Since 1933 when President F. D. Roosevelt prohibited
private ownership of gold, United States money has been completely in
government hands. Monetary instability has, consequently, been
institutionalized. Inflation has followed wave of inflation. Just
consider some figures: From 1967 to 1978, the consumer price index
doubled. In 1979, the index rose by 14 per cent-a pace that would double
the CPI again in only 5 years. Yet the first months of 1980 have shown
the CPI increasing at an annual rate of around 20 per cent. These
figures speak for themselves. Government has lost control of inflation.
Anticipating two centuries ago that the federal government would not
have the restraint to avoid the temptation to inflate, the
Constitutional Convention carefully circumscribed the government's
monetary authority.
"The congress shall have power to coin money, regulate
the value thereof, and of foreign coin, and fix the standard of weights
and measures." (Article I, Section 8.)
The framers of the Constitution gave Congress authority
to "coin money," but specifically withheld authority to create money. By
carefully choosing the verb "coin," they wisely designed to limit the
government to stamping metal into money. The Articles of Confederation,
from which was derived the idea to give the government power to "coin"
metal, granted as well only the specific power to "strike coin." At the
time of the Constitution's ratification, it was clearly understood that
the Congress should only have authority to strike coin and regulate its
alloy and value:
The Federalist Papers, Number 44, clarify:
The right of coining money, which is here taken from
the States, was left in their hands by the Confederation, as a
concurrent right with that of Congress, under an exception in favor of
the exclusive right of Congress to regulate the alloy and value. In this
instance, also, the new provision is an improvement on the old. Whilst
the alloy and value depended on the general authority, a right of
coinage in the particular States could have no other effect than to
multiply expensive mints, and diversify the forms and weights of the
circulating pieces.1
Fixing the Weight
The framers of the Constitution knew the dangers of
irredeemable paper currency. They had experienced the uncertainty and
disappointment of an un-backed currency during their struggle for
independence. Therefore, they placed the coining authority in the same
sentence with the authority to set weights and measures. They were only
giving the central government the power to decide what weight of metal
each coin would contain. This allowed Congress to mandate uniform
denominations nationwide. Thus, as explained in Federalist
Paper 44, Congress would provide for harmony and smooth
commerce amongst the states. But Congress could no more debase its
coinage than it could reduce its fixed standard of twelve inches to the
foot down to seven inches. Just as it could "fix" a permanent standard
of measurement, Congress could "coin" a permanent standard of money.
The Constitutional "coining" clause needs only one
further explanation. The "power to regulate the value thereof" did not
imply anything more than the right to add, if necessary, new standard
coins. In the words of the Supreme Court, "This power of regulation is a
power to determine the weight, purity, form, impression and denomination
of the several coins, and their relation to each other, and the
relations of foreign coins to the monetary unit of the United States."
2
The framers in an earlier clause allowing Congress to
"borrow money" expressly avoided stating the Congress could "regulate
the value" of the money it borrowed. The framers were wary that borrow
ing would be the means of debasing the nation's money. Moreover, if they
had meant to give Congress the right to debase the nations coinage with
the "regulate" language, they would have extended that regulating power
to borrowed money as well. Perhaps the Constitution's view of money is
best expressed in summary by this Supreme Court pronouncement:
The power of coining money and regulating its value was
delegated to the Congress by the Constitution for the very purpose, as
assigned by the Framers of that instrument, of creating and preserving
the uniformity and purity of such a standard of value.3
Thus, under the Constitution, the Congress launched the
gold standard. The dollar was simply a name for a specified weight of
gold, one-twentieth of a gold ounce. Because the rest of the world also
used gold as money, the world enjoyed the economic blessing of a
universal currency. One money worldwide facilitated freedom of commerce,
travel, and investment across national borders. Without force or
external governmental constraint, workers specialized and cooperated
internationally. No wonder the nineteenth century saw unprecedented
economic growth. Indeed, much of our current progress must be attributed
to the accumulation of capital that occurred during the "golden"
economic decades.
