News > The Mud pile
The war on Conspiracy theories!
Giuliano Taverna:
I Giuliano taverna do hereby declare war on all the frauds, fear mongers, and lunatics who use the internet to spread lies and propaganda either to further their political, ethnic, or religious agenda, or simply for kicks.
This thread is open to all, tin foil hat wearing and not alike. Please... post any conspiracy theories you know of, so I can debunk them. Or if you wish to help me out. Post theories and the proof that debunks them.
Giuliano Taverna:
For any of you who have ever heard of the following people, Ron Paul, Ludwig von Mises, Lew Rockwell, or Glenn Beck... You probably think the federal reserve is a sinister entity controlled by evil foreigners who are charging interest on fake money and slowly taking over the world right?
Classic fednut conspiracy propaganda
http://www.youtube.com/watch?v=vVkFb26u9g8
http://www.youtube.com/watch?v=_dmPchuXIXQ
http://www.youtube.com/watch?v=iYZM58dulPE
http://www.youtube.com/watch?v=ji_G0MqAqq8
http://www.youtube.com/watch?v=VB9zQud9hRw
Well you'd be wrong, and crazy.
This is such a long conspiracy theory, that I am going to break it up into different posts.
I would like to thank the good folks at PublicEye.org for all their work, full credit goes to them for this material.
http://www.publiceye.org/conspire/flaherty/Federal_Reserve.html
Giuliano Taverna:
Myth #1: The Federal Reserve Act of 1913 was crafted by Wall Street bankers and a few senators in a secret meeting.
On the Georgian resort hideaway of Jekyll Island (which has some excellent golf courses, by the way), there once met a coalition of Wall Street bankers and U.S. senators. This secret 1910 meeting had a sinister purpose, the conspiracy theorists say. The bankers wanted to establish a new central bank under the direct control of New York's financial elite. Such a plan would give the Wall Street bankers near total control of the financial system and allow them to manipulate it for their personal gain.
G. Edward Griffin lays out this conspiratorial version of history in his book The Creature from Jekyll Island. His amateurish take on history is highly suspect, however. Gerry Rough, in a series of well- researched essays on U.S. banking history, reveals many historical inaccuracies, inconsistencies, and even contradictions in Griffin's book and others of its genre. Instead of reproducing Rough's work here, I offer the reader a substantially more accurate view of the events leading up to the creation of the Federal Reserve System in 1913. To get a proper historical perspective, the story of begins just prior to the Civil War...
The National Banking Acts of 1863 & 1864
Prior to the Civil war there were thousands of banks in operation throughout the Union, all of them chartered, that is, licensed by the state governments. Banking regulations were virtually nonexistent. The federal government had no meaningful controls on banking practices, and state regulations were spotty and poorly enforced at best. Economic historians call the era leading up to the Civil War as the 'state banking era' or the 'free banking era.'
The problems with state banking were numerous, but three were conspicuous. First, the nation had no unified currency. State banks issued their own bank notes as currency, a system which at worst invited severe bouts of counterfeiting and at best introduced additional uncertainty in the task of determining the relative value of each bank note. Second, with no mitigating influence on the issuance of bank notes, the money supply and the price level were highly unstable, introducing and perhaps causing additional volatility in the business cycle. This was due in part to the fact that bank note issuance was frequently tied to the market value of the bank's bond portfolio which they were required to have by law. Third, frequent bank runs resulted in substantial depositor losses and severe crises of confidence in the payments system.5
The National Banking Acts of 1863 and 1864 were attempts to assert some degree of federal control over the banking system without the formation of another central bank. The Act had three primary purposes: (1) create a system of national banks, (2) to create a uniform national currency, and (3) to create an active secondary market for Treasury securities to help finance the Civil War (for the Union’s side).5
The first provision of the Acts was to allow for the incorporation of national banks. These banks were essentially the same as state banks, except national banks received their charter from the federal government and not a state government. This arrangement gave the federal government regulatory jurisdiction over the national banks it created, whereas it asserted no control over state-chartered banks. National banks had higher capital requirements and higher reserve requirements than their state bank counterparts. To improve liquidity and safety they were restricted from making real estate loans and could not lend to any single person an amount exceeding ten percent of the bank's capital. The National Banking Acts also created under the Treasury Department the office of Comptroller of the Currency. The duties of the office were to inspect the books of the national banks to insure compliance with the above regulations, to hold Treasury securities deposited there by national banks, and, via the Bureau of Engraving, to design and print all national banknotes.5
The second goal of the National Banking Acts was to create a uniform national currency. Rather than have several hundred, or several thousand, forms of currency circulating in the states, conducting transactions could be greatly simplified if there were a uniform currency. To achieve this all national banks were required to accept at par the bank notes of other national banks. This insured that national bank notes would not suffer from the same discounting problem with which state bank notes were afflicted. In addition, all national bank notes were printed by the Comptroller of the Currency on behalf of the national banks to guarantee standardization in appearance and quality. This reduced the possibility of counterfeiting, an understandable wartime concern.5
