This commentary was originally posted at www.financialsense.com on 20th October2004.
The recent bull market in gold and silver has generated much discussion in the media regarding the "gold standard" of the past - versus the present system of irredeemable paper fiat currency known as Federal Reserve Notes.
Even the issue of the constitutionality of the Federal Reserve and the irredeemable fractional reserve banking system it wields, as the Sword of Damocles above unwary heads, has been debated. Many well-intentioned and knowledgeable writers have rightfully questioned both the efficacy and the soundness of the present monetary system of paper fiat.
Numerous articles often discuss the "gold standard" of past history, including the recommendation of a return to the standard of old, as being both the financial and constitutional "fix" for our present financial problems.
However, is the "gold standard" as popularly put forth and understood by most of these well-intentioned articles, the same as the original constitutional standard and "hard" money system, as stated within the Constitution of the United States?
And perhaps of even greater importance, is whether returning to the "gold standard" of old - at least the "version" that is most often referenced and discussed, in contra-distinction to the original constitutional standard - is truly the fix-all for the debilitated and debased state of our present monetary system of irredeemable paper currency.
Most, but not all, of those friendly to the precious metals or hard money persuasion, sometimes referred to as gold-bugs, speak of the "gold standard" of the past as if it were sacrosanct and beyond reproach - and thus the standard deemed most suitable as the model for modern day monetary reform. But perhaps this model is flawed, which inherently, yet almost unknowingly, except to the elite few who perpetrated the crime, contributed to its intended demise.
The belief seems widely accepted, that the "gold standard" of the later 1800's and the early 1900's, is sufficient historical documentation of our monetary system to explain not only the problems with the present fiat currency; but to also provide the remedy for any such ills to simply be a return to the "gold standard" of the past.
Such views may very well explain and offer the best course of monetary reform, but then again, perhaps they do not: perhaps there are other more sound and honest alternatives; that are closer in keeping with our original Constitution - as opposed to the present system of irredeemable promises to pay.
The "gold standard" most often discussed, is the standard whereby, U.S. Notes, or Treasury Notes or Federal Reserve Notes are redeemable in gold coin. Occasionally, those of a "purer" ideal, refer to the establishing of the one dollar gold coin - which was set by statute as the standard unit of our monetary system - hence the term "gold standard".
However, this setting of the one dollar gold coin as our standard unit of account, did not take place until 1873; and more importantly, is whether the Act was and is, in accordance with the Constitution and the Original Coinage Act of 1792?
To use the creation of the "gold standard" as a starting point for monetary reform, involves taking quite the leap of faith - as there may be much more to understanding our currency system than just the "gold standard" that involved various paper issuances, that were supposedly backed by, and could be, redeemed for gold coin. Even the minting of gold coins such as the gold eagles; or the coinage of a gold "dollar"; or the coining of the magnificent gold double eagles, leaves out a great amount of very important monetary history and policy.
Such a leap in faith may end up missing the original Constitutional Standard - that set the standard for honest money - of silver and gold coin - not of paper redeemable in specie. It may even be, although unintentionally, offering a cure that is as deadly as the disease it seeks to remedy.
It must be remembered, that even a "gold standard" that has 40% of the currency backed or redeemable in gold may appear to be solvent - but it is not liquid - as there is only backing for 40% of the currency and that's it. What about the other 60%? Is it any less real then the first 40%?
And the above is premised on the gratuitously supposed fact or pretense, that the issuance of paper bills of credit is even allowed or granted by the Constitution - regardless if they (bills of credit) are redeemable or not in gold or silver coin; and more importantly - whether the Constitution directly forbids the issuance of such paper money.
Many of these well-intentioned articles on gold and or the "gold standard" often use the word "dollar" in describing "money", almost in a flippant manner - as if the definition of a "dollar" is automatically understood, both by the general reading audience, and by most writers on the subject as well.
Most often it is taken for granted, that the definition of the "dollar" has always been one and the same - which it has been constitutionally, and according to the Original Coinage Act of 1792. Various subsequent coinage acts, however, and the generally false beliefs of both government officials and the public at large, that such legislation was intended to, and did perpetuate; have seemingly changed the definition of the "dollar" from the original intent of the Constitution.