The result of leaving the gold standard in 1933 has
been clear. The Consumer Price Index in 1933 was 38.8 (1967 dollar
equals 100) on all items. In 1979, that index has soared to 217.4 -
nearly a six-fold increase. The index only failed to rise in three of
the 46 years since the gold standard was abandoned.4 The
government has demonstrated its inability to maintain price stability.
Once before, the United States left the gold standard only to learn that
it must return. A review of that history reveals some instructive
parallels with our current plight.
The Civil War Era
The Civil War demanded that the federal government
immediately produce wealth it did not have. This led to a sad experience
with flat currency.
As the clouds of war began to gather (South Carolina
seceded in December, 1860), the Treasury - already weakened by three
years of deficits - began to experience great difficulty in borrowing
money. Into this tenuous atmosphere stepped the new Secretary of
Treasury, Salmon P. Chase. Already the national debt stood at $75
million, of which $18 million had been incurred in the few months since
the secession.5
Supposing that the impending war would be won in a few
weeks (a common miscalculation), Secretary Chase decided to finance the
conflict by issuing more debt. Chase did not anticipate how much he
would have to borrow. Throughout 1861, the Treasury was incurring
obligations at an alarming rate, faster than it could finance them. In a
vain attempt to meet these obligations, the Treasury issued bonds, i.e.,
borrowed, so swiftly that gold was pouring out of the banks. Confidence
that the banks could redeem in specie began to waver. The banks feared a
run on their remaining specie reserves.
At this juncture, Chase made a grievous mistake which
turned the state banks against him. Chase had been using the banks as
temporary depositories for the proceeds of the loans. Many of the loans
came from the banks themselves. The banks expected to hold the specie
until the government needed it. But Chase required the specie to be
transferred, without delay, to the Treasury. The banks thus saw the
depletion of their gold reserves accelerate.
In July of 1861, the North lost the First Battle of
Bull Run. The financial community realized that the war would not soon
be over. In mid-December, Chase's financial report to the nation
increased an earlier 1862 budget by $200 million. The federal
government's borrowing would grow even more. Already banks saw their
gold stocks disappearing daily. In New York City alone, the banks were
losing $7 million of specie a week. Finally, on December 16th, the
British demanded return of two Southern emissaries forcibly removed from
the British steamer Trent. Great Britain seemed to be siding with the
South. Panic spread in the financial community. On December 30th, the
private banks suspended specie payments. The government suspended specie
payments the next day.
Greenbacks
Chase still had to meet obligations that were
approaching $2 million a day. The people were not prepared to absorb
such enormous loans, and the banks could not invest all their funds in
government loans. Accordingly, voluntary domestic loans were not coming
in fast enough to fund the war effort. Nor could loans be obtained
overseas due to an unfavorable balance of trade and uncertainty about
the outcome of the war. The pressure on the government to meet its
financial promises mounted.
Chase continued to issue notes, but now they were not
redeemable. No one would accept them as payment. Seven weeks after
suspension of specie payment, at Chase's request, Congress passed a law
making the notes legal tender. The greenbacks were born. The first
"temporary" issue was set at $150 million. In July 1862, another $150
million was allowed. Later, yet another $150 million was authorized.
These were the infamous Legal Tender Acts. In essence, Congress decided
to impose involuntary debt upon the nation.
In retrospect, Chase was later to admit that this was a
great error. He said to Congress in 1863 that it was not too much, and
perhaps hardly enough, to say that every dollar raised by taxation for
extraordinary purposes or reduction of debt is worth two in the
increased value of national securities. He learned too late that a
nation, like any individual, must live within its means, that current
taxes must at least cover current expenses.
