Many thanks to Stephen L. Hall for this Monday morning post!
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While looking up a citation for my previous post, my eyes happened upon a provision within the Constitution which provides an interesting perspective on the question.
The Federal Reserve has been controversial since its creation for any number of reasons. However, I am not referring to questioning the Constitutionality of the Federal Reserve based upon the traditional assaults to its existence.
People question whether Congress can legally delegate its authority to “coin money” under Article I, Section 8, Paragraph 5, to a mere privately owned bank. There are a lot of people who question the validity of a fiat currency, which has no value beyond a bit of paper and ink and whether or not the creation thereof is not a form of outright fraud. There is also the question of increasing the money supply not by printing more fiat paper but by the fractional reserve system of lending out multiple times even that paper money.
It is fairly clear that the founding father did not consider paper notes to be money. The currency with which most people are familiar, which they carry in their wallets, were actually once demand notes.
The paper notes used to have printed upon them the words, “pay to the bearer on demand” to signify that at any time the possessor of such notes could go to the US Mint and ask to exchange the notes for actual gold or silver.
Coinage, traditionally called “specie” was minted, or if you will, made out of gold and silver. It was the coinage that the founding fathers actually considered “money” which became apparent in the power delegated to Congress to coin money.
We know that many of the early leaders of our country opposed the idea of an European styled central banking system as they saw it as antithetical to liberty. In particular, President Andrew Jackson considered it his greatest achievement in life that he had managed to “kill the bank”. Which makes it both insulting and ironic that his face is plastered on one of the most popular notes of the Second Bank of America, a.k.a. the Federal Reserve.
In this case, the particular passage of the Constitution which I had in mind is actually a restriction upon the states rather than the federal government. “No state shall . . . coin Money; emit Bills of Credit; make any Thing but gold and silver coin a Tender in Payment of Debt . . . .” Article I, Section 10, Paragraph 1.
It is this last part which I think bears a closer look. It is a restriction upon the states requiring anything other than gold or silver as tender for payment. Yet on ever Federal Reserve Note is imprinted the following, “This note is legal tender for all debts public and private.”
To digress for a little bit, there is a principle much debated in law regarding “incorporation”, meaning the question of whether the Bill of Rights applies to the states by way of incorporation. Now, for the most part, most states have their own version of the Bill of Rights. This is not surprising given that the Bill of Rights itself was essentially copied from the state Constitutions.
But less frequently arises the question of whether a Constitutional restriction upon the states is also effectively a restriction on the federal government itself under the principle of incorporation.
If we were to assume, for the sake of argument, the prohibition against the states from making anything except gold and silver legal tender applies to the federal government through the principle of incorporation; then how could that federal government then delegate that authority which they themselves did not possess to a group of private individuals?
What value is a Federal Reserve Note if people are not forced by law to recognize it as legal tender for all debts public and private? What happens if you can’t pay your mortgage or your taxes with what is officially designated as “currency”? How would you buy groceries if people lost faith in the fiat currency? One of the very things making the currency a viable substitute for specie, i.e. money, is the compulsion by law to accept it.
As an aside, I am struck by the oddity that this provision is in Section 10 of Article I, which section involves restrictions upon the state actions. Article I is what sets forth the powers and limitations of the legislative branch of the federal government. It is Article IV which pertains to the states and their role in the federal government.
The placement of this provision in Article I certainly strengthens the argument of incorporation that like the state governments, the federal government cannot make anything other than gold and silver coin to be legal tender. Otherwise one would expect the restrictions of Section 10 to be in Article IV specifically pertaining to the states.
Not that I in the least anticipate that the Supreme Court or the legal community would be inclined to simply rule the creation of the Federal Reserve to be Unconstitutional, but it does bring up an interesting question of the nature of legal tender as a medium of exchange and the reasons the founding fathers chose to include this provision in the Constitution in the first place.
The power of any nation really lies is its economy. The true wealth and power of any nation is its productive capacity, not its military or political influence; it is the physical and intellectual capabilities of its workers, the productivity of its land, and the accumulated tools and machinery. True wealth is not in gold and silver.
But if people were to employ another form of money for their exchanges at a state level as legal tender, then the central authority of the federal government becomes weaker. In the early days of the colonies, tobacco was actually used as currency, and was accepted as legal tender to pay one’s taxes.
With the rise of virtual currencies such as Bitcoin, could the possibility of alternate currencies increase as the nation begins to tax the population more and more to pay for a bloated welfare state? Could an underground economy supplant the structure of the nation the way that Romans resorted to bartering as out of control taxes became unbearable to the workers in the countryside?
More than likely, things will continue on into the future much the way that they are now, but sometimes it is helpful and comforting to remember where real wealth lies, and that whether gold and silver, or printed pieces of paper, money is only ever what people are willing to accept and to agree to accept.