The third goal of the Acts was to help finance the Civil War. The volume of notes which a national bank issued was based on the market value of the U.S. Treasury securities the bank held. A national bank was required to keep on deposit with the Comptroller of the Currency a sizable volume of Treasury securities. In exchange the bank received bank notes worth 90 percent, and later 100 percent, of the market value of the deposited bonds. If the bank wished to extend additional loans to generate more profits, then the bank had to increase its holdings of Treasury bonds. This provision had its roots in the Michigan Act, and it was designed to create a more active secondary market for Treasury bonds and thus lower the cost of borrowing for the federal government.5
It was the hope of Secretary of the Treasury Chase that national banks would replace state banks, and that this would create the uniform currency he desired and ease the financing of the Civil War. By 1865 there were 1,500 national banks, about 800 of which had converted from state banking charters. The remainder were new banks. However, this still meant that state bank notes were dominating the currency because most of them were discounted. Accordingly, the public hoarded the national bank notes. To reduced the proliferation of state banking and the notes it generated, Congress imposed a ten percent tax on all outstanding state bank notes. There was no corresponding tax of national bank notes. Many state banks decided to convert to national bank charters because the tax made state banking unprofitable. By 1870 there were 1,638 national banks and only 325 state banks.5
While the tax eventually eliminated the circulation of state bank notes, it did not entirely kill state banking because state banks began to use checking accounts as a substitute for bank notes. Checking accounts became so popular that by 1890 the Comptroller of the Currency estimated that only ten percent of the nation's money supply was in the form of currency. Combined with lower capital and reserve requirements, as well as the ease with which states issued banking charters, state banks again became the dominant banking form by the late 1880’s. Consequently, the improvements to safety that the national banking system offered were mitigated somewhat by the return of state banking.5
There were two major defects remaining in the banking system in the post Civil War era despite the mild success of the National Banking Acts. The first was the inelastic currency problem. The amount of currency which a national bank could have circulating was based on the market value of the Treasury securities it had deposited with the Comptroller of the Currency, not the par value of the bonds. If prices in the Treasury bond market declined substantially, then the national banks had to reduce the amount of currency they had in circulation. This could be done be refusing new loans or, in a more draconian way, by calling-in loans already outstanding. In either case, the effect on the money supply is a restrictive one. Consequently, the size of the money supply was tied more closely to the performance of the bond market rather than needs of the economy.5
Another closely related defect was the liquidity problem. Small rural banks often kept deposits at larger urban banks. The liquidity needs of the rural banks were driven by the liquidity demands of its primary customer, the farmers. In the planting season the was a high demand for currency by farmers so they could make their purchases of farming implements, whereas in harvest season there was an increase in cash deposits as farmers sold their crops. Consequently, the rural banks would take deposits from the urban banks in the spring to meet farmers’ withdrawal demands and deposit the additional liquidity in the autumn. Larger urban banks could anticipate this seasonal demand and prepare for it most of the time. However, in 1873, 1884, 1893, and 1907 this reserve pyramid precipitated a financial crisis.5
When national banks experienced a drain on their reserves as rural banks made deposit withdrawals, new reserves had to be acquired in accordance with the federal law. A national bank could do this by selling bonds and stocks, by borrowing from a clearinghouse, or by calling-in a few loans. As long as only a few national banks at a time tried to do this, liquidity was easily supplied to the needy banks. However, an attempt en masse to sell bonds or stocks caused a market crash, which in turn forced national banks to call in loans to comply with Treasury regulations. Many businesses, farmers, or households who had these loans were unable to pay on demand and were forced into bankruptcy. The recessionary vortex became apparent. Frightened by the specter of losing their deposits, in each episode the public stormed any bank rumored, true or not, to be in financial straights. Anyone unable to withdraw their deposits before the bank’s till ran dry lost their savings or later received only pennies on the dollar. Private deposit insurance was scant and unreliable. Federal deposit insurance was non-existent.5
The 1907 Banking Panic
The 1907 crisis, also called the Wall Street Panic, was especially severe. The Panic caused what was at that time the worst economic depression in the country’s history. It appears to have begun with a stock market crash brought about by a combination of a modest speculative bubble, the liquidity problem, and reserve pyramiding. Centered on New York City, the scale of the crisis reached a proportion so great that banks across the country nearly suspended all withdrawals -- a kind of self-imposed bank holiday. Several long-standing New York banks fell. The unemployment rate reached 20 percent at the peak of the crisis. Millions lost their deposits as thousands of banks collapsed. The crisis was terminated when J.P. Morgan, a man of sometimes suspicious business tactics and phenomenal wealth, personally made temporary loans to key New York banks and other financial institutions to help them weather the storm. He also made an appeal to the clergy of New York to employ their Sunday sermons to calm the public’s fears.
