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Section IV

A TALE OF THREE BANKS It has been said that those who are ignorant of history are doomed to repeat its mistakes. It may come as a surprise to learn that the Federal Reserve System is America's fourth central bank, not its first. We have been through all this before and, each time, the result has been the same. Interested in what happened? Then let's set the coordinates of our time machine to the colony of Massachusetts and the year 1690. To

activate, turn the page.

Chapter Fifteen

THE LOST TREASURE MAP The bitter experience of the American colonies with fiat money; the resolve of the founding fathers to prohibit the new nation from resorting to paper money without backing; the drafting of the Constitution to that end; the creation of a true American dollar; the prosperity that followed.

In the golden days of radio, on the Edgar Bergen Show, the ventriloquist would ask his dummy, Mortimer Snerd, "How can you be so stupid?" And the answer was always the same. After a moment of deep thought on the part of Mortimer, he would drawl his reply, "Well, it ain't easy!"

When we look at the monetary chaos around us today—the evaporating value of the dollar and the collapsing financial institutions—we are compelled to ask: How did we get into this fix? And, unfortunately, Mortimer's response would be quite appropriate.

To find out how we got to where we are, it will be necessary to know where we started, and a good place to begin that inquiry is with the Constitution of the United States. Article I, Sections 8 and 10 say: Congress shall have the power — To borrow money ... to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;... [and] to provide for the punishment of counterfeiting....

No state shall ... coin money; emit bills of credit; [or] make anything but gold and silver coin a tender in payment of debts.

The delegates were precise in their use of these words.

Congress was given the power to "coin money," not to print it.

Thomas M. Cooley's Principles of Constitutional Law explains that "to coin money is to stamp pieces of metal for use as a

medium of exchange in commerce according to fixed standards of value."

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What was prohibited was to "emit bills of credit" which, according to the speeches and writings of those who drafted the document, meant the printing of paper IOUs which were intended to be circulated as money—in other words, the printing of fiat money not backed by gold or silver.

At first, it would seem that nothing could be more clear.

Yet, these two simple clauses have become the basis for literally thousands of pages of conflicting interpretation. The crux of the problem is that, while the Constitution clearly prohibits the states from issuing fiat money, it does not specifically prevent the federal government from doing so. That was truly an unfortunate oversight on the part of the document's framers, but they probably never dreamed in their wildest nightmares that their descendants "could be so stupid" as to not understand their intent.

Furthermore, "it ain't easy" to miss their intent. All one has to do is look at the monetary history that led up to the Constitutional Convention and to read the published letters and debates of the men who affixed their signatures to that founding document.

As one reads through the debates on the floor of the convention, one is struck by the passion that these delegates held on the subject of money. Every one of them could remember from his personal experience the utter chaos in the colonies caused by the issuance of fiat money. They spoke out against it in no uncertain terms, and they were adamant that it should never be tolerated again in America— at either the state or federal level.

PAPER MONEY IN THE COLONIES

The first colonial experience with fiat money was in the period from 1690 to 1764. Massachusetts was the first to use it as a means of financing its military raids against the French colony in Quebec. The other colonies were quick to follow suit and, within a few years, were engaging in a virtual orgy of printing "bills of credit." There was no central bank involved.

The process was simple and direct, as was the reasoning behind it. As one colonial legislator explained it: Do you think, gentlemen, that I will consent to load my constituents with taxes when we can send to our printer and get a wagon load of money, one quire of which will pay for the whole?

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The consequences of this enlightened statesmanship were classic. Prices skyrocketed, legal tender laws were enacted to force the colonists to accept the worthless paper, and the common man endured great personal losses and hardship. By the late 1750s, Connecticut had price inflated by 800%, the Carolinas had inflated 900%, Massachusetts 1000%, Rhode Island 2300%. 1 The situation was so out of hand that, beginning in 1751, the British Parliament stepped in and, in one of those rare instances where interference from the mother country actually benefited the colonies, it forced them to cease the production of fiat money. Henceforth, the Bank of England would be the only source.

