Het volgende is een transcript van een lezing gehouden door Edwin Vieira op initiatief van Ron Paul voor een publiek van staffers van leden van het US Congress (link)
Lecture 2/3
What Is Constitutional Money? (01:01:57)
What Is Constitutional Money? (01:01:57)
Presentation:
I'm
Lydia Mashburn, Policy Director for Chairman Ron Paul's Subcommittee
on Domestic Monetary Policy. On behalf of Congressman Ron Paul and
his office, welcome to the second of our afternoon tea lecture series
on the basic principles of money. Today's question is going to be
What Is Constitutional Money? This is following up our first lecture
which was What Is Money? At that lecture – if you missed it – we
had Professor Joe Salerno come and talk about money. Essentially
money is a natural market driven phenomenon that fulfill the
properties of indirect exchange. So money is a commodity. Throughout
history various things have filled the role of money: salt, leather,
cattle, and of course silver and gold. If money is a natural market
driven phenomenon, why is it that governments are so involved in
money? Which brings us to today's question What is constitutional
money? The Founders had a very particular understanding of money,
based on their own historical circumstances and some disastrous
experiments with money that governments did. Based on this
understanding they put in provisions in the constitution, to help
ensure sound money existed throughout our great nation. Unfortunately
those provisions have been either misinterpreted, misunderstood, or
completely forgotten. And I'd say today, we've completely forgotten
why the Founders put in certain provisions or what their
understanding of those provisions was. So I'm delighted to say that
we have to talk to us about constitutional money, Dr. Edwin Vieira,
Jr. Dr. Vieira holds four degrees from Harvard, including his J.D. as
well as his Ph. D. He is also the author of this lovely work Pieces
of Eight,
this is
two
volumes, more than 1700 pages, on constitutional money. The full
title is Pieces
of Eight. The Monetary Powers and Disabilities of the US
Constitution.
To give a sort of a Cliff's Notes version of his magnum opus he'll be
answering the question What Is Constitutional Money? Please join me
in welcoming Dr Ed Vieira.
Edwin
Vieira:
(00:03:06)Thank
you, Lydia. Thank you Ladies and Gentlemen.
What Is Constitutional Money? covers
essentially three centuries of American history, so put your seat
belts on, we're gonna have a very fast flight. And as Lydia pointed
out, governments have historically become involved in monetary
questions and the reason for that, basically, is redistribution of
wealth. Whoever controls the substance and the supply of money at the
source, can do a great deal of redistributing wealth, either directly
through government expenditures or indirectly through government
involvement with the private sector. So keep that in mind as we go
through some of these historical principles.
The Colonial
Period
Now, to understand the Constitution one has to
do more than simply read it. You have to put yourself in historical
context of “We the People” – The People: the framers, the
founders. You have to put yourself in the political context, the
legal context, and in the linguistic context, as well. Because there
are some terms – terms of art, legal terminology – used at that
time which don't quite correspond to the terminology we use today. Or
at least, the original meaning has been lost.
Historically, if you go back to the colonial
period, the pre-constitutional period, the Colonies generally
speaking had no power and did not claim the power to coin money.
There were some desultory attempts in Massachusetts and Virginia, but
they generally fizzled out because that power was one of the
prerogatives of the King and was jealously guarded. And if you read
Blackstone's Commentaries on the Laws of England, which anyone
who studies the Constitution should start with, because it puts you
in that historical-legal context of Anglo-American law at the time,
Blackstone discusses this prerogative of the King, which was
essentially to take a standard, the pound-sterling was the one that
England adopted, and then arithmetically regulate the values of all
of the coinage with respect to that standard. Pretty simple process.
Now, some of the English kings, Henry VIII especially, Edward VI –
well, Edward VI was a minor, the people around him – engaged in
debasement of the currency. And Blackstone went out of his way to
show that if this wasn't a usurpation, it was certainly an aberration
under the English constitution.
Silver was
Currency
So this was the basic principles of coinage,
but it didn't have much to do with the Colonies per se, because they
weren't in a position to coin money. So the Colonies were using two
sources of coinage, one, English coinage – of course, they were
English colonies – and secondly, foreign coinage, which was coming
in through foreign trade and in fact, the major foreign coinage that
was used was coming from Central and South America. And that's why in
a proclamation of Queen Anne in 1704 and in 1707 the Statute of
Parliament, the Spanish
milled dollar was established as the standard for all foreign
coins within the Colonies. I emphasize the Spanish milled dollar,
because you're going to hear about this again. The Spanish milled
dollar was a silver coin, but actually the Spanish unit was the real,
and there were eight reals in a silver dollar. In those days there
wasn't a tremendous amount of coinage and people would literally cut
Spanish dollars in little wedges. There were eight potential wedges
and they were called “bits”, colloquially. Two of those bits made
up a “quarter”. Four of those bits made up a “half”. You
following this now? This is why Wall street until a few years ago,
quoted stocks in “eighths”, “quarters” and “three-quarters”.
They were referring back to this original monetary system.
So, here were the Colonies using the coinage
that was supplied from England, and supplied through essentially the
Spanish trade and part of that of course was the infamous triangle
trade – the slave trade between New England, Africa and the West
Indies.
The Colonies
Start Generating Paper Money
But that wasn't really sufficient, or they
didn't believe it was sufficient for their economy, so the Colonies
started generating paper money. I emphasize those two
words, because money was always considered coinage – gold or silver
– and then there was this other thing, this paper money,
which was a different concept entirely. And it's interesting to see
how these statutes come out. Typically speaking, you'll see first a
statute that deals with raising troops to engage in some kind of
military adventure. Especially in New England where they're going
after the French and the Indians in Canada. And they'll be the
statute raising so many troops and all the logistics that are
involved and then as part of that statute – or as the next statute
in the line – is the statute for emitting bills of credit.
