(Article changed on March 6, 2014 at 11:46)
The bitter experience of the American colonies with fiat money; the resolve of the founding fathers to prohibit the new nation from resorting to paper money without backing; the drafting of the Constitution to that end; the creation of a true American dollar; the prosperity that followed.
In the golden days of radio, on the Edgar Bergen Show, the ventriloquist would ask his dummy, Mortimer Snerd, "How can you be so stupid?" And the answer was always the same. After a moment of deep thought on the part of Mortimer, he would drawl his reply, "Well, it ain't easy!"
When we look at the monetary chaos around us today--the evaporating value of the dollar and the collapsing financial institu tions--we are compelled to ask: How did we get into this fix? And, unfortunately, Mortimer's response would be quite appropriate.
To find out how we got to where we are, it will be necessary to know where we started, and a
good place to begin that inquiry is with the Constitution of the United States. Article
I, Sections 8 and 10 say:
Federal Reserve System
(image by Peter Palms)
Congress shall have the power --
To borrow money ... to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;... [and] to provide for the punishment of counterfeiting....
No state shall ... coin money; emit bills of credit; [or] make anything but gold and silver coin a tender in payment of debts.
The delegates were precise in their use of these words. Congress was given the power to "coin money," not to print it. Thomas M. Cooley's Principles of Constitutional Law explains that "to coin money is to stamp pieces of metal for use as a medium of exchange in commerce according to fixed standards of value."
What was prohibited was to "emit bills of credit" which, according to the speeches and writings of those who drafted the document, meant the printing of paper IOUs which were intended to be circulated as money--in other words, the printing of fiat money not backed by gold or silver.
At first, it would seem that nothing could be more clear. Yet, these two simple clauses have become the basis for literally thousands of pages of conflicting interpretation. The crux of the problem is that, while the Constitution clearly prohibits the states from issuing fiat money, it does not specifically prevent the federal government from doing so. That was truly an unfortunate over sight on the part of the document's framers, but they probably never dreamed in their wildest nightmares that their descendants "could be so stupid" as to not understand their intent.
Furthermore, "it ain't easy" to miss their intent. All one has to do is look at the monetary history that led up to the Constitutional Convention and to read the published letters and debates of the men who affixed their signatures to that founding document.
As one reads through the debates on the floor of the conven tion, one is struck by the passion that these delegates held on the subject of money. Every one of them could remember from his personal experience the utter chaos in the colonies caused by the issuance of fiat money. They spoke out against it in no uncertain terms, and they were adamant that it should never be tolerated again in America--at either the state or federal level.
PAPER MONEY IN THE COLONIES
The first colonial experience with fiat money was in the period from 1690 to 1764. Massachusetts was the first to use it as a means of financing its military raids against the French colony in Quebec. The other colonies were quick to follow suit and, within a few years, were engaging in a virtual orgy of printing "bills of credit." There was no central bank involved. The process was simple and direct, as was the reasoning behind it. As one colonial legislator explained it:
Do you think, gentlemen, that I will consent to load my constituents with taxes when we can send to our printer and get a wagon load of money, one quire of which will pay for the whole?