Morgan’s emergency injection of liquidity into the banking system undoubtedly prevented an already bad situation from getting still worse. Although private clearinghouses were able to supply adequate temporary liquidity for their members, only a small portion of banks were members of such organizations. What would happen if there were no J.P. Morgan around during the next financial crisis? Just how bad could things really get? There began to emerge both on Wall Street and in Washington a consensus for a kind of institutionalized J.P. Morgan, that is, a public institution that could provide emergency liquidity to the banking system to prevent such panics from starting. The final result of the Panic of 1907 would be the Federal Reserve Act of 1913.
The Federal Reserve Act of 1913
Following the near catastrophic financial disaster of 1907, the movement for banking reform picked up steam among Wall Street bankers, Republicans, and eastern Democrats. However, much of the country was still distrustful of bankers and of banking in general, especially after 1907. After two decades of minority status, Democrats regained control of Congress in 1910 and were able to block several Republican attempts at reform, even though they recognized the need for some kind of currency and banking changes. In 1912 Woodrow Wilson won the Democratic party’s nomination for President, and in his populist-friendly acceptance speech he warned against the "money trusts," and advised that "a concentration of the control of credit ... may at any time become infinitely dangerous to free enterprise."3
Also in 1910, Senator Nelson Aldrich, Frank Vanderlip of National City (today know as Citibank), Henry Davison of Morgan Bank, and Paul Warburg of the Kuhn, Loeb Investment House met secretly at Jeckyll Island, a resort island off the coast of Georgia, to discuss and formulate banking reform, including plans for a form of central banking. The meeting was held in secret because the participants knew that any plan they generated would be rejected automatically in the House of Representatives if it were associated with Wall Street. Because it was secret and because it involved Wall Street, the Jekyll Island affair has always been a favorite source of conspiracy theories. However, the movement toward significant banking and monetary reform was well-known.3 It is hardly surprising that given the real possibility of substantial reform, the banking industry would want some sort of input into the nature of the reforms. The Aldrich Plan which the secret meeting produced was even defeated in the House, so even if the Jekyll Island affair was a genuine conspiracy, it clearly failed.
The Aldrich Plan called for a system of fifteen regional central banks, called National Reserve Associations, whose actions would be coordinated by a national board of commercial bankers. The Reserve Association would make emergency loans to member banks, create money to provide an elastic currency that could be exchanged equally for demand deposits, and would act as a fiscal agent for the federal government. Although it was defeated, the Aldrich Plan served as an outline for the bill that eventually was adopted. 5
The problem with the Aldrich Plan was that the regional banks would be controlled individually and nationally by bankers, a prospect that did not sit well with the populist Democratic party or with Wilson. As the debate began to take shape in the spring of 1913, Congressman Arsene Pujo provided good evidence that the nation’s credit markets were under the tight control of a handful of banks – the "money trusts" against which Wilson warned.1 Wilson and the Democrats wanted a reform measure which would decentralize control away from the money trusts.
The legislation that eventually emerged was the Federal Reserve Act, also known at the time as the Currency Bill, or the Owen-Glass Act. The bill called for a system of eight to twelve mostly autonomous regional Reserve Banks that would be owned by the banks in their region and whose actions would be coordinated by a Federal Reserve Board appointed by the President. The Board’s members originally included the Secretary of the Treasury, the Comptroller of the Currency, and other officials appointed by the President to represent public interests. The proposed Federal Reserve System would therefore be privately owned, but publicly controlled. Wilson signed the bill on December 23, 1913 and the Federal Reserve System was born.6
Conspiracy theorists have long viewed the Federal Reserve Act as a means of giving control of the banking system to the money trusts, when in reality the intent and effect was to wrestle control away from them. History clearly demonstrates that in the decades prior to the Federal Reserve Act the decisions of a few large New York banks had, at times, enormous repercussions for banks throughout the country and the economy in general. Following the return to central banking, at least some measure of control was removed from them and placed with the Federal Reserve.
