Government Power, Gold, Fiat Money, and the U.S. Constitution

When we repeat again and again, like a broken record, that pieces of paper with words on them, that is Constitutions, Bills of Rights, Amendments, and the like, have no power to sustainably constrain aggressive gangs, such as governments, then we do that for a reason.

When we say that if such revered and supposedly binding scripture can’t even do the trick, that then surely it is even more deranged to fall prey to the illusion that rather non-binding check marks in polling booths will do the job, then we do that because we have sound syllogistic reasoning to back it up and on top of that have observed centuries of historical evidence.

Those who scoff at such propositions are free to do so. They can mistakenly call the ideas nihilistic, defeatist, and cynical. But in doing such things, they are unfortunately missing something: That is, that such accusations are not arguments against the logical and empirical truth-content of the propositions made; that they are emotional knee jerk reactions that arise out of childhood scar tissue and a deliberate disregard for knowledge in fields where that knowledge hurts them. If they have counter-evidence, then by all means, present it!

When we propose Voluntaryism, then it is out of a deep desire for meaningful change and the conviction that we can no longer afford repeating the same mistakes over and over again, expecting different results; the definition, by the way, of insanity.

And a better case couldn’t have been made in the lab of human society than that of the formation of the United States: A small central government, granting significant rights to states and localities, limited in its powers to tax and imprison, constrained by a Constitution whose spirit and words expressly and virtually unmistakably limit the potential for arbitrariness on the part of those in power, a Bill of Rights that grants to every citizen the due process of law before depriving him of his freedoms and property as punishment for crimes, a clear separation of Executive, Legislative, and Judiciary, all imbued with the Enlightenment spirit of the time, highly secular, and highly in favor of the protection of every individual’s equal rights to Life, Liberty, and Property.

Granted, the American Republic from the outset denied certain rights to certain minorities, but so did the rest of the world! The fact doesn’t change that in comparison there hasn’t been a better example for the deliberate establishment of a limited, constrained, republican form of government, born out of reason, and not passed down through traditions of hegemonic power structures.

Seriously, those who believe that it is possible to have a sustainable limited form of government could not ask for a more ideal example to go ahead and make their case!

The case of Gold, Money, and the U.S Constitution is yet another prime example of how all such Constitutions, Articles, Bills of Rights present nothing but a minor roadblock in the way of bureaucrats’ never ceasing quest for oppression, abuse, and aggression.

It clearly lays out how the spirit and the original intent of such well meaning documents can be turned upside down completely and 100%, giving the abusers the great and far reaching benefit of depredations under the appearance of due process and legitimacy – a far more destructive and longer lasting form of tyranny than outright brute force.

Attorney Eugene C. Holloway lays out the case in 4 parts. I will just provide a quick summary and noteworthy references, but the whole thing is well worth a read.

PART 1 – THE CONSTITUTIONALITY OF PAPER MONEY

The basic case for the unconstitutionality of fiat money in the US arises out of Article 1, Section 8, clause 5, which states that Congress shall have the power …

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

When the Constitution was drafted to replace the Articles of Confederation, some people wanted to include a power that used to be granted as per the Articles, and add “to emit bills of credit” as an enumerated power of Congress.

Bills of credit are essentially paper money bills that, however, grant the holder the right to redeem them for gold or silver money at a future date. They are in that sense fiat money “light”.

So one can argue that if even such a highly constrained form of paper money was struck out upon drafting the US Constitution, then surely it should be clear that an outright fiat money regime was most definitely not desired by the majority of the founders whose experience of the depredations caused by the Continental Dollar was all to vivid at the time.

