Among the major threats facing the American people today is out-of-control spending at the hands of the U.S. government. It is a grave danger that people have faced throughout history from their own governments. After all, let’s not forget the oft-repeated claim by U.S. officials about how they brought down the Soviet Union — by causing the Soviet government to spend itself into bankruptcy and ruin.
When the Framers were deliberating over the Constitution, they were fully aware of the dangers to people’s freedom and well-being posed by a profligate government. As British subjects, they had experienced firsthand the ever-increasing taxes imposed by their king to finance his ever-growing expenditures. As revolutionaries, they had also experienced the ravages that come with the inflation of a currency to finance government expenditures. That’s what “Not Worth a Continental” referred to. As citizens living under the Articles of Confederation, they knew the damage that irredeemable paper money can bring to a society.
The first thing to keep in mind about the Constitution was its dual purpose: to bring into existence the federal government while, at the same time, protecting the nation from it. While the Framers understood the need for government, they also understood that that same government constituted the greatest danger to their freedom and well-being.
Thus, by its own terms the Constitution limited the powers of the federal government to a small number of powers that were enumerated in the document. To make certain that U.S. officials got the point — that the federal government was considered to be the greatest threat to the freedom and well-being of the American people — our ancestors demanded quick passage of 10 amendments to the Constitution. Naming the federal government as the primary threat to their freedom, the Bill of Rights expressly prohibited U.S. officials from infringing fundamental rights and expressly guaranteed important procedural protections as a prerequisite to searching, arresting, incarcerating, or otherwise punishing people.
Our ancestors realized that not only was the U.S. government the primary threat to such fundamental rights as free speech, freedom of religion, peaceable assembly, and gun ownership, it was also the major threat against personal wealth or private property. That’s why, for example, the Bill of Rights expressly prohibits U.S. officials from taking people’s property without due process of law or without just compensation.
The threat of inflation
The Framers also understood that there was an insidious, even fraudulent, way that government officials could seize people’s privately acquired wealth — through an indirect monetary method known as inflation. To protect themselves from that threat, they again used the Constitution.
First, while the enumerated powers that the Constitution granted the federal government included the power to borrow money, they did not include the power to issue paper money or to make paper money legal tender.
Second, the Constitution expressly prohibited the states from issuing paper money (i.e., “bills of credit”) and from making anything but gold and silver coin legal tender.
Thus, from the inception of our nation our American ancestors intended for the United States to operate under a precious-metals monetary system or, more specifically, under a monetary system in which people used gold and silver coins rather than paper money as the media of exchange.
What is vitally important to keep in mind is the reason our American ancestors did this: to protect the nation from the federal government and, specifically, from the ravages of out-of-control federal spending financed by ever-increasing amounts of freshly printed paper money.
Historically, among the most effective ways that governments have plundered their own citizens has been inflation. Directly taxing people gets them upset and even angry. Such anger can be threatening to government officials, especially when it spills over into rebellion or revolution.
Long ago, government officials figured out that it was much easier to seize people’s property through inflation, in large part because people lacked the astuteness to figure out what the government was doing to them. Even better, when the effects of inflation would begin manifesting themselves through rising prices, government officials knew that the propensity of people was to blame the problem on private businesses that were raising prices rather than on public officials who were inflating the currency. Best of all, government officials knew that as prices began rising, they could appear as saviors to the people by imposing price controls on those greedy businesses.
The inflation scheme had been going on long before the invention of the printing press. Here’s how the process worked:
As people engaged in the process of trading with one another, they found that barter could be a less-than-satisfactory mechanism. For example, suppose John is selling a bushel of wheat that Joe wants to purchase. Joe offers John a bushel of apples in exchange for the wheat but John isn’t interested in apples. He wants oranges. So Joe has to go out and find someone who has oranges before he can trade with John to acquire his wheat. But there’s no guarantee that the person who has oranges is going to be interested in Joe’s apples either.
Thus, over time people began using commonly traded items not only for their substantive use but also as a medium of exchange. Consider, for example, tobacco, an item that has sometimes served as money. Joe would go trade his apples for a bundle of tobacco, not with the intent of using the tobacco but solely as a way to purchase John’s wheat. While John wasn’t interested in Joe’s apples, he would be willing to accept the tobacco because he knew that other people would be willing to accept it in exchange for purchases he wished to make.
Gradually, people began turning to precious metals for this purpose. Businesses would be willing to sell an item for an ounce of gold because they knew that everyone else would be willing to do the same. Although gold supplies could increase owing to new discoveries, thereby lowering the purchasing power of gold, people felt that, by and large, the commodity held its value. Other advantages of gold were that it was easily transportable and easy to hide.
But weighing out a quantity of gold each time a trade took place was cumbersome. In response, private minters began minting coins with a fixed amount of gold in them. To facilitate trades, various gold coins would be minted, each one containing a different quantity of gold — e.g., 1 ounce, 1/2 ounce, or 1/4 ounce. For smaller transactions, silver coins were used, and even copper ones.
As in any other business, people turned to those minters who developed a reputation for honesty and integrity. Coins minted by those minters would be more readily accepted in the marketplace as containing the amount of gold represented to be in the coin.
People would use such coins not only to purchase goods and services but also to pay their taxes. They were the money that people used in their day-to-day transactions.