Overt Taxation Preferred to Hidden Tax of Inflation
Taxes are always undesirable because they deprive
individuals of the capital and incentive to continue to produce,
especially when they reach confiscatory rates. Nonetheless, overt
taxation is preferable to the covert tax of inflation because it is more
easily monitored. The representatives of the people in Congress must
vote unambiguously to deprive their constituents of wealth when
approving an overt tax. The covert tax of inflation also deprives the
constituents of wealth, but the representatives escape the consequences.
The constituents do not file an "inflation tax" return every year to
acquaint them with the extent of their losses. Thus the representatives
are tempted to perpetually inflate the currency to raise revenue which
they can spend.
An economist Chase never encountered, John Maynard
Keynes, offered a concise, though somewhat ironic, appraisal of
inflation. He cautioned that inflation "engages all the hidden forces of
economic law on the side of destruction, and does it in a manner which
not one man in a million is able to diagnose." 6 Chase
apparently sensed, too late, the ultimate evil of inflation: it
circumvents the citizen's ability to hold his government accountable.
Many representatives arose in Congress to criticize the
Legal Tender Acts. Nonetheless they were approved by wide margins
because of the temporary emergency. (Isn't every fatal poison
administered as a serum to alleviate some "temporary emergency"?)
Everyone, including President Lincoln, swore that the nation would soon
mend its erroneous ways. In December 1862, Lincoln thus addressed the
Congress:
The suspension of specie payments by the banks, soon
after the commencement of your last session, made large issues of United
States notes unavoidable. In no other way could the payment of the
troops, and the satisfaction of other just demands, be so economically
or so well provided for. . . . A return to specie payments, however, at
the earliest period compatible with due regard to all interests
concerned, should ever be kept in view. Fluctuations in the value of
currency are always injurious. Convertibility, prompt and certain
convertibility into coin, is generally acknowledged to be the best and
surest safeguard against them.7
The greenbacks began to depreciate in terms of specie
almost as soon as they were issued. On the New York gold market
(conversion to specie was allowed in this single location to facilitate
international trade), gold could be purchased at a premium with
greenbacks. In 1864, greenbacks depreciated to their all-time low: $1 of
gold equal to $2.85 of paper or $1 of paper worth only 35¢ of
gold.8
The Post-War Era
After the war, Federal expenditures dropped sharply.
While the government was spending $37 per capita in 1865 to finance the
war, spending was only $14 per capita the following, year.9
Due to tax revenues, the government already had a surplus in 1866.
In 1865, Congress voted (with only a single dissenter)
to begin retiring the greenback debt. McCulloch, the new Secretary of
Treasury, implemented that policy with revenue surpluses.
At that point, however, sentiment began to grow in
favor of retaining the greenbacks as non-interest-bearing debt. The
masses (primarily in the agrarian states) mistakenly believed that
retiring greenbacks was depriving them of money. Some debtors, however,
knowingly advocated inflation to escape the full consequences of their
borrowing. They urged the government to use "cheap tender" to pay off
its war debts. Greenbackism began to take hold.
The Democratic party took up the cause of
green-backism. Many of the leaders who had stood on the floor of the
House and declared paper, "money" unconstitutional now argued that
gold-convertible bonds be paid in greenbacks. Only two years after all
the fervor to retire the debt, a Republican congress enacted a bill
halting contraction of the debt. This measure was intended to allow the
people to escape debt and cope with high prices. Instead, prices
remained high; debt multiplied; depression spread. The greenbacks were
in fact causing the problems they were supposed to cure. Throughout the
next few years, Congress would occasionally consider a measure to
replace the non-interest-bearing debt (greenbacks) with interest-bearing
debt (bonds). These were defeated.