What followed was unforeseen by the promoters of fiat money. Amid great gloom about "insufficient money," a miracle boom of prosperity occurred. The forced use of fiat money had compelled everyone to hoard their real money and use the worthless paper instead. Now that the paper was in disgrace, the colonists began to use their English and French and Dutch gold coins once again, prices rapidly adjusted to reality, and commerce returned to a solid footing. It remained so even during the economic strain of the Seven-Years War (1756-1763) and during the period immediately prior to the Revolution. Here was a perfect example of how an economic system in distress can recover if government does not interfere with the healing process. 2 WARTIME INFLATION But all of this came to a halt with the onset of colonial rebellion. Not only did open hostilities throw England deeper into the cogs and wheels of the central-bank mechanism, it also was the compelling motive for the colonies to return to their printing presses. The following figures speak eloquently for themselves:

路 At the beginning of the war in 1775, the total money supply for the federated colonies stood at $12 million.

路 In June of that year, the Continental Congress issued another $2 million. Before the notes were printed, another $1 million was authorized.

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路 By the end of the year, another $3 million.

1.

2.

Paul and Lehrman, p. 23.

Roger W. Weiss, "The Colonial Monetary Standard of Massachusetts," Economic History Review 27 (November 1974), p. 589.

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· $19 million in 1776. · $13 million in 1777. · $64 million in 1778. · $125 million in 1779. · A total of $227 million in five years on top of a base of $12 million is an increase of about 2000%.

· On top of this "federal" money, the states were doing the same in an approximately equal amount.

· And still more: the Continental Army, unable to get enough money from Congress, issued "certificates" for the purchase of supplies totalling $200 million.

· $650 million created in five years on top of a base of $12 million is an expansion of the money supply of over 5000%. 1 Although the economy was devastated by this flood of fiat money, most victims were totally unaware of the cause. In 1777, the sentiment of a large segment of the population was expressed by the words of one patriotic old lady who said: "What a shame it is that Congress should let the poor soldiers suffer when they have power to make just as much money as they choose."2 The immediate result of this money infusion was the appearance of prosperity. After all, everyone had more money and that was perceived as a very good thing. But this was quickly followed by inflation as the self-destruct mechanism began to roll. In 1775, the colonial monetary unit, called the Continental, was valued at one-dollar in gold. In 1778, it was exchanged for twenty-five cents. By 1779, just four years from its issue, it was worth less than a penny and ceased to circulate as money at all. It was in that year that George Washington wrote: "A wagon-load of money will scarcely purchase a wagon-load of provisions."

The saying "Not worth a Continental" has its origin in this gloomy period.

1.

2.

For an overview of expenditures, see Paul and Lehrman, pp. 26-27.

Gouge, p. 28. The naivite of this lady may be humorous, but are

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Americans any more enlightened today? Would she not feel at home among our modern-day electorate who clamor for legislation to pump Federal-Reserve fiat money into projects to alleviate hardship among the poor and unemployed?

3. Quoted by Bolles, Vol. I, p. 132.

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The true nature of the inflation effect has never been more accurately perceived or more vividly described than it was

by Thomas Jefferson: It will be asked how will the two masses of Continental and of State money have cost the people of the United States seventy-two millions of dollars, when they are to be redeemed now with about six million? I answer that the difference, being sixty-six millions, has been lost on the paper bills separately by the successive holders of them.

Every one, through whose hands a bill passed, lost on that bill what it lost in value during the time it was in his hands.

This was a real tax on him; and in this way the people of the United States actually contributed those sixty-six millions of dollars during the war, and by a mode of taxation the most oppressive of all because the most unequal of all. 1

PRICE CONTROLS AND LEGAL-TENDER LAWS It was natural that people struggled to find ways to escape the destruction of their savings, and the two most obvious methods were (1) to regularly adjust prices upward as the value of the money went downward or (2) exchange their goods and services only for gold coins. In response, the colonial legislatures and the Continental Congress did what governments always do to prevent it. They resorted to wage and price controls and to legaltender laws with harsh penalties for non-compliance.

Under one such law, those who refused to accept worthless money were even described as traitors. It declared: If any person shall hereafter be so lost to all virtue and regard for his Country as to refuse to acce t its notes, such person shall be deemed an enemy of his Country.' ?

Rhode Island not only levied a substantial fine for nonacceptance of its notes but, upon a second offense, an individual lost his citizenship. When this was declared unlawful by a panel of judges • the legislature reacted by dismissing the judges from office."

