Debunking The Gold Standard: The Myth of Legality

by killfile | June 27, 2007 at 07:11 am

9424 views | 12 Recommendations | 11 comments

Thanks in large part to the hype surrounding Ron Paul's candidacy
within the Republican Party, the notion of a US return to the Gold
Standard has enjoyed renewed popularity as of late. Mr Paul supports
the dissolution of the United States Federal Reserve and a return to
the Gold Standard. Others in his ideological camp would take the matter
yet further, and some have gone so far as to suggest that the United
States do away with paper currency altogether and return to the
practice of using coins minted from actual precious metals as currency.

Like many of the solutions seized upon by hobbiest libertarians,
these monetary policies are concise, simplistic, and - unfortunately -
completely wrong. A return to the Gold Standard is not only profoundly
inadvisable for the United States, but also impractical, unnecessary,
and unrepresentative of the problems and solutions put forth by the
followers of Dr. Paul. In an effort to inject some sanity into the
debate, this article will address the second of three myths and
misunderstandings upon which the Gold Standard movement is based.

Myth: The Federal Reserve Is Unconstitutional

Established in 1913, the Federal Reserve (the Fed) is the
quasi-governmental body that manages and maintains the value of US
currency on the national and international market. Though the inner
workings of the Federal Reserve are somewhat complex, its power to
regulate the currency stems from its authority to issue Treasury
Securities on the open market. These securities, in conjunction with
the authorities granted to private banks to lend in excess of deposits,
allows the Federal Reserve and its associated banks the ability to
create (and through a more circuitous process destroy) money as needed
within the US Economy.

Critics charge that the Fed is unconstitutional, citing, as Bacher et allia do in "Fiat Empire," the following excerpt from Article I of the United States Constitution:

The Congress shall have Power To coin Money, regulate the
Value thereof, and of foreign Coin, and fix the Standard of Weights and
Measures; No State shall make any Thing but gold and silver Coin a
Tender in Payment of debts.

Such a sentence would seem the death-knell of the Federal Reserve and its fiat money system, but Article I contains no such sentence.
The above quotation is a convenient fiction, cobbled together from two
dispirit sections of Article I and joined - incorrectly - with a
semi-colon; thus wrongly implying a continuation of thought where none
exists. What follows are the component sentences in their original
context.

Article I, Section 8, Paragraph 5: [The Congress
shall have Power] To coin Money, regulate the Value thereof, and of
foreign Coin, and fix the Standard of Weights and Measures;

Article I, Section 10, Paragraph 1: No State shall
enter into any Treaty, Alliance, or Confederation; grant Letters of
Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing
but gold and silver Coin a Tender in Payment of Debts; pass any Bill of
Attainder, ex post facto Law, or Law impairing the Obligation of
Contracts, or grant any Title of Nobility;

The quotation from Bacher et allia is a conglomeration of
two sections of Article I: Sections 8 and 10. These sections have very
little to do with each other. Section 8 enumerates some of the powers
of the Congress, paragraph 5 in particular codifying Congress' power to
coin money and regulate the value of that money. Section 10 enumerates specific actions which are prohibited to the States. Section 10, which is the only section of the Constitution which contains either the word "gold" or "silver" makes no mention whatsoever of any limits or constraints upon the power of the Congress.

In short, the "supporting evidence" Bacher et allia
provide to substantiate their claims that the Federal Reserve is
unconstitutional is inaccurate at best and dishonest at worst.

Indeed, evidence for the legality and constitutionality of the Federal
Reserve is ample throughout the decisions of the United States Supreme
Court. The Court first upheld the right of the Federal Government to
issue notes in McCulloch v. Maryland (1819) and compounded that ruling
in Nortz v. United States (1935) in which it held that the Congress may
compel the surrender of gold-backed notes for non-gold-backed notes
based upon the power of the Congress to alter, legislatively, the value
of currency visa-vie gold itself and, of course, the regulation of
interstate commerce.

The rational for the Federal Reserve extends legally from the Congress'
authority to create a bank as upheld in McCulloch, but the Fed is not
under the constant and direct control of Congress. Congress and the
President appoint a Board of Governors for the Fed which provide
governmental representation and oversight, but the actual Federal
Reserve Banks are privately held entities that themselves regulate the
money supply to member banks as market pressures dictate.

This hybrid of government and free-market falls under frequent
criticism from strict constructionists who cite it as an abdication of
Congressional Authority.

