The Constitution made it crystal clear what the official money of the United States was to be when it called the federal government into existence. That money was to be gold coins and silver coins, not paper money.
Article 1, Section 10, of the Constitution, which is a restriction on the power of the states, states, “No State shall … coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts….”
What were “bills of credit”? That was the term used at that time for paper money. Through that provision in the Constitution, the Framers expressly prohibited the states from issuing paper money. It prohibited them from making anything but gold coins and silver coins legal tender or official money. It prohibited the states from issuing their own coins, leaving that power and responsibility to the federal government.
With respect to the federal government, Article 1, Section 8, states, “The Congress shall have Power …To coin Money, regulate the value thereof, and of foreign Coin…. To provide for the Punishment of counterfeiting the Securities and current Coin of the United States.”
Why wasn’t there an express prohibition on the power of the federal government to emit “bills of credit” or paper money? The reason is that the Constitution established a government of limited, enumerated powers. The federal government’s powers were limited to those listed in the Constitution. If a power wasn’t enumerated, it couldn’t be exercised. Since there was no power to issue paper money given to the federal government, it couldn’t exercise such power.
It was different with the states. Under the Constitution, they were to have whatever powers they wished to exercise, unless there was an express restriction on a particular power within the Constitution. That was why the Framers deemed it necessary to restrict the powers of the states when it came to money: no printing of paper money, no coining of money, and no making anything but gold coins and silver coins official money.
The federal government, on the other hand, was given the power to coin money, not print money, and to regulate the value of such money. It was also given the power to punish people for counterfeiting “the Securities and current Coin of the United States.”
Article 1, Section 8 of the Constitution also gave Congress the power “To borrow Money on the credit of the United States.” That’s what counterfeiting “the Securities” of the Constitution was referring to — debt instruments of the United States, such as bills, notes, and bonds.
There is something important to realize about the federal government’s debt instruments: It was understood that they were not money or “legal tender” but rather promises to pay money — i.e., promises to pay gold coins and silver coins.
When we consider all of these constitutional provisions, it is easy to see that the Framers intended to establish a monetary system in which gold coins and silver coins were to be the official money of the United States. And, in fact, that is precisely what happened after the federal government was called into existence. The Coinage Act of 1792 established the first mint in Philadelphia for the purpose of issuing coins. The silver dollar was the first unit of money issued. That would be followed by the silver half-dollar, quarter-dollar, dime, and half-dime. Gold coins consisted of the $10 gold Eagle, $5 Half-Eagle, and $2.50 Quarter-Eagle.
That gold-coin, silver-coin system remained the monetary system of the United States for more than 125 years. It turned out to be the most stable monetary system in history, one that, along with no income taxation, no welfare state, no warfare state, no immigration controls, and very few economic regulations, played an important role in the tremendous rise in economic prosperity and rising standards of living in the United States throughout the 19th and early 20th centuries.
It is often said that America’s “gold standard” was a system in which paper money was “backed by gold.” Nothing could be further from the truth. There was no paper money. There were only debt instruments promising to pay gold and silver. The system was one in which gold coins and silver coins were the official money of the United States.
Why did our American ancestors have such a deep antipathy toward paper money? They knew that throughout history public officials had plundered and looted people through the use of paper money. To finance their ever-burgeoning expenses, public officials, of course, would first resort to tax increases. At some point, however, taxes would get so high that people would begin to resist, cheat, or, in extreme cases, violently revolt. That’s when kings and other regimes would resort to the printing press to finance their expenditures. They would simply crank up their printing presses, print whatever amount of money they needed, and go spend it.
The result would be a devaluation of everyone’s else’s money. That reduction in the value of money would be reflected by an overall increase in the prices of goods and services that people would be purchasing. For example, let’s say that before the government began inflating the money supply, the price of a shirt was $10. After the government’s inflation, the shirt cost, say, $15. That reduction in the value of money was the same as a tax; the difference was that the inflation tax would be hidden.
That’s what made the scheme beautiful from the standpoint of public officials — that most people had no idea that the government was behind the overall rise in prices. People would see prices rise on everything and blame it on rapacious businesspeople. Governments would even encourage this mindset by imposing wage and price controls or by whipping up anti-inflation campaigns, even while continuing to spend their newly printed money.