Clipping the coin
Ever-increasing government expenditures and ever-increasing resistance to high taxes caused government officials to look for other ways to raise revenues. The most effective method they came up with was inflation or what was called “clipping the coin.”
What government officials first did was take over the business of minting the coins. It wasn’t enough for government to simply enter the gold-minting business in competition with the private minters. That would obviously leave people free to choose between coins minted by private businesses and those minted by the government.
So the government would decree a monopoly on the minting of coins. That meant that only the government — or a private business appointed by the government — could mint coins. Every other minter was required by law to close down his operations, and new entrants into the minting business were prohibited.
As people paid their taxes with the government’s coins, government officials began shaving off a slight bit of gold around the edges of the coin before returning it into the marketplace in payment for goods and services. The total amount shaved off the coins added significant amounts of money to the state’s coffers.
Obviously, as government officials shaved off the edges of the coins, what was represented to be a 1-ounce gold coin was no longer a 1-ounce gold coin. As a result of shaving, the coin contained less than 1 ounce. Gradually, people began figuring that out, especially as the coins became smaller and smaller in size.
At that point the coin would begin trading at a discount in the marketplace. That is, a businessman selling an item for a 1-ounce gold coin would require not only the shaved coin but also, say, a couple of silver coins to compensate for the smaller amount of gold in the gold coin.
Needless to say, government officials didn’t like their coins’ being treated in such a shabby manner. It was an affront to the king. It was questioning his honor and integrity. The solution was to make the king’s coins legal tender, regardless of how much gold they contained. What that meant was that people were required by law to accept the government’s coins at face value for all economic transactions, including the payment of debts and the purchase of goods and services.
Inflation and the printing press
The invention of the printing press greatly facilitated the ability of government officials to seize people’s wealth through inflation. Here’s how the process worked. Let’s say the government needed an additional one million gold coins to finance its ever-growing expenditures. Reluctant to tax the citizenry, the government went into the marketplace and borrowed the gold coins from the citizenry. The loan would be evidenced by a promissory note, or “bill of credit,” promising to pay a fixed quantity of gold, e.g., a 1-ounce gold coin.
So far, so good, at least insofar as inflation was concerned. The government might be spending wildly but the money being spent was coming from either taxes or borrowing.
People began realizing that the government’s notes could be used as easily as gold coins to facilitate trade. That is, sellers would be willing to accept a government note promising to pay a 1-ounce gold coin because they were certain that the note was as good as gold. All that anyone had to do was demand that the government redeem the note by paying him the gold coin, and it would be done.
Then the problem started. Government officials, ever in need of more money to finance their ever-growing expenditures, figured out that only a certain percentage of people holding the notes would appear and demand their gold at any one time. Most of the notes would continue to circulate as money.
So government officials began cranking up their printing presses and printing lots of government notes that they then used to pay for goods and services in the marketplace. They had little concern that everyone would show up at the same time demanding redemption of all the outstanding notes.
For example, let’s say that on December 31 the government plans to receive tax revenues of one million 1-ounce gold coins. On January 1, it goes out and borrows one million gold coins, evidenced by the delivery of one million notes with a maturity date of one year, each one promising to pay the bearer a 1-ounce gold coin. On the following December 31, the government receives the million gold coins in tax revenue and the following day is prepared to pay off all the notes it issued when it borrowed the money.
However, on the maturity date government officials notice something important. On the maturity date, only 10 percent of the notes are offered for redemption. The other 90 percent continue being used to facilitate trade in the marketplace, with everyone’s having the assurance that he can cash in the note whenever he wants.
Realizing this, the government issues, say, 100,000 additional notes that it uses to pay contractors and suppliers. Those notes begin circulating in the marketplace just like the other ones. But there is now a significant difference: If everyone appears at the gold window and demands redemption, the government can’t make good on its promises. It has only the 1 million in gold that it collected from the taxpayers, not the 1.1 million that it has issued in notes.
As people begin discovering that there are more notes in circulation than the government is able to redeem, there is a rush for the gold window. Everyone wants his gold. No one wants to be stuck with a promise to pay gold if the promise cannot be fulfilled.
Moreover, the government’s notes start trading at a discount in the marketplace. That is, suppose a seller is selling an item for 1 ounce of gold. When a buyer offers him a government note promising to pay 1 ounce of gold, the seller demands the note plus a bit more to compensate him for the risk of default.
Just like the regimes of old, modern-day governments become outraged when people question their integrity and honor. Refusing to accept government notes at face value is considered a grave insult, one even akin to treason. That’s where legal-tender laws came into play. Under threat of severe punishment, government officials require people to accept their notes at face value, without any discount, no matter how many notes have been issued and no matter how serious the risk of default.
That sets the stage to examine the monetary system of the United States, a system that began with precious metals and has ended up with irredeemable paper money known as Federal Reserve Notes, a process that endangers the well-being of the American people and that threatens their nation with bankruptcy and ruin.
The Framers had experienced the ravages of paper money during the Revolutionary War and under the Articles of Confederation, and they were fully aware of how governments had plundered and looted their own citizenry with inflation throughout history. Therefore, the Framers used the Constitution to ensure that neither the states nor the federal government could ever do that to the American people.