That's the special term of art: a bill of credit. That's what they
call paper money in those days. Because it was a bill, a note, a
promise to pay – some kind of debt instrument based on “somebody”'s
credit – somebody back there. And it was typically the credit of
the colonial Administration and it might have been payed off in terms
of taxes, so that you take your bill of credit and pay your taxes or
other public dues with it. Or it might have been a redeemable bill of
credit: At some point in the future, the colonial Administration
would pay in gold or silver, supposedly the face value of those
notes.
So these were the two forms that the colonial
governments used. Parliament, however, did not like the emission of
bills of credit. English merchants did not like to paid with bills of
credit, especially colonial bills of credit that were made “legal
tender”, that could be forced on a creditor. So Parliament
passed two statutes in the middle 1600s extremely limiting the
ability of the Colonies to emit these things, especially with
legal-tender character.
The Period of
the War of Independence
So there's the background. Now we come to the
period of the War of Independence. The thirteen Colonies become
thirteen independent States and start asserting for themselves the
full panoply of governmental authority with respect to essentially
everything. From potentially coining money – although I don't know
that any of them really did – to raising troops and fighting a war.
The first document of consequence you need to think about is the
Articles of Confederation, because that is the precursor (00:10:00)
to the Constitution. The Articles of Confederation created a Congress
with both legislative and executive authority. And it granted to that
Congress the power to coin money and to regulate the value of money
that was coined by the States. Because the States were still claiming
that they had this authority. Secondly it granted to Congress the
power to borrow money or emit bills on thecredit of the United States. Notice how they
were treated as two separate powers, the power to borrow or the power
to emit bills to create this paper money or paper currency. And in
fact, Congress used the second of those powers – it didn't do any
coinage of consequence (I think it sent out a couple of basement
alloy coins) – but they certainly used the power to emit bills. And
they generated a paper money called the Continental. And I think
everybody knows the economic history of the Continental and the
phrase “not worth a Continental”. For one reason or another –
especially over-issue and the fact that Congress had no power to tax,
so it really didn't have a credible way to say it was going to redeem
these things – the purchasing power of Continentals dropped
terrificly and eventually they were anything like 212 to 1 when they
were finally paid off.
Now the States also engaged in the
printing of bills of credit of their own. So you had bills of credit
coming out of Congress and you had bills of credit coming out of the
States and you had essentially a near hyper-inflationary event going
on at that period of time.
The war is on, you have stagflation,
depreciation of all of these paper currencies.
During the war Congress had asked the States to
make the Continentals legal tender, so that they could be forced
merchants, especially so that they could buy materials for the war.
And eventually that didn't work out too well even with price controls
and all sorts of typical government interventions and they had to
give that up. The legal tender provisions were repealed.
Monetary
Measures of the Federal Convention
So now we're in a position of essentially
economic chaos. And what's interesting is that the same people who
had fomented this economic chaos, the same people who had been in the
Continental Congress, the same people who had been in the State
legislatures, many of them now repaired to Philadelphia for the
federal convention to deal with the drafting – well actually it was
supposed to be the amendment of the Articles of Confederation –
they end up drafting a new constitution. And this has always struck
me as a fascinating thing, because it's one of the few instances –
maybe the only instance I know of in world history – where the
politicians who had made these blunders turned around and said,”We
made a mistake.” And then corrected it.
How did they correct this? Well, let's take a
look at the provisions of the Constitution dealing with monetary
affairs. First one:
Article I,
Section 10, clause 1.
Article I, Section 10 contains three clauses, a
whole slew of limitations of the powers of the States.
With respect to money:
No State shall coin money. They remove
that power from the States, primarily because they didn't want
thirteen types of coinage circulating.
No
State shall emit bills of credit.
Period. Any kind of bill of credit, whether legal tender bill of
credit or not. They didn't want State paper money anymore.
No State shall make anything but
gold and silver coin the tender in payment of debts.
Interesting way to phrase it. '...anything but
gold and silver...' meaning there's a reserved power and actually a
duty to make gold and silver coin the tender in payment of debts. Why
were they concerned about that? Well, what are debts? Typically,
debts are some kind of obligations arising in the commercial realm;
at least the most important of them do. So, dealing with commercial
transactions, where would most commercial transactions, if they came
to litigation going to be settled at that time? Well, in the State
courts; there were no federal courts. So what they were looking at
was a situation where the merchant class were going to go into the
State courts, and the State courts were being told by the
Constitution that when they issued judgment on this debt it had to be
payable in gold and silver; it could not be made payable in something
else, as a matter of State law.
So, now if you look
at the State level, you have a gold and silver economy, absolutely.
Where is this gold and silver going to come from? We'll get to that
in a moment.
What about the
congressional side, the Congress side? Article I, Section 8.
Article
I, Section 8, clause 5.
Congress has
delegated the power to coin money, regulate the value thereof, and
of foreign coin. So we have: coinage taken away from the States;
coinage given to Congress. It's pretty clear that Congress's power at
least as a government to coin money is exclusive, because the States'
power has been completely removed. This is interesting language:
regulate the value thereof. That takes you back to Blackstone.
Blackstone told us how to do that. If you have a unit of silver, and
this coin has twice as much silver in it, then it's worth: two units.
If it has half as much silver, then it's worth: half a unit. Whatever
that unit may be. When you factored gold into the equation you have
another element to look at, because the exchange rate between gold
and silver in the market place is never 1 to 1; it's never been 1 to
1; it probably never will be 1 to 1. Gold has always been more
valuable in the market place than silver. So you have to factor in
that market ratio. So if a gold coin has the same weight as the
silver unit and the ratio in the market is 10 to 1, that gold coin is
worth 10 units – again it's simply arithmetic. That's regulation
of the value.