All of which has led to the present make believe world of the Federal Reserve, and the infamous Federal Reserve Note or dollar bill; and whether it just may be possible that a dollar bill, and a "dollar", are two distinct and separate entities - as different from one another as night and day.
In lieu of the above, we are naturally led to ask whether or not the above assumptions of most present day writers on the "gold standard" and the "dollar" are correct, according to the actual history that has transpired?
Also, is it possible that some of the history regarding these subjects has been left out and hidden from the public eye - by deceitful design and behind the scenes manipulation, undertaken by the self-same powers and interests that brought forth the Federal Reserve, and its irredeemable paper fiat currency: to purposefully confuse the issues and muddy the waters?
As unbelievable and stunning as it may prove to be, perhaps the powers that have brought us the Federal Reserve, also brought us the "gold standard"; and the First and Second Banks of the United States, pre-cursors of our central bank; and perhaps for the same reasons: as a means of implementing a wealth transference system of plunder - from "We The People" to "they" who control the system - by dishonest attempts to discredit both gold and silver, by entangling and implementing them in unworkable standards and systems, that were knowingly doomed to fail from the start.
Popular views have been put forth that under the "gold standard" money is gold - perhaps this is true - but perhaps there is a bit more to it. Is the meaning of the statement that money is gold, the same as - gold is money? This involves much more then mere semantics, as will be seen.
A famous quote states: "Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money." This is very much true, but does it not include all paper money, even if fractionally backed by gold, as under a "gold standard"?
Is the "gold standard" where paper currency is backed by gold, the same as a system where only gold and silver coins are the medium of exchange?
Is a system of state or even national private banks that issue paper currency, the same as a system where the government becomes partners with a national central bank, that Congress grants the sole monopoly of power to issue bank notes to - that are only fractionally backed by gold?
And lastly, is the present system of paper fiat currency, that is not only irredeemable and no longer backed by gold; but is also the mechanism and means, by which all Treasury bond or government debt is monetized - exactly the same as any of the systems that came before it, and led to its creation; or is it a gross genetic mutation, engendered by the interbreeding of the preceding diseased and sickly schemes of issue?
So let's take a trip back in time and follow the money and see where it leads us - perhaps we will be able to discover a story not often told about our monetary heritage; and from whence this thing called "money" and "dollar" has come; all in the pursuit of: Honest Money.
We will start by examining "money" according to the Constitution and the Original Coinage Act of 1792. Next we will look at the subsequent Coinage Acts that defined our monetary system. Then the different Treasury Note Issuances will be looked at to see how they fit in. And finally we will go back to the pre-Constitutional history of Colonial America to see from whence this "business" of central banking was born. A summary of conclusions will then be provided.
Part I: The Constitution and Honest Money
Seven Constitutional Monetary Clauses
There are seven main clauses of the Constitution that deal with the issue of "money":
Article I, Section 8, Clause 2. The Congress shall have Power...To borrow Money on the credit of the United States.
Article I, Section 8, Clause 5. 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, Clause 6. The Congress shall have Power...To provide for the Punishment of counterfeiting the Securities and current Coin of the United States.
Article I, Section 9, Clause 1. The Migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the Year one thousand eight hundred and eight, but a Tax or duty may be imposed on such Importation, not exceeding ten dollars for each Person.
Article I, Section 9, Clause 7. No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.
Article I, Section 10, Clause 1. No State shall...coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.
Amendment VII. In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved...
Discussion of Early Monetary History
Of particular interest and importance in reading over these provisions is to note that the word "money" appears but four times in the original constitutional document. The word "coin" appears five times; the word "dollar" appears but twice; the word "credit" twice; and the word "tender" appears but once. Conspicuously absent is the word - paper, although "bills of credit" is a close surrogate.
Most striking is the fact that nowhere in the Constitution is a literal definition of the "dollar" provided. Was the lack of such an important definition as to the dollar or unit of account of our monetary system an oversight by such an august and learned group of men as the First Congress?
Or did our Founding Fathers perhaps know uncontrovertibly the definition of the dollar that at the current time was universally accepted by all? - As in like manner, the usage of the word "day" or "time" within the Constitution was understood, and the definition was not seen to be needed, required, or given - as it was already known.