The result was that from the founding of the nation and for more than a century, the money that the American people used was coins consisting of gold, silver, nickel, and copper. People became accustomed to transacting business with such coins. It was that type of monetary system — one in which people used coins made of precious and non-precious metals — that became known as “the gold standard.”
It wasn’t a purely free-market standard. The U.S. government was in charge of minting America’s coins and, therefore, of defining the weight and fineness of the coins. Moreover, the government established a policy of defining the exchange ratio between gold and silver, a price control that would inevitably be out of sync with changing market conditions and that often led people to hoard one metal or the other.
What was important, however, was that the monetary standard for the United States was a metallic one, not one based on paper money. It’s important to conceptualize what the u201Cgold standardu201D meant. It did not mean some exchange ratio between paper money and gold. Instead, the “gold standard” meant that gold coins, silver coins, nickel coins, and copper coins were the money that the American people had chosen to use in their society.
Liberty, power, and the Constitution
Let’s examine how the Framers used the Constitution to establish a government of limited powers and then examine how it protected Americans from the ravages of inflation with the establishment of a gold standard.
First of all, keep in mind the overall political philosophy that was guiding the Framers and the Americans during the founding of the nation. While Americans believed that a federal government was necessary, they also believed that it would nonetheless constitute the greatest threat to their freedom and well-being. Unlike so many Americans today, who view the federal government as their provider and caretaker, our American ancestors looked upon the federal government as a very dangerous entity, one that needed to be watched very carefully.
One can see this mindset most clearly in the Bill of Rights, which actually should have been called the Bill of Prohibitions. Behind every one of the prohibitions and guarantees in those Amendments was the conviction held by the people that in the absence of such express prohibitions and guarantees, the federal government would engage in the conduct that was prohibited or proscribed.
The reason that the First Amendment prohibited Congress from enacting any law abridging freedom of speech and freedom of the press, for example, was that in the absence of such an amendment, Congress would enact laws that would infringe such freedoms.
The reason the Second Amendment guarantees the right to keep and bear arms was that in the absence of such an express guarantee, federal officials would confiscate weapons from the citizenry in order to maintain order, stability, and obedience.
The same goes for criminal cases in which the government seeks to incarcerate and punish people. Express guarantees prohibiting unreasonable searches and seizures and cruel and unusual punishments, and relating to due process of law, right to counsel, and right to bail were included because our ancestors knew that federal officials would ignore the people’s rights and liberties in the absence of express restrictions.
The cornerstone of American society was private property, whose protection was guaranteed in the original Constitution as well as in the Due Process Clause and the Just Compensation Clause in the Bill of Rights. Realizing that the institution of private property was a necessary prerequisite for a free society, the Constitution and the Bill of Rights prohibited federal officials from arbitrarily confiscating people’s money, land, and other property. There was also an express restriction prohibiting the states from impairing private contracts.
All those enumerated powers and express prohibitions and guarantees reflected the mindset of the Framers. Since they viewed the federal government as the greatest danger to the freedom and well-being of the American people, they decided to use the Constitution not only to call the federal government into existence but also, at the same time, to limit its powers to those that were expressly enumerated.
In other words, one option would have been to delegate to the federal government general, unlimited powers to take whatever actions federal officials deemed to be in the best interests of the American people. That’s not the option the Framers chose, because they knew that such a government would inevitably oppress the citizenry.
What they did instead was to make it clear that the government the Constitution was calling into existence would be one with very few, limited powers. The federal government’s powers would be limited to those expressly enumerated in the Constitution. If a power wasn’t enumerated, the federal government couldn’t exercise it, even if federal officials deemed it to be in the best interests of the citizens.
The Constitution and gold
How did the Framers protect the American people from the ravages of inflation, which had beset people for centuries?
First, the Constitution granted the federal government the power to coin money and to regulate its value in accordance with a fixed standard of weights and measures.
Second, it did not grant the federal government the power to issue paper money or the power to debase the currency.
Third, while the Framers did grant the federal government the power to borrow, they refused to grant the power to make bills and notes legal tender. In other words, the government lacked the power to force people to accept its bills and notes in ordinary transactions or in payment of debts.
Fourth, the Framers expressly prohibited the states from issuing paper money, or what was commonly called “bills of credit.”
Fifth, the Framers expressly prohibited the states from making anything but gold and silver coins legal tender.
Thus, it was clear that the Framers intended the United States to operate on a precious-metals standard, one in which gold coins, silver coins, and copper coins were the money in society.
In fulfillment of that intention, Congress enacted the Coinage Act of 1792, which established the U.S. Mint and provided for the minting of coins that would be based on a dollar unit of value. For example, there were silver dollars and silver half-dollars and $10 gold Eagles and $5 Half-Eagles.
A heritage of economic liberty
While statists love to regale us with stories of how horrible the Industrial Revolution was, the truth is that compared with what had gone on before, the Industrial Revolution was providing people with the means to escape death by starvation. Before long and as wealth began being accumulated, people were not only surviving, they were actually prospering.
Part of the reason for this remarkable outburst in economic prosperity was the fact that our Americans ancestors had rejected income taxation. Thus, through most of the 19th century, Americans could keep everything they earned and there was nothing the federal government could do about it.