1. Thomas Jefferson, Observations on the Article Etats-Unis Prepared for the Encyclopedia, June 22, 1786, Writings, Vol. IV, p. 165.

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2. F. Tupper Saussy, The Miracle on Mainsheet (Sewanee, Tennessee: Spencer Judd, 1980), p. 12. Also see Anthony Sutton, The War on Gold (Seal Beach, Calif • '76 Press, 1977), pp. 47, 48.

3. Jensen, p. 324.

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Then, as now, those who suffered the most from fiat money were those who held the most trust in government. In 1777 these were mostly the Whigs, for it was they who patriotically held paper money and, as a result, lost their livelihoods and their life savings. The Tories, on the other hand, mistrusting both government and its paper money, passed the bills as quickly as possible in trade for real assets, especially gold.

Consequently, as a group, they weathered the storm fairly well. But they often were derided by their less prudent neighbors as "Torie speculators," "hoarders," and even "traitors."

All of this was painfully fresh in the memories of the delegates to the Constitutional Convention and, as the opening session convened in Philadelphia in 1787, there were angry mobs in the streets threatening the legislators. Looting was rampant.

Businesses were bankrupt. Drunkenness and lawlessness were everywhere to be seen. The fruit of fiat money had ripened, and the delegates did not enjoy its taste.

In October of 1785, George Washington wrote: "The wheels of government are clogged, and ... we are descending into the vale of confusion and darkness." 1 A year later, in a letter to James Madison, he said: "No day was ever more clouded than the present. We are fast verging to anarchy." 2 In February of 1787, Washington wrote to Henry Knox: "If any person had told me that there would have been such formidable rebellion as exists, I would have thought him fit for a madhouse." 3 Just three months prior to the opening of the convention, Washington voiced his reasons for rejecting the notion of fiat money. In answer to the complaint that there was not enough gold coin (specie) to satisfy the needs of commerce, he replied: The necessity arising from a want of specie is represented as greater than it really is. I contend that it is by the substance, not the shadow of a thing, we are to be benefited.

The wisdom of man, in my humble opinion, cannot at this time devise a plan by which the credit of paper money would be long supported; consequently, depreciation keeps pace with the quantity of the emission, and articles for which it is exchanged rise in a greater ratio than the sinking value of the money.

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1. Quoted by Atwood, p. 3.

1. Ibid., p. 4.

2. Ibid., p. 4.

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An evil equally great is the door it immediately opens for speculation, by which the least designing and perhaps most valuable part of the community are preyed upon by the more knowing and crafty speculators. 1 THE CONSTITUTIONAL CONVENTION

This was the prevailing view held by the great majority of delegates to the Convention. They were adamant in their resolve to create a constitution which would prevent any state, and especially the federal government itself, from ever again issuing fiat money. And they said so in unmistakable terms.

Oliver Ellsworth from Connecticut, who later was to become our third Chief Justice of the Supreme Court, said: This is a favorable moment to shut and bar the door against paper money. The mischief of the various experiments which have been made are now fresh in the public mind and have excited the disgust of all the respectable parts of America?

George Mason from Virginia told the delegates he had a "mortal hatred to paper money." Previously he had written to George Washington: "They may pass a law to issue paper money, but twenty laws will not make the people receive it.

Paper money is founded upon fraud and knavery."

James Wilson from Pennsylvania said: "It will have the most salutary influence on the credit of the United States to remove the possibility of paper money."

John Langdon from New Hampshire warned that he would rather reject the whole plan of federation than to grant the new government the right to issue fiat money.

George Reed from Delaware declared that a provision in the Constitution granting the new government the right to issue fiat money "would be as alarming as the mark of the beast in Revelation."

Thomas Paine, although not a delegate to the Convention, had written the previous year that he was strongly opposed to fiat money, which he called counterfeiting by the state, and he especially abhorred legal tender laws which force people to accept the 1. Washington to Stone, 16 February, 1787. Quoted by Bancroft, pp. 231-32.

2. For the context of this and the following statements expressing a similar

sentiment, see Bancroft, pp. 30, 43-44, 82; also Paul and Lehrman, p. 168.