References:
1. Davidson, James West, Mark A. Lytle, et al, (1998), Nation of Nations, New York: McGraw-Hill.
2. Galbraith, John K. (1995), Money: Whence it Came, Where it Went, Boston: Houghton Mifflin.
3. Greider, William (1987), Secrets of the Temple, New York: Simon & Schuster.
4. Griffin, G. Edward (1995), The Creature from Jekyll Island, Appleton: American Opinion Publishing, Inc.
5. Kidwell, David S. and Richard Peterson (1997), Financial Institutions, Markets, and Money, 6th edition, Fort Worth: Dryden Press.
6. "Wilson Signs the Currency Bill," New York Times, pages 1-2, December 24, 1913.
Giuliano Taverna:
Myth #2: The Federal Reserve Act never actually passed Congress. The Senate voted on the bill without a quorum, so the Act is null and void.
The silliest of the Federal Reserve conspiracy theories is that the Federal Reserve Act of December 23, 1913 passed illegally. The constitution stipulates that both the House and the Senate must have at least half their members present, a quorum, to vote on any bill. According to this myth, the Senate voted on the Federal Reserve Act (known as the Currency Bill at the time) deviously in a late night session when most of its members had gone home or had left town for the holiday. This was done to impose the will of a pro-banker minority on the objecting majority. Since no quorum was present, the Federal Reserve Act is not valid.
This idea is better described as folklore than a full-blown conspiracy theory because I've never been able to find it in print, only on occasion on Usenet or in e-mail from readers. Gary Kah, author of En Route to Global Occupation, came close when he wrote that the bill's supporters waited until its opponents were out of town and it was passed under "suspicious circumstances" (Kah, p. 13-14). Nevertheless, the myth has no basis in fact. The House passed the bill 298-60 on the evening of Dec. 22, 1913.3 The Senate began debate the following day at 10am, and passed it 43-25 at 2:30pm.4
What of the missing Senators? Since there were 48 states in 1913, forty eight votes plus the tie-breaking vote of vice-President Thomas Marshall would have been sufficient to approve the bill even if all absent votes had been cast against the bill. However, many of the missing Senators had their positions recorded in the Congressional Record.1 Of the 27 votes not cast, there were 11 'yeas' (in favor of the bill) and 12 'nays.'1 Even if the absentee Senators had been there, the Currency Bill would have passed easily.
President Wilson signed the Currency Bill into law in an "enthusiastic" public ceremony on Dec. 23, 1913.4
References:
1. Congressional Record, 63rd Congress, 2nd Session, Dec. 23, 1913, pp. 1487-1488.
2. Kah, Gary (1991), En Route to Global Occupation, Layfayette, La.: Huntington Press.
3. "Money bill goes to Wilson today," New York Times, pp. 1-3, Dec. 23, 1913.
4. "Wilson signs currency bill," New York Times, pp. 1-2, Dec. 24, 1913.
Giuliano Taverna:
Myth #3: The Federal Reserve Act and paper money are unconstitutional. Gold and silver coins are the only constitutional forms of money.
Those who hold that the constitution should be interpreted very strictly believe the Federal Reserve System and paper money are unconstitutional. Sharing the interpretive philosophy of Thomas Jefferson, they argue that Congress has only those powers which the constitution specifically enumerates. If the power is not explicitly granted, then the federal government simply does not have it. Therefore, the Federal Reserve is unconstitutional because Congress does not have the specific power to create a central bank. In addition, the federal government's power to create money -- lawful money -- is limited only to minting gold or silver coins; paper currency is forbidden.
The Constitutional Basis for Central Banking
First, the constitution grants the Congress the right to coin money and to regulate its value. It is not clear from the constitution or the Federalist Papers what the authors meant by the term 'value.' Traditionally, it has meant the weight and metallic content of the coin. No one challenges this interpretation. On the other hand, the only relevant meaning of 'value' in the context of money is its value in trade, also known as its purchasing power. This a government cannot regulate merely by an act of Congress. The government's only tool for regulating this latter value is altering the money supply.
Second, Congress has the right to regulate interstate commerce. Banking and other financial services clearly involves interstate commerce as the courts have come to define it.
Finally, and perhaps most importantly, Congress has the right to make any law that is 'necessary and proper' for the execution of its enumerated powers (Art. I, Sec. 8, Cl. 18). A law creating a Bureau of the Mint, for example, is necessary and proper for the Congress to exercise its right to coin money. A similar argument may justify a central bank. It facilitates the expansion and contraction of the money supply and it serves as means to regulate the banking industry.