And of foreign
coin. Why were they interested in that? Because they wanted to
monetize the entire gold and silver coin in the world as part of the
American monetary system. And if you look at what happened early on
in the area of tariffs, customs duties, you'll see exactly how that
worked. Foreign merchants come into the United States, bring in their
goods; they have to pay some customs duty. Paid in what? Well,
typically they would pay in some foreign money. That's what they
would have. So Congress passed a series of statutes right away
setting out the various foreign monies that would be acceptable and
what they were worth; the regulated value of those foreign
monies in terms of the United States' standard. Of course, that
brings you to this question: What is the United States' standard?
What
is the United States' standard?
Well, the
Constitution talks in two places about “dollars”:
Article
I, Section 9, clause 1 –
the so-called slave tax clause; a tax of 10 dollars on every
person imported into the United States. Some of those “persons”
might have been indentured servants, or possibly they were free
people who would be brought in. But it was directed at the slave
trade.
And then of course,
the 7th
Amendment – jury trial in any case in which the
issue is of greater value than 25 dollars – 25 dollars or
more. Does the Constitution define the word “dollars”? No! The
Constitution's got a few words it doesn't define; one of the few that
it does is “treason”. You look at that, because it's a good
example because: they wanted to narrow the definition. The English
definition of treason was extremely broad. It was a political crime,
essentially. But most terms in the Constitution are not defined,
you're supposed to know what they mean. And at that time people did
know what they meant. The “dollars” they were talking about were
what dollars? The dollars from 1704 and 1707 – what dollars? The
Spanish milled dollars! How do we know they were talking about this?
Because the Continental Congress of the Articles of Confederation
adopted the Spanish milled dollar as the American dollar. It was
Thomas Jefferson who proposed that. So, when the Constitution is
written and refers to dollars, they're thinking back to what was done
under the Articles of Confederation, proposed by Jefferson and
adopted – they're thinking back to this Spanish milled dollar. And
of course, if you go and try to find historically anything else that
was called “the dollar”, you will get frustrated very quickly.
The
Dollar Defined as Weight in Silver and Gold Eagle Defined in (Silver)
Dollars
So, it is fairly
clear that the standard in this system is going to be the dollar.
What is a dollar?
Again we come Mr
Jefferson and
Mr Hamilton. This is one of the few things on which they
agreed. During the first Washington Administration, Jefferson was
Secretary of State and Hamilton was Secretary of the Treasury, and
the question was: “All right. The dollar is the standard. What is a
dollar.” These were pretty practical men, they went out and got
some merchants and said: “Go out on to the market place and do” –
a what we today would call a statistical sampling or analysis - “and
get what appears to you to be a good sample of Spanish milled dollars
that are circulating by tale in the economy.” “By tale” means
that they are taken at sight. Because, obviously, when a coin is worn
sufficiently, people don't take them at sight. Then they have go and
be remelted somewhere. Some of these would be
pristine, some of them would be (00:20:00)
worn to the point almost at which they would no longer be taken. They
went out and did this analysis, melted them down, divided by the
number of coins, and they said: “The average Spanish milled dollar
that's now circulating in the economy contains 371 ¼ grains of
silver.” And they put that into the coinage act, the Mint Act of
1792, which says that the dollar or unit shall be of the value of
the Spanish milled dollar as the same is now current and containing
on average 371 ¼ grains of silver. Notice the language! “…
shall be of the value of the Spanish milled dollar…” What
are they talking about? “Value” is weight in silver that it
contains. Not “purchasing power” as we think of it today, but the
actual weight of the coin. “... as the same is now current...”
“Current”, Latin: curro, currere;
to run; running, accepted in the market place. So what they were
doing in that statute is determining an historical fact. They were
determining as an historical fact what that word in the Constitution
meant. Because it was out there, in the market place.
Now, I suppose we
could come back today and we could find that bar of melted silver
that they had somewhere off with the Ark of the Covenant there hidden
away in the archives and if we gave that to some top flight
analytical chemist, we could come up with a more accurate number,
like 371.32 or 370.99; whatever it would be. It's essentially
irrelevant, because whatever the unit is, it's arbitrary. But it's
fixed. Or it was fixed in 1792. “That's the unit.”
What are they going
to do with the gold coinage? In that same statute they created gold
coins. Did they call them dollars? Well of course not. You can't call
something by a name that doesn't apply. They called them eagles.
And they gave them values in dollars by looking at – what? Their
weight and what was their exchange value in the market place at the
time, which was about 15 to 1.
So there was the
system. And there's absolutely no other way to interpret what was
done, because actually there's a hundred something years of history
that ties it all together. So there you have the coinage system. Now
the problem in that coinage system was the gold-silver ratio.
Because, as I said, the gold-silver ratio was not fixed; it never has
been. Typically, for several hundred years before the American War of
Independence, it fluctuated a bit between 14 ½ and 15. So it was
relatively stable and given the lack of ability for information to be
transferred from one place to another, it worked fairly well. So they
adopted that principle, a bi-metallic standard, a fixed exchange
ratio between silver and gold in that statute. And that was their
mistake, their practical mistake. I'll tell you about that a little
later.
The
Constitution Does Not Allow Congress to Emit Bills of Credit
Now, what about
paper currency? Well, go back to Article
I, Section 10, clause 1: No
State shall emit bills of credit.
End of discussion. That was their word for paper currency. There
shall be no official currency coming out of the States. But what
about Congress? Remember, the Articles of Confederation had the power
of Congress to borrow
money or emit bills on the credit of the United States.
And the first draft of the Constitution in the Federal Convention
essentially borrowed that language directly from the Articles of
Confederation. In fact, you'll find a lot of language in the original
draft and even in the final draft of the Constitution that you can
trace right back to the Articles of Confederation. So, it was
proposed initially that Congress should have the power to borrow
money and emit bills. And for those of us interested in reading
legislative history – it relies on who you are, being connected to
the Legislature – if you read Madison's notes on the debates
regarding that provision of the Constitution, Article I, Section 8,
clause 2, you'll see that there was a tremendous dispute over those
three words: And
emit bills.