The Framers not only knew monetary history, they had had first-hand experience with monetary destruction. During the Revolutionary War, the Continental Congress had printed paper money called the “Continental.” To finance its expenditures, it printed so many Continental dollars that by the time the war was over, they were all worthless. At the time the Constitutional Convention was drafting the Constitution, everyone was still familiar with the phrase “Not worth a Continental.”
That’s not to say, however, that it was impossible to plunder and loot people through debasement of coinage. Rulers were notorious for doing that long before Gutenberg invented the printing press. The king would issue, say, royal gold coins certified to contain one ounce of gold. When the coins entered the realm in payment of taxes, the king would shave off the edges and melt the shavings down into new coins. He then would put the old coins back into circulation even though they contained less than the one ounce of gold they were represented to contain. At the same time, the king would make his coins “legal tender,” or official money, in the realm. No one was permitted to question the credibility of the king’s legal tender even if they contained less gold than their face value represented them to contain.
Thus, theoretically that could have turned out to be the case with America’s gold-coin, silver-coin standard. The federal government could have done what rulers throughout history had done and begun debasing its gold coins and silver coins. It never did that. The American people experienced the longest period of sound money — more than a century — in history.
An exception occurred during the Civil War. Abraham Lincoln’s war expenditures were skyrocketing. Having raised taxes to the highest levels possible to finance his war, Lincoln decided to resort to the time-honored device to which rulers throughout history had resorted — the printing press. He began printing large amounts of debt instruments and using those to pay people. Since the debt instruments promised to pay people gold coins, people were willing to accept them in lieu of the actual gold coins.
Problems arose when people realized that the Lincoln regime could not honor all of the debt instruments that it had put into circulation. That risk caused the Lincoln notes to begin trading at a discount. In other words, let’s say that a federal note promised to pay the holder $10 in gold. Lincoln then begins inflating the amount of federal notes. Someone walks into a store and sees something that has a price tag of $10 on it. He pulls out his federal note promising to pay the holder $10 and offers it to the storekeeper. The storekeeper says no. He’ll only take a $10 gold eagle in payment. If the customer insists on paying in notes, the storeowner will insist on payment of a $15 note, in order to cover the risk of default by the Lincoln regime.
What did Lincoln do then? He resorted to another time-honored way to plunder and loot people through inflation. His regime simply made federal notes “legal tender” for all debts. That meant, in our example above, that the storeowner would be legally required to accept at face value the devalued notes of the Lincoln regime. He would have to accept a $10 bill when it was only worth, say, $7 in the marketplace.
There were people damaged by Lincoln’s legal-tender law. One of them was Henry A. Griswold, who was the holder of a promissory note for $1,000 from one Susan P. Hepburn. When the note came due, Hepburn tendered $1,000 in Lincoln’s paper money to Griswold in payment of the note. The problem was that the paper money was selling at a discount in the marketplace, which meant that Griswold was receiving less in gold than the two parties had contracted for.
Hepburn v. Griswold ended up in the U.S. Supreme Court. In 1870, the Court held that Lincoln’s legal-tender law was unconstitutional. The Court held that while the federal government had the power to coin money, the Constitution did not give it the power to make paper money legal tender. It also held that the Constitution did not give the federal government the power to impair contracts, which Lincoln’s legal-tender law had clearly done.
Less than a year later, owing solely to a change in justices on the Supreme Court, Hepburn v. Griswold was overruled in Knox v. Lee and Parker v. Davis. The Court held that Lincoln’s legal-tender act was justified during a time of national emergency. The dissent of Justice Stephen J. Field explained what was happening and foretold what was to come:
The power to commit violence, perpetrate injustice, take private property by force without compensation to the owner, and compel the receipt of promises to pay in place of money, may be exercised, as it often has been, by irresponsible authority, but it cannot be considered as belonging to a government founded upon law…. From the decision of the Court I see only evil likely to follow.
Lincoln’s legal-tender law was later repealed, and America returned to its gold-coin, silver-coin standard.