Is this a reasonable use of the necessary and proper clause? I do not know, but a test of its meaning came early. The history of central banking in the United States does not begin with the Federal Reserve. The Bank of the United States received its charter in 1791 from the U.S. Congress and Washington signed it. Secretary of State Alexander Hamilton designed the Bank's charter by modeling it after the Bank of England, the British central bank. Secretary of State Thomas Jefferson believed the Bank was unconstitutional because it was an unauthorized extension of federal power. Congress, Jefferson argued, possessed only delegated powers that were specifically enumerated in the constitution. The only possible source of authority to charter the Bank, Jefferson believed, was in the necessary and proper clause. However, he cautioned that if the clause could be interpreted so broadly in this case, then there was no real limit to what Congress could do.2
Hamilton conceded that the constitution was silent on banking. He asserted, however, that Congress clearly had the power to tax, to borrow money, and to regulate interstate and foreign commerce. Would it be reasonable for Congress to charter a corporation to assist in carrying out these powers? He argued that the necessary and proper clause gave Congress implied powers -- the power to enact any law that is necessary to execute its specific powers. A “necessary” law in this context Hamilton did not take to mean one that was absolutely indispensable. Instead, he argued that it meant a law that was “needful, requisite, incidental, useful, or conducive to” the primary Congressional power which it supported. Then Hamilton offered a proposed rule of discretion: “Does the proposed measure abridge a pre-existing right of any State or of any individual?” (Dunne, 19). If not, then it probably is constitutionally proper on these grounds. Hamilton’s arguments carried the day and convinced Washington.
The Supreme Court had its say on the matter in McCulloch v. Maryland (1819). It voted 9-0 to uphold the Second Bank of the United States as constitutional. The Court argued with the doctrine of implied powers, stating that to be ‘necessary and proper’ the Bank needed only to be useful in helping the government meet its responsibilities in maintaining the public credit and regulating the money supply. Chief Justice Marshall wrote, “After the most deliberate consideration, it is the unanimous and decided opinion of this court that the act to incorporate the Bank of the United States is a law made in pursuance of the Constitution, and is part of the supreme law of the land” (Hixson, 117). The Court affirmed this opinion in the 1824 case Osborn v. Bank of the United States (Ibid, 14).
Therefore, the historical legal precedent exists for Congress' power to create a central bank. It formed the Federal Reserve system in 1913 to perform many of the same functions as its predecessors. As before, the courts have agreed that a central bank, and the Federal Reserve in particular, is constitutional.
The Constitutional Basis for Paper Money
Even if the Federal Reserve is a constitutionally proper institution, what of paper money? The federal government has issued many forms and denominations of paper currency since 1812. It first made paper a legal tender in 1862. Does not the constitution require the Congress to coin money, not to print it? Is this not what the authors of the constitution intended? Perhaps, but it's not an air-tight issue. S.P. Breckenridge wrote in Legal Tender of the significant disagreements the delegates to the constitutional convention had over the issue, and even over the interpretation of the wording that they eventually adopted.
Prior to the constitutional convention in the summer of 1787, the States exercised their sovereign powers over monetary matters. Most States had issued their own forms of paper money, typically called ‘bills of credit’ at the time, and had declared some foreign coins as a legal tender. By ‘legal tender’ we mean a form of money which a government specifies may be used to settle debts and to pay taxes due to it. During the Revolutionary War many States issued paper money to excess. The Congress of the Articles of Confederation had also relied heavily on using paper money to fund its war expenditures. The States had also declared various forms of paper currency, including the Congress’ emissions, a legal tender. Severe price inflation was the necessary result of this over-indulgence in paper, and by the time the constitutional convention convened paper money had many enemies.
The primary foes of paper money were commercial and banking interests. When a lender agrees to fund a loan, he charges a rate of interest which, among other factors, includes a premium for any expected loss in the purchasing power of the principal during the life of the loan. If the price level is expected to rise, say, five percent then the lender will insist on an interest of at least that amount. If in actuality the price level increases eight percent, then the lender stands to lose as much as three percent of his principal. If a government has the power to issue paper money, then the potential abuse of this power increases the probability of an unexpected inflation. Commercial concerns also were generally against allowing paper, and for similar reasons. The sour inflationary experience of the previous decades made the business climate less stable than it might otherwise be with a constitutionally guaranteed gold or silver monetary standard. In addition, such a standard would protect the integrity of commercial contracts that specified fixed payments in specie. These interests at the convention therefore had two objectives: To forbid both the States and the federal government from issuing bills of credit -- the common term for paper money at the time -- and to base the monetary system on gold or silver.