It was also a society in which there was a lack of economic regulation on the part of the government. That’s what “free enterprise” meant — economic activity that was free of government control.
There was no socialism — no Social Security, Medicare, Medicaid, public schooling, education grants, foreign aid, or welfare.
There was no large standing army, no foreign aid, no foreign wars, no entangling alliances, and no overseas empire.
There were no controls on immigration, except for a cursory health inspection at Ellis Island.
All those factors contributed to the unbelievable rise in the standard of living of the American people. People were going from rags to riches in one, two, or three generations. They included the thousands of penniless immigrants who were fleeing the lands of taxation, regulation, socialism, conscription, militarism, and empire to come to the land of self-reliance, independence, voluntary charity, and limited government.
Savings, capital, and gold
Another critically important factor in the economic prosperity, however, was the gold standard. For the first time in history, people felt safe from the threat that had besieged people throughout history — the threat that government officials would take away their wealth by debasing their currency.
Equally important was the positive effect that the gold standard had on capital markets. Companies were issuing bonds with a 100-year maturity date, with the proviso that the loan had to be paid back in a specified amount of gold or the same unit of value as when the bond was issued. In other words, no repayment in debased, inflated paper currency. Thus, people were willing to buy such long-term bonds because they didn’t fear being paid back in depreciated currency. The massive accumulation of capital, brought about by the absence of an income tax, the propensity of people to save, and the existence of sound money, were among the critical factors that brought about an enormous increase in real wages in the 19th century.
Since America’s money consisted of gold coins, silver coins, and copper coins, people knew that the federal government couldn’t easily inflate the currency. After all, it’s much more difficult to arbitrarily increase the supply of gold, silver, and copper than it is to increase the supply of paper money. Mining for precious metals can be expensive, while simply printing money off a printing press is much less onerous.
Of course, the federal government could have “clipped the coins,” as regimes of old had done, leaving the coins with less gold and accumulating the shavings for government use. But the federal government didn’t do that. While there were sometimes controversial adjustments in the weight or fineness of U.S. coins as well as in the exchange ratio between the coins, by and large U.S. coins were renowned for their quality and trustworthiness.
That’s not to say that there weren’t periodic increases in the supply of money, but at least they were localized or brought about by unusual market conditions rather than by government policy. A new gold discovery in California, for example, would increase the supply of gold overnight, causing prices of everything to go up in relationship to gold. It was the gold and silver coins that were the money, not the federal government’s dollar bills.
By and large, the American people had confidence in the ability of their coins to hold their value. The consequence was that people were saving vast amounts of money, oftentimes passing it from one generation to the next. Thus, not only could people leave their children large sums of money that had been accumulated from the fact that there was no income tax, but they knew that federal officials lacked the power to ravage those savings with inflation.
Borrowing and gold
What about the federal government’s power to borrow, which was among the enumerated powers granted in the Constitution? In principle, the power entailed nothing different from ordinary citizens’ borrowing money. For example, people would lend gold coins to the government.
To evidence the debt, the government would issue a promissory note, which promised to repay the lender the gold that was being borrowed. Everyone understood that it was the gold and silver coins that were the money, not the government’s notes. The notes were promises to pay money, not money itself.
Of course, there was nothing to prevent the federal government from simply printing an excess number of notes and using them to pay for goods and services in the marketplace, except that by doing so, it would run the risk that everyone would show up at the government’s gold window and demand to have the promissory notes redeemed in gold coin. Thus, an excess issue of notes would, at some point, result in the bankruptcy of the government. That possibility operated as a very real constraint on excessive government spending.
All this is like ancient history to today’s Americans. They’ve heard of the “gold standard” but it’s a vague concept in their minds. They might be somewhat aware that gold coins, silver coins, and copper coins once circulated in American society, but most of them have no idea of the integral part the gold standard played in the lives of our American ancestors.
Most Americans today have no idea why a gold standard was important to our ancestors. The notion that a gold standard was established to protect them from the federal government is an alien notion to most people.
To most people today, the gold standard was a system in which the federal government’s paper bills and notes were the real money, which was “linked” to some fixed amount of gold.
When people pull out a Federal Reserve Note from their billfolds or wallets, it never occurs to them to ask why it’s called a “note,” given that it’s not promising to pay anything. They have no idea that the “note” is a cruel reminder of a bygone era in which the American people once had a monetary system based on sound money rather than on irredeemable notes issued by the Federal Reserve.
What happened to the gold standard on which the United States was founded? What happened to all those gold and silver coins that Americans used to use in their day-to-day transactions? Why do people use irredeemable paper money today instead of coins made of precious metals? What happened to bring about such a monumental, even revolutionary, change in America’s monetary system? Why do so few Americans know what happened and why it happened?
The answers to those questions require an examination into the economic policies of two presidents: Abraham Lincoln and Franklin D. Roosevelt.
Abraham Lincoln and Franklin Roosevelt were the two presidents most responsible for the abandonment of sound money in the United States. These two U.S. presidents opened the floodgates to the monetary debauchery under which today’s Americans have suffered for their entire lives.
In waging war to prevent the Southern states from leaving the Union, Lincoln was faced with the age-old problem that rulers have faced throughout history: how to pay for the war’s ever-increasing military expenditures. One answer, of course, was taxation, but Lincoln was no fool. He knew that taxes were not popular among the citizenry, especially when they’re continually going up.