The Delegate Luther Martin’s statement, albeit for the wrong reasons, provides a stellar case to support the notion that it is fiat money that makes large scale war and murder possible in the first place, of course imbued with all the typical, juicy and fear-mongering language of a true early-day neocon:

(…) a motion was made to strike out the words “to emit bills of credit.” Against the motion we urged, that it would be improper to deprive the Congress of that power; that it would be a novelty unprecedented to establish a government which should not have such authority; that it was impossible to look forward into futurity so far as to decide that events might not happen that should render the exercise of such a power absolutely necessary; and that we doubted whether, if a war should take place, it would be possible for this country to defend itself without having recourse to paper credit, in which case there would be a necessity of becoming a prey to our enemies (…)

In conjunction with the 10th Amendment it should be clear that, as per the Constitution, the U.S. Congress should not be allowed to print or delegate the printing of fiat money:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

And as we all know, bureaucrats will always stick with passion and consistency to the application of laws that are passed to constrain their own power, right? Well …

PART 2 — THE LEGAL TENDER LAWS

This part documents the three big legal tender cases and the Supreme Court’s step by step perversion of the obvious intent of the US Constitution:

Treasury Secretary Salmon P. Chase, proponent of a national currency, but opposed to making it legal tender, was by his own admission forced by the exigencies of the Civil War to accept the 1862 program of New York Congressman Eldridge G. Spaulding and the House Ways and Mean Committee to issue the federal government’s first legal tender notes and suspend the right to redeem the notes in specie. The scheme worked insofar as it succeeded as a means of financing the war without crushing the fragile Northern economy with excessive direct taxes. In the second Legal Tender cases Justice Bradley explained in salutary terms how the device works as an “imperceptible tax” to finance war by invisibly spreading the financial pain:

Particularly eye-opening to me was the ease with which such legal tender laws could be enforced with minimal effort:

Some scoff at the statement that the legal tender laws are coercive. The answer to those skeptics appears in Andrew Dickson White’s monograph Fiat Money Inflation in France. In 1793, failure to accept the French paper money was made punishable by death and the punishment was actually imposed as demonstrated by the lists of those condemned to the guillotine. In contrast to the Draconian measures taken after the French revolution, the import of the U.S. legal tender laws has been merely to allow private and public debtors to legally discharge their debts by payment of legal tender currency. But this form of interference by the state in private transactions to appropriate the wealth of creditors is coercive nevertheless; and the French experience illustrates the direction that any kind of state coercion can take once the state’s authority to act is established.

The following statement from the Attorney General and the subsequent note by the author illustrate the maddening logic used to literally turn the US Constitution upside down:

[Opposing] counsel quotes from the debates in the Federal Convention of 1787 to show that members of that body were opposed to making paper a legal tender. The very quotations prove that the members considered that the power to emit bills of credit involved the power to make them a legal tender, and hence they struck out of the draft of the Constitution the power to emit bills. But it is no uncommon experience that the words of a constitution or statute are found, in their fairest interpretation, to import more than their authors distinctly designed. It is not given to man, when framing a constitution, to foresee all the cases to which the conferred powers will properly extend. And in this very matter, notwithstanding that the power to emit bills of credit was struck out, this court has held that the power exists; and why, then, does it not exist with all that in 1787 was supposed the belong to it? [Note the logic here: The Constitutional Convention struck the authority to emit bills of credit because they were opposed to paper money as a legal tender, but inasmuch as the authority to emit bills of credit has now been recognized, legal tender ought to come along as well because the founders felt that they went hand in glove!]

PART 3 – CONFISCATION AND THE GOLD CLAUSE

Even knowing that it actually happened, it still is almost unthinkable that the United States government would nationalize the personal assets of its citizens, give paper in exchange at 60% of the value of the assets – and book a profit. The public begrudgingly recognizes that the government can take private property as long as the taking is accomplished by due process (such as an eminent domain proceeding) and the owner receives just compensation. However, we expect those cases to be relatively isolated and infrequent. In 1933, the U.S. government devalued the dollar by 40% in less than eight months, but not before it ordered a docile population to exchange their gold for paper and banned gold ownership and transactions in gold to keep citizens from escaping the devaluation. The combined actions operated as a confiscation of the property of every citizen, all at once, with no compensation.