To answer this question one must turn to another example of
Congressional outsourcing. In Article I, Section 8, Clause 7, Congress
is granted the power To establish post offices and post roads..
In Searight v Stokes (1845) the Supreme Court ruled that the Congress
could accomplish this by entering into a contract with a State to
undertake the construction and upkeep of a postal road. In short,
Searight upholds the Congress' authority to charge some other entity
with the inaction of its powers. Indeed later and repeated opinions and
dissents confirm the Searight decision. Congress is not bound to
undertake provisions in Article I, Section 8 but merely granted the
power to do so. As such, the charging of a third party with the
responsibilities of monetary governance is neither unconstitutional nor
without precedent.

Solidly on legal ground, the Federal Reserve's hybrid governmental and
corporate nature serves to insulate it from the excesses of both. As a
governmental entity it is, by design, cautious and concerned for the
long term viability of the money supply. As a corporate entity is
responds rapidly (but within the dictates of its Board of Governors) to
the pressures of the open market. Certainly not without failings, the
Fed's hybrid structure has created a system that is driven by both
equity and efficiency and, despite criticisms to the contrary,
completely within the legal framework set forth by the founding
fathers.

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mtippett

flagged this story as Good Stuff

at 07:44 on July 2nd, 2007

killfile, Ttanks for posting this. It's good stuff.

barrydonegan

at 15:28 on February 15th, 2008

"No State shall

enter into any Treaty, Alliance, or Confederation; grant Letters of

Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing

but gold and silver Coin a Tender in Payment of Debts; pass any Bill of

Attainder, ex post facto Law, or Law impairing the Obligation of

Contracts, or grant any Title of Nobility;"

while you correct in stating that the constitution doesn't specifically limit the right of congress to coin money which is made of other metals than gold and silver, it DOES explicitly prohibit the states from recognizing it as legal tender. This, de facto, makes it illegal for Federal Reserve notes to be traded as legal tender in the states of the United States. Sure, the congress could theoretically create bills of credit and use them with the federal reserve while inside the corporate municipality of Washington D.C. for the purposes of paying for the business of congress, inside of that municipality only, however for the states and citizens of the states to recognize a federal reserve bill of credit as a form of currency is not legal for the states themselves. This was the intended purpose of the founders in making this rule. it is obvious in the fact that there are 2 rules to the states, one is to prohibit them from being able to "coin money" and the other is the prohibition from being able to "make any Thing but gold and silver Coin a Tender in Payment of Debts". It is clear here that "make... a tender" does not mean actually coining the money, it means recognizing as tender. Because if "coin money" means to create a form of currency, then it would be redundant to say that they were not allowed to coin things out of other materials than gold and silver, as they are not allowed to coin anything at all.

I'm sorry, but just because politicians were able to strategically manipulate courts a couple of hundred years later to legalize the theft of gold from American citizens, does not make it constitutional. that is activist judiciary at its worst. The constitution was not written in the hopes of it changing meaning without a constitutional ammendment. the ammendment process is the only constitutionally correct way to update it, not common-law precedent.

"Like many of the solutions seized upon by hobbiest libertarians,

these monetary policies are concise, simplistic, and - unfortunately -

completely wrong. A return to the Gold Standard is not only profoundly

inadvisable for the United States, but also impractical, unnecessary,"

support this, or don't present it. how do you propose that fiat currency effectively protects the market from jeapordy, despite the fact that the federal reserve has failed to prevent stock market crashes from becoming recessions and depressions. the federal reserve failed to prevent a bank run after the stock market crash during the great depression! how did we even have a great depression if the federal reserve was there to increase the money supply in that case! before the federal reserve, banks were allowed to temporarily cut off people from emptying their bank accounts in the event of speculation, honoring only payroll checks, and checks which were written to purchase goods.

It is true that the federal reserve is legal due to court precedent in the 20th century, but the idea that it is constitutionally based, and not based on a late 19th early 20th century court precedent, is proposterous. it is not the intention of the document and the court precedent of the century following it. clearly to make this legal, constitutionally, not in lower court precedent, there needs to be an ammendment allowing federal reserve notes to be honored as legal tender by the states.

right now this does not exist, and the current common law and legislative practice is in dissonance with the constitution.

barrydonegan

at 15:40 on February 15th, 2008

also, from the federalist papers by James Madison regarding this section of the Constitution, regarding the promotion of people to accept this part of the constitution.

The right of coining money, which is here taken from the States, was left in
their hands by the Confederation, as a concurrent right with that of Congress,
under an exception in favor of the exclusive right of Congress to regulate the
alloy and value. In this instance, also, the new provision is an improvement on
the old. Whilst the alloy and value depended on the general authority, a right
of coinage in the particular States could have no other effect than to multiply
expensive mints and diversify the forms and weights of the circulating pieces.
The latter inconveniency defeats one purpose for which the power was originally
submitted to the federal head; and as far as the former might prevent an
inconvenient remittance of gold and silver to the central mint for recoinage,
the end can be as well attained by local mints established under the general
authority.