Some people wanted them left in, because they thought Congress should
be able to emit paper currency in an emergency. Others wanted them
absolutely to be removed. There were two delegates who said they
would vote against the whole Constitution if those three words were
not removed. And they were removed. And if you read Farrand's
notes on the Constitutional Convention – he has Luther Martin's
report to the Maryland legislature. Luther
Martin
was one of Maryland's delegates. And Martin makes it very clear. He
says: “By the removal of those three words you have absolutely
disabled Congress from emitting paper money”. Why? “Because
Congress has only the power that is granted to it. Congress, this
Congress especially, did not exist prior to the Constitution of the
United States. So there is absolutely no way that you can find an
implied authority in this entity when it was proposed to give it that
power, and those three words were removed.”
The System of
Free Coinage
So,
1788 – 1791, Bill of Rights, that period of time; what do we have?
We have a system that's running in principle entirely on a gold and
silver coin basis – as official money. And I say “official money”
because nothing in the Constitution would preclude private parties
from engaging in banking. And, typically, what banks did then – and
they do now, at least through the Federal Reserve cartel – but
individual banks did then was to emit their own bills of credit,
private
bills of credit, banknotes,
which typically they promised to redeem in gold or silver, usually on
demand, so that they pushed the circulation. But there is nothing in
the Constitution that prevented that kind of activity, except in so
far as it was fraudulent and then the Commerce Clause could come into
play, or the State police powers could come into play. So you had a
private sector monetary system that would depend upon honest bankers,
and you had an official system that was based entirely on gold and
silver. Why? Because that's the one system that prevents the
government from redistributing wealth. Unless the government happens
to have gold and silver mines, where does the coinage come from? It
comes from the free market through some minter. And the system of
minting that you find in the Mint Act of 1792 is what was called
“free coinage”. The mint was open to all the gold and silver that
might be brought from the market place. And it would cost the
individual who brought that gold and silver nothing to have it
converted into coinage – Maybe it's essentially treating coinage as
a public utility. Or if the individual wanted to take the gold and
silver immediately he had to pay a premium for that. But basically it
was the government's role to mint gold and silver, and by putting a
stamp on those coins – defined in the statute – to certify what
the weight of the gold and silver was in the official coins that were
coming out of the mint. Period. End of discussion.
Bimetallism
Now we go back to a point I was discussing a
little bit earlier: the gold-silver ratio. Of course the gold-silver
ratio changed – fairly quickly – after the 1792 Mint Act. It
moved up. It went from 15 to the 16 level. So comes the statute of
1834, the Coinage Act of 1834. Congress now recognizes this problem,
and they engaged in regulation of the older coinage. They changed the
value of the older gold coinage, and they came up with a new gold
coinage that would reflect this new 16 to 1 ratio. What was
interesting is that at the time there was a Senate committee, the
Coinage Committee, that recommended what I think everybody recognizes
as the right thing to do. They said: “Look, let the gold coins
flow.” (Our terms, not theirs.) “Don't give them a dollar
denomination. We're calling them eagles anyway. Simply put a weight
denomination on them, and let the market place determine from day to
day what these gold coins are valued in terms of the silver dollar.”
But apparently traditionalism overcame innovation, as it were, and so
they stuck with the bi-metallic ratio. And apparently there was also
lurking in the background the idea that if they used that fixed ratio
they'd be able to put pressure on the Bank of the United States. So
there was a political brouhaha in the background.
So there was a point at which a great deal of
future difficulties could have been avoided. But weren't.
The
next example of that is 1849. A gold
dollar was coined. Very small coin. Like a button. And in principle I
suppose one could say, well, what you're talking about there is a
gold coin that has the value of a dollar. That's all right. But, in
fact, it began to have people think of a gold
dollar
as opposed to a silver dollar, because “silver dollar” is a
redundancy now. So now this is the beginning of the gold-silver
political controversy, which eventually breaks out in a large scale–
after the Civil War, in 1873. (00:30:00)
Private Paper
Money Only
Now
let's get back to paper money. No paper money being generated by the
States, no paper money being generated by the Treasury, paper money
being generated by the banks. But there was this – we call it an
incestuous relationship – between Congress and the banking system.
Alexander Hamilton said it very well, he said: “We need to have the
merchants on the side of the government, and to have the merchants on
the side of the government we need to give them a piece of special
interest legislation.” He didn't put it quite that way, but that's
what he meant. And the Bank of the United States was one of those
pieces of special interest legislation. It was a private entity, but
the government of the United States had some influence over the
selection of the directors. And it was generating it's own banknotes.
We had the First Bank of the United States, that wasn't … we had
the Second Bank of the United States – famous
bank fight
with [president Andrew] Jackson. And the Charter was not renewed.
By the time we get to the Civil War, you don't
even have a connection between the government of the United States
and private banking. You have these two episodes and then they're
gone. At the State level you had a lot of private State banks
chartered by the State governments. So the system is pretty much the
same as it was at the beginning.
The Civil War
Period
Now comes the Civil War. The Union government
had a problem. It was an unpopular war. There were a lot of Southern
sympathizers, even to the extent of being the so-called Copperheads,
really sympathizers with the South. The great difficulty in raising
taxation to the level necessary to pay for this war. The banks were
charging astronomical rates of interest, so now the Union Congress
found itself in a fiscal squeeze. What do they do? Well, Salmon
P. Chase, the Secretary of the Treasury comes forward and says,
“Aha, we're going to do the same thing I told you they did during
the Colonial period. You know, when they had a war, what was the
first thing they did after they raised the troops? They printed paper
money!” So, February of 1862, the first paper money under the
government of the United States under the Constitution – orderly
under the Constitution – is emitted. The so-called “greenbacks”
because on one side they were printed with green ink. And these were
made legal tender and lawful money: legal tender for all payment
of all debts and lawful money. Supposedly they were going to be
redeemed, but they weren't going to be redeemed during the war,
because the government wasn't redeeming anything. There was what's
called the suspension of specie payments during the war.
