The Constitution’s Seven Money Clauses

They protect liberty and prosperity — when we follow them.

Seven clauses of the United States Constitution touch on questions that might be described as relating to monetary policy.

Properly interpreted, these seven clauses together form a system of rules that strongly protects economic prosperity and political liberty.

Four of the clauses include the word ‘money,’ three the word ‘coin,’ and two the word ‘dollars.’ /1

Below is the text of each of the clauses, followed by some definitions and comments. I’ve modernized the punctuation for readability.

The Seven Money Clauses

  1. Congress shall have power to borrow money on the credit of the United States. ~ Art. I, sec. 8, cl. 2.
  2. Congress shall have power to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures. ~ Art. I, sec. 8, cl. 5.
  3. Congress shall have power to provide for the punishment of counterfeiting the securities and current coin of the United States. ~ Art. I, sec. 8, cl. 6.
  4. No money shall be drawn from the Treasury, but in consequence of appropriations made by law. ~ Art. I, sec. 9, cl. 7.
  5. The migration or importation of such persons as any of the states now existing shall think proper to admit, shall not be prohibited by the Congress prior to the year one thousand eight hundred and eight, but a tax or duty may be imposed on such importation, not exceeding ten dollars for each person. ~ Art. I, sec. 9, cl. 1.
  6. No state shall coin money, emit bills of credit, or make any thing but gold and silver coin a tender in payment of debts. ~ Art. I, sec. 10, cl. 1.
  7. In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved. ~ Amdt. VII.

The Constitution’s Five Monetary Rules

Read in conjunction with the Ninth and Tenth Amendments, and the obligation-of-contracts clause (Art. I, sec. 10, cl. 1), we can identify five monetary policies that are constitutionally requisite in 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 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.

The remainder of this article defines some of the foregoing terms, and explains how we get to the five rules.

Definition: ‘Dollar’

The Constitution makes the ‘dollar’ the basic unit of account for the republic. It does not explicitly define the dollar. Why? Because no definition was necessary. Everyone at the time knew what a dollar was. It was a silver coin of a fixed weight and fineness, the most popular edition of which was the Spanish milled dollar. That popular coin, remembered today as ‘pieces of eight,’ contained on average 371.25 grains of pure silver or 416 grains of standard silver. ‘Standard silver’ is pure silver mixed with other metals, such as nickel or copper, for added durability. /5

Prior to the Coinage Act of 1792, also called the Mint Act, the Spanish dollar was basically the only ‘dollar’ Americans knew. The U.S. government did not mint its own version of the coin until after the ratification of the Constitution (1788) and the Bill of Rights (1791). In the Coinage Act, Congress codified the existing, universally understood definition of ‘dollar’:

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.

A coin of that weight and fineness, and only such a coin, is a dollar for constitutional purposes. Banknotes backed by dollars may circulate as dollars.

The value of the dollar is fixed, because it is a known quantity incorporated by reference into the constitutional text. Congress has no power to alter the value of the dollar. Only a constitutional amendment could do that.

Definition: ‘Regulate the Value’

The term ‘power to regulate the value thereof,’ with respect to ‘coined’ money, means simply the power to adjust the amount of gold in U.S. gold coins, in order to keep both gold and silver money in circulation — that is, to counteract Gresham’s Law. (Indeed, because of the Legal Tender Clause, this is not just a power but a duty.) Additionally this power allows Congress to adjust the Mint exchange rates of foreign specie coins vis-à-vis their U.S. equivalents. It does not allow Congress to redefine the value of the dollar arbitrarily.

Definition: ‘Currency’

The term ‘currency,’ as I use it here, is synonymous with banknotes, paper money. When banknotes are backed by specie or some other commodity, they may be regarded as honest money. When unbacked by anything of value, they are typically called ‘fiat money.’ The Constitution refers to them as ‘bills of credit.’ Such money is forbidden. Neither the federal or state governments may issue it.

Definition: ‘Legal Tender’

The term ‘legal tender’ means a specific kind of coin or currency that the government requires creditors to accept in payment of debts. (‘Public’ debts can refer to government taxes, fines, charges, dues, and the like.) Under the Constitution, only gold and silver coins may be required to be used as legal tender (‘a tender in payment of debts’). Today in the United States, legal tender is statutorily defined as all coins and currency issued by the United States Treasury or the Federal Reserve System, including fiat money coins and notes (31 U.S.C. 5103). This obviously includes all Federal Reserve Notes, those little green pieces of paper we carry about in our pockets. As we shall see when we get to the term ‘fiat money,’ this definition exceeds Congress’s power under the Constitution. Federal Reserve Notes notes are bills of credit, which the Constitution forbids. Therefore, they cannot be legal tender.

