supply is brought into line with actual wealth and productive capacity.
At some point, the cycle will reach its logical end and honest money will be restored. In order revive the economy, the U.S. government 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—that is, 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 (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. Two and two make four. The Fed’s money-printing 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 honest money to the preservation of political liberty. And they made that understanding the law of the land. It’s time we followed the law.
Free banking is a system that leaves banks mostly regulation-free, allows competing private banks to issue asset-backed notes that may circulate as currency, and lacks any government-sponsored lender of last resort. In short, free banking is a decentralized, monopoly-free system that leaves control of the money supply with 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.
End the Fed?
Should we end the Fed altogether? I would say not necessarily. Should we end the Fed as we know it? Definitely!
The Fed can remain, but its money-printing power needs to end.
The modern movements to end the Fed, balance the budget, and return to dollar-gold convertibility are all essentially the same movement. Each logically entails the others. Balanced budgets and sound money are impossible without limiting government’s ability to print money out of thin air.
We could, as I say, keep the Fed’s building and employees. We could redefine the Fed’s mission, so that it continued doing the same things it does now except serve as lender of last resort and act as the Treasury’s sole fiscal agent. It could still serve as a national bank regulatory agency (though we would want to reduce the amount and burden of regulation, and let markets take the lead in disciplining banks). What is essential is to prevent the Fed from being able to monetize Congress’s debts or set interest rates.
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 interpretation is 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 the aforementioned cases, the Court makes the incorrect assumption that the federal government is endowed with attributes of ‘national sovereignty’ like those found in governments with monarchical governments or 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 convenanting 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.’
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 simply don’t cut it. ***
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 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 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, as often as it likes? No!
What the ‘power to regulate the value thereof’ means is Congress can adjust the amount of metal in gold coins from time to time, and to 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). 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? Simple. Enact the specific recommendations of this plank. The result will be the return of sound, honest, constitutional money, and with it, an exponential increase in freedom and prosperity and their attendant blessings.
* Nothing in this ‘pocketbook’ definition of ‘currency’ prevents people from using checkbook money, i.e., digits in computers. Nor does it prevent banks from temporarily creating and destroying money, as markets demand, through fractional-reserve banking, which is the practice of lending out money that is not fully backed by bank reserves. In a fractional-reserve system, banks create money whenever they make bank loans and borrowers destroy money whenever they repay such loans—and thus the system self-regulates. Fractional-reserve banking provides the public with a benefit: it makes it easier for liquidity to find its way to places where it’s needed, when it’s needed. So long as it is self-regulating, and therefore limited, it is harmless and indeed helpful.
** 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.
*** 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.
**** 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.
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.