1. Gold and Silver: The Money of the Constitution
Students, scholars, and some curious people who
occasionally stray into the text of the U.S. Constitution are properly
puzzled by what seems to be that document's " plain language" and some
of the things they see around them in the world today. One such thing is
the paper money and checks everyone uses to make ordinary transactions.
The Constitution stipulates that, "No state shall ... coin money.... or
make anything but gold and silver coin' a tender in payment of debts . .
. " (Article 1, section 10). Yet on every unit of paper money the U.S.
government asserts without apology: "This note is legal tender for all
debts public and private." By what political alchemy has gold and silver
become paper?
Not only is the paper money legal tender, meaning that
it must be accepted as payment for any debt owed by any person to
another person or to a government, but the gold and silver specified in
the Constitution are nowhere to be seen. Gold and silver coins rarely
appear, and then only as collectible artifacts not as money.
This seeming contradiction between the fundamental
monetary law of the Constitution and real life conditions might suggest
to a thinking person that gold and silver had somehow disappeared from
the face of the earth in the 200-plus years since the Framers included
that simple clause. However, such is not the case. The world's
governments own more than 35,000 tons of gold as bullion and coin, and
private persons own another (estimated) 50,000 tons. Silver is even more
plentiful. Its current market price, reflecting its abundance, is only
about one-eightieth the price of gold.1
The absence of gold money correlates with the
accumulation of gold hoards in the possession of government central
banks and treasuries. If it's there, it obviously cannot be out in
markets transacting business dealings, or in banks serving as a base for
bank-issued notes and checks.
It was not always this way. Until the time of the Civil
War in the United States, banks routinely held gold and silver as
redemption reserves for their outstanding notes and deposits while the
federal government held just enough to expedite its minting operations.
Congress had the constitutional power to "coin money," but that power
did not presuppose that it keep any stock of gold and silver beyond the
inventory requirements of its mints. Indeed, even though Congress had
the power it was not required to coin money at all. Private mints
flourished until the Civil War, often minting coins of slightly greater
gold content than government mints.
2. Paper Money and Gold after the Civil War
Civil War policies, however, changed fundamentally both
the monetary system and the polity norms for governmental management of
money. Congress authorized two new paper moneys, U.S. notes, or
"greenbacks," which were declared full legal tender, and national bank
notes that were legal tender for debts due to and payment due from the
federal government. For all practical purposes, both these issues of
paper money were obligations that the U.S. Treasury had to redeem in
gold on demand after 1879. In addition, silver money at the specified
mint price began to decline in real value starting about 1875 due to the
burgeoning supplies of silver from the American West, so that it, too,
was a viable currency only because it was redeemable in Treasury gold.
Gold held for monetary purposes in the 1880s and 1890s therefore became
concentrated in the U.S. Treasury and sub--treasuries, whereas 50 years
earlier several thousand commercial banks had held the gold to meet the
demands of their local depositors and note holders.
The laws that authorized the three major fiat
currencies changed the character of the gold standard from a widely
dispersed gold standard, kept operational by thousands of local banks,
to a "collectivist" gold standard operating from Washington and New
York. Almost all the pressure for redemption of paper currency was
transmitted to the U.S. Treasury and its sub--treasury offices. During
the Panic of 1893, for example, the Treasury allowed its gold reserve to
decline from $259 million (average for 1892) to $126 million (average
for 1895), or by51 percent. 2
The Federal Reserve Act that Congress passed in late
1913 continued and aggravated the centralization of gold. The Treasury
still held gold as a reserve against its paper currencies outstanding,
and the twelve new Federal Reserve Banks received the gold deposits of
their "member" banks and gave them in return a bookkeeping reserve asset
labeled "Reserve Bank credit." Presumably, the member banks could get
these deposits converted into gold whenever they needed it - much as an
ordinary householder or businessman could write a check against his
deposit at a commercial bank to get cash.
The events of World War I witnessed an extraordinary
gold flow into the United States to pay for war materials and services.
By 1922 total gold in the U.S. Treasury, including the amount held for
the Federal Reserve Banks, was $2,109 million, or 3,188 tons. Treasury
gold fluctuated somewhat during the 1920s, but by 1929 was at $3,278
million or 4,956 tons.
3. New Deal Gold Policy: The Government's Great Hoard of Gold
As the Great Contraction began in 1929, the Treasury
and Fed increased their hoards of gold -as though the stockpiling of
gold in government vaults would serve as some kind of magical panacea
that would reverse the disastrous ongoing contraction of money, bank
credit, and employment. By 1931, Treasury gold was $3,696 million over
5,500 tons, while commercial banks were failing literally by the
thousands for want of reserves.