Thus, he resorted to another revenue-raising device, one that historically did not engender the same amount of animosity among people that taxes did. He simply borrowed the money through the issuance of government notes.
Keep in mind an important point here: The notes promised to pay dollars, which everyone understood were simply units of value reflecting the value in gold coins and silver coins. Ever since the country’s founding, the money that people used in their everyday transactions was gold coins and silver coins, along with copper coins for smaller transactions.
Since the Constitution permitted the federal government to borrow money, there was nothing unconstitutional about Lincoln’s decision to employ that method to finance the war. The problem arose when the federal government took one additional fateful step: It made the federal notes “legal tender.” That action converted the notes from simple evidence of a loan into “paper money.”
Why was a legal-tender law important to Lincoln and the Congress? They knew that when profligate governments borrow excessive amounts of money, their notes ultimately begin losing value in the marketplace compared with everything else. As more and more notes promising to pay gold are issued, the chances of default increase. If everyone appears at the government’s gold window at the same time and says, “I wish to redeem this promissory note for 10 gold Eagles,” there is a chance that the government will be able to pay off, say, only 70 percent of the note-holders before running out of gold.
Inflation and the Constitution
Thus, as more and more notes are issued, their relative value in the marketplace begins to drop. Suppose, for example, a federal agent walks into a dry-goods store and selects merchandise having a price of 10 gold Eagles. He hands the clerk a federal promissory note promising to pay 10 gold Eagles. The storeowner, however, knows that such promissory notes are trading at a discount. So he tells the federal agent, “Sorry, that’s not satisfactory. Either pay me 10 gold Eagles, or give me the note plus an additional 2 gold Eagles in exchange for the merchandise.”
Lincoln’s legal-tender law avoided that problem by simply dictating that every American had to accept federal notes at face value.
Yet that was precisely the reason that the American people had established a sound-money system in the Constitution. They knew that throughout history rulers had plundered and looted their own citizenry through inflation, first through such devices as “clipping the coin” and later through the issuance of paper money. Through the Constitution, the Framers intended to establish a monetary system by which the American people would forever be protected from the ravages of inflation. Lincoln’s legal-tender law effectively removed that protection.
Let’s assume that in 1860 Peter lends Paul the sum of $1,000 in gold coins. The loan is evidenced by a promissory note in which Paul promises to repay the sum of $1,000 in gold coins. The loan, principal and interest, is due three years from the date of issuance.
When the loan comes due in 1863, Peter demands his money. Paul tenders to Peter federal promissory notes totaling $1,000 and cites Lincoln’s legal-tender law, which permits him to use federally issued paper money to pay his debts. Paul refuses the tender of the notes because in the marketplace the notes are trading for only $700 in gold coins. He demands payment in the money standard that the loan originally called for.
The Legal Tender Cases
That was the issue in the Legal Tender Cases, which are among the most significant cases in the history of U.S. Supreme Court. When Lincoln’s legal-tender law came before the Supreme Court in the case of Hepburn v. Griswold (1870), the Court held that the law was unconstitutional.
However, because of a change in the makeup of the Court — two new justices were named by President Grant (!) within two years of the Hepburn decision — the ruling was overturned and the constitutionality of Lincoln’s legal-tender law was upheld in the cases of Knox v. Lee and Parker v. Davis.
The thrust of the argument sustaining the constitutionality of Lincoln’s legal-tender law was that since the Constitution granted Congress the power over the nation’s monetary system, it was the prerogative of Congress to use such power to issue paper money and force people to accept it with a legal-tender law.
It was, however, a spurious argument, as the justices who voted against the constitutionality of the legal-tender laws pointed out.
Recall, first of all, that the Constitution expressly prohibited the states from making anything but gold and silver coin legal tender. The Constitution also expressly prohibited the states from issuing “bills of credit,” a term that meant paper money.
Obviously, restrictions on the power of the states do not operate as restrictions on the powers of the federal government. But those specific restrictions on the states do provide a clear expression of the type of monetary system that the Framers intended for the United States — one based on gold coins and silver coins.
Why didn’t the Framers use the Constitution to expressly restrict the federal government in the same way as they did the states?
Recall that the Constitution brought into existence a government of limited powers that were expressly enumerated in the Constitution. Therefore, there was no need for the Framers to impose specific restrictions on federal power. To determine whether the federal government could exercise a particular power, all that people had to do was simply examine the list of enumerated powers. If a power was not listed, then the power could not be legally exercised.
Thus, since the Constitution did not give the federal government the power to issue paper money or bills of credit, such power couldn’t be constitutionally exercised, even though there was no express prohibition against issuing paper money or bills of credit.
By the same token, while the Constitution did give the federal government the power to borrow money, it did not give it the power to make its promissory notes legal tender. Therefore, under the doctrine of limited, enumerated powers there would have been no need to include an express restriction on the power to enact legal-tender laws.
We should also note the importance that the Framers placed on the sanctity of contracts, as reflected by the Constitution’s express restriction on the states from impairing contracts and their decision to not delegate the power to impair contracts to the federal government. That would be especially important to a person who had lent money pursuant to a loan contract that provided for repayment in the same standard of money under which the money had been lent.
