The essay which appears below is the Introduction to my book Government’s Money Monopoly, discussed in my previous blog (which should be read as the predicate to this essay).
I want to remind you that Government’s Money Monopoly was written and published in 1981, nearly thirty years ago. I mention this because as I re-read my Introduction, it seems that the essay could have been written today.
Each day, the news media report still another example of the government's intimate and extensive involvement in the nation's monetary system:
- "In an effort to ease a nationwide shortage of mortgage loan money, the Administration moved today to make millions of dollars available to savings and loan associations for home loans."
- "The unexpected Senate approval of a six-month moratorium on foreign purchases of American commercial banks has both pleased and surprised the banking community."
- "In announcing the Administration's support for Federal loan guarantees to help save the Chrysler Corporation, the Secretary of the Treasury, called the Chrysler crisis a `unique' situation. . . ."
- "Government officials indicate that Washington might find a way to purchase mortgages from troubled savings banks or that the Federal Reserve System might provide funds to savings banks unable to obtain funds elsewhere."
As Americans have experienced ever deepening economic difficulties—-among them unavailable mortgage money, soaring interest rates, double digit inflation, crushing tax burdens—many have been starting to discern a connection between federal monetary power and their personal financial problems.
Some of the victims, as they become increasingly aware of government manipulation of the monetary system, have been groping for answers.
They have been looking in the wrong place.
The answer to what has been happening to them is not to be found in the empty rhetoric of politicians or the ramblings of intellectually impotent academics, but rather in the recognition of a fundamental principle: the nature and extent of government power over monetary affairs depends entirely on the underlying political relationship between government and the individual.
Across history, invariably there has been a clear correlation between government's involvement in the monetary system and the extent of a society's freedom. As this book will demonstrate, the cause of the monetary problems that America faces today has been a statist attitude about the nature of government. That attitude had its genesis long ago in other lands, but it gradually took root in our soil and, nurtured by the Supreme Court of the United States, finally brought forth today's bitter fruit.
The story begins in Greece some five hundred years before Christ, with Solon's devaluation of that country's money. His reasons, the reader will note in Chapter 1, were not unlike those of present-day politicians. Rome's destiny was even more noticeably affected by the state of its monetary system. And in the Dark Ages, feudalism embodied the idea that monetary affairs were the exclusive province of the rulers—an idea that proved to be popular with Europe's absolute monarchs years later.
A strong sentiment did develop in England against a sovereign prerogative to debase money. Nevertheless, in the year 1604, a landmark English case reverted to the old feudal notion by holding that:
"... as the king by his prerogative may make money of what matter and form he pleaseth, and establish the standard of it, so may he change his money in substance and impression, and enhance or debase the value of it, or entirely decry and annul it...."
"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 money within their dominions: and this prerogative is allowed and approved not only by the common law, but also by the rules of the imperial law."
". . . although at the time of the contract and obligation made in the present case, pure money of gold and silver was current within this kingdom, where the place of payment was assigned; yet the mixed money being established in this kingdom before the date of payment, may well be tendered in discharge of the said obligation, and the obligee is bound to accept it; and if he refuses it, and waits until the money be changed again, the obligor is not bound to pay other money of better substance, but it is sufficient if he be always ready to pay the mixed money according to the rate for which they were current at the time of the tender."(1)
The "royal prerogative" rhetoric speaks volumes about the statist nature of the English government at that time. And while there was some disagreement in England about the extent to which the sover¬eign could debase money, the basic premise was accepted: some debasement was permissible.
That notion crossed the Atlantic from the mother country to the American colonies. At the beginning of Chapter 2, Professor Nussbaum observes that England "followed a definitely negative and prohibitive policy toward the monetary evolution of the American colonies." As in earlier times, there was a direct correlation between repressive political attitudes and the monetary system: England con-trolled its American colonies in virtually every important respect, and the Americans had little or no say in the enactment of laws which vitally affected them. The chapter goes on to explain how the in¬genious colonists attempted to free themselves from English monetary control. It also discusses their early experiences with paper money. The author contends that "monetary disputes proved a powerful factor in the revolutionary movement." The colonial ex-perience with paper money which grew out of those disputes had an important consequence: it substantially affected the monetary powers that would be granted to the new government, and withheld from the states, by the Constitutional Convention of 1787.