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counterfeit. He said: "The punishment of a member [of a legislature] who should move for such a law ought to be death."

An interesting thought.

If any further evidence is needed that the Founding Fathers intended to prohibit the federal government from issuing "bills of credit," consider this. The first draft of the Constitution was copied in large measure from the original Articles of Confederation. When it was taken up for consideration by the delegates, therefore, it contained the old provision that had caused so much chaos. It stated: "The legislature of the United States shall have the power to borrow money and emit bills of credit." But, after a lively discussion on the matter, the offending provision was voted to be removed from the Constitution by an overwhelming margin.1 Voicing the sentiment of the majority of the delegates, Alexander Hamilton said: "To emit an unfunded paper as the sign of value ought not to continue a formal part of the Constitution, nor ever hereafter to be employed; being, in its nature, repugnant with abuses and liable to be made the engine of imposition and fraud." 2 The journal of the Convention for August 16 contains this notation: It was moved and seconded to strike out the words "and emit bills of credit," and the motion ... passed in the affirmative. [The vote cleared by a margin of better than four to one.] 3

The Tenth Amendment states: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." The power to issue bills of credit is definitely not delegated to the United States, and it is specifically prohibited to the States. Therefore, if any power to issue fiat money legally exists at all, it is reserved for the people. In other words, individuals and private institutions, such as banks, have the right to issue IOUs and hope that the public will use them as money, but government, at any level, is clearly

prohibited by the Constitution from doing so.

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1. For an excellent summary of the interplay of ideas between the delegates, see Edwin Vieira, Jr., Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution (New Jersey: Sound Dollar Committee, 1983), pp.

71-76.

2. Alexander Hamilton, Works, Part II, p. 271, as cited by Bancroft, p. 26.

3.

Quoted by Bancroft, pp. 39, 40.

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A SUGGESTION FOR YOUR CONGRESSMAN Incidentally, the Constitution has never been amended on this point, nor has the provision that only silver and gold can be used as lawful money. It would be interesting if each reader of this book would send copies to his or her elected representatives in Washington, or at least a photocopy of this section. Every member of Congress has sworn to uphold the Constitution, and you might attach a short note asking them when they intend to begin.

Do not be disappointed if your reply is less than satisfactory. Politicians have a similar problem to that which judges have. It is permissible to rock the boat from time to time, but they are not supposed to sink it. Suits against the government challenging the constitutionality of our monetary system seldom get to court. It is safer for the justices to decline to accept these cases or to dismiss them as supposedly "frivolous." Otherwise they would face a difficult choice. Either they would have to mutilate logic in order to uphold the present inconsistencies—thus, opening themselves to possible ridicule—or they would have to declare in favor of the Constitution and literally cause the collapse of the entire deficit-spending, central-bank mechanism. Such an act would take a considerable amount of courage. Not only would they suffer the wrath of the Establishment that is nourished by that mechanism, they also would have to face a bewildered public which, because of lack of knowledge about the Constitution or the nature of money, could easily be convinced that the judges had lost their minds. Likewise, it is safer for politicians to respond to inquiries of this kind merely by quoting some self-serving government document which makes our fiat monetary system sound quite legal and marvelously constitutional.

Unfortunately, that is reality. Until the public becomes considerably better informed than it is at present, we cannot expect too much from the courts or from Congress. Bringing this matter to the attention of your elected representatives, however, is still well worth the effort, because the process of education has to start somewhere, and Washington is an excellent place to begin.

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Returning to the point of this digression, however, it is important to know that the federal government was given a precisely limited monetary function: "to coin money" and to "regulate the value thereof." In view of the fact that gold and silver coin was

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specifically defined as the only kind of money to be allowed, there can be no doubt of what was meant by the first half of that power. To coin money meant to mint precious-metal coins.

Period.

The second half is equally clear. Both in the Constitution and in the discussions among the delegates, the power to regulate the value of gold and silver coin was closely tied to the power to determine weights and measures. They are, in fact, one and the same. To regulate the value of coin is exactly the same as to set the nationally accepted value of a mile or a pound or a quart. It is to create a standard against which a thing may be measured. The wording of this section of the Constitution can be traced to the original Articles of Confederation which further clarifies the meaning that was generally understood at that time: The United States in congress assembled shall ... have the sole and exclusive right and power of regulating the alloy and value of coin struck by their own authority, or by that of the respective states—fixing the Standard of Weights and Measures throughout the United States.