Paper money was not without its partisans, however. Agricultural interests and debtors were fond of paper money, as well as Ben Franklin, and for many of the same reasons. The losses a lender is likely to suffer at the hands of a paper-induced inflation are exactly offset by the gains of the borrower. The debtor would then be able to repay a fixed debt in less valuable currency. Farmers also generally favored paper money because it tended to create an economic climate of rising commodity prices relative to other goods, thereby increasing their real income. Their monetary goal at the convention was to give the government the right to issue bills of credit or, at the very least, not to deny it the power.
Charles Pinckney of South Carolina produced a draft of a constitution that had two interesting features for our purposes. From Art. VII. Sec. 1 of his draft we read “The legislature of the United States shall have power … (4) To coin money … (5) To regulate the value of foreign coin … ( 8 ) To borrow money and emit bills on the credit of the United States …” Also we find in Article XII: “No state shall coin money.” We further read in Article XIII: “No state, without the consent of the legislature of the United States, shall emit bills of credit, or make anything but specie a tender in payment of debts.” We can glean some indication of the Founders’ intent concerning paper money from the debate on the matter in Madison’s notes on the convention. What follows below is an excerpt of those notes on this debate:
MR. GOUVERNEUR MORRIS [PA.] moved to strike out “and emit bills on the credit of the United States.” If the United States had credit such bills would be unnecessary; if they had not, unjust and useless.
MR. BUTLER [S.C.] seconds the motion.
The fundamental theory on which the Founders created the U.S. constitution is of a government of limited powers. The federal government would have only those powers specifically enumerated and those reasonably necessary to enact them. If a power is not expressly given to it, then it is denied. What Robert Morris of Pennsylvania seeks to do with the above motion is to deny the federal government the specific right to issue paper money. The discussion continued:
MR. MADISON [Va.] Will it not be sufficient to prohibit making them a tender? This will remove the temptation to emit them with unjust views; and promissory notes in that shape may in some emergencies be best.
MR. GOUVERNEUR MORRIS: Striking out the words will still leave room for the notes of a responsible minister, which will do all the good without the mischief. The moneyed interests will oppose the plan of government if paper emissions be not prohibited.
MR. GORHAM [Mass.] had doubts on the subject. Congress, he thought, would not have the power unless it was expressed. Though he had a mortal hatred to paper money, yet, as he could not foresee all emergencies, he was unwilling to tie the hands of the legislature. He observed the late war could not have been carried on had such a prohibition existed.
Gorham’s thoughts on this are key to interpreting how the Founders would eventually resolve this issue. The Revolutionary War was financed to a great extent on paper money the Continental Congress and later the Congress of the Articles of Confederation had issued. The Congress had no taxing authority of its own and the newly independent States were unwilling to contribute any significant funds of their own for the war effort. The Congress, with limited credit, was therefore left to emitting paper money. Although its over-issuance was largely responsible for the severe inflation of the time, it was also clear to the Founders and to later historians the States could not have funded their effort in any other way. The personal financial losses many of the delegates suffered at the hands of the paper money did much to alienate them from the medium, but it did not erase from their memory the acknowledgment of its financial contribution to their independence. Gorham, like others at the convention, disliked paper, but were hesitant in denying forever the government’s ability to use it. Madison’s notes continued:
MR. MERCER [Md.] was a friend to paper money, though in the present state and temper of America he should neither propose nor approve of such a measure. He was consequently opposed to a prohibition of it altogether. It will stamp suspicion on the government to deny it discretion on this point. It was impolitic also to excite the opposition of all those who were friends to paper money. The people of property would be sure to be on the side of the plan, and it was impolitic to purchase their further attachment with the loss of the opposite class of citizens.
MR. ELLSWORTH [Conn.] thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which been made were now fresh in the public mind, and had excited the disgust of all the respectable part of America. By withholding the power from the new government, more friends of influence would be gained to it than by almost anything else. Paper money can in no case be necessary. Give the government credit, and other resources will offer. The power may do harm, never good.
MR. RANDOLPH [Va.], notwithstanding his antipathy to paper money, could not agree to strike out the words, as he could not foresee all the occasions that might arise.
Here in a microcosm is the debate on whether to deny the federal government the right to issue paper money. Mercer and Ellsworth clearly represented the agricultural and commercial interests, respectively, and their positions are understandable within this context. Randolph, however, took the middle ground, wondering whether it was wise to tie the hands of future legislatures.
