Pages

Wednesday, September 26, 2012

Good question...

Why Do We Have Paper Money?
by Jacob G. Hornberger


Article One, Section 10, of the U.S. Constitution reads: “No state shall … make any Thing but gold and silver Coin a Tender in Payment of Debts.”

Article One, Section 8, reads as follows: “The Congress shall have Power … To Coin money, regulate the value thereof….”

Keep in mind the dual purpose of the Constitution: one, to call the federal government into existence and, two, to enumerate the powers that it would have. If a power wasn’t enumerated, then that meant that it could not be exercised.

Thus, there was no need to expressly prohibit the federal government from exercising powers that the Framers didn’t want it to have. It was understood that the only powers the federal government would have would be those enumerated in the Constitution.

It worked the opposite way with the states. The state governments would have the traditional powers of sovereignty (historically known as “police powers”) except those powers that the Constitution expressly forbade the states from exercising.

Thus, Article One, Section 10, reads as follows: “No state shall … emit bills of credit.”

What were bills of credit? It was a term that meant paper money.

Was there an express prohibition against the federal government’s emission of bills of credit or paper money? No, because there didn’t have to be. The issue would be whether the power to emit bills of credit or paper money is among the enumerated powers that the Constitution granted to the federal government. The answer is: No, the Constitution did not grant to Congress or any other part of the federal government the power to issue paper money or bills of credit.

From the very inception of our nation, every American understood that the United States was going to be different from every other nation in history with respect to money and a monetary system. Everyone understood that there would be no paper money, either at the federal level or the state level. Instead, the official money of the United States was to consist of gold coins and silver coins.

And that, in fact, is what happened. Soon after the federal government came into existence, the federal government began coining money, just as the Constitution empowered it to do. Those coins consisted primarily of gold and silver. That was the official money of the United States, and it remained our nation’s official money for more than a century after the founding of the country. The states made gold and silver coins legal tender, as the Constitution required them to do.

There was no paper money, including paper money “backed by gold.” The official money of the United States was gold coins and silver coins. That was the legal tender at both the federal and state level, pursuant to the provisions of the Constitution.

What about federal debt instruments?

Article One, Section 8, also reads: “The Congress shall have Power … To borrow Money on the credit of the United States.”

So, the federal government could borrow money through the issuance of such debt instruments as bills, notes, and bonds. What did those debt instruments promise to pay? They promised to pay money. What was the money they promised to pay? Gold coins and silver coins, the official money of the United States.

Thus, the federal government would borrow gold and silver coins and its debt instruments promised to pay back gold and silver coins.

Since the Constitution prohibited the issuance of bills of credit (or paper money), the federal government’s debt instruments were not permitted to circulate as money. Thus, while debt instruments might be payable on demand — e.g. short-term bills — they remained debt instruments and could not legally circulate as money.

Why did our American ancestors insist on that type of monetary system, one where the money is gold coins and silver coins and not paper debt instruments? Because they knew history. They knew that ever since the invention of the printing press, governments had used paper money to plunder and loot the citizenry.

How did governments do that? By taking control over the issuance of paper money and then printing up as much paper money as they wanted to spend. If they needed more money, they just cranked up the printing press, grabbed stacks of newly printed paper money, and went out and spent it. In that way, public officials could spend money to their heart’s content and without having to raise taxes.

That posed an enormous problem for the citizenry, however. The government’s expansion of the money supply would inevitably reduce the value of people’s own paper-money holdings. That reduction in value would be reflected in the ever-increasing prices of the things that people needed to buy.

The government’s inflation of the paper money supply was a way to tax people indirectly, without their knowing that they were being taxed. As the value of the paper-money holdings would go down, as reflected in rising prices, people would inevitably place the blame on the businesses raising prices rather than on the public officials who were debasing the currency.

Thus, paper money has always been a dream-come-true for public officials and an absolute nightmare for the citizenry.

That wasn’t going to happen in America. That’s why our American ancestors gave the federal government the power to coin money but not the power to issue paper money. That’s why they also prohibited the states from emitting bills of credit (paper money) and from making anything but gold and silver coins a legal tender in payment of debts.

Yet, we all know that the federal government prints paper money and makes it legal tender, which the Constitution does not authorize it to do.

We know that every state now makes U.S. paper money — i.e., Federal Reserve Notes — a tender in payment of debts rather than gold and silver coins, as required by the Constitution.

And we know that the Constitution has never been amended to permit the federal government to issue paper money and to permit state governments to make paper money legal tender.

I’m curious: What’s the point of having a Constitution that provides for a government of limited powers if public officials are free to ignore it and do whatever they want?


Link:

No comments:

Post a Comment