Coins versus paper
Was the Constitution silent on federal power with respect to money? Absolutely not. The Constitution expressly gave Congress the power “to coin money, regulate the value thereof, and of foreign coin.” That power made it clear that the intent of the Framers was to bequeath a monetary system to the American people based on gold coins and silver coins.
Obviously “to coin money” means to make coins out of metal, not out of paper. “To regulate the value thereof” obviously means to define how much gold and silver each coin will comprise.
Thus, given the express restrictions on the states prohibiting them from making anything but gold and silver coin legal tender and prohibiting them from issuing paper money, and given no delegation of power to the federal government to do those things, and given the expressly granted power to Congress to coin money and regulate the value therefore, how in the world could anyone rationally arrive at the conclusion that the Framers intended to permit Congress to establish a paper-money system, especially one in which people would be forced to accept devalued or even irredeemable paper notes as money?
Yet that’s precisely what the Supreme Court held after the addition of the two new justices appointed by President Grant. The dissenting justices in Knox and Parker correctly pointed out that the result was that the American people would now be subject to being ravaged by the very inflationary measures that the Framers intended to protect them from. As dissenting Justice Stephen J. Field put it,
Speaking of paper money issued by the states — and the same language is equally true of paper money issued by the United States — Chief Justice Marshall says, in Craig v. State of Missouri, “Such a medium has been always liable to considerable fluctuation. Its value is continually changing, and these changes, often great and sudden, expose individuals to immense loss, are the sources of ruinous speculations, and destroy all confidence between man and man. To cut up this mischief by the roots, a mischief which was felt through the United States and which deeply affected the interest and prosperity of all, the people declared in their Constitution that no state should emit bills of credit.”
After the Civil War, the American people continued operating under a monetary system based on gold and silver coins (as well as copper coins and nickel coins), which was the monetary system that the Framers had brought into existence through the Constitution. Since Lincoln’s legal-tender law applied only to a select group of federal notes issued during the Civil War, its impact was limited in scope. Nonetheless, it set the stage for what would come 70 years later — the nationalization of gold, the repudiation of gold clauses, irredeemable paper money, ever-increasing federal spending, financial chaos and crises, and never-ending inflationary plunder of the citizenry.
On April 5, 1933 — about a month after taking office — President Franklin Roosevelt issued an executive order commanding every American to turn in his gold to the federal government. The order was soon ratified by Congress, which made it a felony offense for Americans to own gold. The Congress also nullified clauses in both private and public contracts that required payment to be made in gold coin.
Roosevelt’s actions rank among the most horrific abuses of government power in history. For 150 years, the American people had been accustomed to using gold coins as money. Their gold was their property. They were the owners of it. It belonged to them as much as their homes, their automobiles, and their personal effects. It did not belong to Franklin Roosevelt, nor to the members of Congress, nor to any other public official. It was privately owned property.
Nonetheless, the Roosevelt administration simply declared that everyone’s gold suddenly belonged to the federal government. Everyone, including individuals and banks, was required to surrender his privately owned gold to the federal government. Anyone caught failing to do so was subject to being indicted by a federal grand jury and faced a possible jail sentence of 10 years and a fine of $10,000.
Imagine: In 1787 the Framers used the Constitution to establish a system whereby people were going to use gold and silver coins, rather than paper, as money. The reason they did that was to enable people to protect themselves from what governments throughout history had done — plunder and loot people through inflation — e.g., by printing ever-increasing amounts of paper money to finance ever-increasing governmental expenditures. For the next 150 years, Americans used such coins in their everyday transactions.
Then, one day federal officials suddenly made it a felony for Americans to do what they had been legally and constitutionally doing for 150 years.
In fact, the Roosevelt administration’s confiscation of privately owned gold was no different from the nationalization of privately owned property that had taken place at the hands of the communist regime in the Soviet Union. And Roosevelt’s criminalization of gold ownership was no different, in principle, from the types of economic crimes that the Soviet communists were creating and enforcing.
What was Roosevelt’s rationale for this revolutionary action? He claimed that since the Great Depression was a national “emergency,” the federal government had the authority to exercise emergency powers, including the power to confiscate gold, to make gold ownership a felony, and to nullify gold clauses in contracts.
One big problem, however, was that the Constitution didn’t provide for the exercise of emergency powers. In fact, the Framers understood that emergencies are the time that liberties are most at risk. Therefore, it was during emergencies that constitutional restraints were most important.
Constitutional restraints, however, didn’t present a problem for Roosevelt. After all, this was the man who would later come up with an infamous Court-packing scheme when the Supreme Court was declaring many of his socialistic and fascistic New Deal programs unconstitutional. He had no intention of letting constitutional restraints stand in the way of his aims and objectives.
Thus, it’s not surprising that one of Roosevelt’s greatest admirers was none other than Adolf Hitler, who was adopting many of the same types of measures to deal with the economic emergency in Germany that Roosevelt was employing in the United States. Here’s what Hitler wrote to U.S. Ambassador Thomas Dodd on March 14, 1934, about a year after the Roosevelt administration had nationalized gold and nullified gold contracts:
The Reich chancellor requests Mr. Dodd to present his greetings to President Roosevelt. He congratulates the president upon his heroic effort in the interest of the American people. The president’s successful struggle against economic distress is being followed by the entire German people with interest and admiration. The Reich chancellor is in accord with the president that the virtues of sense of duty, readiness for sacrifice, and discipline must be the supreme rule of the whole nation. This moral demand, which the president is addressing to every single citizen, is only the quintessence of German philosophy of the state, expressed in the motto “The public weal before the private gain.”