The compulsion of the U.S. Treasury and Federal Reserve
Banks to hoard gold between 1929 and 1933 was in sharp contrast to
Treasury policy between 1892 and 1896. In the earlier period the
Treasury felt duty-bound to redeem its paper currencies with gold and in
so doing lost over 50 percent of its gold reserves. All through the
19291933 period, except for a brief interval in the middle of 1932, the
Treasury and Fed added to their gold holdings while the banking system
collapsed as its reserves disappeared. The net change in Treasury gold
holdings was a minuscule decline of 1.8 percent.3
Given the gold flow into the United States at this
time, the commercial banks would have had significantly greater reserves
for redemption purposes and credit expansion if the Treasury and Federal
Reserve had not existed! Rather than an "engine of inflation," the
Federal Reserve System at this time was an absorber of gold and an
"engine of contraction." Between 1929 and 1933 it allowed the economy's
monetary stock of hand-to-hand currency and bank deposits to decline
from $26.2 billion to $19.2 billion, or by 27 percent. 4
Instead of relieving the depressed monetary and credit
conditions of 1933 by getting the gold out of the hands of the Treasury
and Federal Reserve Banks and into commercial banks and households, New
Deal monetary legislation only made matters worse. Congress and the
Roosevelt Administration passed several acts in 1933-1934 that added
more gold to the government's holdings and at the same time induced the
surviving banks to be even more squeamish about extending new credit. On
May 12, 1933, Congress passed the Thomas Amendment to the Agricultural
Adjustment Act. This provision, among other things, gave the President
the power to raise the dollar value of gold by 60 percent. Then on June
5th, three weeks later, Congress passed the Act Abrogating the Gold
Clause, which repudiated all gold clauses in all contracts public and
private, including the bonds issued by the government itself to help
finance World War I.
Next came the expropriation of privately held gold. By
the Gold Reserve Act of January 30, 1934, President Roosevelt called
into the U.S. Treasury all domestically owned gold and paid for it at
the official mint price of $20.67 per ounce. Then, by the fiat power of
proclamation given to him in the Gold Reserve Act, he raised the mint
price of gold by 59 percent to $35 per ounce. Since the government now
owned all of the gold, none of the "profit" from the gold price increase
went to private house holds, to banks, or to business firms where it was
desperately needed. Rather it enhanced the already bloated hoard of gold
in the U.S. Treasury. Treasury gold, which was valued at $4,033 million
in January 1934 was accounted at $7,438 million in February 1934!
5
The political uncertainty in Europe, in addition to the
enhanced price of gold in the United States, caused significant exports
of gold to the United States in the 1930s. By 1941, Treasury gold had
reached $23 billion, which even at the new price amounted to over 20,000
tons! At the same time, private persons and businesses by the Act of
1934 were not allowed to own gold or to use gold for monetary purposes.
And certainly the Treasury gold was not their gold.
4. Treasury Gold Policy after World War II
The gold in fact had become nothing more than a balance
sheet adornment for the Treasury Department and the Federal Reserve
Banks. Government spokesmen dishonestly claimed that the Treasury's
hoard of gold "backed" Federal Reserve Banks' notes and reserves. But
what does "backed" mean if no one is allowed to own or use the gold? It
meant in this case that the U.S. government through its Federal Reserve
Banks could issue almost as much paper money as it pleased.
Paradoxical as it might seem, foreigners, unlike U.S.
citizens, could legally claim the U.S. Treasury's gold through their
central banks and treasuries. Consequently, in accordance with balance
of payments adjustments in the 1950s and 1960s, more than half of the
Treasury's gold stock was exported to other countries. This continued
outflow prompted President Nixon to discontinue even the pretense of a
gold standard. On August 15, 1971, he barred any further gold
redemptions to foreigners who held dollar claims. The price of gold then
became an object of world market forces, but the U.S. Treasury holding
since 1971 has remained almost constant at around 260 million ounces, or
8,125 tons. 6
5. Why the Gold Should Be Separated from Government
What should be done with all this gold the 8,000-plus
tons the U.S. Treasury holds as well as the other 27,000 tons that other
governments sequester? It seems obvious from the history of the
relationship between gold and the state that the more gold there is in
the hands of governments the less surely the gold serves as money.
Therefore, the only way to restore gold and silver as media of exchange
is to get the metals out of the possession and control of governments.
Certainly the gold has no current monetary or fiscal
function for its government owners. It generates no revenue of any sort.
