The rise of Bitcoin as an alternative currency raises some important questions about America’s monetary system. Why does the United States have a fiat-money system — that is, a system of irredeemable paper currency? Why aren’t Americans free to use any money they want? What is the role of legal-tender laws in America’s monetary system? What role does the Federal Reserve play? Why is there FDIC insurance?
Most important, is America’s modern-day monetary system consistent with the principles of a free society?
To find the answer to those questions, let’s begin with an examination of the U.S. Constitution, the document that brought the federal government into existence.
By the time the Framers met at the Constitutional Convention to propose changes to the country’s governmental system, the country had been operating under the Articles of Confederation for several years. After the break from England, the states had come together under a confederation, one that provided for a national government with very limited, weak powers. In fact, the national government under the Articles didn’t even have the power to tax.
The primary reason for that type of governmental structure was that the American people ardently opposed the concept of a strong, centralized national government. As Englishmen, they had experienced firsthand what it was like to live under a powerful central government and, even worse, one that was an empire, and they had not liked it. That was why they had been willing to take up arms against their own government and secede from the British Empire.
When the delegates to the Constitutional Convention met, it was with the object of proposing changes to the Articles of Confederation. To the surprise of nearly everyone, they did not come up with a plan to modify the Articles. Instead, they came up with an entirely new governmental system, one that provided for a federal government that had significantly more power than the national government under the Articles of Confederation.
Americans were not happy. Despite the many problems that had arisen under the Articles, the last thing people wanted was another strong, centralized national government similar to the one against which they had recently rebelled.
The Framers had an answer to their concerns. They pointed out that the new government would be called into existence by the Constitution, whose very terms would outline its powers. That is, unlike other governments throughout history, it would not be a government of unlimited power to do whatever it deemed in the best interests of the citizenry. Instead, its powers would be limited to those few enumerated in the Constitution itself, along with those that would be “necessary and proper” for carrying out the enumerated powers.
Thus, to determine whether the federal government could legally wield a certain power, it would be unnecessary to search for an express restriction on such power in the Constitution. Instead, one would simply examine the list of powers enumerated in the Constitution. If the power wasn’t among those enumerated or “necessary and proper” to carrying out an enumerated power, it simply could not be legally exercised.
Under the Constitution, it was different with respect to the states. They would retain full sovereignty over the citizens under their jurisdiction except where the Constitution expressly restricted the exercise of a particular power.
Thus to determine whether a state could legally wield a certain power, one would search the Constitution to determine whether the state was expressly prohibited from exercising it. If there was no restriction, the state could legally exercise it. If there was a restriction, the state could not exercise it.
Of course, the powers of the state governments were restricted by their own state constitutions, which spelled out what those governments might and might not do.
Why didn’t the Framers simply propose a federal government with the omnipotent power to do whatever it deemed to be in the best interests of the citizenry? Because they didn’t want that type of government, and they knew that the Americans people would never have accepted that type of government.
The structure of the governmental system that the Constitution brought into existence is a testament to the distrust that our American ancestors had in a strong central government. Not only were powers limited to those enumerated in the document, the government was also divided into three separate branches in the hope that such division would keep the federal government weak.
Moreover, soon after the Constitution was accepted, ten amendments were added, emphasizing the concerns that Americans had over the bad things that their new government could do to people — the types of things that tyrannical regimes had done to people throughout history, including the British regime against which they had recently rebelled.
Among the worst and most tyrannical acts that they were concerned with was governmental debasement of the currency. Throughout history, governments had plundered and looted the citizenry through monetary debasement. Prior to the invention of the printing press, gold coins and silver coins had circulated as money. That didn’t stop kings from debasing the currency.
For example, when coins came into the realm, say, for the payment of taxes, government officials would often shave the edges around the coins, leaving, say, a one-ounce coin weighing less than one ounce. They would then take the shavings, melt them down, and create a new coin that they could spend on their ever-growing number of governmental projects or imperial military adventures. That process of monetary debasement was known as “clipping the coin.
As bad as clipping the coin was, however, it paled in significance in comparison with inflation associated with paper currency. With the invention of the printing press, there was virtually no limit to how much money the king could print and spend in the marketplace to fund his projects and programs. The influx of newly printed money would result in a decrease in the value of everyone else’s money.
The beauty of that type of monetary debasement, from the standpoint of the government, was that the citizenry often couldn’t figure out that it was the king’s inflation of the money supply that was the cause of rapidly escalating prices within society. Thus the citizenry would often embrace the king’s condemnation of rapacious businessmen in the private sector and his imposition of harshly enforced price controls against them.
When the delegates met at the Constitutional Convention, Americans had just recently experienced the hyperinflation of the Continental currency, the paper currency that Congress had overissued during the Revolution. The popular phrase at the time “Not worth a Continental” reflected the results of that period of severe monetary debasement.
Thus, the last thing that the Framers wanted to bring into existence was a federal government with the power to debase the currency, not only because they understood the evil in such a system, but also because they knew that the respective states would never approve the Constitution if the government had such a power.