In his excellent book, Three New Deals: Reflections on Roosevelt’s America, Mussolini’s Italy, and Hitler’s Germany, 1933—1939, Wolfgang Schivelbusch points out,
On May 11, 1933 [one month after Roosevelt’s gold decrees], the main Nazi newspaper, the Volkischer Beobachter, offered its commentary in an article with the headline “Roosevelt’s Dictatorial Recovery Measures.” The author wrote, “What has transpired in the United States since President Roosevelt’s inauguration is a clear signal of the start of a new era in the United States as well.” The tone on January 17, 1934, was much the same, “We, too, as German National Socialists are looking toward America…. Roosevelt is carrying out experiments and they are bold. We, too, fear only the possibility that they might fail.”… Just as National Socialism superseded the decadent “bureaucratic age” of the Weimar Republic, the Volkischer Beobachter opined, so the New Deal had replaced “the uninhibited frenzy of market speculation of the American 1920s.” The paper stressed “Roosevelt’s adoption of National Socialist strains of thought in his economic and social policies, praising the president’s style of leadership as being comparable to Hitler’s own dictatorial Fhrerprinzip.”
Plundering and looting
Why did Roosevelt nationalize gold? Why were gold clauses nullified?
The answer is simple: to enable the federal government to do what governments throughout history had done — plunder and loot people through inflation in order to pay for ever-increasing government programs and projects.
Let’s review the process to understand what Roosevelt was doing.
The reason the Framers established gold and silver coins as the money that Americans would use was to protect them from the inflationary ravages of paper money.
The Constitution permitted the federal government to borrow money — e.g., gold and silver coins — and issue notes promising to repay the loans. Such notes customarily contained gold clauses requiring repayment in the same gold-coin standard in effect when the loan was made.
Let’s assume that I lend the federal government a gold coin containing 1 ounce of gold. Before the loan is repaid, the government lowers the quantity of gold in coins of that same denomination to ½ ounce. When the loan becomes due, the government tries to repay me in the devalued coin. But the gold clause protects me. It requires the government to repay me in the standard that was in effect when the loan was made — or its equivalent. Because of the gold clause, the government would have to pay me two of the new gold coins containing ½ ounce of gold each.
What constrains the government from issuing too many short-term paper notes — or bills? The fact that people might start demanding gold in payment of such notes! And that’s exactly what was happening by the time Roosevelt assumed office. Americans were doing what people throughout history had done — they were putting their savings into gold coins rather than in the ever-increasing numbers of bills and notes that the federal government was issuing. That’s what Roosevelt called the “hoarding” problem.
Moreover, people continued doing what Americans had done since the start of the Republic — relying on gold clauses in contracts, both government and private, to ensure that their loans would not be repaid in debased, depreciated currency.
Yet, within just a few weeks of taking office, Roosevelt extinguished 150 years of sound money. From the day his executive orders were issued, Americans could no longer use the media of exchange on which their country had been founded and which Americans had used ever since. In fact, while Roosevelt billed his actions as “emergency” measures, most people knew that that was a lie. Everyone knew that the criminalization of gold ownership and the nullification of gold clauses would continue long after the Great Depression ended.
Also remarkable is the fact that this revolutionary and permanent transformation of America’s monetary system occurred without even the semblance of a constitutional amendment.
Why didn’t Roosevelt simply do what Lincoln had done during the Civil War? Recall that Lincoln had enacted a legal-tender law that required people to accept paper money at face value, even though it had depreciated against gold in the marketplace. While Lincoln’s actions violated fundamental moral principles, not to mention constitutional principles, at least Americans still had the freedom to continue owning and using gold, and the gold standard was eventually restored after the end of the war.
Why did Roosevelt go so much further than Lincoln? Why did he actually seize people’s gold? Why did he convert millions of peaceful and law-abiding gold-owning Americans into potential felons? Why were gold clauses nullified?
The reason for Roosevelt’s actions was simple: He knew that the federal government was moving in a new direction — in the direction of a socialistic welfare state and an interventionist economy, a direction that he knew would entail massive federal spending in the decades ahead. Obviously, that type of revolutionary change would be impossible under a gold standard. The only thing that would enable the welfare-and-interventionist state to operate, decade after decade, would be the ability to print unlimited amounts of paper money.
Thus, Roosevelt and the statists surrounding him knew that they needed to do much more than simply enact a legal-tender law, as Lincoln had done. They knew they had to smash the concept of gold as money from the consciousness of the American people. It was absolutely necessary, they felt, that people totally forget that Americans once used gold coins as their money as normally and naturally as people today use dollar bills. It would, of course, take a few generations but gradually people would forget the past and just accept the new order of things.
Consequences of debasement
And so it has been. Decade after decade, inflationary debasement was accompanied by periods of panicky constraints on money growth, bringing about the traditional boom-bust cycle. Over time, the primary engine of the monetary debasement became the Federal Reserve, one of the most powerful government agencies in history, an agency whose supposed mission, ironically, had been to stabilize America’s monetary system.