Which brings us to the rule: Only gold and silver coins, and notes freely redeemable in and fully backed by such coins, may serve as legal tender in the United States. The Founders did not legislate this rule by accident, they put it in the Constitution knowing very well what they were doing. Honest money is not just a good idea, it’s the law.

Definition: ‘Fiat Money’

The term ‘fiat money’ means currency with legal-tender status that is not backed by anything of value.

Fiat money retains its value only so long as its users have confidence that its issuer (the government) will faithfully repay its debts. When that confidence evaporates, fiat money begins to lose value and can even become worthless.

The Supreme Court, in its famous Legal Tender 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. This interpretation is erroneous. Congress has no such ‘plenary’ power. Its power to regulate the value of gold and silver coins is a limited power that exists for the limited purpose of ensuring that both kinds of coin remain in circulation, that is, to counteract Gresham’s Law.

In these famous rulings, the Court made the incorrect assumption that the people had endowed their federal government 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, indeed 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 consent, and the power of the rulers (understood as the people’s servants) must be limited. Congress’s powers are limited in numerous ways. Among these ways are the five monetary rules that derive from the Constitution’s seven money clauses.

To be absolutely clear (for the true pedant), the Constitution does permit paper currency to serve as legal tender. But that currency must be backed by gold or silver coin. /6

Definition: ‘Bills of Credit’

The term ‘bills of credit’ in the Constitution refers to government-issued notes that represent a debt to the holder, and are typically intended to circulate as money in private transactions.

Bills of credit are a form of paper money that can be backed by something of value, but might not be. Typically they are not. When they are not, they run afoul of the Constitution’s explicit prohibition on bills of credit.

Interestingly, the Constitution is silent on whether the federal government may emit bills of credit. Does this mean it may? No. A provision specifically authorizing Congress to do so was struck from a draft of the Constitution. And more importantly the Ninth and Tenth Amendments tell us that, in the absence of clear evidence to the contrary, we must assume that Congress has not been granted a power. Like the states, Congress may not make anything but gold and silver coin a legal tender in payment of debts.

In short, in the United States only gold and silver coins, or banknotes readily redeemable in such coins, can be legal tender.

To my knowledge, there have been three federal issues of bills of credit since 1788:

  • United States Demand Notes, issued in 1861 and 1862. 
  • United States Notes, issued from 1862 to 1971. 
  • Federal Reserve Notes, which have been issued since 1914.

All of these issues are unbacked by anything of value. Therefore, as a legal matter, they are bills of credit. And thus unconstitutional.

By contrast, among the federal issues that are not ‘bills of credit’ in the constitutional sense, because they are fully backed by gold or silver coin, are:

  • United States Gold Certificates, issued from 1863 to 1933.
  • United States Silver Certificates, issued from 1878 to 1964.

Fractional Reserve Banking

Does the Constitution require banks to maintain 100 percent reserve ratios? Does it ban fractional reserve banking? Not at all. But does it require that legal tender be honest money? Absolutely.

Aside: Do I think fractional-reserve lending is a bad thing? I do not. It is naturally self-regulating: the same money that a bank creates through making too many loans is destroyed when those loans are repaid. And it adds helpful flexibility to the system.

Fractional-reserve lending is not a problem so long as market forces can operate freely. Government money-printing, by contrast, tends not to be self-regulating and thus tends to be destructive of people’s freedom and prosperity. Certainly, it has not been self-regulating since we stopped following the Constitution’s five money rules.