The intent, therefore, was simply for Congress to determine the exact weight of a precious metal that would constitute the national monetary unit.

THE ORIGIN OF THE DOLLAR At the time of these deliberations, Spanish silver coins, called pieces of eight, had already become the de facto monetary unit. An official commission had been established by the Continental Congress to sample the circulating coins in the country and determine their average value by weight and purity. Charts were published, and all coins of various origin were listed by comparative value. Congress was already "regulating the value of" the nation's money by the time the Constitution was drafted. How these coins became dollars is an interesting story. Edwin Vieira tells us: Monetary historians generally first associate the dollar with one Count Schlick, who began striking such silver coins in 1519 in Joachim's Thal, Bavaria. Then called "Schlicktenthalers" o r "Joachimsthalers," the coins became known simply as "thalers," which transliterated into "dollars." Interestingly, the American colonies did not adopt the dollar from England, but from Spain.

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Under that country's monetary reform of 1497, the silver real became the Spanish money-unit, or unit of account. A new coin consisting of eight reales also appeared. Variously known as pesos, duros, pietas de ocho ("pieces

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of eight"), or Spanish dollars (because of their similarity in weight and fineness to the thaler), the coins quickly achieved predominance in financial markets of the New World because of Spain's then-important commercial and political position. 1

In 1785, Thomas Jefferson urged the adoption of the Spanish silver dollar as the nation's official monetary unit. In a pamphlet submitted to the delegates of the Continental Congress, he said: Taking into our view all money transactions, great and small, I question if a common measure, of more convenient size than the dollar, could be proposed.... The unit or dollar is a known coin, and the most familiar of all to the minds of people.

It is already adopted from south to north; has identified our currency, and therefore happily offers itself as an unit already introduced. 2

On July 6, 1785, Congress unanimously voted to adopt the Spanish dollar as the official monetary unit of the United States. Jefferson realized, however, that this was not sufficient. Although the coin had been one of the most dependable in terms of weight and quality, it still varied in content between issues, and a way had to be found to rate one coin in value against another. That was, after all, the service that Congress was required to render when it was given the power to "regulate the value" of money. Jefferson came directly to the point when he said: "If we determine that a dollar shall be our unit, we must then say with precision what a dollar is. This coin as struck at different times, of different weight and fineness, is of different values."3 The logic voiced by Jefferson could not be ignored. Two years later, after carefully examining the actual weight and fineness of the Spanish dollars currently in circulation, Congress defined the dollar. After ratification of the Constitution, a dollar would contain 371.25 grains of fine silver, and all items in commerce, including other coins, were to be measured in value against that standard.

As the Spaniards continued to reduce the silver content of their coins, the pressure for the minting of an American dollar of predictable value began to mount. Secretary of the Treasury, Alexander Hamilton, in his 1791 report to Congress, urged the

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1.

1.

23

Vieira, p. 66.

Propositions Respecting the Coinage of Gold, Silver, and Copper (printed pamphlet presented to the Continental Congress on May 13, 1785), pp. 9-10.

Cited by Vieira, p. 68.

2. Ibid., p. 11.

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establishment of a federal mint and also presented a powerful case for maintaining an inviolable standard for the coins to be produced by that mint. He said: The dollar originally contemplated in the money transactions of this country, by successive diminutions of its weight and fineness, has sustained a depreciation of five per cent, and yet the new dollar has a currency in all payments in place of the old, with scarcely any attention to the difference between them. The operation of this in depreciating the value of property depending upon past contracts, and ... of all other property is apparent. Nor can it require argument to prove that a nation ought not to suffer the value of the property of its citizens to fluctuate with the fluctuations of a foreign mint, or to change with the changes in the regulations of a foreign sovereign....