It has no effect whatsoever on central bank monetary policies nor on the
credit volume of the private banking system. In its present status as a
government-owned "surplus" commodity, it is the "barbarous relic" that
John Maynard Keynes characterized it in 1923. It may serve in the minds
of Treasury bureaucrats as psychological starch for something or other
that the government does, but the role it could play, and did play in
earlier eras, as a viable money is completely absent.7
The gold cannot be forced into a monetary role. No
government, including especially the U.S. government, is going to
re-establish a gold standard by specifying the gold content of gold
coins and declaring them legal tender. Treasury spokesmen would claim
with some validity that it would be impossible to estimate the gold
value of the current Federal Reserve dollar. They would argue that the
indeterminacy of gold's monetary value was a good excuse for doing
nothing. So the gold would lie there, a useless heap similar in its
non-function to other surplus commodities the government has stockpiled.
Even if the Treasury went through the formality of
giving dollars a fixed gold value, it would insist on keeping the gold
in the Treasury's vaults in order to "back" the existing monetary
aggregates that would now be "based" on gold. Central bank policies
would continue to operate much as they do today. Rather they would now
have an undeserved aura (literally) of respectability behind which
Treasury and Federal Reserve managers could conduct business as usual.
Therefore, sound money advocates should not waste their
resources lobbying for a gold standard, which by definition would
include the state as overseer and manager of a gold currency, specifier
of a gold price in terms of dollars, custodian of the gold, and
continuing manipulator of a central bank-issued paper money.
No. The only way to ensure that gold becomes a viable
money is first to separate the gold from the state and the state from
any further role in the operation of a gold money. Indeed, the
separation of gold and the state would begin as an economizing measure -
a form of privatization. Here are all those thousands of tons of gold
lying idle and useless. Give them back to the people from whom the gold
was unconstitutionally snatched in 1934.
6. Redistributing the Treasury Gold to the People
The Treasury Department collects and disburses money
for the federal government through its Internal Revenue Service (IRS).
In some given taxable year, say 19%, the IRS would note the total number
of dependents on the various income tax forms1040, 1040A, and 1040 E-Z.
It would then issue one one-ounce gold certificate for each listed
dependent to the heads of households who had filed the returns.
The stored gold is in the form of ingots each of which
weighs 400 troy ounces (27plus pounds), and is worth somewhat more than
$15,000 at the current market price of gold. The Treasury would offer to
exchange (sell) these bars in the open market for the appropriate number
of gold certificates to any private firm or individual tendering them in
the proper quantities. It would leave the actual disposition of the gold
completely in the hands of private wholesalers and brokers.
In order to get the gold bars from the Treasury, a
wholesaler would have to collect enough gold certificates to make his
effort worthwhile. Very quickly, the gold market would establish a
dollar price for the gold certificates. The price would be slightly less
than the spot gold price currently posted in markets because the
wholesaler--distributor would have to get some return for his services,
which would include shipping, handling, storing, and packaging the gold.
Taxpayers who received the gold certificates would be
elated. After all these decades of paying taxes, they were finally
getting something in return. True, it would be far less than what they
had paid in, but at least the gesture would reflect a disposition on the
part of a grateful government to reward its supporters by returning to
them some real wealth that the government cannot use and that cost it
nothing in the first place.
The new gold owners - virtually all of us - would next
ponder what to do with their windfalls. Some would at first want to
deposit their gold certificates in banks as gold demand accounts until
they were more certain of its value and utility to them. Because many
people might want this option, banks would cater to their wishes by
offering gold - deposit accounts distinct from conventional checking
accounts. The banks would use the gold certificates to claim the gold
bars from the U.S. Treasury, and the gold would then become a true
reserve backing the gold demand deposits.
Industrial users would also want the gold to make art
objects as well as other gold items. And some amount of the gold would
probably be used in medical technology and the physical sciences.
Finally, some certificate holders might want to
exchange their certificates for gold coins that would be something like
the half-eagles, eagles, and double eagles of the pre-1914 era. (The
double eagle was a "twenty-dollar gold piece" and contained slightly
less than one ounce of gold.) To satisfy the demand for coins, private
coin-smiths would buy bunches of one-ounce certificates from the
taxpayers who had received them and exchange them at Treasury offices
for ingots. The coinage specialists would then produce coins in
convenient denominations and sell them to their numismatic clients.
7. How the People's Gold Would Become Money
The gold redistribution would find everyone a winner.
