Sound money is a key to a free and prosperous society. That principle was clearly reflected in the monetary system that the Constitution established when it called the federal government into existence.
Our ancestors didn’t trust government officials with power. They believed that the greatest threat to their own freedom and well-being lay not with some foreign regime but rather with their own government. They understood that historically most people had lost their freedom and prosperity at the hands of their own governments rather than at the hands of some conquering foreign power.
That was why the American people lived for more than a decade under the Articles of Confederation, a governmental structure that provided for a federal government with extremely weak and limited powers. Under the Articles, the federal government didn’t even have the power to tax.
That was precisely how our American ancestors wanted it. For them, a weak federal government meant a federal government that was incapable of destroying their freedom and economic well-being.
When the delegates met at the Constitutional Convention, they were charged with the task of simply modifying the Articles of Confederation. Instead, the delegates came up with a proposal for a federal government that was very different from that under the Articles. Under this new governmental structure, the federal government would have much more power, including the power to tax.
Given their conviction that government was the main threat to their freedom and well-being, most Americans were not excited about the proposal. They could envision ending up with a federal government that would enslave them, confiscate their property, incarcerate them, torture them, impoverish them, and even kill them, all without due process of law.
The proponents of the Constitution emphasized that the federal government would be prohibited from doing such things to Americans because the Constitution itself set forth the limited powers that the federal government could exercise. If a power wasn’t enumerated, it couldn’t be exercised.
Historically, one of the most effective ways that political rulers would destroy the liberty and economic well-being of the citizenry was through control over the nation’s monetary system. That’s because governments would inevitably use that control as a way to finance ever-burgeoning expenses of the king, his court, and often his wars against foreign regimes.
To pay for such expenses, the king would tax his subjects. The king’s law required people to pay their taxes. If a person refused, the king’s soldiers or other agents would simply seize the person’s assets and arrest and incarcerate him. Nothing would be permitted to interfere with the process of seizing people’s assets or income to pay for the king’s expenses and debts.
However, kings knew that when taxes got too high, people would get angry. If the anger got deep enough, rebellion and revolution would become a possibility, which was certainly not in the kings’ best interests.
Thus, when a king’s taxes rose to the point where revolution became a possibility, he would resort to his control over the nation’s money to acquire the additional resources that he needed to fund his burgeoning expenses and debts.
The history of money
In commerce, people enter into trades with one another in order to improve their respective standards of living. A person with lots of apples, for example, trades with a person with lots of oranges. At the moment of the trade, both sides benefit because each is giving up something he values less for something he values more.
However, over time that barter system becomes impractical because often people with lots of apples want to trade with someone with lots of pears. Sometimes, however, the person with lots of pears wants oranges but not apples. And the person with lots of oranges wants apples but not pears.
Historically, to facilitate trades, people began using commonly used commodities. The most popular became gold and silver. The person with lots of apples would use a small quantity of gold or silver to buy some pears. The person with the pears would then use that gold or silver to purchase oranges. The person with oranges would use it to buy apples.
Over time, kings assumed the power to mint the gold and silver into coins. Their argument was that this process would ensure that people could trust the coins in circulation to be valid and legitimate. If the king’s coins said “One ounce of gold,” presumably people could rely on that representation because it was the king making it.
Kings, however, figured out a way to turn this power to their advantage. People would pay their taxes in, say, gold coins. Once the coins entered the government’s treasury, the king’s monetary agents would shave a small part of the gold from around the edges of the coin. The process came to be known as “clipping the coin.”
The king would then put the coins back into circulation. The problem, of course, is that while the coin said “One Ounce Gold Coin” on it, it now contained less than one ounce, owing to the king’s clipping of the coin.
Meanwhile, the king would melt the shavings down and create new coins with them, which obviously multiplied the number of coins at his disposal to pay for his ever-increasing expenses and debts. This inflation of additional coins, however, would debase the value of all the other coins in circulation.