So
now we have gold and silver coinage and the irredeemable legal tender
paper notes. Comes the end of the war. You had two political –
parties, if you will. You had a greenback party, a greenback movement
that wanted to expand the paper money; who thought it was a great
idea. And then you had a sound money party that wanted to redeem and
then remove the paper money entirely. So they compromise. And the
compromise was that the paper money would be redeemed, as it came
into the Treasury, for gold and silver coin, but then the Treasury
could re-emit that paper money. And here's where the Supreme Court
comes into play because there were two cases dealing with the
constitutionality of paper money. The first is the Knox
case
of 1871, and there's the Juilliard
case,
of 1884, I guess. The question in the Knox case was: Is this stuff
constitutional? There was a 5 to 4 decision. Interestingly, Salmon P.
Chase had become the Chief Justice of the Supreme Court in the
interim. But he was in the minority, he said, “Oh no, this was
wrong. This is unconstitutional. I should never have done this.”
But it didn't matter. There were a bunch of railroad lawyers on the
Court by then, Republicans and … Not Republicans, but a political
point of view in this. And they said, “Look, this was necessary to
win the war. It was emergency legislation that was necessary to win
the war. And besides we can't go back now, declare unconstitutional
and unwind all of those contracts made in it.” Now, that was false!
Because, in fact, there was a whole series of cases in which they
unwound contracts that had been made in Confederate money and had
come up through the court system to determine whether those contracts
could be enforced. But that was the basis for an emergency piece of
legislation. Well now comes the readmission of the Treasury notes.
And somebody noticed: “Wait a minute. We're not in an emergency
anymore, there's no war going on here.” There was another
challenge: the Juilliard v Greenman case. The Supreme Court said:
“Weeeell, we said that about an emergency then, but actually it's
for Congress to decide when it should do this.” You see, this is
the incremental way the Constitution has been subverted. Really. And
I lay it all at the doorstep of the Supreme Court. They don't operate
properly in dealing with the Constitution. They treat the
Constitution as some communal document, which it isn't. But anyway.
There you have it.
Government
Paper Money Becomes Permanent
So now we have
paper money as a permanent fixture in the system. But, it's paper
money that is redeemable in gold or silver – even the earlier
decision had pointed that out – and it's paper money that issues
from – where? From the United States Treasury. Not from a private
institution of some kind. Meanwhile the banks are coming into closer
involvement with the government. Civil War – you have the National
Currency Act, the creation of the National Bank system; we still have
those banks: Chase Manhattan? National bank. Mercovia? National bank.
(Is that still around, Mercovia? Well, whatever.) The national banks
comes from the Civil War, in 1863 and 1864, two statutes were passed.
That system was kind of a cartel, because you had the rural banks and
the small city banks and the big city banks. The rural banks were
supposed to deposit their money at the larger banks and the larger
banks at the big city banks which are in New York and Chicago. So it
was a way to essentially focus financial resources behind the big
players, essentially in Wall street and Chicago. But it was limited
because the currency depended upon the banks buying US bonds and
depositing the bonds with the Treasury, and then they could emit
currency 90 percent of the value of their bonds. And this was at a
period of time when the American people were not particularly
interested in extending public indebtedness. They had huge public
indebtedness from the Civil War. So there was a restriction on the
banks. Well, banks don't like restrictions on the emission of
currency, because – How do they make their money? – they emit
currency and interest, right? So the more they can emit, the more
return they make. They didn't like that. Well, fractional reserve
banking; you probably heard Joe Salerno, he'll tell you that
fractional reserve banking is an inherently unstable process, so you
had a series of bank crises from the Civil War through to the turn of
the 20th century, eventually the big one, 1907. During
this period of time the bankers came up with the idea that, “Well,
we need a central bank. This cartel structure we have is too loose,
we need to bring it together with a lender of last resort, a
capstone.” And this is the basis of the Federal Reserve System.
Now, the Federal
Reserve System is interesting because Federal Reserve notes are not
simply notes of a private banking system or a bank cartel or private,
individual banks, although all the Federal Reserve regional banks and
the commercial banks, are all private institutions, thank you very
much. Federal Reserve notes were made obligations of the United
States! So now you have the American people om the hook for this
banking system.
Now, they were also
originally to be redeemed in lawful money or gold. But the banks
actually didn't have to redeem in gold, the Treasury had to
redeem in gold. So,once again you had the US Treasury on the hook, as
the ultimate surety of this system. The system was sold on the basis
that this was scientific management of currency. We would no longer
have depressions, we would no longer have stringencies, we would no
longer have inflations. All that stuff that we'd had in the 19th
century would be gone. Twenty years later: the greatest depression
the world had ever seen... OK.
Now what's
fascinating here is – I'm gonna have to stop in a moment, I'm just
gonna tell you about Franklin Roosevelt – here Franklin Roosevelt
comes in. And what he wanted to do is raise prices. That was the
theory of the New Deal: prices are being driven down by the
Depression, so we to have raise prices, so we're gonna kill pigs and
poor milk in the streets and do a lot of stuff to raise prices. And
one of the ways he wanted to raise prices was to depreciate the value
of the gold currency. The gold dollar – the dollar actually of the
Coinage Act of 1900 which had finally settled on this gold unit. He
wanted to depreciate that value. And he did that – how? He did that
by seizing all the gold from the American people, and then simply
putting an arbitrary value on gold from day to day until he came up
to $35 an ounce. You ought to read how he did that. Henry Morgenthau,
the Secretary of the Treasury would sometimes come in to Roosevelt,
and Roosevelt was lying in bed, “How much are we gonna put it up
today, Henry? How about 25 cents more?” “OK. Let's do that.”