In the late 1800s and early 1900s, however, America began moving in the direction of socialism, interventionism, and imperialism. Socialist programs such as
Social Security, national health care, public schooling, and minimum-wage laws were originating in Germany and winning support in the United States as part of the Progressive movement.
In 1898, the United States entered the Spanish-American War with the ostensible aim of assisting Spanish colonies to win their independence from Spain. The real aim was to acquire such colonies for the United States, beginning a shift toward empire and foreign intervention.
A big problem with a shift toward socialism and imperialism was expense. Socialism and imperialism are expensive. If the federal government were to go down that road, it would require significant increases in federal taxes, which posed a big problem for federal officials because America had no federal income tax.
For more than a century, Americans had lived without federal income taxation. People were free to keep everything they earned and decide for themselves what to do with it. The result was a massive accumulation of capital, which made workers more productive, leading to tremendous increases in real wage rates and standards of living in America. Combined with sound money, open immigration, and few economic regulations, America became the most economically prosperous society in history and, also, the most charitable society in history.
There was always the possibility of shaving the edges off America’s gold coins when they entered the federal government’s coffers in payment of taxes, as kings of old had done. The American people, however, would never have put up with that. Moreover, the tradition of sound money was too well-established for the federal government to try such a thing.
In 1913, there were two significant events, both of which permitted the federal officials to begin breaking out of their financial straitjacket. In that year, Americans adopted a federal income tax and the Federal Reserve System, both of which enabled Woodrow Wilson to embroil the United States in World War I with the foolish aim of “making the world safe for democracy” and ending all future wars.
The establishment of the Federal Reserve was consistent with the overall trend toward socialism. The Fed was based on the socialist principle of central planning, in that it was given the power to centrally plan the amount of U.S. debt instruments being introduced into the economy. As with other socialist programs, the result was a disaster.
Throughout the 1920s, the Fed over-issued federal debt instruments, creating an artificial economic boom during the “roaring 20s.” When people began demanding the gold coins that the notes promised to pay, the Fed panicked and over-contracted the supply of debt instruments. That caused the stock-market crash in 1929, which was then followed by the Great Depression.
Franklin Roosevelt blamed the economic crisis on the failure of America’s “free enterprise” system rather than place responsibility where it lay — with the Federal Reserve. He then used the crisis to revolutionize America’s economic system. The primary purpose of the federal government became to take care of people through welfare-state programs. That’s what Social Security was all about, a socialist program that had originated in Germany. He also converted the federal government into a manager of the economy and a regulator of economic activity. In 1941, with his political machinations against Japan, he was able to embroil the United States in another foreign war, leading to a long road of costly foreign interventionism.
To ensure that the federal government would never have any problems paying for this new socialist, imperialist, and interventionist direction, the Roosevelt administration decreed an end to America’s gold-coin standard. Gold ownership by Americans was made illegal. Even though gold coins had been the official money established by the Constitution and had been the official money for more than 100 years, Roosevelt made it a felony offense for Americans to own non-numismatic gold coins. Everyone was required to deliver his gold to the federal government and was given irredeemable federal notes in return.
Roosevelt’s nationalization of gold ranks among the most tyrannical acts in the history of the United States. It was no different in principle from what the communist regime in the Soviet Union was doing.
During the Nixon administration, the federal government announced that it would no longer honor international obligations payable in gold. Instead, such obligations would be paid in irredeemable paper notes.
The floodgates were now open for unrestrained federal spending for socialist, imperialism, and interventionist programs. The constraints that the Framers had placed on the federal government were gone — and without even the semblance of constitutional amendments.
The finest monetary system in history was destroyed, and the federal government became one gigantic engine of plunder and looting of American taxpayers, both directly through the progressive income tax and indirectly through the inflationary policies of the Federal Reserve.
There is but one solution to all this socialist, imperialist, and interventionist mayhem: economic liberty. That means a repeal of all socialist programs, including Social Security and Medicare, the end of all imperialism and interventionism, the restoration of a limited-government republic, the repeal of the Federal Reserve System, and the adoption of a free-market monetary system.
This article was originally published in the February 2020 edition of Future of Freedom.