This process of monetary debasement inevitably left people worse off. For example, a seller might receive from a purchaser of his wares a coin purporting to contain one ounce of gold but actually containing less than an ounce. When he went into the marketplace to buy something for one ounce of gold, he could encounter sellers who demanded his one-ounce coin plus a bit more, given that his one-ounce gold coin no longer contained one ounce of gold.
Thus the king’s clipping of the coin and his inflation of the money supply became a means by which he could secretly and surreptitiously tax people. Another reason that kings preferred this way of taxing people to the direct way was that most people didn’t realize what the king was doing. When prices rose across the realm, which is the way a debased currency manifests itself, the citizenry would blame it on sellers and producers rather than on the king.
Once the printing press was invented, the process became even more beneficial to political regimes. They would decree that paper bills and notes issued by the government, rather than gold and silver coins minted by the government, were now the official “legal tender” for the nation. That meant business would be transacted in “fiat” or paper money that was being printed and supplied by the government.
It didn’t take long for governments to realize that they could use the printing press to print up as much paper money as they wanted to pay for their ever-growing expenses and debts. No more clipping the coin, melting the shavings, and producing more coins with them. Just crank up the printing press and print up as much money as they needed.
Of course, the process would have the same destructive effect as debasing coins. As the inflated supply of paper money flooded the economy, the value of everyone’s money went down. That reduction in value was reflected in rising prices across society, which people inevitably blamed on producers and sellers, just as they did when coins were being debased.
Guaranteeing sound money
The delegates at the Constitutional Convention knew that the American people were well versed in the history of monetary debasement at the hands of government officials. They also knew that Americans had just recently experienced this phenomenon during the Revolutionary War, when the Continental Congress and state governments had resorted to the printing press to pay for the war effort. They ended up printing so much paper money that they destroyed the value of everyone’s money. That’s how the phrase “Not worth a Continental” came into existence.
Thus, the Framers knew that if they were to persuade the American people to abandon the Articles of Confederation in favor of the new governmental system, the Constitution would have to make it clear that the new federal government would lack the power to destroy people’s liberty and economic well-being through monetary debasement.
That’s how the American people acquired the most effective sound-money system in history, one that lasted for more than 100 years. It was a system that not only protected the citizenry from monetary debasement but also played a major role in the monumental increase in the standard of living of the American people throughout the 19th century.
The Constitution was a document that set forth the limited powers of the federal government and, at the same time, restricted some of the powers of the states. The idea was that if a power wasn’t expressly delegated to the federal government, it couldn’t be exercised. The idea also was that the states were authorized to exercise any power they wanted (subject to any limitations in state constitutions) except those powers that were expressly prohibited by the Constitution.
The Constitution delegated the power to coin money to the federal government. At the same time, it did not expressly delegate a power to the federal government to issue paper money, which, at that time, was referred to as “bills of credit.”
The Constitution also expressly prohibited the states from making anything but gold and silver legal tender. It further expressly prohibited the states from issuing “bills of credit” or paper money.
The Framers’ intent was clear: the U.S. economy would be based not on a paper-money monetary system, but rather on a gold standard. The official money of the American people would be both gold coins and silver coins.
The Constitution also provided the federal government with the power to borrow money, a power that U.S. officials would exercise through the issuance of bonds, notes, and bills. While such instruments would often circulate and appear to be money, everyone understood that they weren’t money at all but instead promises to pay money.
Today, it is often said that the United States had a monetary system based on paper money that was backed by gold. That is incorrect. There is no way that our American ancestors would ever have accepted the Constitution if it was going to bring into existence a paper-money monetary system. The system the Constitution brought into existence was one based on gold coins and silver coins.
From the very beginning, the U.S government took charge of minting the coins. While it was theoretically possible for federal officials to begin “clipping the coin,” as rulers had done throughout history, they didn’t do that, possibly because they knew that Americans would never tolerate such political tampering with their money.