Perhaps by examining the past monetary history from which the Constitution evolved, as well as the monetary history the Constitution gave birth to, a clearer understanding of the Constitution's meaning and intent can be revealed.
As Blackstone noted in his "Commentaries": "Sir Edward Coke lays it down, that the money of England must be either gold or silver; and none other was ever issued by the royal authority till 1672, when copper farthings and half-pence were coined".
During our early Colonial history, Queen Anne's Proclamation of 1704, and the Parliamentary Act of 1707 both referred to "...regulation of coin according to their weight and fineness in proportion to the rate before limited and set for the Pieces of Eight of Sevil, Pillar, and Mexico... commonly known as the silver Spanish milled dollars".
In 1776 a report in the Journals of the Continental Congress referred to "the precise weight and fineness of the Spanish milled dollar now becoming the Money-Unit or common measure of other coins in these states".
The Continental Congress subsequently laid the groundwork for The Constitution with the Articles of Confederation in 1781. The following sections of the articles are the most noteworthy in regards to the present discussion:
"...The United States in Congress assembled shall never engage in a war, nor grant letters of marque or reprisal in time of peace, nor enter into any treaties or alliances, nor coin money, nor regulate the value thereof, nor ascertain the sums and expenses necessary for the defense and welfare of the United States, or any of them, nor emit bills, nor borrow money on the credit of the United States, nor appropriate money, nor agree upon the number of vessels of war, to be built or purchased, or the number of land or sea forces to be raised, nor appoint a commander in chief of the army or navy, unless nine States assent to the same: nor shall a question on any other point, except for adjourning from day to day be determined, unless by the votes of the majority of the United States in Congress assembled".
The First Congress followed with The Constitution of The United States, which was adopted in 1787 and ratified in 1788. The sections that express the monetary powers granted to Congress and that are of importance to this discussion have been previously listed above.
In 1791 Secretary of State Alexander Hamilton presented to Congress his report on the subject of a mint to "coin" the "money" the Constitution had mandated.
In Hamilton's report to Congress there are many passages that discuss the dollar or unit of money to be issued. The following depicts the definition of the dollar that is constantly used by Hamilton:
"It may, nevertheless, be advisable to repose a discretionary authority in the President of the United States, to continue the currency of the Spanish dollar at a value corresponding with the quantity of fine silver contained in it..."
The following year, The Second Congress passed the Coinage Act of 1792 by which The United States monetary system was enacted.
What the Constitution Did Not Say
The Constitution was the written plan for the construction of our government, that was established and ordained by "We The People", according to the legislative powers that were granted to Congress by the People; including the limitations of such powers; the disabilities of the government in regards to such powers; as well as the delineation of all rights, duties, privileges, and immunities of the government.
Very often it is forgotten that what the Constitution didn't state is just as important as what it did state. The Constitution was the written expression of the People's will, to form a more perfect "Union", by granting to Congress specific powers to carry out the implementation of their new form of government - that the People had established and ordained.
Of particular interest is to note that the Constitution does not grant any of the following powers:
No power to print paper money
No banking powers or regulations
No mention of fractional reserve banking policies
No power to loan money - only to borrow
No power to create any paper currency regardless if it was redeemable in specie
No power to delegate non-existing Constitutional powers to private corporations
No power to grant charters of incorporation to banks
No power to form monopolies
No power to issue forced loans
No power to draw money from the Treasury, but in consequence of appropriations by law
Coinage Act of 1792
The Coinage Act of 1792 was the legislative means to implement by statute, the monetary system of the government, according to the monetary powers granted in the Constitution.
The following are the most important sections of The Coinage Act of 1792 as related to the subject under question - what was the original Constitutional money or dollar?
Section 9. "And be it further enacted, That there shall be from time to time struck and coined at the said mint, coins of gold, silver, and copper, of the following denominations, values and descriptions, viz
EAGLES - each to be of the value of ten dollars or units, and to contain two hundred and forty-seven grains and four eighths of a grain of pure, or two hundred and seventy grains of standard gold.
HALF EAGLES - each to be of the value of five dollars, and to contain one hundred and twenty-three grains and six eighths of a grain of pure, or one hundred and thirty-five grains of standard gold.