The constitutional validation of these actions followed a similar pattern to the validation of the legal tender laws: (1) unchallenged legislative precedent falling into accepted custom, (2) incremental changes in constitutional interpretations over a period of time and (3) the precipitation of a major crisis that the government chose to address by assuming theretofore unexercised and unauthorized power.

It was now finally time to see if plain and outright Orwellian measures would bode well with the American public, WW1 was a welcome guinea pig:

During the First World War Congress passed a number of war measures, including the 1917 Trading With the Enemy Act, that were designed to marshal the economy to support the war effort. The laws gave much power to the executive branch and were generally acknowledged to be authorized under the constitutional war powers. As originally enacted, Section 5(b) of the Trading With the Enemy Act, 40 Stat. 411, provided:

That the President may investigate, regulate, or prohibit, under such rules and regulations as he may prescribe, by means of licenses or otherwise, any transactions in foreign exchange, export or earmarkings of gold or silver coin or bullion or currency, transfers of credit in any form (other than credits relating solely to transactions to be executed wholly within the United States), and transfers of evidences of indebtedness or of the ownership of property between the United States and any foreign country, whether enemy, ally of enemy or otherwise, or between residents of one or more foreign countries, by any person within the United States; and he may require any such person engaged in any such transaction to furnish, under oath, complete information relative thereto, including the production of any books of account, contracts, letters or other papers, in connection therewith in the custody or control of such person, either before or after such transaction is completed.

As if that wasn’t enough, this law was amended shortly thereafter to read:

During time of war or during any other period of national emergency declared by the President, the President may, through any agency that he may designate, or otherwise investigate, regulate, or prohibit, under such rules and regulations as he may prescribe, by means of licenses or otherwise, any transactions in foreign exchange, transfers of credit between or payments by banking institutions as defined by the President, and export, hoarding, melting, or earmarking of gold, or silver coin or bullion or currency, by any person within the United States or any place subject to the jurisdiction thereof; and the President may require any person engaged in any transaction referred to in this subdivision to furnish under oath, complete information relative thereto, including the production of any books of account, contracts, letters or other papers, in connection therewith in the custody of or control of such person, either before or after such transaction is completed. Whoever willfully violates any of the provisions of this subdivision or of any license, order, rule or regulation thereunder, shall, upon conviction, be fined not more than $10,000, or, if a natural person, may be imprisoned for not more than ten years, or both; and any officer, director, or agent of any corporation who knowingly participates in such violation may be punished by a like fine, imprisonment, or both. As used in this subdivision the term ‘person’ means an individual, partnership, association, or corporation. [Emphasis added.]

Thus, what was solely a wartime measure that many believed had expired was converted into a statute granting war time powers to the President in times of “national emergency,” a term which was not defined in the law (and which, if such an emergency existed in 1933, itself had been precipitated by government mismanagement). This law identified a new “enemy” – domestic “hoarders” who would be subject to imprisonment for violating any rule laid down by the President at any future time during a period of national emergency declared by him based on undefined criteria. Professor Henry Mark Holzer’s monograph “How Americans Lost Their Right To Own Gold And Became Criminals in the Process” catalogues the events of 1933, and more; and it should be read as an adjunct to this article, which despite its appearances is a relatively superficial treatment of the subject.

All hail the mighty Fuerer!!

PART 4 – SEARCHING FOR AMERICA — A COMMENTARY

As many political libertarians, they get this kind of stuff so right in the analysis, and so wrong in the very final conclusions, when they still think that somehow it is possible to establish a “good” government.

