Thursday, November 20, 2008

Ben Bernanke, Henry Paulson and Alexander Hamilton


Until the last few months, the Federal Reserve and Treasury Department have had a near monopoly on America’s monetary system. But now, with the advent of financial crises, corporate bailouts, market meltdowns, credit crunches, housing losses, bank takeovers and actual recession, the federal government’s unprecedented and ruinous monopoly over the financial affairs of the United States has become complete.

The United States government’s money monopoly has been created by numerous federal laws passed by Congress, approved by various Presidents, and upheld as constitutional by the Supreme Court of the United States.

If this monopoly and its devastating consequences for capitalism and the free market are ever to be broken, Americans must first understand its roots and how it grew into the political monster it is today.

The Historical Roots[1]

The belief that government should have a monopoly on money was not an invention of the United States. Five hundred years before Christ, Solon, King of Greece, used his “sovereign” prerogative to control and debase that country’s coinage in order to support his military adventures, and to redistribute wealth from creditors to debtors. Similarly, over many centuries a long succession of Roman emperors steadily debased that empire’s money in order to fund their expenditures when they couldn’t raise taxes any higher.

Eventually, the justification for government control of money was simply that it had always been so.

In the Dark Ages, an integral part of feudalism was that monetary affairs were the exclusive province of monarchs.

A landmark English legal case in 1604, the Case of Mixed Money, provided a clear, unequivocal statement of the relationship between government and money:

"And so it is manifest, that the kings of England have always had and exercised this prerogative of coining and changing the form, and when they found it expedient of enhancing and abasing the value of the money within their dominion: and this prerogative is allowed and approved not only by the common law, but also by the rules of the imperial law."[2]

Money and the Constitution of the United States

The birth of the United States ushered in a new era in the relationship between the individual and government. In a bold statement, the Founding Fathers recognized that man had “unalien­able” rights. Individual liberty was not to be subordinate to the whims and caprice of political rulers.

Unfortunately, however, the question of the individual's right to freedom in monetary affairs was not so clear. The Constitutional Convention of 1787 grappled with the questions of government authority over money. As one commentator noted:

"Once the Convention was under way, proposals that the Federal Government be given the power to coin money and to fix its value and that both the Federal and State governments be vested with authority to emit bills of credit triggered heated debate over the appropriate limits of governmental monetary power."[3]

When the work of the delegates was finished, the constitutional monetary power that emerged in Article I, Section 8, was brief and unambiguous. Congress was given the power only:

“To borrow money on the credit of the United States.”

“To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.”

“To provide for the punishment of counterfeiting the securities and current coin of the United States.” (My Emphasis.)

At the same time, lest there be any doubt where the monetary power reposed, Article I, Section 10 of the Constitution, provided that: “No state shall . . . coin money . . . [or] make anything but gold and silver coin a tender in payments of debts. . . .” (My emphasis.)

These few monetary powers expressly delegated to the federal government by the Constitutional Convention, together with the powers expressly denied to the states, constitute the aggregate “money powers” of the Constitution. As such, they are the root of government power over monetary affairs in the United States.

What that root grew into, few if any of the Founders would have recognized.

First Test of Constitutionality

The first question regarding the nature of the federal government’s monetary power, as defined by the new Constitution, came in early 1791. Legislation to create the first Bank of the United States was proposed in Congress. Both the attorney general and Secretary of State Thomas Jefferson concluded that the proposed bank was unconstitutional. Alexander Hamilton, then secretary of the treasury, disagreed.

What Jefferson and Hamilton disagreed about was not whether government possessed the power to enter the banking business, but rather what level of government—state or federal—possessed that power. Their dispute was not over the principle but over its application. More important, Hamilton's conclusion that Congress had the power to charter the bank was based on his contention that the federal legislature possessed powers beyond those specifically delegated to it in the Constitution.

Even though Congress lacked the constitutional power to charter a bank, and even though the argument in support of the power’s existence relied in part on an assumption of extra-constitutional powers, Hamilton’s opinion prevailed. President George Washington signed the bank bill into law, and the first Bank of the United States came into being.

The test of the constitutionality of the bank (and thus of the power of government in monetary affairs generally) did not come before the Supreme Court until the charter of the First Bank of the United States expired, and Congress had authorized the incorporation of the Second Bank of the United States.

The bank opened a branch in Baltimore, Maryland, and the state legislature attempted to levy a tax on the institution, which it later sued to collect.

Superficially, the question to be decided was whether the Maryland law taxing the federally established bank was constitutional. Implied in that question, however, was the more basic one of the extent of federal power.

The bank case is known as M'Culloch v. Maryland, and it is without doubt among the most important ever decided by the Supreme Court, in two respects.