True, the U.S. Treasury would lose the gold. But since Treasury
executives realized no travail in collecting the gold, and since the
gold currently has no fiscal or monetary function to the government or
any other use, parting with the gold should cause no more concern than
clearing out obsolete records and other trash. Its departure would in
fact markedly reduce the administrative costs of Treasury operations.
The now-privatized gold that had become the basis for
special bank-administered checking accounts would develop monetary
functions. Gold depositors who wished to transact in this medium would
have checkbooks appropriately identified with gold logos, and would
write checks to anyone who would accept title to the designated quantity
of gold as payment for a debt. Gold reserve banks would clear gold
balances with each other based on their daily or weekly debits and
credits. They would perforce redeem deposits on demand in gold for any
gold depositor who so wished. Eventually, borrowers might base their
loans on gold, whereupon the gold would complete its restoration as a
viable money.
Gold would not become the monetary standard. It would
continue to have a dollar-price in the world's gold market but it would
not have a mint price specified by Congress. No government department or
bureau would own gold. Federal Reserve notes as currency and Federal
Reserve Bank reserve-deposit accounts for commercial banks would stiff
be the only legal tender (in spite of the Constitution) and available as
they are now for those who want conventional fiat paper money. The gold
would simply be an alternative money for people who chose to use it for
transactions and contracts.
8. The New Gold Money as a Check on Federal Reserve Policies
A final interesting feature of the privatized gold
would be the effect of its market price in paper dollars on present-day
Federal Reserve policy. Some responsible Federal Reserve officials on
the policy-making Federal Open Market Committee (FOMC) are currently
trying to implement a policy of long-term price level stability, that
is, a policy of zero inflation. However, they are constantly badgered by
monetary "activists" in Congress and the Administration who want the
FOMC to revert to a short-run inflationary "cure" for unemployment and
economic slumps. If the privatized gold became fairly widely used as
money side-by-side with Federal Reserve fiat money, the price of gold in
Federal Reserve dollars would tend to be an instant check on the state
of inflation-much more so than it is today. When the market price of
gold rose, everyone would know that the Fed was inflating-that the real
value of the paper dollar was falling-and would substitute private gold
money for Federal Reserve money. The market price of gold, therefore,
would be a constant check on too much monetary activism by the FOMC. It
would thereby contribute significantly to the Fed's desired policy of
price level stability.
To achieve a gold-based money, the gold must be held
ubiquitously so that individual people may endow the gold with monetary
properties and monetary functions. But to have this effect, the gold
must be in everyone's possession so that everyone "can get the idea."
For the last 60 years the Treasury has hoarded thousands of tons of
gold, and has only disbursed it to foreign central banks and
governments; and for the last 20-plus years the gold has been a largely
inert mass of no use to anyone. Even Treasury officials are largely
ignorant of its physical details. Suppose, however, that an astute
politician promised to return the gold to the people as a means of
economizing on the inventory of "surplus" government commodities. Can
anyone imagine that such a plank in a political platform would be
unpopular? "No, no," the candidate would declaim, "I am not buying votes
with gold. I would not stoop to that. I simply want to economize
government operations and, at the same time, return a useful commodity
to the public so that people can use it as money if they wish to do so."
Yes, Mr. Candidate, you have my vote.
At the time of the original publication, Dr.
Timberlake, this month's guest editor, was Professor of Economics
Emeritus at the University of Georgia, Athens.
1. Lewis Lehman and Ron Paul, The Case For Gold,
Washington: The Cato Institute, 1982, pp. 160-161.
2. Richard H. Timberlake, Monetary Policy in the United
States, Chicago: University of Chicago Press, pp. 158-159.
3. Ibid., pp. 280-281.
4. Milton Friedman and Anna 1. Schwartz, A Monetary
History of the United States, 1867-1960, National Bureau of Economic
Research, Princeton: Princeton University Press, 1963, pp. 712-713.
5. Timberlake, ibid. Also, Horace White, Money and
Banking, rev. and encl. by Charles Tippets and Lewis Froman, New York:
Ginn & Co., 1935, pp. 696-721.
6. Paul & Lehrman, The Case for Gold, pp. 159-161.
7. Treasury officials and other government spokesmen
often speak reverently about the "country's gold reserves." This
reference is at least 662/3 percent inaccurate. The gold does not belong
to the "country"; it belongs to the federal government. And the gold is
not a "reserve" for anything. It is an inert stockpile of precious
metal. I do not doubt, however, that it is truly gold, and that it
exists. Nevertheless, I would like a little more on-the-spot
confirmation of this presumption.
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
April 1995, Vol. 45, No. 4.
Yourname@libertyhaven.com