QUARTER EAGLES - each to be of the value of two dollars and a half dollar, and to contain sixty-one grains and seven eighths of a grain of pure, or sixty-seven grains and four eighths of a grain of standard gold.
DOLLARS OR UNITS -each to be of the value 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, or four hundred and sixteen grains of standard silver. (Note no mention of gold in regards to the dollar)
HALF DOLLARS - each to be of half the value of the dollar or unit, and to contain one hundred and eighty-five grains and ten sixteenth parts of a grain of pure, or two hundred and eight grains of standard silver.
QUARTER DOLLAR - each to be of one fourth the value of the dollar or unit, and to contain ninety-two grains and thirteen sixteenth parts of a grain of pure, or one hundred and four grains of standard silver.
DIMES - each to be of the value of one tenth of a dollar or unit, and to contain thirty- seven grains and two sixteenth parts of a grain of pure, or forty-one grains and three fifths parts of a grain of standard silver.
HALF DIMES - each to be of the value of one twentieth of a dollar, and to contain eighteen grains and nine sixteenth parts of a grain of pure, or twenty grains and four fifths parts of a grain of standard silver.
CENTS - each to be of the value of the one-hundredth part of a dollar, and to contain eleven pennyweights of copper.
HALF CENTS - each to be of the value of half a cent, and to contain five pennyweights and a half a pennyweight of copper.
Section 11. And be it further enacted, That the proportional value of gold and silver in all coins which shall by law be current as money within the United States, shall be fifteen to one, according to quantity in weight, of pure gold or pure silver; that is to say, every fifteen pounds weight of pure silver shall be of equal value in all payments, with one pound weight of pure gold, and so in proportion as to any greater or less quantities of the respective metals.
Section 16. And be it further enacted, That all the gold and silver coins which shall have been struck at, and issued from the said mint, shall be a lawful tender in all payments whatsoever, those of full weight according to the respective values herein before declared, and those of less than full weight at values proportional to their respective weights.
Section 20. And be if further enacted, That the money of account of the United States shall be expressed in dollars, or units, dimes or tenths, cents or hundredths, and the milles or thousandths, a dime being the tenth part of a dollar, a cent the hundredth part of a dollar, a mille the thousandth part of a dollar, and that all accounts in the public offices and all proceedings in the courts of the United States shall be kept and had in conformity to this regulation."
Now that we have before us the pertinent information regarding the original monetary policy of the United States, according to the Constitution and the Coinage Act of 1792, let's take a closer look at what was said.
Summary of the Constitution and Coinage Act of 1792
Article I, Section 8, clause 5 of The Constitution states that Congress has the "power to coin money" and furthermore Article I, Section 10, Clause 1 specifies that " No State shall...coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt."
The Constitution undeniably grants Congress the power to coin money, i.e. to form and shape metal (silver, gold & copper) and to regulate its weight and purity and to affix the stamp of the issuing government thereon.
From ages past, before the time of the Bible, man has coined metal to be used as money. Accordingly, money is brought forth into society to be used as a medium of exchange to facilitate the trade of goods of all kinds. The use of money involves the progress from direct exchange or bartering of goods, to the indirect exchange of goods using a common medium: money.
The free acts of individual commerce, that collectively form an economic body of trade, chooses and decides by its own internal market forces of supply and demand, what commodity is most widely accepted as "the medium of exchange" - money.
We have seen that in early Colonial times that the Spanish milled Silver Dollar had been the most popular and widely accepted coin then current, although many other different types of coin also circulated.
The Constitution clearly states that money is to be coined and that only gold and silver coin (i.e. money) is a tender in payment of debt. Note that Congress was never granted the power to print money, only to coin it.
However, the Constitution does not define exactly what a "dollar" is, although twice it refers to the dollar - once in Article I, Section 9, Clause 1 and once in Amendment VII.
Let us now once again turn our attention to the Coinage Act of 1792 to see if the Founding Fathers and Congress expressly and explicitly defined the "dollar".
In Section 20 of the Coinage Act we read, "...that the money of account of the United States shall be expressed in dollars or units."
