Hornberger's Blog

Hornberger's Blog is a daily libertarian blog written by Jacob G. Hornberger, founder and president of FFF.
Here's the RSS feed or subscribe to our FFF Email Update to receive Hornberger’s Blog daily.

The Pathetic U.S. Golden Dollar

by

I recently received a U.S. golden dollar from a vending machine. What a pathetic thing. Golden in color, Wikipedia reports that it actually has “a copper core clad by manganese brass.”

Needless to say, this golden coin is nothing like the gold coins that, along with silver coins, were the official money of the American people for more than a hundred years. The gold coins that Americans used throughout the 1800s and into the early 1900s were real gold coins, not alloyed coins consisting of base metals, like today’s golden coin.

It is impossible to overstate the uniqueness of America’s founding monetary system. Lots of people today think that it was a system in which paper money was backed by gold. Nothing could be further from the truth. In fact, the so-called gold standard was a system in which gold coins and silver coins were the official money of the country.

In other words, those gold coins and silver coins didn’t back anything. They were the official money of the country — the official money as established by the U.S. Constitution, the document that called the federal government into existence.

For well more than 100 years, there was no paper money because the U.S. Constitution did not permit the issuance of paper money.

Note, for example, that the Constitution expressly prohibits the states from making anything but gold and silver coins legal tender. The states were also expressly prohibited from emitting “bills of credit,” which was the term used in that era for paper money.

Note also that the Constitution did not empower the federal government to issue paper money. Instead, it limited its power to “coining” money.

Under the Constitution, both the states and the federal government were permitted to borrow money. Sometimes people would use those debt instruments as media of exchange. But everyone understood that they were not money. They were instead promises to pay money. The bills and notes, both at the state and federal level, promised to pay gold and silver coins. The bills and notes were just debt instruments, nothing more.

Why did our American ancestors insist on this unusual monetary system? Why didn’t they instead found our country on a paper-money standard, as today’s Americans have?

Because they understood that historically governments had plundered and looted people by simply inflating the supply of printed money. Let’s say, for example, that the government has issued $10 trillion in paper bills, which are circulating in society. Let’s say that officials suddenly need $1 trillion to fund a new foreign military escapade or a new welfare program. They could raise income taxes by $1 trillion but that oftentimes tends to make people angry. So, instead officials simply print the $1 trillion and use it to pay for their new welfare-warfare state programs.

That increase in the supply of money — or “inflation,” if you will — causes the value of the dollar to drop. That decrease in the value of the dollar is reflected by a rise in the prices of everything else. The beauty of the scheme, however, from the standpoint of government officials, is that the process enables officials to pay for the things they want while, at the same time, providing them with the opportunity to condemn and castigate “greedy and selfish” businessmen whose prices are rising in response to the devalued currency.

With gold and silver coins as the nation’s money, it is much more difficult for government officials to plunder and loot the people through inflation. That’s because they can’t use a printing press to print more gold and silver coins, like they can with paper notes and bills. But inflation, while difficult, is still not impossible. In the olden days, when coins came into the treasury through taxes, government officials would shave the edges, leaving the coin a bit lighter and then using the shaved edges to make new coins, which would then be used to pay for things.

While “clipping the coin” was theoretically possible with the gold coin-silver coin money that the Constitution established, people had confidence that federal officials would never try it. And in fact, they never did. Throughout the 125 years or so of U.S. coinage, U.S. gold coins and silver coins were honest, sound, and reputable throughout the world.

The combination of a sound monetary system and no income taxation throughout the 19th century combined to bring about the most economically prosperous period in the history of man. When people were free to keep everything they earned and when government was precluded from looting people through inflation, countless people went from rags to riches in one, two, or three generations. The overall standard of living of the Americans people soared, which was one of the main reasons that thousands of penniless immigrants were fleeing their homelands and flooding American shores.

It all came to an end with the adoption of a central bank, the institution that goes by the name of the Federal Reserve. From World War I through the 1920s, the Fed began over-printing bills and notes. When holders of those debt instruments began demanding the gold coins the instruments promised to pay, the Fed panicked over the thought of having to honor all those debts. In response, the Fed over-contracted the money supply, which was what caused the stock market to crash in 1929, which then led to the Great Depression.

U.S. officials, led by President Franklin Roosevelt then used the Great Depression, which was a temporary emergency, to permanently revolutionize the nation’s monetary system. They decreed that ownership of gold coins would henceforth be illegal, with anyone caught owning gold coins being subject to a felony prosecution and conviction. Everyone was required by law to deliver his gold coins to the federal government. The government’s bills and notes, FDR decreed, would henceforth serve as the official money of the United States. Even though those debt instruments promised to pay gold coins, they effectively became promises to pay nothing. America had become just like most other nations — one based on a fiat-money standard which is constantly being debased because of forever-rising federal spending.

Not surprisingly, federal spending and debt soared after the 1930s, given that there was now no more constraint on the ability of the Federal Reserve to expand the money supply. After a couple of decades, the inflation had become so bad that it drove silver coins out of circulation. That’s how Americans ended up with cheap, alloyed coins as their official money compared to the gold coins and silver coins of our ancestors.

The abandonment of America’s founding monetary system was one of the most revolutionary and destructive transformations in U.S. history, ranking right up there with the adoption of the welfare state way of life in the 1930s and the conversion of the federal government to a national-security state in the 1940s. It is worth noting that none of these structural changes was brought about through constitutional amendment.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.