The extension of the prohibition to bills of credit must give pleasure to
every citizen, in proportion to his love of justice and his knowledge of the
true springs of public prosperity. The loss which America has sustained since
the peace, from the pestilent effects of paper money on the necessary confidence
between man and man, on the necessary confidence in the public councils, on the
industry and morals of the people, and on the character of republican
government, constitutes an enormous debt against the States chargeable with this
unadvised measure, which must long remain unsatisfied; or rather an accumulation
of guilt, which can be expiated no otherwise than by a voluntary sacrifice on
the altar of justice, of the power which has been the instrument of it. In
addition to these persuasive considerations, it may be observed, that the same
reasons which show the necessity of denying to the States the power of
regulating coin, prove with equal force that they ought not to be at liberty to
substitute a paper medium in the place of coin. Had every State a right to
regulate the value of its coin, there might be as many different currencies as
States, and thus the intercourse among them would be impeded; retrospective
alterations in its value might be made, and thus the citizens of other States be
injured, and animosities be kindled among the States themselves. The subjects of
foreign powers might suffer from the same cause, and hence the Union be
discredited and embroiled by the indiscretion of a single member. No one of
these mischiefs is less incident to a power in the States to emit paper money,
than to coin gold or silver. The power to make any thing but gold and silver a
tender in payment of debts, is withdrawn from the States, on the same principle
with that of issuing a paper currency. Bills of attainder, ex-post-facto laws,
and laws impairing the obligation of contracts, are contrary to the first
principles of the social compact, and to every principle of sound legislation."

here the discussion of congress' power to choose the "alloy"... I'm not sure which "alloy" of "coin" you find a federal reserve note to be. But its a serious stretch to say that the constitution authorizes the usage of paper, non-backed fiat money, despite the clear intent to outlaw it by the founders, both in the text and in the writings ABOUT the text.

they made these laws because the Crown was inflating their paper currency out of control, one of the main reasons that the revolution even occured

TheHerk (not verified)

at 13:25 on July 15th, 2008

@barrydonegan

Thanks for sticking up for the truth here.

@author

I anxiously await your rebutal of the destruction that barrydonegan just placed upon you.

Alex Stein (not verified)

at 09:44 on August 18th, 2008

Thank you killfile for the well-presented argument against the gold standard. I have yet to find a gold-standard proponent with a solid understanding of economics, so most of their arguments resort to bizarre interpretations of the constitution.

Article I, Section 8, Paragraph 5 makes no mention of gold or silver whatesoever. Article I, Section 10, Paragraph 1 is dealing with powers granted to the states. It begins with "No State shall..." making it obvious that this section is about LIMITING THE RIGHTS OF THE STATES. It is not granting any rights, ONLY limiting them. Barry Donegan has implied in his argument that the latter section overrides the first, while I would argue that Section 10 is intended to limit the power of the states and not to supercede section 8.

With constitutional government, someone has to be the arbiter of the constitution and its interpretation. That someone is not specified in the constitution itself, but the Supreme Court has filled that role since the early nineteenth century. I'm much more comfortable with the Supreme Court fulfilling that role than Ron Paul, Barry Donegan or any other government-hating extremist.

Ron Paul and his little band of misanthropic followers should face their real problem - they just don't like the USA. Scoff if you will at politicians and "activist judges" - they ARE the USA and it's constitution. READ the constitution. It's all about elected representatives and courts. The system has worked for 200 years - please point to another nation who has done better.

barry donegan (not verified)

at 10:42 on September 17th, 2008

sorry, but judicial "reinterpretation" is not the role of the judiciary. the judiciary is supposed to judge the rule of law based on the founders, and any changes to the document are to be made via constitutional means, such as an amendment to the Constitution. yes, the constitution was designed to be modified to keep with the times. if you guys are a fan of paper money, have your states get together and get the proper majority figures together to amend it. until this has happened, it is STILL the job of the judiciary to rule on the Constitution based on the intentions of the founders, and the people who wrote and drafted successful amendments.

based on your theory, a judiciary could decide that "Due process of law" meant that a King decided something. calling someone an extremist for standing up for the intended purpose of the Rule of Law, is saying that Law is extremist, and that the temporary whim of man is moderate and conservative.

sorry, but this is the United States of America, and while many of you might have fallen for the same old time-tested oligarchial tactics for erosion of the Liberties, we have not, and we will always live in these 50 states, and tyranny will never last. we know our rights, and we will assert them, and the worse this fiat money wrecks our economy, the louder we will shout, and the more angry, poverty stricken people will listen to the wisdom our forefathers gave us, that we have, as a nation, forgotten.