Supreme Court Rulings
The Supreme Court entered the debate over the integrity
of our money in 1870. Chief Justice Chase issued in 1870 a finding that
the Legal Tender Acts were unconstitutional as applied to pre-existing
contracts. Speaking for the Court, he stated:
For no one will question that the United States notes,
which the act makes a legal tender in payment, are essentially unlike in
nature, and, being irredeemable in coin, are necessarily unlike in
value, to the lawful money intending by the parties to contracts for the
payment of money made before its passage.10
This is the same Chase who as Secretary of the Treasury
issued the paper nine years earlier. He pronounced this judgment upon
his own action:
And there is abundant evidence, that whatever benefit
is possible from that compulsion to some individuals or to the
government, is far more than outweighed by the losses of property, the
derangement of business, the fluctuations of currency and the values,
and the increase of prices to the people and the government, and the
long train of evils which flow from the use of irredeemable paper
money.11
This statement now echoes as a grim prophecy about the
current age of inflation. He did not base his decision merely on the
effects of inflation, however, but went on to substantiate his decision
with reasoning based on the "coining" clause of the Constitution and the
Fifth Amendment which prohibits the government from impairing private
contracts or depriving citizens of property without due process of law.
He concluded that his own action as Secretary of Treasury violated both
the letter and the spirit of the nation's most sacred document.
No effort was made to conform to the 1870 decision. On
the contrary, every effort was directed at changing the make-up of the
Court to reverse the ruling. President Grant appointed two railroad
lawyers to the bench who were sympathetic to the railroad's deep debt
and desire to repay loans with inflated currency. The monumental Hepburn
v. Griswold decision, which could have prevented the United States from
ever suffering from wholesale inflation, was retried and fell, 5-4, the
following year. The heart of the Court's reversing decision was an
expediency argument:
If it be held by this court that Congress has no
constitutional power, under any circumstances, or in any emergency, to
make treasury notes a legal tender for the payment of all debts.... the
government is without those means of self-preservation which, all must
admit, may, in certain contingencies, become indispensable even if they
were not when the acts of Congress now called in question were
enacted.12
Chief Justice Chase, now writing a bitter dissent to
the majority decision, could only reiterate:
We perceive no connection between the express power to
coin money and the inference that the government may, in a contingency
make its securities perform the functions of coined money, as a legal
tender in the payment of debts.13
If one Supreme Court decision could be expunged to have
the greatest altering effect on our current economic conditions, this
would be the one. Inflation could have been pronounced dead and sealed
in a tomb of law, instead it was reincarnated by this last Legal Tender
Case.
The Legal Tender Cases did not quiet the constitutional
debate, however. The Court had implied that the greenbacks were
constitutional only because the war emergency warranted drastic action.
The emergency was over and green-backism persisted. Despite the doubts,
Boutwell (another Treasury Secretary) began to issue more greenbacks.
Resumption
Specie coins continued to circulate throughout this
period. The greenbacks were, of course, always worth less than the
coins. In fact, the coin value of greenbacks varied with the amount of
paper in circulation, the degree of uncertainty that the paper would
ever be redeemed, and the strength of general consent to accept payment
in paper. Early in 1873, the coin value of paper currency dipped
significantly. Due to Gresham's law, "bad money drives out good," coins
were held out of circulation. Moreover, lenders hesitated to extend
credit, fearing payment in depreciating currency. Traders were reluctant
to accept greenbacks. At harvest time, these inflationary pressures
caused a scarcity of money. This developed into panic in 1874.
The treasury, of course, was asked to print more
greenbacks. The nation's attention was focused on a bill to authorize
more un-backed paper currency. It passed Congress and the debate shifted
to the White House. The eastern establishment (primarily creditors)
protested against this inflation bill and urged a veto. The agrarian
debtors west of Ohio were arrayed in favor of the measure. The whole
issue of green-backism had reached a climax.
As long as the matter of the currency's integrity was
only debated in the intellectual circles of Washington, D.C., no wave of
popular fervor developed on either side of the question. This bill made
the issue public. In the perspective of the bulk of the people, the
nation's honor was at stake. Grant, sensing the public mood, vetoed the
bill on April 22, 1874, reminding the nation that Congress had
repeatedly passed resolutions promising to discharge the war debt and
return to sound money:
Among the evils growing out of the rebellion, and not
yet referred to, is that of an irredeemable currency. It is an evil
which I hope will receive your most earnest attention. It is a duty, and
one of the highest duties, of Government to secure to the citizen a
medium of exchange of fixed, unvarying value. This implies a return to a
specie basis, and no substitute for it can be devised. It should be
commenced now and reached at the earliest practicable moment consistent
with a fair regard for the interests of the debtor class ...
