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The Failure of the Republican “Revolution,” Part 4


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It would be difficult to find a better example of socialist central planning than the Federal Reserve Board — the central bank of the United States. Since 1913, when the Federal Reserve Act was enacted, a small group of government bureaucrats have planned the monetary affairs of hundreds of millions of people. As with all other instances of socialist central planning, the results have not been surprising: continual debasement of the currency, surreptitious confiscation of wealth by the political authorities, and a continual series of monetary booms and busts.

But the major significance of the monetary revolution in 1913 was the omnipotent power that the U.S. government assumed over the lives and fortunes of the American people. For no people can ever be free as long as their government officials have unlimited power to confiscate their wealth, either directly or indirectly.

When the Constitution was enacted in 1787, it brought into existence the national government. But there was one stipulation: the national government’s powers were limited to those enumerated in the Constitution. If a power was not specifically listed, government officials were not permitted to exercise it. If public officials did attempt to exercise illegal powers, it would be the duty of the Supreme Court to declare their actions unconstitutional.

The 10th Amendment to the Constitution emphasized that those powers not granted to the national government belonged to the states and to the people. But state powers themselves were restricted by express language in the Constitution. For example, states were prohibited from making anything but gold and silver coin legal tender. The states were also expressly prohibited from emitting bills of credit, or “paper money.”

The national government was given the power to coin money and regulate the value thereof. Why didn’t the Founders include the same types of express restrictions on the national government as they did on the states? Because the understanding was that there was no need for express restrictions on the national government — if a power was not enumerated, then it simply could not be exercised. (Of course, not trusting their public officials on this point, the American people secured the enactment of the Bill of Rights, which expressly restricted certain powers of the national government.)

For over 100 years, the American people used gold and silver coins as their money. People would carry around gold and silver coins the way Americans today carry around Federal Reserve notes. Was this cumbersome? Not in the least. For example, today, a person who has a one-ounce gold coin in his pocket has the equivalent of almost $500.

Didn’t the government issue paper money? No. The government borrowed money — that is, it borrowed gold and silver coins — and the debt was evidenced by government-issued promissory notes. The notes would read as any other notes would read: the government promised to pay the bearer of the note on demand or at some date in the future a certain quantity of gold. While the notes themselves would often be negotiated, they did not trade as paper money.

Gold itself was the money. The government-issued note was the promise to pay money, not the money itself. If the government issued too many notes and people began to suspect that the notes would not be honored, the notes would begin trading at a discount.

For example, suppose the government borrowed ten gold Eagles and issued a note promising to pay the bearer on demand ten gold Eagles. Someone could take the note to a merchant and ask the merchant if it would be okay to pay for merchandise by giving the note to the merchant. If the merchant had confidence in the government’s ability to fully repay the note, he would permit the customer to buy merchandise equal in price to ten gold Eagles; in other words, the note would be negotiated at full value. But if the merchant had doubts about the government’s ability to repay, he would say to the customer: “I will take the note in exchange for merchandise equal to nine gold Eagles.” In this case, the note would be trading at a discount.

So, the government’s ability to issue debt was limited by the marketplace. If government “inflated” its notes, the marketplace — people buying and selling — would place a lower value on the government notes. What is significant is that people were free to stick with gold and silver regardless of what their government was doing with its debts. And government officials were constrained by the marketplace when it came to borrowing from the people.

The result was the soundest currency in the history of man. Throughout the ages, governments had used their powers over money to steal from the citizenry — confiscating their wealth by debasing their currency. One of the earliest methods of doing this was what was called “clipping the coin.” When people in the Middle Ages would send gold coins to their king in payment of taxes, the king would shave the edges off the coin before reusing the coins in the marketplace. Thus, what was officially a one-ounce gold coin would end up containing a little less than an ounce. The king would then gather up his shavings and melt them down into another gold coin. What would happen if someone refused to accept the clipped coins at face value? The king’s legal-tender laws imposed fines, imprisonment, and sometimes even death for anyone violating his legal-tender laws.

The 19th century was the most prosperous period in the history of man (see Part II of this series). The reasons: no income taxation; few regulations; no Social Security, Medicare, Medicaid, meals on wheels, or other socialistic political schemes; and virtually no trade and immigration controls. And one additional important reason: the American people had the strongest currency in the world — a currency that, for the first time in history, government had no power to debase.