We are now getting closer to our goal for a definition of a dollar. Congress in Section 20 clearly states that the money of account of the U.S. is expressed in dollars, which are "units"
In Section 9 of the Coinage Act we read that "...That there shall be from time to time struck and coined at the said mint, coins of gold, silver, and copper, of the following denomination, values and descriptions, viz. Eagles-each to be of the value of ten dollars or units and to contain two hundred and forty-seven grains and four eighths of a grain of pure, or two hundred and seventy grains of standard gold."
Here we clearly see that Congress coined Eagles that were of the value of ten dollars or units. But an Eagle was not a "dollar", but of the value of ten dollars. So what is the definition of a dollar?
Further on in Section 9 it is stated, "...dollars or Units-each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenths parts of a grain of pure silver, or four hundred and sixteen grains of standard silver."
At long last - the goal we have been searching for - the definition of "the dollar" or unit - each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenths parts of a grain of pure silver, or four hundred and sixteen grains of standard silver.
According to the documents we have so far examined, we find that the Constitution grants Congress the power to coin money while explicitly limiting the states to make "any Thing but gold and silver Coin a Tender in Payment of Debt".
We further find in the Coinage Act of 1792, that the money of account of the United States shall be denominated in dollars or units of the value of a Spanish Silver Dollar, as was current at the time (1792). Also note that the Gold Eagle is to have a value of ten dollars or units.
This means that originally our monetary system had as its standard the Spanish Silver Dollar, and that the Gold Eagle coin was not a "dollar", but was measured against the silver standard, being valued at ten dollars or units or 3,712 - ½ grains of fine silver.
Congress had statutorily defined and legislatively implemented a bimetallic system of coinage - that had the Silver Dollar as the standard where:
"...the proportional value of gold and silver in all coins shall be fifteen to one, according to quantity in weight, of pure gold or pure silver and that all the gold and silver coins which shall have been struck at, and issued from the said mint, shall be a lawful tender in all payments whatsoever, those of full weight according to the respective values herein before declared, and those of less than full weight at values proportional to their respective weights".
The widely accepted belief that originally the United States was on a monometallic "gold standard" is incorrect. The idea that Congress had originally ever issued a gold "dollar" or that the Constitution ever granted Congress such power is also incorrect.
The first monetary standard was a silver standard that defined the "dollar" as a specific weight of silver, as well as establishing that the "dollar" was the "money or unit of account".
However, a bimetallic monetary system of coinage was also established by the Constitutional mandate to Congress to "coin Money, regulate the Value thereof".
The word "regulate" means to "adjust", as in one thing to another - which in the use of coins refers to systems of weights and measures and the regulation of such weights and measures to the standard, which is the "measure" they are to be regulated to or against.
As stated in the Coinage Act of 1792 - Section 11 introduces an exchange ratio of 15 to 1, according to weight. Therefore, although a dollar was defined as 371.25 grains of silver, gold exchanged for a dollar at 24.75 grains of gold (10 x 371.25 divided by 15).
Also, Section 9 of the act defined the Eagle as containing two hundred and forty-seven grains and four eighths of a grain of pure, or two hundred and seventy grains of standard gold.
To reiterate: the standard was Silver - the monetary system of exchange was a bimetallic system of coinage.
Note, however, that the "dollar" that the Coinage Act of 1792 statutorily decreed was not the exact original "Constitutional dollar" - but as the act says, "...each to be of the value of a Spanish milled dollar".
Thus "each" denotes something that is not the Spanish milled dollar but is to be the "value" (specific weight and fineness) of the Spanish milled dollar.
Furthermore, originally there was no gold dollar - only a gold Eagle valued at ten dollars. The Coinage Act of 1849 created the first gold dollar 57 years later. Any reference to an "original gold dollar" dating back to the Constitution is incorrect.
We have thus answered the question regarding whether or not the United States was originally on a "gold standard" according to the monetary powers granted in the Constitution and according to the subsequent legislative statues of the original Coinage Act of 1792.
The answer emphatically being - No - the standard was the then current Silver Spanish Dollar known as Pieces of Eight, coupled with a bimetallic system of coinage using both silver and gold.
This is not a matter of semantics - there are very important distinctions of detail involved that have greatly affected our monetary history - especially our present system of irredeemable paper fiat currency - incestuously wedded to its sibling: fractional reserve banking, spawned in greed - nurtured by the lust for power.