The result was a system of sound money, the likes of which the world had never seen. Given that people were assured that government lacked the power to destroy or harm them through monetary debasement, they were free to make long-term loans and investments, which contributed to the economic prosperity of the nation. People even felt safe buying 100-year bonds from private corporations, knowing that they (or their heirs) would not be paid back in cheapened, devalued money.
The finest monetary system in history came unraveled in the 20th century. In 1913, the Federal Reserve System was established, which was a government agency charged with centrally planning America’s monetary system. It proved to be a disaster, especially in 1929, when its monetary calculations went awry, resulting in the stock market crash that year, which was followed by the Great Depression.
U.S. officials, led by President Franklin Roosevelt blamed the crash and the Depression on America’s “free-enterprise system” rather than on the Federal Reserve, where the responsibility for the crisis lay. Roosevelt used the crisis as an excuse to destroy America’s gold-coin, silver-coin standard in favor of a paper-money standard that rulers throughout history had used to plunder and loot their citizens and subjects.
Keep in mind that the Constitution also provided for an amendment process should Americans wish to change any aspect of their constitutional system. The Constitution could not be amended by either presidential decree or legislative enactment.
Yet that is precisely what Roosevelt and Congress did. They destroyed the monetary system on which the nation had been founded through executive decree and congressional legislation. They used the crisis of the Great Depression as their justification, but they knew that the Framers had intentionally not included a crisis or emergency justification in the Constitution for the exercise of tyrannical powers.
And there is no better word than “tyranny” to describe what Roosevelt and Congress did. “Morally reprehensible” would be a close second. Roosevelt ordered every American to deliver his gold holdings to the federal government. If an American failed to do so and was caught with gold coins, he would be arrested, prosecuted, convicted, and incarcerated for having committed a grave felony offense.
In return for their gold coins, Roosevelt gave Americans federal promissory notes, which effectively promised to pay them nothing. Soon after Roosevelt nationalized people’s gold, he devalued the paper debt instruments that he had delivered to Americans in exchange for their gold.
Roosevelt’s conversion of America to a paper-money monetary system, one managed by a central bank (the Federal Reserve), opened up the floodgates for federal spending and debt, which would increasingly grow as America moved toward a welfare-warfare state way of life. Decade after decade, as federal spending and debt grew, the feds would crank up the printing presses to augment the ever-increasing taxes they were collecting to pay for the welfare-warfare monstrosity.
Over time, all that “bad money” pushed silver coins out of circulation. People were discovering that they would be better off retaining their silver coins and using the alloyed coins and paper money with which U.S. officials were flooding the market decade after decade. The Lyndon Johnson administration accelerated the process by discontinuing the issuance of silver certificates in 1964, followed by the Coinage Act of 1965, which eliminated silver from dimes and quarters and reduced the silver content in half-dollars from 90 percent to 40 percent.
Today, countless Americans are financially strapped, barely making ends meet. Many people live paycheck to paycheck and are unable to save up a nest egg. The financial situation becomes worse with each boom and bust that periodically afflicts America’s economy.
Unfortunately, all too many of them fail to realize that one of the primary reasons for this phenomenon is America’s paper-money system and the ability that it provides federal officials to plunder and loot the American people.
Is the solution to this monetary mayhem a return to America’s founding monetary system? That certainly would be preferable to America’s paper-money, central banking system under which Americans have now lived for more than 100 years.
But the ideal is one set forth by the libertarian economist Friedrich Hayek in an essay he wrote, “The Denationalization of Money,” in which he advocated a complete separation of money and the state. Thus, just as the Constitution prohibits the federal government from intervening in religious affairs, a similar amendment would prohibit it from intervening in monetary affairs.
A necessary prerequisite for the achievement of a free, peaceful, normal, prosperous, and harmonious society is a monetary system based on sound money. A monetary system based entirely on free-market principles would go along way toward achieving such a society.
This article was originally published in the December 2019 edition of Future of Freedom.