The Convention debates, set forth in part in Chapter 3, are eloquently revealing on two counts. They show that among the many issues which divided the delegates, federal monetary powers were one of the most important. The passionate exchanges that flew back and forth across the chamber also reveal the bias, pro and con, regarding paper money. But when the smoke had cleared, one side in the age-old battle between the individual and his government could claim a great, albeit partial, victory. The finest charter of human liberty ever struck by man had expressly provided for a minimum of government power over monetary affairs.(2)
Less than four years after the Convention, the Constitution's monetary powers once again divided the new nation's leaders. This time, the result would be different, and Chapter 4 shows how the seeds of broad federal monetary power were sown for the next two hundred years. Congress wanted to charter a bank. Washington was President; Randolph, his Attorney General; Jefferson was Secretary of State; and Hamilton, Secretary of the Treasury. The President had doubts about whether Congress's constitutionally delegated monetary powers extended to chartering a bank. Among the opinions he sought and received from cabinet officials, two stand out as classic political statements. In both Jefferson's and Hamilton's conflicting opinions can be found the essence of the statist view of government monetary power which would come to dominate future legislative and judicial thinking.
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. Moreover, essential to Hamilton's conclusion that Congress had the power to charter the bank, was his contention that the 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 the notion of extra-constitutional powers, Hamilton's opinion prevailed. Washington signed the bank bill into law, and the first Bank of the United States came into being. It operated without incident, and for nearly three decades there was little significant discussion about the broadened monetary powers of Congress.
By 1819, arch-federalist John Marshall had been Chief Justice of the United States for nearly twenty years. Like Hamilton, Marshall was an exponent of broad federal power in general, extensive government monetary power in particular, and "loose" construction of the Constitution. Therefore, when the constitutionality of the second Bank of the United States came before Marshall's Court in 1819, the idea that Congress had the power to charter that bank could not have had a more dedicated champion.
The case, M'Culloch v. Maryland, discussed in Chapter 5 and excerpted in Chapter 6, is without doubt among the most important ever decided by the Supreme Court of the United States—at least in two respects. First, the Court adopted Hamilton's approach to "loose" interpretation of the Constitution. Second, it upheld the constitutionality of the bank, and thus of Congress's power to charter it. The Court did so, however, by going outside the delegated powers themselves into the realm of the powers possessed by "sovereigns." The net result of the decision was that the powers of Congress, at least in monetary affairs, were not limited by the Con¬stitutional grant of power to that branch of government. The actual monetary power that the federal government possessed, according to the Court, could be ascertained by reference not only to the Instrument that created this nation, but also by recourse to notions of "sovereignty." sovereignty." Yet sovereignty, presumably, was exactly what the Founding Fathers had left behind when they took their first step down the road to independence on July 4, 1776. If Congress did possess such extra-constitutional powers, rooted in the concept of sovereignty, what had become of the "unalienable rights" of the Declaration of Independence? That question would be answered by the next test of the government's monetary powers to reach the Supreme Court—-the Legal Tender Cases.
Earlier in this Introduction I observed:
"The nature and extent of government power over monetary affairs depends entirely on the underlying political relationship between government and the individual. Across history, invariably there has been a clear correlation between government's involvement in the monetary system and the extent of a society's freedom.... [T]he cause of the monetary problems that America faces today has been a statist attitude about the nature of government."
At no time was this phenomenon more apparent than in the Civil War period.
While the North was fighting a moral war to destroy the blight of slavery, it was seriously curtailing the freedom of its own citizens. In 1861, the first federal income tax was imposed. In 1863, the first draft law was enacted in order to force unwilling conscripts into the Union army and onto the bloody battlefields of Chancellorsville, Gettysburg, Chickamauga. If the government believed it had the power to take the lives and money of its citizens, it is a small wonder that the same government enacted the Legal Tender Acts.