The Twenty-Dollar Rule

It is common these days for legal scholars to profess not to know the meaning of the Seventh Amendment’s twenty-dollar rule, the rule that declares that a jury trial is not required in civil disputes involving amounts less than twenty dollars. They claim that the dollar’s value has changed since the eighteenth century, to an extent we cannot fathom. This is silly. Our modern Federal Reserve Notes may be labeled as ‘dollars,’ but they are not dollars in the constitutional sense, and are therefore not the ‘dollars’ spoken of in the twenty-dollar rule. For the purposes of that rule, they might as well be pounds, yen, or euros. To apply the rule in a fiat-money world, we need to know how much a constitutional dollar is worth in modern fiat money, Federal Reserve Notes. We need an exchange rate. It is a floating exchange rate, since the value of FRNs floats relative to silver in the marketplace. So what we need to know is the exchange rate of the constitutional dollar and the FRN dollar at the time the dispute is filed. Okay. To determine that exchange rate, we need to know five specific things: the amount in controversy in FRN dollars, the legal definition of a constitutional dollar, the current market price of silver, the basic unit of measure used for silver, and how to multiply. We already know the legal definition of dollar: a silver coin containing 371.25 grains of pure silver. As for the unit of measure for silver, precious metals are traditionally defined in terms of troy ounces. Troy ounces are about 10 percent bigger than imperial ounces, and are subdivided into grains. One troy ounce is 480 grains. From this information, we can deduce that the amount of silver in a constitutional dollar. Now, 371.25 grains are equal to 77.344 percent of 480 grains, and thus 77.344 percent of a troy ounce. So, when the market price of silver tells us an ounce of silver is worth ten dollars in FRNs, then we know a constitutional dollar is worth $7.73 in FRNs. And when the market price is twenty dollars in FRNs, then a constitutional dollar is worth $15.46 (two times $7.33), and so on. Now, armed with this information, we are ready to determine whether an American plaintiff is legally entitled to a jury trial in a civil suit. This takes three steps. First, multiply the current ounce price of silver in terms of FRNs by 77.344 percent. This tells us the value of one constitutional dollar, expressed in FRNs. Next, multiply that figure by twenty. This is the constitutional threshold value for purposes of applying the twenty-dollar rule, also expressed in FRNs. And finally, compare the two values to see which is the greater. If the amount in controversy is the greater, the plaintiff is entitled to a jury trial. If the threshold amount is the greater, he is not.

Of course, this would all be simpler if there were no FRNs and we just used constitutional dollars.


Sidebar: Dates

In the list of money clauses quoted at the beginning of this article:

  1. The first six of the Constitution’s seven money clauses are part of the original U.S. Constitution, which was proposed on September 17, 1787, and ratified on June 21, 1788.
  2. The seventh money clause, found in the Seventh Amendment, is part of the Bill of Rights, which was proposed on September 25, 1789, and ratified on December 15, 1791.
  3. The Coinage Act of 1792 was passed by Congress on April 2, 1792.
  4. An Act to Provide for a Copper Coinage (whence the humble penny) was signed into law on May 8, 1792. Note: While Congress has the power to issue base-metal coins, such coins cannot be legal tender. That status only applies to gold and silver coins.

Notes

1/ The words ‘bank’ and ‘currency’ do not appear in the Constitution, nor its amendments. In this analysis, I have disregarded words like ‘taxes,’ ‘duties,’ and ‘excises’ — revenue provisions.

2/ The principle of enumerated powers expressed in the Tenth Amendment is inherent in the Constitution by virtue of the document’s structure. The federal government would be limited to a finite set of delegated powers even if there were no Tenth Amendment explicitly stating the fact.

3/ The Ninth Amendment is worded in a confusing, eighteenth-century way, but when read in light of eighteenth-century legal concepts and the text of its nearby companion, the Tenth, the amendment’s meaning becomes clear and surprisingly simple: federal powers are to be construed narrowly. That’s it. The Ninth Amendment is not an ink blot. For more on this topic, see the writings of Professor Kurt T. Lash. 

4/ The obligation-of-contracts clause is relevant because most contracts involve promises to pay money, and some contracts require payment specifically in gold. Since the 1930s, the federal government has refused to enforce gold-clause contracts, which require payment under certain conditions of some amount of money in physical gold, usually gold coin. Such clauses are used by contracting parties as a shield against inflation. Now, Congress intentionally inflates the currency by emitting ‘bills of credit,’ paper money unbacked by anything of value, and by making this funny money legal tender. If gold clauses were allowed, this deliberate, and unconstitutional, policy of inflating the currency would be frustrated. So Congress bans them. Unfortunately for Congress, banning gold-clause contracts is unconstitutional. Along with banning bills of credit and making only gold and silver coin a legal tender, the Constitution, in Article I, sections 8 and 10, bars the states explicitly, and Congress implicitly, from impairing the obligation of contracts. Gold-clause contracts are contracts.

5/ 371.25 grains equals about 24 grams or about 77 percent of a troy ounce. 416 grains equals about 27 grams or about 87 percent of a troy ounce.