On the contrary, what the Framers instead wanted was to bring into existence a monetary system based on sound money — a system by which the federal government would be precluded from plundering and looting people through inflation.
To determine the nature and extent of the federal government’s monetary powers, we must examine the list of enumerated powers within the Constitution. Keep in mind, once again, that if a certain power isn’t enumerated in the Constitution (or necessary and proper to carrying out an enumerated power), that means that the federal government is precluded from exercising it.
Keep in mind also that it’s different with the states. They have the sovereign power to do whatever they want unless there is a specific restriction in the Constitution.
Three important questions naturally arise, especially in the context of the type of monetary system we have today: Does the Constitution delegate to the federal government the power to issue paper money, either redeemable in gold or silver or something else, or redeemable in nothing but other paper money (i.e., fiat money)? Is the power to make paper money legal tender among the federal government’s enumerated powers? Is the establishment of a central bank, e.g., a Federal Reserve, among the federal government’s enumerated powers? How about the establishment of a federal insurance program to insure people’s deposits in banks?
The answer to all of those questions is: No. None of those powers is among the enumerated powers of the federal government in the Constitution.
Instead, the only monetary power that the Constitution expressly delegates to the federal government is the power “to coin money, regulate the value thereof, and of foreign coin.”
We do find references to monetary issues within the Constitution that are directed to the states. The states are expressly prohibited from emitting “bills of credit,” which was the term used at that time for paper money. They are also expressly prohibited from making anything but “gold and silver coin a tender in payment of debts.” The states are also expressly prohibited from enacting any law “impairing the obligation of contracts.”
Does the fact that the Constitution places no such express restrictions on the federal government mean that it may wield the power to do those things that the state governments are expressly prohibited from doing? No! Again, remember that the test for determining whether a federal power is permitted is whether such power is among those that are expressly enumerated. If it’s not enumerated, the federal government may not exercise it.
Since the enumerated powers expressly delegated to the federal government do not include the power to issue paper money (i.e., “emit bills of credit”) or to make paper money legal tender, the federal government is precluded from doing such things even though the document does not expressly prohibit the federal government from doing them. The only monetary power that the federal government was given was the power to coin money and regulate the value thereof and of foreign coin.
Thus, the U.S. Constitution brought into existence the most revolutionary monetary system in history, one that was based on gold coins and silver coins serving as the official money of the United States. It was a system in which people could rely on sound money for their economic transactions indefinitely into the future, a monetary system by which people could be assured that the government lacked the power to plunder and loot them through inflation.
The enumerated power to “coin money,” combined with the failure to grant the federal government the power to issue paper money, combined with the restriction on the states from issuing paper money, combined with the prohibition on the states from making anything but gold and silver coins legal tender could mean only one thing: The Framers intended the U.S. monetary system to be based on a gold-coin, silver-coin standard.
That intention was demonstrated soon after the federal government came into existence. In the Coinage Act of 1792, Congress established the U.S. Mint, which was charged with the responsibility of issuing official U.S. gold coins and silver coins as the new official money of the United States.
The basic unit of currency would be called “the dollar.” It would consist of a silver coin, commonly known as a “silver dollar,” which would contain a specified weight and fineness of silver. There were also half-dollars, quarter-dollars, dimes, and half-dimes, all of which were made of silver.
Ten silver dollars would be equal to a $10 gold coin, called an Eagle, which would contain a certain defined weight and fineness of gold. Another gold coin, a Half Eagle, would be smaller and be equal in value to five silver dollars. Quarter-eagles would be equal to two and a half dollars.
This system became known as the “gold standard.” Notice something important about it. It wasn’t a paper-money system “backed by gold,” as so many commentators today suggest. That’s because there wasn’t any federal paper money at all, including paper money backed by gold. Remember: the Constitution didn’t empower the federal government to issue paper money.
Instead, the gold standard was a monetary system in which gold coins and silver coins were the official money of the United States. That’s the system that the Constitution brought into existence. That was the system that was used in the United States for more 100 years. That’s the system that prevented the U.S. government from plundering and looting the American people through monetary debasement. Combined with such things as open immigration, no income taxation, minimal regulation, and no welfare, it was a monetary system that contributed to the tremendous outburst of economic growth and prosperity that characterized 19th-century America.
That is obviously not the type of monetary system we have today, which is one based on fiat money — that is, paper money denominated by notes that promise to pay nothing and that are irredeemable in nothing but other paper notes — a system by which the U.S. government has been able to plunder and loot the American people through monetary debasement for more than 100 years. It’s not a coincidence that what is denominated as a “dollar” today has approximately 5 percent of the value the dollar had back in 1913, when the Federal Reserve was established.
How did that happen? How did that radical change in the monetary system occur, without even the semblance of a constitutional amendment? The story begins with the Civil War and culminates in the economic chaos of the Great Depression.
This article originally appeared in the May 2014 edition of Future of Freedom.