Thus Holloways final statements here are brilliant up to the point where he urges to not abandon that ideal. This is, in my humble opinion, but a minor blemish on an otherwise excellent treatise:

[T]he complaints against the gold standard were, and are in actuality, complaints against the unyielding discipline of objective value. The goal of stable prices is inherently inconsistent with a standard that allows gold to circulate as money. If the money supply is inelastic, as it likely would be in the case of gold, normal improvements in technology and productivity naturally ought to cause prices to decline. Businesses have proven throughout history to have a remarkable ability to adapt individually to market conditions (or to go out of business). If they knew that there would be no inflation to negate the natural decline in prices, sooner or later they would figure out how to adjust their business processes to adapt for declining prices – for example, by using strategic product pricing techniques. Surely we must have learned by now that there are grave risks associated with a fiat money system and that the market’s call to be relieved of its function and obligation to deal with objective value is no justification for the government to saddle its citizens with that risk.

Runs on banks arose when depositors were worried about the safety of their deposits. Come now, that cannot be the fault of the monetary system. The banks either had the gold or they did not. But, it is said, they lent the money to finance farms and businesses and mortgages. OK, they must have lent too much and did not keep adequate reserves or failed to arrange privately to be covered by other banks or insurance companies. Anyway, even if depositors gave express or tacit permission for the banks to lend out their money, if a bank promises to redeem bank notes in gold on demand, the bank ought to be managed to be able to do that. To avoid subjecting the bankers to punishment for mismanagement and to avoid causing depositors to have a healthy skepticism about bank trustworthiness, the Federal Reserve System was chartered to insulate the banks from the market’s preference for trustworthiness and to give the depositors a sense of security by government fiat. The Fed was created to bail out irresponsible banks and foster price stability by the expansion of money and credit – a most dangerous game, one that has been played with almost universal failure ever since the first coin was debased.

Instead of allowing the market to fix the problem of declining prices and irresponsible banks, the new System in 1913 allowed the problem to be assumed by the Fed. But in spreading the risk over the entire system and theoretically lowering it, the government created a broader risk, a risk that was national in its scope rather than isolated to individual banks and businesses. When the Fed realized that its expansion of credit in the 1920’s had created a stock market bubble without raising prices, it was faced with a paralyzing dilemma: it could not keep a deflation of the stock market bubble from spilling over into the general economy. The Fed found that it had no precise control over what sectors of the economy would be impacted first by a credit contraction and no way to engineer a deflation so that it did not permeate the economy. Bubbles usually appear at the fountainhead of inflation and then begin to permeate the economy. Bursting the bubble cannot be accomplished surgically – at least no one has figured it out yet, as the internet bubble illustrates. The Fed, despite nine decades of experience, has yet to devise a way to exercise better long term control over the money supply than the gold standard accomlished. I suspect that it is this obvious fact that Mr. Greenspan was referring to in his remarks on December 19.

War and other crises provide pretexts for increases in government power. Once it is acquired, rarely does the assumption of that power completely relent when the crisis subsides. The departure from the discipline of gold money in 1862 with the greenback and in 1933 with gold prohibition was attended by crises that added measurably – by step-functions – to the U.S. government’s control over the economy and its ability to confiscate the fruits of the individual’s labor through inflation. In both cases, there were later repeals, but the repeals represented two steps forward and one step back. The 1879 Resumption Act did not eliminate the legal tender laws, which remain in effect today. Likewise the restoration of gold ownership rights in 1974 and the legalization of gold clauses in 1977 did not resurrect the gold standard or put gold coins back into circulation as money.

We do not know how the government will respond to the upcoming financial difficulties that appear inevitable. But the history of gold money in the U.S. and the increased sophistication and technology available to the government indicate that one may find it difficult to escape the solutions that are handed down. It will not be enough to understand the benefits that the discipline of gold creates for long-term political and economic stability if the vast majority of citizens do not appreciate the political value of a gold standard. It will not be enough to buy gold while it is legal and hide it before the next prohibition occurs. Where, other than the black market, will it be useful? It will not be enough to hope that confiscatory laws and regulations will not be enforced. As will be demonstrated in a later article, the 1933-1974 regulations were enforced. It will not be enough to draft new gold clauses in an attempt to predict what loopholes might be overlooked in the next law. The loopholes eventually will be closed both by the legislature and in the courts. And it will not be acceptable, for me at least, to leave my home in a vain attempt to find a place where I can have greater social, political and economic freedom. I doubt that there is such a place; and even if there were, why should I allow myself to be driven from my home? Some of us have now lived long enough to know that despite Lord Keynes’ famous comment, when the long run has run its course, we will still be here; and even if we are not, our children certainly will be. So the long run is important.