One of the first assaults on monetary freedom came from Abraham Lincoln. Realizing that the people of the North were resisting the imposition of higher taxes to finance the war against the South, Lincoln did what all rulers in history had done under similar circumstances. He began issuing ever-increasing amounts of government debt to finance the war. What happened when the notes began trading at a discount in the marketplace? Lincoln ensured the passage of the first legal-tender law in American history. Americans were required to accept the notes at face value even though the marketplace was severely discounting them.

What about the Constitution? What about limited powers? Was there an enumerated power permitting the national government to enact legal-tender laws? Was there an enumerated power permitting the national government to make its notes legal tender? When the case reached the Supreme Court, Lincoln’s legal-tender laws were held to be unconstitutional. However, due to a court-packing scheme shortly thereafter, that decision was overruled and the legal-tender laws were sustained.

Were there problems with the gold standard? Of course. One major problem was that the government made gold and silver legal tender, rather than simply letting the marketplace determine what medium of exchange people desired to use. Government officials would fix the price of gold and silver. For example, assume that in the marketplace ten ounces of silver were trading for one ounce of gold. The government would then decree that a one-ounce gold coin would be equal to ten one-ounce silver coins. The problem would arise when market conditions would change. If a one-ounce gold coin would later be valued at nine silver coins in the marketplace, people would use their gold coins in the marketplace and hoard their silver coins. This was Gresham’s Law-that bad money would drive out good money, or, more appropriately, that overvalued money would drive out undervalued money.

There were also inflationary periods. For example, a new gold discovery would devalue gold relative to silver and other things.

There were also bank failures. People would deposit their gold in banks. Banks would lend the money. But bankers realized that everyone would not attempt to withdraw their funds at the same time. Thus, bankers would lend money — that is, issue bank notes — in excess of what was on deposit — fractional reserve banking. Gradually, people began suspecting that the bank was not in a position to redeem its notes and, thus, the notes would begin trading at a discount. In the worst case, worried depositors would “make a run on the bank” by demanding the return of their deposits. The bank would fail, and the depositors would lose their money.

Government officials promised the American people that monetary problems would be solved with the creation of the central bank in 1913. But, of course, the opposite happened. First came the “Roaring 20s,” when the Fed inflated the paper supply. Then, the Fed overtightened the money supply in 1929, giving America the stock-market crash and the Great Depression. Then came decade after decade of continual monetary debasement — a constantly depreciating medium of exchange. On top of all this was an endless series of booms and busts.

And, of course, there was the political regime of Franklin D. Roosevelt. To finance government expenditures to pay for his beloved New Deal welfare programs, Roosevelt and his cohorts began printing massive amounts of government notes. To ensure that gold would not expose what they were doing, legal-tender laws were enacted. But that wasn’t the worst of it. The Roosevelt people next canceled — nullified — extinguished — every single gold clause in every single contract, public and private.

And even that wasn’t the worst of it. Roosevelt and his cronies nationalized — confiscated — the gold coins of the American people and then made it illegal for Americans to own gold. Imagine — after 150 years of the strongest monetary system in history — a system free from government assault — a system that was a bulwark for American liberty — the American people became subject to serving time in a U.S. federal penitentiary for owning a gold coin!

What about the Constitution? What about enumerated powers? Unfortunately, Roosevelt had sufficient cronies on the Court to sustain his policies, especially after his infamous and shameful court-packing scheme.

Today, most Americans don’t even realize what their own government has done to them. They carry around their beloved government-issued, irredeemable Federal Reserve notes and never even think to ask what the notes are promising to pay. They see “legal tender” on their Federal Reserve notes and don’t even wonder why. Widows and orphans have lost fortunes in debased pension payments over the years and simply assume that this is due to some complex natural force in the universe. Americans throw away their ever-depreciating pennies and just convince themselves that devaluation is a natural way of life.

Americans refuse to face the fact that the government, through the insidious, indirect tax of monetary debasement-inflation, has stolen billions of money from them over the years.

Unfortunately, all too many Americans have come to meekly accept the role of government in their monetary affairs. And the primary reason for this is another big revolution that took place at the turn of the 20th century. While it was more in the nature of state-by-state revolution, rather than a national one, it was nonetheless one of the most powerful and destructive events in American history — the advent of public schooling.

Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part 6 | Part 7 | Part 8 | Part 9

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    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.