Why are so many state legislators beginning to call for issuance of a form of gold money? The Constitution prohibits states from coining money but allows them to make “gold and silver Coin a Tender in Payment of Debts.” By prohibiting everything except “gold and silver Coin” the Constitution clearly considers gold and silver coinage to be legitimate, no matter who issues it.
States haven’t issued currency in any form for more than a hundred years. So why now? Disgust is probably the answer. Various state legislators are disgusted by the federal government’s promiscuous dollar-printing. Accordingly, legislators in a dozen states are contemplating legislation to issue gold or silver-based currencies, including Utah, South Carolina, Virginia and New Hampshire.
The transcript of the debates in the original Constitutional Convention shows that the attitude of the Founders toward paper money was one of contempt. One delegate, Roger Sherman, called for the insertion of an absolute prohibition against states issuing their own paper money.
Sherman’s argument prevailed, as the Founder’s decided that the states would not possess the power to “emit bills of credit, nor make any thing but gold and silver coin a tender in payment of debts” making these prohibitions absolute…
As for the federal government, the earliest drafts of the Constitution included language permitting the federal government to issue unbacked paper money. But this language would not survive the final draft.
Many of the Founders objected strongly to this power. The objections were summed up by delegate Oliver Ellsworth, who sought to “shut and bar the door against paper money.”
“Paper money can in no case be necessary,” Ellsworth argued, “The power [to issue it] may do harm, never good.”
Since most of the Founders agreed, the federal government was also denied the power to issue non-convertible paper money. The federal government mostly operated within these constraints – the main exception being the Civil War, when saving the Union took precedence over all other considerations.
But for most of American history, dollars have been convertible into gold or silver. It is a 20th century innovation to have non-convertible currency. In 1932, FDR denied US citizens the right to convert their dollars into gold by US citizens. Then, in 1971, Richard Nixon denied foreign central banks the right to convert their dollars into gold.
On August 15, 1971, Nixon declared:
I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold… Now, what is this action – which is very technical – what does it mean for you?
Let me lay to rest the bugaboo of what is called “devaluation.”
If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. (Emphasis supplied.)
President Nixon called the suspension “temporary,” but it has been anything but temporary…and the dollar has suffered as a result.
The dollar today is worth less than a quarter was worth in 1971. And yet, Washington has been curiously unresponsive to the suffering brought by Nixon’s failed promise. Why? Because Washington, itself, has been a primary beneficiary of monetary depreciation.
The federal government spent $15 billion from 1789-1900. Not $15 billion a year. $15 billion cumulatively. Uncle Sam will spend $10 billion per day in 2011. The federal government spends more every two days than it did altogether for more than America’s first century. Although these sums are not adjusted for inflation, they give a correct impression of the magnitude of the change from what our Founders set forth and our early statesmen delivered.
How does Washington get its hands on so much money? Three ways. Taxation, borrowing and printing dollars. The third mechanism is usually the easiest road…at least for a while. Almost no one complains about printing dollars because almost no one feels the resulting consequences directly or immediately.
The power to print money at whim is wrong. It is toxic to our personal and national wellbeing. And it is unconstitutional.
No wonder that legislators in twelve states are considering issuing their own gold-based currencies. By doing so, these states are challenging the federal abuse of an unconstitutional power – challenging the issuance of unhinged paper money.
Federal officials should take these state initiatives as a cue. Federal officials have sworn to preserve, protect and defend the Constitution of the United States. Let them take their oath seriously and restore the convertibility of dollars to gold.
For Markets and Money Australia
Editor’s Notes: Ralph Benko, a member of the bar of the State of New York, is Senior Advisor, Economics, of the American Principles Project, and was called by the United States Department of the Treasury to testify before the U.S. Gold Commission on the constitutional history of American monetary policy. He is also an Advisor for The Gold Standard Now and an important contributor to the Gold Standard 2012 project.