The quantity of gold and silver in the national coins, corresponding with a given sum, cannot be made less than heretofore without disturbing the balance of intrinsic value, and making every acre of land, as well as every bushel of wheat, of less actual worth than in time past.... [This] could not fail to distract the ideas of the community, and would be apt to breed discontent as well among those who live on the income of their money as among the poorer classes of the people to whom the necessities of life would ... become cleared

BIMETALLISM Note in the preceding quotation that Hamilton referred to both gold and silver coins, not merely silver. That is because it was precisely at this time that Congress began to consider a bimetallic coinage. In retrospect, this was a mistake for, throughout history, bimetallism has never worked well very long. It always has led to confusion and, ultimately, the disappearance as money of one of the metals. This is because there is always a subtle shifting of the relative values between gold and silver—or any other two metals for that matter— depending on constantly changing supply and demand. We may set a value ratio of one to the other that is quite acceptable today but, eventually, that ratio will no longer reflect reality. The metal which grows in value over the other will be hoarded or possibly even melted down because it will bring a higher price as metal than it will as money.

That is precisely what happened in the early days of our

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Republic. It was determined after careful analysis of the free-

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market that the value of gold at that time was approximately fifteen times the value of silver. The Coinage Act of 1792 accordingly set the relative value of gold-to-silver at fifteen-to-one. It then authorized the federal government to mint gold coins called Eagles, and it specified that their value was ten dollars. In other words, the gold coins would be equal in value to ten silver coins. Ten silver coins, each of 371.25 grains of fine silver, would contain a total of 3,712.5 grains. The content of the Eagle, therefore, was one-fifteenth that amount, or 247.5 grains of fine gold.

Contrary to popular misconception, Congress did not create a "gold dollar." (It didn't do that until fifty-seven years later in The Coinage Act of 1849.) In fact it reaffirmed that "the money of account of the United States shall be expressed in dollars or units" and again defined those units as coins containing 371.25 grains of pure silver. What Congress did do was authorize the minting of a gold coin and arbitrarily fix the value of the gold in that coin at fifteen times the value of the dollar. And it also stated that all silver and gold coins produced in the federal mint were to be legal tender in accordance with their value, based on weight and purity, relative to the standard of the silver dollar.

Oh yes, another thing. It set the death penalty for anyone who debases the nation's coinage; a law which, if enforced today, would wipe out the House of Representatives, the Senate, the managerial level of the Treasury Department, and the Presidency as well.

FREE COINAGE Perhaps the most important provision of this Act, however, was the establishment of what is called free coinage.

Under free coinage, any citizen may take raw silver or gold to the mint and, for a nominal fee, have it converted into coins for personal use. The government merely performs a technical function of creating the coin and stamping it with its insignia to certify the correct weight and purity. The state's role in this is exactly the same as inspecting the scales in a grocery store or the meter on a gasoline pump. It is merely fulfilling the Constitutional requirement to set standards and verify the accuracy of weights and measures.

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Free coinage was to become an important part of the American success story, and it lasted until the Gold Reserve Act of 1934 which, not only terminated it, but even made it illegal for citizens to possess gold. We shall take a closer look at that dismal period in a

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later section but, for now, it is important to recall the greatness of our monetary system as it once was. Elgin Groseclose explains: The principle of free coinage has proved its practical worth as a deterrent to debasement and depreciation. Where coinage is on private account there is no profit to the state in tampering with the standard, and there is no opportunity for such practice by the individual. The circulation of coins of similar appearance and denomination but of uncertain standard, the arbitrary and unpredictable modifications in the standard by autocratic government, the temptations to profit which were constantly dangled before despotic rulers—these were evils which had perplexed and harassed society and hindered the natural growth of economy since the days when coined money first appeared. By a stroke they were swept away. At the same time, the institution of free coinage, by giving stability and character to one of the chief instruments of organized economy, made possible a more vigorous and healthy commercial life and gave prestige and increased substance to the government adopting it.

SOUND MONEY AND ECONOMIC PROSPERITY This was, indeed, an auspicious beginning for the new nation, and the result was immediately observable in an upsurge in prosperity. The December 16, 1789 edition of the Pennsylvania Gazette declared: "Since the federal constitution has removed all danger of our having a paper tender, our trade is advanced fifty per //2

cent. But that was just the beginning. Historian Douglass North says that "the years 1793-1808, were years of unparalleled prosper//3

ity. Louis Hacker describes the period as one "of unexampled business expansion, one of the greatest, in fact, the United States has had.... The exports of the country mounted from $19 millions in 1791 to $93 millions in 1801.' 4 Furthermore, the federal deficit, which amounted to twenty-eight per cent of expenditures in 1792, dropped to twenty-one per cent in 1795. By 1802, the deficit had disappeared altogether and had been replaced by a surplus that was almost as large as the government's total spending.