It's gonna be arbitrary, right?
Remember how I told
you that the value of currency, of money was supposed to be set?
Well, the ratio between gold and silver in the 1930s never went below
50 to 1. So, if Roosevelt had simply come in...If I'd been
Roosevelt's advisor I would have said, “Franklin, here's what we
have to do. We have the wrong ratio between gold and silver at 16 to
1. If we put in the correct ratio, let's say 51 to 1, that will
effectively depreciate the gold coinage versus (00:40:00)
silver, and we'll get what you want, constitutionally! We won't have
to seize the gold from the American people, and we won't have to
prohibit gold clause contracts, and we won't have to have this huge
political brouhaha, if we would just follow the Constitution. And,
oh, by the way, we can depreciate it far more than Congress is
willing to let you depreciate it now. They're only willing to let you
depreciate it 60 percent. We can depreciate it 76 percent.” so it
would really have been valuable if Franklin Roosevelt and
Henry Morgenthau and the people around them had known a little bit –
just a little bit! – about the Constitutional principles of money.
So where are we
today. The answer is, we have an irredeemable paper currency –
actually an electronic currency, because most of it is just generated
on electronic account books – coming out of a private banking
cartel for which the American people are on the hook, in some kind of
bail-out. Because, of course, the bank cartel comes to us and says,
“Oh, we've made terrible mistakes. We'll admit that and now they
may be fatal to the economy, if you don't bail us out.” And of
course, “they'll be worse next year. And you can bail us out next
year...” – this thing just perpetuates. So this is the system we
have now. And I would suggest that it's even worse than the worst
events that occurred under the Colonial and State systems prior to
the Constitution. Because there's absolutely no control on this
system whatsoever. Except for one – actually two: the States can
take action. You're gonna see, I think, in the next couple of years,
action being taken by the States to deal with alternative currencies
– Section 30 of the Federal Reserve Act. You know what Section 30
does? Section 30 of the Federal Reserve Act: Congress retains the
right to alter, amend or repeal legislation at any time. Why is
that even there? In most of the statutes you people see, there's no
statute like that. “Congress retains the right to repeal this” Of
course Congress has the right to repeal. Because they recognized that
those banks were private entities and by creating this charter and by
giving them these powers some smart lawyer in the future might come
along and say, “Wait a minute. You can't take these away! Because
you've made a contract with us.” Actually the Supreme Court said
that along time ago, that the Legislature makes these arrangements,
maybe a contractual arrangement, and it cannot be rescinded. So
Congress put this in – it's also in the Social Security Act, by the
way, or the Retirement Act or a number of these provisions, where
Congress recognizes it might have a problem in changing the terms of
the deal, so it puts that kind of language in there. That means that
the Federal Reserve system, the Federal Reserve note is what John
Exter, now deceased, pretty famous banker, called it, it's an
I-Owe-You-Nothing currency in the truest sense of the word. The banks
don't owe you anything. And Congress can turn around and tell you it
owes you nothing too. So, I'd suggest that you people and the people
you talk to should begin thinking about just what we are going to do
to correct this situation, before the roof falls in.
Now, I'll take
whatever questions you have.
Questions
and Answers:
First
question: [Inaudible]
Edwin
Vieira: (00:43:30)
The first question is of course, how long? How long before the roof
falls in?
Well,
I don't predict those things, but I'm willing to predict this: It
will not be a depressionary phenomenon, if will be a
hyper-inflationary phenomenon. Won't necessarily be in this country,
it could start in Europe. But a hyper-inflationary phenomenon. What I
mean by that is 50 percent depreciation a month, minimum. You always
come out of every hyper-inflationary phenomenon, at least to my
knowledge in the world – except for one, because we had one during
the War of Independence, except for that one – some kind of police
state, a dictatorial system. Always. Because the chaos that's
generated by that event – especially at this time you have the most
complicated price structure in the history of the world. It depends
entirely on essentially a stable monetary unit of some kind. When you
blow that monetary unit out, what happens? The price structure
collapses. You go to barter? How do you go to barter? What are the
number of products out there? How do you settle on a product, a
series of products, a small number of products to be used as the
bartering medium? It's essentially an impossibility.
So we're looking at an unprecedented situation.
If this currency system goes into hyper-inflation, you're gonna have
an economic collapse, the world just – you can't contemplate what's
it going to be like. That's why I'm saying, somebody has to begin to
think what would be the alternative currency if this one goes down.
And don't tell me it won't go down, it's already gone down once, in
1932. Well, 1930 to 1932. It's already gone down once. And that was
on a 40 percent gold reserve, thank you very much.
40
percent behind the notes and 35 percent behind the demand deposits in
the Federal Reserve regional banks. And that wasn't enough. Now you
have no reserve. So this is like the Titanic. And the Titanic had the
one possibility that someone might have gotten there in time. There's
nobody coming to help us. It's going to have to be done – I'm sorry
to say – right here. [Capitol Hill] Because the system is now
essentially out of control. And I think you see that especially in
Europe now. I've been watching the Italian situation. You can smell
the panic coming over the Internet, from this. And Italians you know,
they're kinda voluble. But these are mostly not Italians that are
panicking, it's actually Germans. But really you can smell it, coming
out of Europe. And who's gonna bail them out? Do we have a guess as
to who's gonna do that? It's gonna be Mr Bernancke. Because they
cannot face – and I think correctly so – the consequences of a
depression. Can you imagine what a 1930s style depression in this
country would be like? That's what they won't have happened. And the
one tool they have that they think can prevent that in the short term
is – what? Quantitative easing. Inflation. Generating money. Paper
currency. Bills of credit. Well, bills of discredit,
because they're not gonna be paid. We keep generating this stuff and
we hope that something will happen. We're playing for time,
financially. But think what Machiavelli has said, “That's a
fallacy. Time brings all things, bad as well as good.”