Fluctuation, however, in the paper value of the measure of all values
(gold) is detrimental to the interests of trade. It makes the man of
business an involuntary gambler, for in all sales where the future
payment is to be made both parties speculate as to what will be the
value of the currency to be paid and received.14
The issue, which had bubbled along beneath the nation's
consciousness for years, was now in the open and decided. There was no
turning back. Congress felt honor bound to uphold its promises. A bill
quickly passed to limit greenback distribution. Congressional elections
in 1874 restored the Republicans to power in Congress and they
immediately adopted the Resumption Act which effected specie payment by
1879. The conversion happened smoothly.
Results of 1879 Resumption
In 1861, when the U.S. abandoned the gold standard, the
consumer price index rested at 27 (1967 dollar equals 100). By 1864, the
index had soared to 47-almost a doubling. Prices remained high, between
36 and 46 on the index scale, until the Resumption Act was adopted in
1875. The value of the currency fluctuated wildly during this period.
Indeed it lost one--tenth of its value in a single day. This decade
provides some instructive lessons about the causes of our own age of
inflation. The politicians of this period, in order to stay in power,
were willing to sell the notion that more paper currency meant more
wealth. Advocates of green-backism thought they wanted more paper
currency; they really needed more capital, a greater capacity to
produce. Nonetheless, it took the nation a decade to learn that lesson.
The year 1879 brought the resumption of the redeemable
currency. The consumer price index stabilized at 28 in that year. For
more than three decades thereafter (World War I interrupted the price
tranquility), the index never rose above 29 or dipped below 25. The
index remained at 27 for a decade.15 Never did it rise or
fall more than a single point in a year. The gold standard worked
throughout that entire period to keep prices remarkably stable.
The United States has been locked for years in a
devastating cycle of inflation. Each flare up of inflation is followed
by recession. But the bottom figure for inflation each time through the
cycle is higher than the last bottom. The launching platform for the
inflation take-off is always higher. If the cycle continues, our
inflation may go over 50 per cent in the eighties. The current 20 per
cent rate is already intolerable. America returned to the gold standard
in 1879. A century later, it needs to return again.
At the time of the original publication, Mr. Rader was
Legislative Counsel in the office of Congressman Philip Crane.
1. The Federalist Papers, Alexander Hamilton, James
Madison, John Jay; The New American Library of World Literature, 1961.
Republication of original essays explaining and defending the
Constitution.
2. Hepburn v. Griswold, 8 Wallace 604, 616 (1869).
3.U.S. v. Marigold, 9 Howard 567 (1850).
4. Handbook of Labor Statistics 1978, U.S. Department
of Labor, Bureau of Labor Statistics Bulletin 2000, 1979; Table 116,
Page 369.
5. Financial History of the United States, Paul
Studenski and Herman E. Kroos, McGraw-Hill Book Company, Inc., 1952.
6. Address delivered by John Maynard Keynes at 1919
Paris Peace Conference.
7.Messages of Presidents, Volume VI, December 1862.
8. Financial History of the United States, supra.
9. Financial History of the United States, supra.
10. Hepburn v. Griswold, supra at 607.
11. Hepburn v. Griswold, supra at 621.
12. Legal Tender Cases, Knox v. Lee and Parker v.
Davis, 12 Wallace 457, 529 (1870).
13. Legal Tender Cases, supra at 574.
14. Congressional Record, 43rd Congress, First Session,
3270-3271 (April 22, 1874).
15. Handbook of Labor Statistics 1978, supra.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
September 1980, Vol. 30, No. 9.
Yourname@libertyhaven.com
