September 22, 2014

The Federal Government and Money

By In Articles, Economics, History

Since the Constitution does not give the Federal Government the power to create a central bank (which was a topic of much debate between the Federalist Alexander Hamilton and the Anti-federalist Thomas Jefferson), what does the Constitution say about money?

There are two primary provisions in the US Constitution which deal with the concept of money.  The first is in Article 1, section 8, clause 5, which reads: “[The Congress shall have Power] to coin Money, regulate the value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.”  The second is in Article 1, section 10 (the section dealing explicitly with the powers that were prohibited to the States) and says that “no state shall…coin money…, make anything but gold and silver Coin a Tender in Payment….”

Throughout the Constitution, when regarding compensation, or issues of payment, the term “dollar” is used to express the currency that is to be used to measure the payment.  In other words, the dollar was a preexisting idea that was being used in markets before the Constitution came to be.  The market had, over time and based on voluntary free trade, produced a currency that was being used independent of a governmental mandate to declare something as money.  Michael Rozeff, writing at the Ludwig von Mises Institute, points out that the dollar was a reference to the commonly used “Spanish milled dollar” which was based on a “specific weight of silver.”  The Coinage Act of 1792 makes this idea a law when it states that “the money of account of the United States shall be expressed in dollars or units… of the value [mass or weight] of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure… silver.”  This act, coupled with the power given congress in Article 1, section 8, shows what was meant by the founders to make up our money.

To coin money is not to create money.  To coin money is to create a currency based on a money.  The money that was to be coined was 371.25 grains of silver, known as the Spanish dollar.  The same Coinage act which established the dollar as the Spanish dollar also established a “mint for the purpose of a national coinage.” In other words, the government, based on its power in Article 1 section 8, coined (minted) money.

The phrase following the “coin money” provision in this fifth clause of Section 8, is that the Federal Government is allowed to “regulate the value thereof” (referring to the “coined” money).  This phrase is many times misconstrued so as to mean that the Federal Government can make the money worth whatever it feels necessary but, as Dr. Woods has pointed out, to regulate the value of a coined money is to “determine the ratio in which this coin will exchange for coins made out of other metals.”  For example, if, on the market, gold is “sixteen times as valuable as silver… then the Federal Government will be involved in regulating the currency by simply announcing that it will take sixteen silver coins to be the equivalent of one gold coin.  Strictly speaking, it does not need to do that; the market can handle that job… but that’s what its role is.  It is a measurement role.  That’s all it is, it’s not that you can make money whatever it is and you can debase it…”

The second provision for money in the Constitution (Article 1, section 10) is a restrictive statement prohibiting the individual states from declaring something other than gold or silver as legal tender.  This is important to note because it is a great example of the Federal Government, especially through the unconstitutional efforts of Franklin Roosevelt in 1933, of illegally tearing down the Constitutional establishments of sound money.[1]  The framers, understanding the dangers of a government issuing fiat money and debasing its own currency (such as the Roman Empire), made sure that no state would do such a thing to its own constituents.  It therefore declared state mints (coining of money) illegal and in order to accept money for payments, it had to only be done in gold or silver coin.  In other words, as the Federal Government was only allowed to mint the silver coins, so the states were only allowed to accept money based on silver and gold.  Therefore, the states were made allowed to accept the federally minted money.

What does this mean for the Federal Monopoly on money?  Firstly, as discussed in the preceding paragraphs, the government is definitely allowed, by the Constitution, to coin money.  Therefore, when strictly talking about Constitutionality, it would not be accurate technically to argue that the federal government is supposed to stay out of money altogether, regardless of a philosophical preference.  We may indeed prefer, based on economic theory and libertarian philosophy, that money be minted and regulated only in the free market. But the constitution does allow the Federal Government (not the Federal Reserve) to do some things regarding money.  Of course, the grand solution of our economic turmoil is to remove the Federal Government from the realm of money altogether.

However, it should be noted that there is nothing in the Constitution which gives the Federal Government monopoly rights on coining money and creating currencies.  Although the Constitution is clear on the individual State Government’s role in minting coin, it says nothing about the people, their businesses, or the markets and their right to free enterprise.  In fact, the tenth amendment, as discussed above says that wherever the Constitution is quiet, the decisions are up to the states or the people to decide.  Since the Federal Government is not permitted to declare its own exclusivity, the people who make up the market place are not and cannot be prohibited in coining money, issuing currency, and establishing banks.  Based on the Constitution, the Federal Monopoly on money is illegal.

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[1] Executive Order 6102 forbade “the hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the continental United States.”  In other words, this order made criminal any possession of gold, regardless of the form of that gold.

Written by C.Jay Engel

Editor and creator of The Reformed Libertarian. Living in Northern California with his wife, he writes on everything from politics to theology and from culture to economic theory. You can send an email to reformedlibertarian@gmail.com