And the only solution here, I think, is to come
up with an alternative currency. A lot of people have proposed
exactly how to do this. This is not something that's difficult. On
the shelf technology. We can set this thing up in 30 to 60 days after
the statute is passed. An alternative sound currency based on silver
and gold. Start using that in the market place. Start transitioning
the governments into using it for purposes of taxation and spending.
And let the banks figure out how to solve their own problem. Because
we can't figure it out. It's a problem of what's called rational
economic calculation. Which is the problem of all central planning.
There is no way from the top down how to reform this system, it has
to be reformed from the bottom up, through the market place. And to
do that you have to give the market place an alternative, sound
currency to generate a price structure that works. Which we're going
to discover very shortly we do not have.
Interesting problem, you know. I've been doing
this for a long time and I never thought it would get to this. I
thought I'd miss out. I'm watching it. But no. I wouldn't want to be
anywhere else. It should be fascinating to see how this plays out.
Second
question: Just
curious whether you have any view with regard to the sort of little
baby steps the States take, you talked perhaps Virginia as well, to
perhaps protect themselves from their own government and to give
themselves the leeway to do what you suggested for themselves in the
event that the US economy gets so unstable that they need to protect
their own folks and their own economies.
Edwin
Vieira: (00:48:49)
Well,
yeah, I know about these things because I've been involved in a lot
of them going back several years. New Hampshire to begin with, and
then Montana. Virginia, we're trying to get them to...the Virginia
State Legislature came up with a commission to study this problem,
primarily to educate the legislators. In most States the legislators
have never thought about this. Most State
legislators treat it as some kind of a Federal problem, that doesn't
relate to them. But basically the idea is exactly what I said: the
States adopts an alternative currency unit which is actual silver, or
actual gold. I'd like to see that done on the electronic basis
because that already has been tested on the market place. Those
system are there, they work. You can funnel any kind of gold and
silver into the [market.]
It
doesn't have to be a particular kind of coinage, it can also be
bullion. And they're capable of working down to very small amounts.
One of them – one of the private companies out there –
Goldmoney.com founded by a feller by the name of James Turk, whom
I've known for a long time. They're down now to a thousandth of a
gram of gold, and a thousandth of a gram of silver, that they'll use
in trans actions: Well, now you're making small change in gold. And
that was always the problem in the coinage era. (00:50:00)
You had coins of certain sizes, but how did it work out in between?
You'd have some kind of token coins, some kind of paper credit, or
whatever; it was rather cumbersome. And if you look at it today, it's
even worse; because, what's the value of an American liberty? Silver
dollar, one ounce; the coins that are now coming out of the Mint
under 1985 Act? Well, it's somewhere between 35 and 40 Federal
Reserve notes [paper dollar], right? So your one dollar silver piece
is worth 35 of these other things in the market. That's not going to
be that useful in the supermarket. Well, it will be later, when
inflation sets in, but right now
it isn't. Or the American eagle, the gold coin; that'll be close to
$2000 now, one ounce of gold in coin form. So if you look at the
coinage system we have, once again because Congress – because
they're the ones that are supposed to be doing the coinage here –
has not kept up to date with our problem, we have a coinage system
that really is not workable. The States can't coin money, so we
couldn't see any reform there. But the States can make gold and
silver legal
tender in the payment of debts,
and they can certainly use these electronic systems. The supreme
Court already ruled on that twice. Not on electronically, but they
ruled on the right of the States to have an alternative currency of
their own. So we don't have to worry on the legality of the thing.
And if that were done – let's say it were done in Virginia –
don't wanna take some … I mean Montana is kind of a backwater,
people might not pay attention to it, but Virginia is difficult to
ignore; here's Virginia, right next door to DC, right? – Virginia
does this, what do you think the influx of capital into Virginia is
going to be? Virginia will be the only polity in the entire world
with a sound money system! And you don't think that other States,
that border Virginia will say: “Oh, my goodness, it will be in our
interest to pick this up too, because we have cross border trade.”
And on an on it goes. And of course, this particular system, if you
use the electronic system – international trade...Because everybody
can be tied into the Internet tool – that's the way it runs. So, as
I told these legislators, I said: “Listen, 30, 60, 90 days after
the statute – tell me how fast you want it done – we can have
this up and running.” And what it would mean is that the average
Virginian – 'cos you'd have to tell them to do this – would get
a debit card, and he'd be told how he'd go on the Internet and sign
up for this; transfer his funds from his regular bank account into
this; all very simple. You don't force him. If he wants to do it,
fine, if not … But he has to have the capability. And then the
State simply starts taxing in the alternative currency. And paying
out from that tax fund to creditors of the State, first to whoever
asks for it. What do you think is going to happen? Those creditors
are going to deplete that fund as fast as it is built up. And then
the Treasurer is going to come back to the General Assembly in
Virginia and say: “I need to expand the tax base here.” And
pretty soon you'll have the Commonwealth of Virginia on a gold and
silver basis treating Federal Reserve notes as a foreign currency –
because hey may need those Federal Reserve notes for something. And
you'll see the economy of Virginia following along with this, because
the State has given them the mechanism and the State of course, is a
big player in the State economy – a lot of money passes through
State finance. Now you have shown how it can work.
And
my view of the thing is, if people have two choices, a relatively
sound currency here and a rotting vegetable currency there, which one
are they going to choose? Well, they'll choose this one, of course.
That's the reversal of Gresham's Law. Gresham's Law says what? Bad
money drives good [money] out of circulation. That's how it's usually
formulated? (It's actually Aristophanes' Law, I think it's in the
play The
Frogs.