George Washington watched this economic miracle with great satisfaction and, in correspondence to his friend, LaFayette, the

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1.

2.

3.

THE CREATURE FROM JEKYLL ISLAND Groseclose, Money and Man, p. 167.

Quoted by Saussy, p. 36.

Douglass C. North, The Economic Growth of the United States (New York: W.W. Norton, 1966), p. 53.

4. Louis M. Hacker, American Capitalism (New York: Anvil, 1957), p. 39.

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French statesman and former General in the Continental Army, Washington commented: "Our country, my dear sir,... is fast progressing in its political importance and social happiness."

In a letter to Catherine Macaulay Graham, he said: "The United States enjoys a sense of prosperity and tranquility under the new government that could hardly have been hoped for." And in a letter to the American poet and diplomat, David Humphreys, Washington exclaimed: "Our public credit stands on that high ground which three years ago it would have been considered as a species of madness to have foretold."

On the specific subject of paper money without backing by gold or silver, Washington wrote: We may one day become a great commercial and flourishing nation. But if in the pursuit of the means we should unfortunately stumble again on unfunded paper money or any similar species of fraud, we shall assuredly give a fatal stab to our national credit in its infancy.2

This, then, was the monetary blueprint laid down by the men who drafted our Constitution. In retrospect, about the only flaw one can find was the attempt to set a fixed ratio between the value of gold and silver. Rather than placing a dollar value on a gold coin, the mint should have imprinted the gold value in terms of weight and fineness. The free market then would have assigned it an exchange value in terms of goods and services, and that automatically would have determined its correct monetary value as a ratio to the silver dollars which were bidding for the purchase of the same items. It was inevitable, therefore, that soon after the "ten-dollar" Eagle was created, the value of gold over silver began to climb higher than the prescribed ratio of fifteen-toone, and the Eagles ceased to circulate. In later years, with the discovery of the great gold fields in California and Australia, the process reversed itself, and silver dollars disappeared from commerce. But, even though this bimetallism led to a discrepancy between the actual conversion ratio and that which the government had

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prescribed, nevertheless, it took place in the open market and no one was greatly injured by the inconvenience. Throughout it all, there was just one standard:

1.

2.

These letters were written in 1790 and 1791, quoted by Atwood, pp. 5-6.

Written in 1789, quoted by Louis Basso, A Treatise on Monetary Reform (St. Louis, Missouri: Monetary Realist Society, 1982), p. 5.

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the defined silver content of a dollar. Furthermore, both the silver and gold coins were of intrinsic value and totally honest in their measure. No nation could do more for the prosperity of its citizens than that.

SUMMARY The Constitution prohibits both the states and the federal government from issuing fiat money. This was the deliberate intent of the Founding Fathers who had bitter experience with fiat money before and especially during the Revolutionary War. In response to the need to have a precisely defined national monetary unit, Congress adopted the Spanish dollar then currently in use and defined the content of that dollar to be 371.25 grains of pure silver. With the establishment of a federal mint, American silver dollars were issued in accordance with that standard, and gold Eagles also were produced which were then equal in value to ten silver dollars. Most importantly, free coinage was established wherein Americans were able to convert their raw silver and gold into national coins officially certified by the government as to their intrinsic value. The product of these measures was a period of sound money and great economic prosperity, a period that would come to an end only when the next generation of Americans forgot to read their history and returned to the use of paper money and "bills of credit."

The monetary plan laid down by the Founding Fathers was the product of collective genius. Nowhere in history can one find so many men in one legislative body who understood the fraud inherent in fiat money and the hiddentaxation nature of inflation. There was never such an assembly of scholars and statesmen determined to set a safe course for the nation of their own creation. Literally, they

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handed us a treasure map. All we had to do was follow it to economic security and national prosperity. But, as we shall see in the following sections, that map was discarded when the lessons of history died out with those who had lived it.