First, the Court agreed with Hamilton's contention that the government possessed powers beyond those specifically delegated to it in the Constitution.

Second, the Court upheld the constitutionality of the bank, and thus of Congress’s power to charter it. The monetary power the federal government possessed, according to the Court, could be ascertained not only by reference to the Constitutional document itself, but also by recourse to the concept of “sovereignty.” Although the nation had supposedly rejected the concept of “sovereign rights” in our Declaration of Independence, the Court resurrected it in M’Culloch.

The Legal Tender Cases

The next test of the constitutionality of government monetary power was the Legal Tender Cases.

In order to finance the Civil War, the government issued “greenbacks” (currency run off government printing presses, with green ink on the back) and enacted the first “legal-tender” laws. The laws made the newly printed paper currency legal tender for paying not only import duties, but private debts, as well.

As the circulation of paper money coming off the government’s printing presses increased, all the fiat currency necessarily fell in value. Creditors who had loaned full-value dollars backed by metal were forced to accept depreciated paper currency in payment of their notes and mortgages.

A series of lawsuits ensued, and the Supreme Court was once again called on to settle the dispute. As expected, the Court stood firmly behind the existence and exercise of government power. In each of the cases, the legality of the legal-tender laws was upheld.

After the Legal Tender Cases had firmly established the monetary philosophy started by the sovereign rulers of Greece and Rome, and resurrected by Hamilton, all that remained were logical extensions of that philosophy.

In subsequent cases, the right of individuals to mint and circulate coins was struck down ( Ling Su Fan v. United States), and the Court asserted the government possessed “sovereign rights” over the entire banking system (Noble State Bank v. Haskell).

The final blow to individual liberty, capitalism and the free market as they related to the monetary system came with the Gold Clause Cases. In Franklin Delano Roosevelt’s bid to prevent Americans from withdrawing the gold they had deposited in good faith in the nation’s banks, in 1933 he simply outlawed the private ownership of the metal.[4]

Many individuals had foreseen a depreciation of currency coming, and when entering into contracts they had inserted clauses giving them the option of being paid either in dollars or in a specified amount of gold. With gold outlawed, the debtors were relieved of this burden. They could pay off debts in depreciated, legal-tender currency.

Holders of gold-clause bonds and contracts sued, and the cases eventually reached the Supreme Court of the United States. No one should have doubted the result. Chief Justice Hughes summed up the Court's position:

"The contention that these gold clauses are valid contracts and cannot be struck down proceeds upon the assumption that private parties . . . may make and enforce contracts which may limit [Congress’s] authority. Dismissing that untenable assumption, the facts must be faced. We think that it is clearly shown that these clauses interfere with the exertion of the power granted to Congress . . . ."

Imagine that!

Existing private contracts had gotten in the way of later Congressional power over gold ownership in particular and the monetary system generally. What an inconvenience![5]


An ocean had been crossed, a revolution fought and won, a Constitution debated, promulgated, and approved, and still the age-old sovereign power over monetary affairs persisted.

The story of how the United States government has come to possess its enormous power over our entire monetary system is not an uplifting one. It is sad to realize how the basic intention of our Founding Fathers at the Constitutional Convention was subverted by ideas foreign to the principles of capitalism and the free market--ideas that had animated this nation’s formation. Even sadder is the realization that the subversion was occurred through the collusion of all three branches of our federal government.

In light of recent events it should now be obvious that capitalism and the free market, monetary freedom and economic stability, cannot be attained simply by controlling or even abolishing the powers of Mr. Bernanke and his money-manipulating Federal Reserve or Trillion-Dollar-Tsar Paulson’s Treasury Department.

Indispensable to restoration of the Founders’ vision of limited government in general, and enumerated monetary power in particular, is an understanding by the American people that allowing the President, Congress and the Court to manipulate money, with the ghost of Alexander Hamilton looking over their shoulders, is merely to emulate the sovereigns of history—with the disastrous results that swamp us today.

[1] For a book-length treatment of the subject discussed in this essay, see "Government’s Money Monopoly," published by iUniverse and available at

[2] Pursuit of the Case of Mixed Money through the corridors of history finds it used as a precedent 250 years later in America's Legal Tender Cases and roughly half a century after that in the Gold Clause Cases.

[3] Getman, “The Right to Use Gold Claues in Contracts,” XLII Brooklyn Law Review, 479, 489 (1976).

[4] The most thorough historical discussion of Roosevelt’s illegalization of private gold ownership is the article entitled “How Americans Lost The Right To Own Gold And Became Criminals In The Process.” Long out of print, it may be located by a Google search.

[5] For a book-length treatment of the subject discussed in this essay, see "The Gold Clause: What It Is and How To Use It Profitably," published by iUniverse and available at