It goes back to the ancient Greeks. Gresham had nothing to do with
it.) Why is that true? I have good money in my one pocket and bad
money in the other, and you're willing to take money, what am I gonna
give you? The bad money, right? Think of Mammie with Jimmy, and there
is Jimmy and Billie playing in the sandbox. And Billie is crying,
'cos Jimmie won't let Billie play with one of his toy soldiers, and
Mammie says, “Be fair Jimmy, let 'm play with one of your toy
soldiers.” With one is he gonna give to the other child? The nice
one that's beautifully painted, or the other one with one arm broken
off and the head that's twisted. You tell me. That's Gresham's Law.
It's at the kindergarten level of intelligence. But it works the
other way too. If I'm going to you to make a contract, I'm going to
demand what? The bad money or the good money? I'm going to demand the
good money, right? So we can reverse this whole system once you put
into play somewhere a significant player in the market place – has
to be a fairly large size – that's using this good money and we can
force that through taxation. Start off with a certain amount of State
taxation.
Congress can do this too.
Maybe
I'm being facetious, but in principle Congress can do this too. And I
should think Congress would have more understanding of this problem,
I mean, it's their power we're talking about, monetary power. The
difficulty I always have with State legislators – always talking to
them – they say: “We can't do that. States can't do that.” So I
say: “Well, wait a minute. Article I, Section 10, …” We go
through this little litany of constitutional principles and then
eventually the little light bulb comes on over their head: “Oh,
yeah, we can
do that.” And then there's the problem: “What's the six o'clock
news gonna say about me? That I'm a gold bug, making fun of me.”
That type of thing. You're getting into the political problem there.
But
as a practical solution – I shouldn't say solution, there is no
solution, this thing is gonna happen; we can't stop it from happening
– as a practical direction,
putting a floor under, mitigating, the damage, I'm willing to bet a
stack of cougourians(?) this high this is the only way it can be
done. If someone can think of another way that doesn't involve
Congress passing ...– [laughs] I rack my brain … If someone came
to me and offered me some huge fee to write a statute to correct the
Federal Reserve problem, through the Federal Reserve, could I do it?
No. I think I'd say “I can't take the money, I can't do it. It
won't work. There's no way we can correct that.” The market has to
correct it. And the market won't correct it, unless it has an
alternative to work with. Wasn't it Archimedes who said: “Give me a
place to stand and I will move the earth with my lever.” We need a
place to stand monetarily. We need the alternative currency.
An example: Go back to Weimar Germany;
everybody remembers Weimar Germany, right? Six months: June, July
till the end of November, they blew the currency out. An egg that
cost 80,000 marks in June – they created a lot of inflation during
the war and immediately after the war – 80,000 marks was like a
trillion marks by the end of November. And the first week of December
the currency was gone. How did they survive? Because they had a whole
slew of alternative currencies circulating in Germany. From other
European countries, from the United States, from England – England
wasn't considered a European country – and people using these and
making contracts in them. So they had a kind of black price structure
in alternative currencies. So when that mark collapsed the entire
economy didn't go with it.
Third
question:
So you're assuming that we still keep the Federal Reserve but States
can create their own currency? But then how will the big banks
themselves, will they stop being a member given that the States will
have to create their own State Bank or will they be a member of the
Federal Reserve?
Edwin
Vieira:
(00:57:57)
Well, there would be a State Depository to deal with the alternative
currency, because the alternative currency system is not really
banking, it's warehousing. What I anticipate would happen is – if I
were writing the complete statute for … I'd say: Look, we need to
set up some private institutions dealing with what used to be called
“real bills”. 30, 60, 90 day banknotes based on real commodities,
because that kind of creates an underpinning to the use of gold and
silver. In a lot of transactions you don't need to use gold and
silver, you use real bills. And those private institutions I would
imagine at some stage they might also at some stage come into the
Depository. That'll be the loan function. See, the depository
function is the warehousing function. The loan function is a
different situation and you can have a loan bank which is paying on
demand. The Depository obviously is
paying on demand, paying immediately, electronically. So you'd set up
banks dealing with the 30, 60, 90 day real bills, and you'd set up
banks – or it could be the same banks – who set up accounts that
would be longer term. But the fractional reserve aspect of it has to
be cut out entirely. That's the devil in the detail, as the word
goes. You cannot lend short and borrow long for very long. That's why
fractional reserve systems and banks have always failed, because the
notes are out there to be paid on demand, and they don't have a
hundred percent reserve to pay those notes. Leaving aside if that
were fraudulent or not, I guess it wouldn't be if people were
completely told about it. But the other assets that might be fed into
that pool, they're not on demand. Who knows how long those assets
might be until they're paid. The banks might very well get onto these
squeezes, because they extend themselves too much. And there's only
one way to get around that and that's to prevent it at the beginning.
Our
problem is, we painted (01:00:00)
ourselves into a – well, I don't want to include myself. Somebody
out there has painted me
into
a corner, and you as well. We're painted into this corner, and either
we're gonna go down with the Titanic, or we're gonna get in a
lifeboat and row away. That's the difference between the Titanic
situation and our situation: on the Titanic they didn't have enough
lifeboats and they didn't have a way to build any more. We don't have
enough lifeboats now, but we have 50 ways to build them. This can be
done at the State level. And I don't say there won't be a lot of
wailing and gnashing of teeth, economically. Or that a lot of people
won't be very sorry that we put up this system and ran it as long as
we did and ran it into the ground. But that's not my problem. My
problem is, I'm sort of the salvage yard guy, here. You brought me
this mess, and I say: “I'll see what I can do.” Or like trauma
surgery, “You've got to lose the leg. Don't blame me. You shouldn't
have been driving drunk.”
Oh, I don't want to sound so pessimistic, but
do you know what the definition of a pessimist is? He's an optimist
who knows the facts.
Thank you.
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