TexasKevin (not verified)

at 09:44 on November 15th, 2008

Barry Donegan you are wrong in your interpretation. Under Art. I, Sec. 8 Congress is given the power to "coin Money, regulate the Value thereof". This clearly means that Congress can denominate anything to be money in the United States and they can regulate its value. Therefore Federal Reserve Notes are legal tender and the Federal Reserve itself is a legal entity. Under Art. I, Sec. 10 the States are expressly forbidden from creating their own Money, "No State shall... coin Money." and when read together with the portion of Art. I Sec. 10 that states "No State shall... make any Thing but gold and silver Coin a Tender in Payment of Debts," means that the States cannot accept any other currency except that denominated and valued by Congress or gold and silver Coin. Therefore, Texas cannot accept Euros for payment of debts, but it must accept Dollars and it may accept any gold and silver Coin.

RationalOregon (not verified)

at 11:50 on December 11th, 2008

Since the Constitution specifically states that Congress is given the power to "coin Money, regulate the Value thereof," the Federal Reserve violates the Constitution, since the Congress has at this time ZERO power to "regulate the value thereof."

The actions of the Federal Reserve are so obfuscated that no argument can be made for Congress having the information they need to exert their power. Assuming the Federal Reserve WAS constitutional, let alone legal based on recent court precedent, it would still be a hindrance to Congress exerting its power, due to its very secretive nature. To assume that based on precedent Congress could delegate this authority to another entity (governmental or private), would in no way be supported by precedent that the Congress could or would lose its ability or authority to assess and enforce the legality of the authority it delegated. In short, constitutionally, "the buck stops here," and the here is Congress. No entity that is delegated authority by Congress is not subject to oversight by Congress; the Federal Reserve is in violation of this.

If the Reserve is really such a good and wonderful thing, then it should have no issue being public and honest about its workings, as required by law, before Congress, and therefore by representation, before the Public that it claims to serve so faithfully.

National Security might be argued to depend at times on secrecy for safety, but at no time do National Prosperity, Liberty, Freedom, Morality, or Decency succumb to the "need" for secrecy. Those virtues are dependant on transparency and confidence in our system of economy, and are ensured by We the People having elected and representative government. In the case of the Federal Reserve, We the People are not represented, nor do we elect our "Governors" of this fraudulent misinformatory institution. Therefore, its existance is unconstitutional.

barrydonegan2 (not verified)

at 22:21 on January 21st, 2009

texas kevin, in order for your definition of the power of congress, the word "coin" has to mean "make anything legal tender", which is not an accepted usage of the word coin in any application in history anywhere.

also, the states are not given the power to accept non gold and silver payments for the legal tender in payment of debts, even if they are issued(illegally) by congress. it specifically allows ONLY for state business to be conducted in gold and silver, meaning that for a state to collect taxes in fiat currency is a violation of the Constitution.

AndyH (not verified)

at 18:41 on January 12th, 2009

Fiat money has no intrinsic value. It is only worth something because the government outlaws the use of gold or silver as a form of legal tender. According to the constitution under a very strict interpretation, gold and silver is the only form of legal tender for the payment of debts. That suggests that our current laws ARE in fact unconstitutional.

All of the governments laws are designed to prop up a fiat currency and the dangerous practice of fractional reserve banking. A good explanation of the way the federal reserve system creates recessions can be found here: http://en.wikipedia.org/wiki/Austrian_Business_Cycle_Theory

I suggest you read it before dismissing talk about getting rid of the federal reserve. Thomas Jefferson thought the creation of a central bank was the most dangerous thing to happen to the U.S. and Andrew Jackson got rid of the central bank. These Presidents were not without very good reasons. The federal reserve system is responsible for the creation of the boom bust cycle. By keeping interest rates lower than they would be in a free market, the federal reserve system stimulates overinvestment / overconsumption in any industry that can be financed (ie housing, manufacturing, autos, finance). The bust comes when the overinvestment needs to be liquidated in order to balance supply and demand. It is no coincidence that the industries impacted the most have been housing, manufacturing, autos, and finance. The expansion in these industries was driven by an artificial government stimulus in the form of lower interest rates. People do not really need as many new homes and new cars. Because so many new homes and new cars were built and consumed in the last several years, now even fewer are needed on an ongoing basis. That is at the heart of the current economic crisis.