The United States once had the finest monetary system in history. It was a system that the U.S. Constitution established. It was a system in which the official money of the United States consisted of gold coins and silver coins.
We often hear that the “gold standard” was a system in which paper money was “backed by gold.” Nothing could be further from the truth. There was no paper money in the United States. That’s because the Constitution did not empower the federal government to issue paper money. It also expressly prohibited the states from issuing paper money.
The Constitution used the term “bills of credit.” That was the term people at that time used for paper money. The Constitution expressly forbade the states from issuing “bills of credit” or paper money. It also did not delegate the power to issue “bills of credit” or paper money to the federal government.
Instead, the Constitution empowered the federal government to “coin” money. At the risk of belaboring the obvious, one does not “coin” money out of paper. One “coins” money out of such metallic commodities as gold and silver.
The Constitution also expressly forbade the states from making anything but gold and silver coins “legal tender,” or official money, which further established the intent of the Framers.
The Constitution also empowered the federal government to borrow money. That’s what U.S. debt instruments — bills, notes, and bonds — are all about. But even though these debt instruments oftentimes circulated as “semi-money” in economic transactions, everyone understood that they were not money itself. Instead, they were promises to pay money, which meant promises to pay gold coins and silver coins.
Soon after the enactment of the Constitution, the U.S. government began minting gold coins and silver coins. Gold coins and silver coins remained the official money of the American people for more than a century. Those coins ranked among the most honest coins in history.
The gold-coin-silver-coin standard — and the monetary stability that came with it — was a major contributing factor to the enormous rise in the standard of living of the American people in the 19th century and early 20th centuries, especially in the period from around 1880 to 1915.
Of particular importance was that the American people did not have to worry about inflation reducing the value of their assets, investments, and income. That’s because the federal government lacked the means to inflate the quantity of gold coins and silver coins in the economy.
All that changed in the 1930s. Using the Great Depression as an excuse, President Roosevelt and his Congress abandoned the monetary system established by the Constitution and that had been in place for more than a century. In its place, they installed a paper-money standard. Possession of gold coins was deemed to be a felony. Anyone who was caught possessing what had been the official money of the nation for more than a century, faced a criminal prosecution, a 10-year jail sentence, a $10,000 fine, and forfeiture of his gold to the government.
In other words, Roosevelt and the Congress changed the Constitution without ever getting the Constitution amended. What they did was classic dictatorial conduct, the type of conduct one finds in totalitarian regimes.
Ever since, the result has been decade after decade of monetary debauchery and monetary crises at the hands of the Federal Reserve, which was called into existence in 1913. Ironically, it was the Fed’s monetary antics in the 1920s that led to the 1929 stock-market crash, which led to the Great Depression, which led to the abandonment of America’s founding monetary system.
In the wake of the latest banking crisis, we can continue following the road of monetary debauchery, crisis, and chaos. Or we can build on what our ancestors did by getting government totally out of the monetary business.
I say: Let’s raise our vision to a higher level. Let’s totally separate money and the state, just as our ancestors separated church and state. Let’s implement a free-market monetary system. The free market produces the best of everything, It would produce the finest monetary system in history, even better than the one our ancestors established.
Reprinted with permission from The Future of Freedom Foundation.
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