Gold, Money and the U.S. Constitution
Eugene C. Holloway, J.D., L.L.M (Admin. Law Economic Regulation) ©2003
PART 1 - THE CONSTITUTIONALITY OF PAPER MONEY
PART 2 - THE LEGAL TENDER LAWS
PART 3 - CONFISCATION AND THE GOLD CLAUSE
PART 4 - SEARCHING FOR AMERICA -- A COMMENTARY
In this series I described how a limited government - with only the charter to borrow money, mint coins and regulate their value - attained a peacetime financial dictatorship in just a few generations. I took care to present historical materials in a relatively matter-of-fact manner, linking you to source documents on government sites. Without that documentation, the story is not believable; it reads like the outline of a bad Ayn Rand novel instead of real history.
The story I told only hit the highlights of a few constitutional issues. But there were more constitutional issues, and the laws were much more extensive and complicated than presented. The complete history of U.S. money from 1787 to 1933 is quite complex, involving business regulation, high finance, banks and banking, a variety of gold standards, currency exchange issues, world-wide economics, military and economic war, international relations and intrigue, apparent propaganda efforts to eradicate a popular understanding of the political value of gold money, great abuses of position, either incredible stupidity and negligence or callous and outrageous disregard for humanity and, some allege, the surreptitious hijacking of the birthright of the American people by arrogant, power hungry men. For those interested, links and references to works of others - scholarly and not-so-scholarly, fact and opinion, supported and unsupported, wild-eyed and staid - appear at the end of this commentary. As you read them you will note how style and presentation color their credibility. But do not be misled. Some authors offer balanced historical bases for strident claims. Others, more scholarly and erudite, blandly serve up their opinions as gospel without adequate support. Many writers have a thesis and omit facts supporting contrary conclusions. Pay attention to these differences, glean the objective facts from all possible sources, apply right reason and draw your own conclusions.
I provided you with a simple story taken from the opinions of the Justices of the U.S. Supreme Court, debates in the Congress and statutes so that you can demonstrate to your untutored acquaintances - without inviting a reputation as a nut case - that gold once played an accepted and respected role in the long term economic stability of the United States and the freedom of its people and that it was taken from them contrary to the express intent of the drafters of the Constitution. Your intellectual arsenal is not complete, however, unless you are prepared to respond to the conventional wisdom that the gold standard did, and will, place the economy in a straight jacket and did, and will, stunt economic growth and cause debilitating price instability.
Despite what Mr. Greenspan's initial remarks in his address to the Economic Club of New York on December 19, 2002, might imply, the era of the gold standard was not an idyllic picture of stable prices and economic security - that is, when viewed over short horizons.
One of the pieces of the story that I omitted is that, during the period from 1789 to 1933, there were periodic money panics and runs on banks, causing hardship and injustice to unsuspecting citizens. Professor Rothbard discussed the Panic of 1819 in his book by that name. I briefly referred to the problem leading up to the adjustment in the gold weight of the dollar in 1834. The printing press was openly used to finance almost every major war without raising taxes - with resulting inflation and subsequent contractions. And there were other recurring inflations, bank panics and recessions.
From the very beginning of the nation until 1913 there were huge political battles over the power and role that the central, national and state banks should take in the evolving economy of the United States. But it was the common knowledge of the people that kept a lid on things and succeeded in keeping gold money in circulation. After the worst paper inflation in the history of the United States, it was the popular understanding of gold as money that forced the country to return to redeeming paper currency in specie in 1879, ending the greenback era. But the 1875 Resumption Act was passed in the face of significant political resistance and compromise necessitated the continuation of legal tender paper money. Then came the cry for more currency spawning the free silver movement. The California and Alaska gold rushes injected the country with liquidity and caused price levels to rise because the country was on the gold standard - i.e., there was a significant increase in the gold supply.
So, while we complain about the loss of our Constitutional right to gold money, we should be prepared to acknowledge that a gold standard imposes some stringent rules on both government and the market that will punish not only the people who ignore those rules but also their unsuspecting victims. It is that discipline that kept prices relatively level - over the long haul - from 1800 to 1929.
Two major complaints arose during that period. The first is that during a period of relatively constant money supply, price levels tended to decrease, causing business hardships. Because capital investment and production labor precede product sales, price decreases tended to occur in advance of cost decreases, causing farmers and businessmen to sell more costly inventory for relatively less than they anticipated when their investments in capital goods and inventory were made. The second complaint is that there was a recurring problem of liquidity, especially outside of the more populous money centers. There were complaints about the unavailability of credit for financing the planting of crops and the growth of industry. And the recurring panics about whether a bank had sufficient reserves to redeem deposits were particularly distressing to ordinary citizens and businesses alike.
Those favoring a fiduciary standard argued that the bank panics and the relentless erosion of prices were caused by the inability of the gold standard to provide the needed liquidity to the market and the banks. Gold is inelastic. It cannot expand to meet seasonal requirements, unexpected demands and financial emergencies; and it does not grow with the economy. Their solution to this "problem" was the Federal Reserve System and fractional reserve banking. But they learned very quickly that when the entire banking system makes system-wide errors, a centrally controlled dual currency system - gold coin and fiat money - by Gresham's Law will not work. Even if gold certificates can be redeemed at the teller's window for gold coin, if gold coin is available to redeem only 40% of the certificates, the remaining 60% are, in fact, fiat. In the final analysis, that is why the people's gold was confiscated in 1933. The financial system could not tolerate dual money without runs on the banks (i.e., a flight to gold) when things got tough. The Federal Reserve System failed and confiscation became the final solution for avoiding bank runs.
But the 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.'"
Links and References
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Michael D. Bordo, Ehsan U. Choudhri and Anna J. Schwartz, Was Expansionary Monetary Policy Feasible During the Great Contraction? An Examination of the Gold Standard Constraint, NBER Working Paper No. w7125 (May 1999)
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Walker F. Todd, The Federal Reserve Board Before Warner Eccles, Working Paper 9405 (Federal Reserve Bank of Cleveland 1994).
Dr. Edwin Vieira, Jr., How to Restore Constitutional Money: The Challenge, an address delivered The Conservative Caucus Foundation at its Annual Meeting in Washington, D.C. on January 13, 1997
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