Many of us do not care to evade the law or become exiles or fugitives. We prefer to live and remain in a country where our daily affairs can be conducted freely, in private or in the open, without any concern that, some day, those charged with our protection will turn on us, confiscate our meager savings and forbid us from engaging in prudent and honest trade with our fellow citizens. That is the country that Thomas Jefferson and James Madison thought they had created. I like the idea of living in their country. It is the America that I want to leave to my children and I will continue to search for it.

It is becoming increasingly apparent that the fiat system is entering an unstable, perhaps uncontrollable, phase at precisely the time when a major crisis is brewing. Government budgetary and fiscal policies promoting guns and butter and lower taxes, and monetary policies designed to fight deflation, “stimulate the economy” and monetize historically high mountains of debt are classic signals that the worst fears of the founders are being realized on a scale that they could not have imagined. The accumulation of government power over the individual in such an environment will be, and is, accelerating. Privacy is almost a thing of the past and the movement of assets will join the transfer of money as a carefully regulated activity.

The general population today, unlike the citizenry in 1862 and 1933, has no understanding of monetary economics. Moreover, huge portions of the population (including large and small business enterprises) are in one form or another feeding at the trough of government largesse with absolutely no regard for or understanding of the source of the government’s revenues or how a nation’s wealth is created and what is required to sustain it. They see government money as a kind of natural resource. It is an easy trap to fall into. Just the other night I listened to President Bush commit a substantial sum to fight AIDS in Africa and caught myself saying, “Finally, we are going do something to fight that awful epidemic,” without the least thought about where the money will come from. But if we do not think about where the money comes from, except to oppose direct taxes that affect us, we are digging our own financial graves.

Many people apparently believe, vaguely, that their financial well being is somehow threatened by those seeking lower taxes and less government. (If they are feeding at the trough, perhaps they are right.) And they make no connection whatsoever between monetary policy and their financial security. This wholesale ignorance facilitates, with no serious main stream criticism, the appropriation of wealth from one citizen through inflation and taxes and the redistribution of it to others in the form of government benefits, contracts and programs. I am reminded of the Roman Emperors who taxed the people and then tossed out bread and gold during parades and pageants to curry the favor of the masses. The system will not change until we improve the understanding of the citizens whose votes influence policy.

A libertarian society protected from, and by, a limited government may have been an ideal that the founders sought; but it has never been achieved. Even so, that fact, and the fact that the contrary direction appears to have been generally taken, does not mean that the ideal should be abandoned. If you understand the economic risks posed by the fiduciary (“trust me”) monetary standard and the moral dimensions of its inevitable consequences, you should attempt at a minimum to educate the people around you about the history, the respectability and the security that can be found in the gold standard and encourage them to pass the word. Changing popular understanding begins in your neighborhood, in your business circles and in your associations. It is a daunting undertaking, but it most certainly will not be accomplished if those who understand its importance shrink from the task or retreat into cynicism.

In The Regulation Game, a treatise on government’s regulation of enterprise, authors Bruce M. Owen and Ronald Braeutigam questioned the wisdom of using government power to achieve economic security and justice rather than allowing the market to work. They concluded, “We do not know the answers to these questions. Nevertheless, we are reminded of Edward Gibbon’s comment on the fall of Athenian democracy: ‘In the end they valued security more than they valued freedom, and they lost both.'”

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