6/ To use the language of modern economists, the Constitution permits representative money to serve as legal tender, but only so long as it represents commodity money. 


How to restore honest, constitutional money

38 Replies to “The Constitution’s Seven Money Clauses”

  1. Been pushing this same “lawful money” argument for decades. A Colonel friend is currently ‘educating’ Pender County Tax Office , NC on this .

  2. Economics must obey the laws of physics because activity resists force. To have activity occur it must be derived form energy applied to the economy as a force push. This means many things one of which is only energy can increase wealth because wealth is a form of energy. Energy can be neither created nor destroyed. Wealth cannot be created therefore printing money is not energy and printed money cannot stimulate the economy. I think this is where you are trying to go. Your direction can be supported by following the logic of the laws of Physics. Please see the Physics to Economics Model PEM. There cannot be inflation in physics. Policy to increase wealth must first increase net force or wealth cannot be increased.

  3. One problem with your argument. The Constitution actually says “twenty dollars”, not 20 dollar coins. Why is this important? Well, the same Coinage Act of 1792 allows for the minting of $10 GOLD coins (called Eagles) that weigh 16.04g pure or 17.5g standard gold. So there is actually a discrepancy and thus it is subject to interpretation whether in a world where the value of silver and gold fluctuate relative to one another (sorry – the US Constitution really cannot change that singular fact). Given the current world price of Gold and Silver, we can EITHER choose to use gold OR silver. I think it is best to choose gold. As I write this, the value of silver is a mere $0.49 per gram of pure silver based on federal reserve notes (I will leave the Constitutionality of fiat for another day but let’s just say that we are using our current fiat money for sake of argument). That leads us to a value today in terms of the 7th Amendment of $0.49/g x 24.1 x 20 = . $236.18.

    Oh, and the coinage act allows us to use copper for pennies, which at $0.01/g x 17.1 x 2000 = $342.00

    Finally, we can use gold, which based on today’s value would lead us to a value for the 7th Amendment of $41.63 x 16.04 x 2 = $1,335.49.

    Now let’s compare that to what the value would be in dollars based on inflation rates (and thus allowing for fiat currency and a strict literal reading of “dollar” but placing it in terms of real value from the Coinage Act of 1792):

    $100 in 1792 is equivalent to $510.67 based on the data from this website: https://www.officialdata.org/1792-dollars-in-2017

    Hmm….maybe our fiat money isn’t so bad after all in terms of holding up its value relative to gold, silver and copper as we might at first think.

    Oh, but it gets EVEN MORE INTERESTING. Why? Well read Article I, Section 10 of the US Constitution that states:

    “No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.”

    So the Federal government was issuing a coin (in copper) that could not be used as “a Tender in Payment of Debts” in any state. Hmm…. Seems like those copper coins were a problem….

    In any case, though, it makes sense to use gold, not silver, as the basis for addressing the 7th Amendment because there literally is nothing in the US Constitution that says that we ought to base these decisions on the price of silver. The whole “regulate the value thereof” clause was designed to maintain a silver coin’s parity with gold, since you can really only have one standard, not the other way around.

    Indeed, the mere fact that the $10 coin was a gold coin argues that the Constitutional provision should be read with gold, rather than silver, in mind.

    Zagros Madjd-Sadjadi, Ph.D.
    Professor of Economics
    Winston-Salem State University

    1. By your own math, fiat has lost 61% of its value since 1792 in terms of gold. Hmm, perhaps that Ph.D. in economics isn’t holding up its value as well as you think.

    2. The problem I have with your statements is the fact that you do not address the manipulation of Gold and Silver and the Federal reserve and its members. I am sure you will say the Fed does not manipulate but it accepts the clear manipulation by its member and IMHO that is being part of the party. The manipulation provided lots of profit for members and it keeps the Fed happy because someone will point to how well the reserve notes are doing.

      Gold and Silver prices do not reflect a free market value.

    3. “Money clause #6. No state shall coin money, emit bills of credit, or make any thing but gold and silver coin a tender in payment of debts. ~ Art. I, sec. 10, cl. 1.

      Monetary rule #3. No state may issue coins or currency.”

      I’d like the author to explain why the constitutional clause listed that clearly implies States may manufacture gold and silver coins, isn’t in contradiction with monetary rule 3 which states that States may not issue coins.