Eventually, the convention voted 9-2 to strike the clause, thereby denying the federal government the specific power to emit bills of credit. The relevant sections of the constitution eventually approved read: Art. I. Sec. 8.: “The Congress … shall have power … (2) to borrow money on the credit of the United States … (5) To coin money, regulate the value thereof, and of foreign coin, and fix the standard weight and measures.” Art. II. Sec 10.: “No state shall coin money nor emit bills of credit nor make anything but gold and silver coin a legal tender in payment of debts …”
These clauses have several implications relevant to the question of whether today’s paper money is constitutional. Among the lesser effects for our purposes is that it removed from the States their previous sovereign power to coin money or to emit paper money. It also restricted what they could declare a legal tender. The question, though, is whether the Congress may legally issue paper money. Some argue that it was the Founders’ intent to bar the door to paper money permanently and the vote to strike the bills of credit clause from Pinckney’s draft is evidence of this intent. This may be a hasty interpretation, however.
Although several members of the convention wanted to deny paper money to the federal government and believed the act of striking the 'bills of credit' clause accomplished the task, not all delegates shared either this intent or this interpretation. Several members, as shown above, were either friends of paper money or did not want to tie the hands of the Congress for all time. The interpretation of their action varies widely. Mason believed that if the power was not expressly given, it was denied. As far as he was concerned, the Congress could not authorize paper money. Morris, though, believed it to be permissible for a ‘responsible minister.’ Madison, who cast the deciding vote in the Virginia delegation to strike the clause, still viewed it as legal provided the notes were safe and proper. Madison wrote, “Nothing very definite can be inferred from this record” as to the views of the convention on this matter. As President, Madison approved of a $36 million non-legal tender paper money issue to help finance the War of 1812. His actions seem to have spoken louder than his words. Luther Martin, a delegate from Maryland, explained his views to the Maryland legislature and stated:
Against this motion we urged that it would be improper to deprive the Congress of that power; that it would be a novelty unprecedented to establish a government which should not have such authority; that it would be impossible to look forward into futurity so far as to decide that events might not happen that should render the exercise of such a power absolutely necessary; and that we doubted whether if a war should take place it would be possible for this country to defend itself without resort to paper credit, in which case there would be a necessity of becoming a prey to our enemies or violating the constitution of our government; and that, considering that our government would be principally in the hands of the wealthy, there could be little reason to fear an abuse of the power by an unnecessary or injurous exercise of it.
It is clear the intent of the Founders was to prohibit the States from issuing paper money. It is not clear whether the same intent applied to the Congress. Wrote Breckenridge, “the clause granting to Congress the power to emit bills was stricken out, and no prohibition was laid. Silence as to that was maintained; and all that can be said as to the interpretation of that silence is that, although there was a strong and well-nigh universal dread of paper issues, there was a stronger dread of too narrowly limiting the powers of the new legislature; and that there was neither a very definite nor a unanimous opinion as to the effect of striking out the clause, or as to the extent of the power granted (p.84).” It appears the Founders, whether intentionally or not, left the paper money issue to be settled by future generations.
Recent Federal Court Rulings on the Federal Reserve and Paper Money
Below are some recent court rulings on the issues of the Federal Reserve and paper money.
U.S. v. Rickman, 638 F.2d 182, C.A.Kan. 1980:
Federal Reserve Notes in which the defendant, charged with failure to file federal income tax returns, was paid were lawful money within the meaning of the United States Constitution. 26 USCA §7203; USCA Const. Art. 1, §8, cl. 5.
U.S. v. Wangrund, 533 F.2d 495; C.A.Cal. 1976
The statute establishing Federal Reserve Notes as legal tender for all debts, public and private, including taxes, is within the constitutional authority of Congress; thus the defendant could not overturn his conviction on two counts of wilful failure to make an income tax return on the theory that he did not receive money since checks he received as compensation for his services could be cashed only for Federal Reserve Notes which were not redeemable in specie. 26 USCA §61, §7203; USCA Const. art. 1, §8; Coinage Act of 1965, §102; 31 USCA §392.
Nixon v. Individual Head of St. Joseph Mortgage Company, 615 F.Supp. 890, affirmed 787 F.2d 596. D.C.Ind. 1985.
Federal Reserve notes are legal tender.
Ginter v. Southern, 611 F.2d 1226, certiorari denied 100 S.Ct 2946, 446 US 967, 64 L.E.d.2d 827. C.A.Ark. 1979.
Tax protestor's claims concerning the constitutionality of the Federal Reserve System, Internal Revenue Code and establishment of tax court were so frivolous as not to require discussion and detail. USCA Const. Amends. 5, 13; 28 USCA §1346; 26 USCA §6532, 26 USCA §7422.
U.S. v. Schmitz, 542 F.2d 782 certiorari denied 97 S.Ct. 1134, 429 US 1105, 51 L.Ed.2d 556. C.A.Cal. 1976.
