Congress Must Take Control of Money Back From the Fed

Published in Real Clear Markets.

The question of Money is always political.  What is the definition of “money,” what is its nature, how is it created, and how are debts settled—these are questions that have been much debated over time, sometimes very hotly.  Recall, for example, William Jennings Bryan’s famous, burning rhetoric of 1896:

“You shall not press down upon the brow of labor this crown of thorns—you shall not crucify mankind upon a cross of gold”!

He was addressing the definition of money.

What the U.S. Constitution says about the definition of money is succinct.  Article I, Section 8 gives Congress the express power:

“To coin money [and] to regulate the value thereof.”

As writers on the subject have pointed out innumerable times, to “coin” is obviously not the same as to “print.”

How then does it come about that the American government issues irredeemable, fiat, paper money, and this is the only kind of money we have today?

The Constitution expressly prohibits the states from issuing such paper money, but is silent about the national government on this point.

Considering original intent through the Constitutional debates, the founding fathers were nearly unanimous in their strong opposition to paper money, as the Notes of the Debates in the Federal Convention make completely clear.  In general, they shared the view later expressed by James Madison about:

“The rage for paper money…or any other improper or wicked project.”

Although this was the dominant opinion of the members of the convention, and although they debated an express prohibition of national paper money, they decided not to include it.  Of course, neither was there an authorization.

In the discussion, George Mason explained:

“Though he had a mortal hatred to paper money, yet…he could not foresee all the emergencies” of the future and was “unwilling to tie the hands of the legislature.”

Paper money in this view is a matter only for emergencies.

The Constitutional result was the express power “to coin” and silence on “to print.”  Should one conclude that there is an implied power for the government to print pure paper money?  Further, is there an implied power to make it a legal tender in payment of debts, even if those debts had been previously contracted for and explicitly required payment in gold coin?

A lot of supreme judicial ink would later be devoted to debating and ultimately deciding this question.
In the Constitutional Convention debates, Gouverneur Morris:

“Recited the history of paper emissions and the perseverance of the legislative assemblies in repeating them, with all the distressing effects.”

He further predicted:

“If a war was now to break out, this ruinous expedient would again be resorted to.”

This prediction was proved right when the Civil War did break out, and the Lincoln administration soon turned to paper money to pay the costs of the Union Army.

In 1861, faced with the staggering expenses of the war, Congress authorized the issuance of paper money, or “greenbacks,” as they were called.  In 1862, it made them a legal tender.  Predictably, the greenbacks went to a large discount against gold—their value fluctuated with the military fortunes of the ultimately victorious Union.

As another war measure, national bank notes were created by the National Currency Acts of 1863 and 1864, which we now know as the National Bank Act.  The main point was to use the new national banks to monetize the Treasury’s debt.  Governments always like the power to monetize their deficits.

After the Civil War, the expedient of paper money as legal tender resulted in a series of Supreme Court cases in which:

First, making paper money a legal tender for debts previously contracted in gold was found unconstitutional in a 4-3 decision.

Then, soon afterwards, the Court reversed itself 5-4, after the addition of two new justices, finding that it was constitutional, after all.  The new majority stressed the sovereign right of a government to do what was necessary to preserve itself.

About the legal tender cases it has been said:

“Measured by the intensity of the public debate at the time, it was one of the leading constitutional controversies in American history.”

Yet they are now largely forgotten.

In one of the series of legal tender decisions, one later overruled, the Court wrote:

“Express contracts to pay in coined dollars can only be satisfied by the payment of coined dollars…not by tender of United States notes.”

That this decision did not stand was handy for the United States government later—in 1933, when it defaulted on its express promise to pay Treasury gold bonds in gold.  Instead it paid in paper money.

This action the Supreme Court upheld in 1935 by 5-4, although no one doubted the clarity of the promise to pay that was broken.  Among the majority’s arguments were the sovereign right of the government to default if it wanted to and the sovereign right of the national government to regulate money.

Coming to today: We have a pure fiat money system of the paper Federal Reserve notes in your wallet and bookkeeping entries on the books of the Fed.

This paper currency, the Federal Reserve on its own has committed to depreciate by 2% per year forever, in spite of the fact that the Federal Reserve Act instructs it to pursue “stable prices.”

By promising perpetual 2% inflation, the Fed keeps promising to make average prices quintuple in a normal lifetime.  (That is simply the math of compound interest.)

The Fed made this momentous, inherently political, decision on its own, without the approval of the Congress.  It did not ask Congress for legislative approval and no hearings on this debatable proposal about the nature of money were held.

Where, under the Constitution, did the Fed get this right to proceed without Congress?  That the Fed presumed to do this on its own authority was a highly questionable action of the administrative state.

I believe one could correctly argue that this was an unconstitutional violation of Article I, Section 8. Unfortunately, we have no lawsuit about it, so we can only observe it.

One scholar of the legal tender cases concluded:

“There remains the intriguing question of the Constitutional basis for today’s legal tender paper… today’s fiat money.”

Indeed there does.  But the political basis rules and life goes on.