In fact, the most terrible irony is that it was the Federal Reserve itself whose policies had brought about the 1929 stock-market crash and the Great Depression, notwithstanding Roosevelt’s pronouncement that it was all the fault of free enterprise, speculation, and greed. After decades during which public schools and state-supported colleges and universities had deceived students as to the cause of Great Depression, one of most remarkable admissions in U.S. history was made by Bernard Bernanke, the Federal Reserve official who would go on to become its chairman. At a dinner in 2002 in honor of Milton Friedman, who, along with Ludwig von Mises, Friedrich Hayek, and the Austrian school, had long pointed out that the Federal Reserve was the culprit behind the Great Depression, Bernanke stated,
Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve System. I would like to say to Milton and Anna [Schwartz]: Regarding the Great Depression. You’re right: we did it. We’re very sorry. But thanks to you, we won’t do it again.
Americans who are 55 or older remember that as children they used dimes, quarters, and half-dollars made of silver, and nickels made of nickel. As such coins gradually disappeared from circulation, Americans just scratched it off to “progress” or “the natural order of things.” The last thing Americans wanted to do was accuse their government of some sort of monetary wrongdoing. After all, as the federal government began playing an ever-increasing paternalistic role in people’s lives with its welfare state and interventionist system, Americans placed ever-increasing faith in their government.
But the reason that those coins disappeared from circulation is the same reason that gold coins were starting to disappear from circulation when Roosevelt took office. The federal government was printing such vast quantities of money, decade after decade, to finance its welfare-state operations that the value of the silver in dimes, quarters, and half-dollars began to exceed the face value of the coins. In other words, it was worth more to people to sell the silver to be melted down than it was to use the silver coins to make purchases at the face value of the coins.
Over the years, the federal government prosecuted Americans caught owning gold, but none of those cases ever reached the Supreme Court. The cases that did reach the Supreme Court were ones that challenged Roosevelt’s nullification of the gold clauses. Those four cases have become known as the Gold Clause Cases.
In 5—4 rulings, the Court ruled in favor of Roosevelt’s actions and against the victims of his policies. The damages suffered by those victims were not small. While people were being paid for the gold they were sending to the federal government, they were being paid in depreciated paper money, for Roosevelt had increased the price of gold, and so had devalued the dollar by some 40 percent. The financial losses suffered by private lenders who had relied on gold clauses to protect them and by private holders of government-issued gold certificates were incalculable.
Not everyone rolled over. One of the finest expressions of opposition to Roosevelt’s monetary horror, from a legal standpoint, appears in the dissenting opinion in the Gold Clause Cases. Writing for the group of justices who would become known in judicial history as the Four Horsemen, Justice James Clark McReynolds wrote,
Just men regard repudiation and spoliation of citizens by their sovereign with abhorrence; but we are asked to affirm that the Constitution has granted power to accomplish both. No definite delegation of such a power exists, and we cannot believe the far-seeing framers, who labored with hope of establishing justice and securing the blessings of liberty, intended that the expected government should have authority to annihilate its own obligations and destroy the very rights which they were endeavoring to protect. Not only is there no permission for such actions, they are inhibited. And no plenitude of words can conform them to our charter….
Under the challenged statutes, it is said the United States have realized profits amounting to $2,800,000,000…. But this assumes that gain may be generated by legislative fiat. To such counterfeit profits there would be no limit; with each new debasement of the dollar they would expand. Two billions might be ballooned indefinitely to twenty, thirty, or what you will.
Loss of reputation for honorable dealing will bring us unending humiliation; the impending legal and moral chaos is appalling.
Restoration of gold ownership
In 1974 — 40 years after Roosevelt confiscated people’s gold and made it illegal for Americans to own gold — and three decades after the “emergency” of the Great Depression had ended, Congress made it legal for Americans to once again own gold. By this time, of course, the notion of gold as money had been wiped from the consciousness of most Americans. After decades of being taught economics in public schools and state-supported colleges, their understanding, at best, was that America once had a paper-money standard that was somehow linked to gold.
Over the past 30 years many Americans have rediscovered the value of owning gold, even if it isn’t being used as official money in society. They discovered what people throughout history discovered — that placing their savings in gold, rather than bills and notes, is more likely to protect the value of their savings, especially if the government intends to continue printing the necessary paper money to fund its ever-growing operations.
Today, there is increasing awareness of what the Federal Reserve has done to destroy what was once one of the soundest monetary systems in the world, one based on gold and silver coins. There are even calls, especially among young people, to abolish the Fed and restore sound money to the nation. More and more people are recognizing that a system of sound money is a necessary prerequisite to a free society.
Yet, there is now the specter of another monetary horror, one in which President Obama decides to mimic the actions of the president he so admires, Franklin Roosevelt. As Obama embarks on one of the biggest federal spending sprees in U.S. history, continued monetary debasement has become a certainty. The risk, of course, is that Obama will resort to the same method employed by Roosevelt and the Soviet communists. To replenish the coffers of the federal government in order to fund his ever-growing socialistic, interventionist, and imperial programs, Obama may well decide to re-confiscate people’s gold in another massive assault on the freedom, private property, and economic well-being of the American people.