Chapter 7 describes how, ultimately, $450 million in "greenbacks" were forced on an unwilling public, who were compelled by law to accept them "in payment of all debts, public and private," even at their low of 38 cents on the gold dollar. As usual, the Supreme Court of the United States was a willing accomplice to Congress's usurpation of extra-constitutional monetary power. In the first important legal tender case to reach the Court, Hepburn v. Griswold, while a bare majority held that the act could not be applied to a debt contracted before legal tender became law, all the Justices agreed on the underlying principle of broad monetary power enunciated by Marshall in M'Culloch. It took less than eighteen months for Hepburn to be reversed by Knox v. Lee. The reasons make interesting reading, especially those which advert to the Court's attitude toward sovereignty, and to the government's view of what is "necessary."
The legal tender fight continued into the next decade, the last significant case coming before the Court in 1884. Juilliard v. Greenman put the finishing touches not only on the constitutionality of legal tender, but on the acceptance of Hamilton's theory concerning the inter¬pretation of the Constitution and the monetary powers of Congress. Hepburn, Knox, and Juilliard are excerpted in Chapters 8, 9 and 10 respectively. After the Legal Tender Cases had firmly established the monetary philosophy of the Mixed Money-Hamiltonian-M'Culloch axis, all that remained were logical extensions of that philosophy. An important one came in 1911, with the Supreme Court's decision in Ling Su Fan v. United States, excerpted in Chapter 11. The Court held that Ling Su Fan's privately-owned silver Philippine, pesos belonged to him only for certain purposes. The coins, it seemed, were of concern to the "sovereign," so Ling Su Fan was guilty of criminal conduct by exporting them from the Islands.
In another case, Noble State Bank v. Haskell, excerpted in Chapter 12, the Court asserted "sovereign rights" not over the coins of one individual, but over the entire banking business. In compelling a state bank to help insure its competitors' depositors against insolvency, the Court implied that private individuals operate banks at the sufferance of government. In a unanimous opinion written by Justice Oliver Wendell Holmes, Jr., the Court stated: ". . . The police power extends to all the great public needs. . . . It may be put forth in aid of what is sanctioned by usage, or held by the prevailing morality or strong and preponderant opinion to be greatly and immediately necessary to the public welfare." In other words, the government's perception of what is necessary takes precedence over individual rights.
In light of what preceded them, the legendary Gold Clause Cases can be viewed as the culmination of ideas and events that spanned three centuries. They are excerpted in Chapter 13. All the ghosts are there: the Case of Mixed Money, the Bank Controversy, M'Culloch v. Maryland, the Legal Tender Cases. Again, statist doctrines carried the day. Chief Justice Hughes put the point thus in his concluding paragraph in the Norman case:
"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 the Congress and certainly it is not established that the Congress arbitrarily or capriciously decided that such an interference existed."
The story of how the American 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 freedom and justice which animated this nation's formation. Even sadder is that-the subversion was done by the Supreme Court—the one institution of our government whose principal task is to uphold the Constitution.
What, then, can be done?
There are basically two courses of action, both of which are indicated in the book's conclusion.(3)
Unsurprisingly, the two courses of action I recommended thirty years ago have not been accepted, nor will they be in the foreseeable future, if ever.
The continued monopolization of money by the federal government—let alone in the incapable, collectivist-statist hands of the Greenspans, Bernackes and Geithners—bodes ill for a lasting reformation of the American economy into anything even remotely resembling a free-market system.
(1)It would be getting ahead of our story to pursue the Case of Mixed Money through the corridors of history. The reader may be tantalized to know, however, that the case shows up about 250 years later in America’s Legal Tender Cases and roughly half a century after that in the Gold Clause Cases.
(2)Regrettably, the Constitution contained some major contradictions. Towering above all others was its recognition of slavery, an obscene institution which should have been abolished on the Convention floor, no matter what the cost to the emerging nation. The existence of slavery side-by-side with the founding of this country substantially undermines the achievement of the Founding Fathers.
(3)For those readers who may wish to delve even more deeply into the subject of government monetary power, I have included at the end of the book all of the original footnotes from each of the selections that appear in the book.