      If you ask me, while it’s fine for the government to specify what “money” they will only use, one of our freedoms is to use any means of exchange we want, with a free market in the production of money or any “means of exchange”. While this freedom is not specifically listed specifically in the Constitution, IMHO it’s covered under the 9th amendment which states:

      “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.”

      How can basic exchange of things not be a rightful freedom we enjoy? I can see limits such as the exchange of WMDs such as nuclear weapons, but IMHO the regulations on business and currency exist, because that’s where the real money is (Willie Sutton was short sighted thinking all the money is in the banks, politicians know better).

      This brings up my favorites SCOTUS qualification question: “The ninth amendment mentions rights not listed in the Constitution that are retained by the people. Can you name some of them?” I’ve never heard it being asked.

    4. The United States treasury note pegged to gold and silver is the only lawful currency in the United States treasury it’s not crypto junk otherwise if it’s not the United States treasury note pegged to gold and silver then there shall be a defamation lawsuit against any president that installed crypto or other money contracts ‼️

  4. Professor Madjd-Sadjadi: Thank you for your thoughtful comment.

    You are right that gold and silver trade freely against each other in the marketplace, and that a system based on silver and a system based on gold are basically one system, and that Congress recognizes these facts in the Coinage Act where it provides for gold as well as silver ‘dollars.’ All true. I do not, however, think it correct to say that the Constitution makes gold the ‘basis’ of U.S. money. Silver is clearly the basis, as I explain in my post. I start with silver, in my analysis of the twenty-dollar rule, because the Constitution starts with silver. But if you prefer to start from gold, by all means. The result should be the same.

    You’re also right about the penny. A coin made of anything but gold or silver cannot be legal tender absent a constitutional amendment. Only specie coins (meaning gold and silver coins), or notes backed by the same, can be legal tender. But does that mean it’s illegal for Congress to issue non-specie (and therefore non-legal-tender) coins as a public convenience? I would say the answer is no. I mean, try to imagine the size of a one-cent gold piece. You’d need a magnifying glass!

    1. Gold and silver are absolutely NOT freely traded. The LBMA and the Comex markets trade fictional “paper gold and silver” that are criminally manipulated. Remove these moneychangers and institue a truly free market and both gold and silver will soar astronomically against worthless debt instruments. The premise that FRN are preferable to real money is insane. Price inflation is in direct proportion to the inflation of these worthless notes. Mayer Amschel Bauer (Rothchild) give me the power to create a nations money and I care not who makes the laws. The only way to restore monetary sanity is to completely restore the republic, the Articles of Confederation and the original constitution that includes the original 13th amendment.

      1. Agreed to restoring the functionality of the original US Constitution, and doing so by repealing Amendments 11-27 in full. Amendments 11-27 were not authored by our nation’s founders, but by congress. These Amendments do not comprise rights unalienable, as do the Amendments listed in The Bill Of Rights. Amendments 11-27 are instead divisive, misleading, and predatory, and such are the 13th and 14th Amendments. Although Amendment 13 appears to make “slavery” illegal, Amendment 14 then grants rights to groups, through “equal protections,” to thereby enslave absolutely everyone to everyone else through corporate personhood. Therefore, the argument to restore the functionality of the US Constitution by gutting Amendments 11-27, but to keep Amendment 13, is in error, since “slavery” is a relative term. Therefore, it appears that “slavery” is instead a principle rather than a word, and that slavery is instead better addressed by strictly adhering to the principles of individual rights unalienable, those described in The Bill Of Rights, enforced for all non-criminal US citizens.

        1. I agree that 11-27 should be removed, however I would also say that term limits should be instituted on all 3 branches of the federal government. Executive 2 terms; Senate 2 terms; and House 3 terms. With also mandatory retirement of Federal Judges at age 75.

          1. SCOTUS judges are generally granted lifetime appointments for a good reason: so they have no strings attached to them by politicians who’ll pull those strings to get the judge to rule against the Constitution, and for the political class.

            I disagree with your suggested terms limits for the judicial branch. I’ve seen some 90 year olds who are sharper than much younger adults, so don’t agree with your arbitrary limit for federal judges. Usually the other judges talk to the judge unable to do their job to push them out if they don’t do so themselves. But I’d agree to having all federal employees submit to, and pass, a cognitive test to remain employed. It’s far more suitable a test to assure judges aren’t too old to do their job.

  5. Thank you very much for the insightful information. It has open my eyes to keep looking into the USA constitution.

  6. It says “states” won’t emit bills of credit. Does not read like the federal government is prevented from it at all.

    Also, it doesn’t say anything about “dollars” in the Constitution, or the specific values to be applied.