Federal Reserve Notes constitute legal tender and are taxable dollars. USCA Const. Art. 1, §10.
Milam v. U.S., 524 F.2d 629. C.A.Cal. 1974.
The statute which delegates to the Federal Reserve System the power to issue circulating notes for money borrowed and the power to define the quality and force of those notes as currency is valid ... Although golden eagles, double eagles, and silver dollars were lovely to look at and delightful to hold, the holder of a $50 Federal Reserve Bank Note, although entitled to redeem his note, was not entitled to do so in precious metal. Federal Reserve Act, §16, 12 USCA §411; Coinage Act of 1965, §102, 31 USCA §392.
Moreover, the paper money issue is an irrelevant one. If we replace each all paper that has "one dollar" printed on it with a coin that has "one dollar" stamped on it, what will we gain? We willl have achieved compliance with the literal words of the constitution at the expense of a convenient and popular form of money.
Gold and Silver Coin
It is also sometimes argued that the constitution permits the minting only of gold or silver coins. This is a misinterpretation, as a federal court makes clear in U.S. v. Rifen, 577 F.2d 1111. C.A.Mo. 1978:
The United States Constitution prohibits states from declaring legal tender anything other than gold or silver but does not limit Congress' power to declare what shall be legal tender for all debts ... Federal Reserve Notes are taxable dollars. Coinage Act of 1965, §102, 31 USCA §392; USCA Const. Art. 1, §10.
This point is made further in Nixon v. Phillipoff, 615 F.Supp. 890, affirmed 787 F.2d 596. D.C.Ind. 1985:
The provision of the Constitution [USCA Const Art. 1, §8, cl. 5] which gives Congress the right to coin money, and regulate the value thereof, gives Congress exclusive ability to determine what will be legal tender throughout the country ... The provision of the Constitution [USCA Const. Art. 1, §10, cl. 1] which mandates that no state shall make anything but gold or silver coin tender in payment of debts acts only to remove from states inherent soverign power to declare currency, thus leaving Congress as the sole declarant of what constitutes legal tender; the provision does not require states to accept only gold and silver as tender ... Federal Reserve Notes are legal tender for any debt or public charge ... Using or accepting Federal Reserve Notes as payment for state court filing fees was completely proper under the Constitution. USCA Const. Art. 1, §8, cl. 5; 31 USCA §5103.
The court made the point again somewhat humourously in Foret v. Wilson, 725 F.2d 400. C.A.La. 1984:
Gold and silver coin do not constitute the only legal tender by the United States; thus, the appellant, who bid $2.80 in silver dimes on a foreclosed property requiring a minimum bid of $80,000 under Louisiana law, was not entitled to the deed to the property.
Are Gold and Silver Practical Metals for Coins?
We could replace all our paper money with coins containing the appropriate amount of a precious metal. Gone would be the $1 Federal Reserve Note, and in its place a coin with $1 stamped on it. Apparently, this would make the paper money opponents happy. Or would it? As it turns out, the amount of gold that would need to be in a $1 coin would be so tiny it would barely be there at all.
In the summer of 1999, the price of gold is about $250/oz. Therefore, a $1 coin would need 1/250ths ounce of gold in it; that is to say, it would contain 0.4% gold and 99.6% base metals. A quarter-dollar would have 0.1% gold and 99.9% base metals. A $20 coin would have 8.0% gold and 92% base metals. If any more gold than that were included, then it would pay to melt the coins and sell the gold, and then we'd be without a physical medium of exchange.
Silver has the same problem. The price of silver is about $5/oz., so we could mint a $5 coin containing 100% silver. A $1 coin would have 20% silver. A quarter would have about 5% silver and 95% base metals. Could anyone honestly tell the difference between the quarter we have now and one with 5% silver?
References:
Breckenridge, S.P., Legal Tender, N.Y.: Greenwood Press, 1903, 1969.
Dunne, Gerald T., Monetary Decisions of the Supreme Court, Rutgers Univ. Press, 1960.
Hixson, William F., Triumph of the Bankers: Money and Banking in the Eighteenth and Nineteenth Centuries, Praeger, 1993.
Footnotes:
1. I have no formal legal training and do not consider myself a constitutional scholar.
2. Then, curiously, in the memorandum in which he articulated his thoughts on this matter, Jefferson advised that if the President felt that the pros and cons of constitutionality seemed about equal, then out of respect to the Congress which passed the legislation the President could sign it (Dunne, p. 17-19).
Navigation
[0] Message Index
[#] Next page
Go to full version