    So it’s entirely Constitutional to create other currencies, and alter the value of the dollar, since those are written in law by Congress and … Congress can re-write laws..

    “The migration or importation of such persons…” …this doesn’t even matter anymore, as it is well beyond 1808.

  7. Is it a fact that we are not governed by a piece of paper called the Constitution, but by what SOME HUMAN BEINGS SAY & DO, giving more or less heed to the words. We are largely governed by what the SCOTUS SAYS; it makes the laws. And Amendment 9 largely destroys any Republic by allowing the SCOTUS to make up any rights at its whim & use such rights to erase Republic Laws & make up its own laws. We have Oligarchy at the top. And the Bill of Rights drove the nails into the coffin of the Republic by establishing rights, which rights are super laws trumping laws passed by the Republic (Congress), which rights are only what the SCOTUS says they are.

  8. “Aside: Do I think fractional-reserve lending is a bad thing? No, I do not. It is naturally self-regulating: the same money that a bank creates through making too many loans is destroyed when those loans are repaid. And it adds helpful flexibility to the system.”

    You assume that collateral the FRB keeps: US Treasuries, lots of mortgage-backed securities, collateralized debt obligations (more mortgage backed securities that led to the 2008 GFC), corporate bonds (nice favor for “selected” corporations), GSE securities, other federal agency securities, foreign government securities, and more see https://www.frbdiscountwindow.org/~/media/Documents/FRcollguidelines.ashx, has great opportunity to destroy value via non-paying entities that go broke. In other words, you assume the loans will be repaid, and there are too many examples in history to make such an assertion.

    If you’re so confident loans will be repaid, why don’t you or a free market institution (such as a foreign entity) make the loans instead of risking our government money taken from taxpayers? The answer is obvious. When the government will lend you money for nearly no interest, you can bet people will borrow, but you’ve no way to ensure they’ll pay you back, unless you allow them to roll over their debts indefinitely. Meanwhile, they’ll have consumed the loaned money, which is why it can’t be paid back.

    1. Now I believe the author’s comments about fractional reserve lending, apply to your typical local or national banks, not to the FED. However, it’s hard to see how fractional reserve lending at such banks can exist without the FED there to insure its deposits, and provide a backstop when on demand depositors withdraw enough that the bank no longer holds sufficient reserves to cover its debts. Of course banks that don’t engage in fractional reserve lending, will still suffer from failing loans, but they typically have collateral where other third parties don’t have a claim on it.

      To which borrowers do you think Chinese firms will pay back first? The Chinese Communist Party government, local Chinese citizens, foreign governments, foreign firms, or foreign individuals? The answer is the order listed. Except for some creditors accepting Chinese fiat, who will be paid in paper money that’s worth less, if not worthless.

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  10. I see a logical fallacy in this notion that money repaid that was created by the fractional reserve banking, that was created out of thin air, is destroyed upon repayment. That would logically require we consider (temporary) removal from circulation as equivalent to destruction! This equality of removal=destruction fails scrutiny. It does not make sense to me. Here’s why:
    The money created out of thin air and then repaid becomes part of the banks reserves.
    The newly created money of the loan when it is transferred back to the bank is not cancelled by the bank, if all created money was really destroyed, it could not be used again. But it is used again, as the repaid money, it becomes part of the banks reserves. Allowing the bank to loan out even more. That is not true destruction of the money that was created.
    If you find any flaw in my reasoning, I’d like to consider your argument. Thanks.

    1. Basically the Fed is stealing from each borrower because of the pre-1913 (illegal and immoral) compound interest! Biblical sanctions demanded the death penalty for anyone found guilty of usury. Making someone pay with their labor, and as such spending their life, to pay more than the debt, was considered by the original law-giver, as murder. Even the Koran forbids it.

    2. A loan triggers two entries to a bank ledger. One, an asset( the obligation to repay) and two, a liability, either a check or a created account. Once the loan is repaid both entries disappear. The profit to the bank on the loan is the only created money and that is created elsewhere. If we are talking reverse repos, that is a different story.

  11. This was great information on the FRN and open my mind to a lot of what is going on with the monetary system. I do believe that we the people need to start holding our elected officials to a higher standard. We are allowing our congress to amend our constitution in a way that it is no longer reflecting the standard meaning of our original constitutional.

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