Last week (February 6, 2013) an article appeared in the Washington Post about Virginia Delegate Bob Marshall’s proposal to study the possibility of reinstituting a specie currency (gold and silver) as a means of stabilizing the money supply and preventing the growing federal debt from crushing the economy.
While we fully sympathize with Mr. Marshall, it’s a plan that can’t work — and it’s been tried before. If he wants to know how to put things back on an even keel monetarily, Bob really ought to be talking to Norman Kurland (he has the phone number) about ways to do what he wants without the potential for disaster his current proposal embodies. Why don’t you suggest to Bob that he give Norm a call? Bob’s e-mail is “delegatebobmarshall [at] hotmail [dot] com. Here’s the letter we sent him (you don't need to go into this much detail):
Dear Mr. Marshall:
Both as a Certified Public Accountant and a citizen of Virginia, I have grave reservations about your proposal to institute a “Virginia-only” currency as reported in today’s Washington Post.
Article I, Section 10 of the United States Constitution prohibits the individual states from creating money: “No State shall . . . Coin Money [or] emit Bills of Credit.” Much to the surprise of a number of people, the federal government does not have the power to create money, either.
The first draft of Article I, Section 8 gave Congress the power to “emit bills of credit” — the “constitutional” term meaning “create money,” a bill of credit being, “A bill or promissory note issued by the government of a state or nation, upon its faith and credit, designed to circulate in the community as money” (Black’s Law Dictionary). This had been in the Articles of Confederation as well.
The power to emit bills of credit was, however, removed during the debates. This was on the grounds that it would give the government too much power. With the debacle of the Continental Currency in very recent memory, the delegates were fully aware that it was much too easy for a government to abuse the money power, as recent events have demonstrated.
So where does the power to create money reside? As Alexander Hamilton made clear in his Opinion as to the Constitutionality of the Bank of the United States (1791), and understanding that “money” is broadly defined as “anything that can be accepted in settlement of a debt” (“everything that can be transferred in commerce” — Black’s Law Dictionary), the money power resides in the people.
This is obvious under the 10th Amendment, which provides, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Nor does a central bank infringe on this right per se, as we can infer from Justice Marshall’s decision in McCulloch v. Maryland (1819).
Until 1863, it was legal in the United States for private individuals to mint their own coins and, if organized as a bank under state law, issue banknotes. Due to some sleight-of-hand by Treasury Secretary Salmon P. Chase (who wanted to be president), the federal government figured out a way to circumvent the Constitution and emit bills of credit to finance the Civil War.
Nevertheless, despite the prohibition against private individuals and companies minting coins and issuing banknotes, any person, natural or artificial, who is competent to enter into a contract can still create money. All money is, in fact, a contract, just as all contracts are, in a sense, money.
Commercial banks were invented to purchase these contracts (called “bills of exchange”), using promissory notes issued by the bank. Where these promissory notes were originally used to back small denomination banknotes used as currency, they now back demand deposits that function as a currency substitute.
The problem under the current system is that no commercial bank will purchase a bill of exchange (a process called “discounting” or “rediscounting”) unless the drawer or maker of the bill is “creditworthy.” To be creditworthy, a borrower (the maker or drawer of the bill) must have collateral.
A mortgage is secured with the present value of existing marketable goods and services, while a bill of exchange is secured with the present value of future marketable goods and services. Since future marketable goods and services do not yet exist, a bank requires that the borrower have other wealth that can be seized in the event the borrower does not redeem the bill on maturity.
To enable people without collateral (savings) to finance new capital formation, Louis Kelso proposed that capital credit insurance and reinsurance be substituted for traditional forms of collateral. If the new capital failed to generate its own repayment out of future profits, the bank could collect on the insurance policy instead of seizing other assets belonging to the borrower.
It would thus be much more advantageous for the Commonwealth within the framework of existing law to foster free enterprise and productive activity without attempting the questionable expedient of instituting a special currency for Virginia. Sponsoring legislation to establish private sector capital credit insurance and reinsurance companies in Virginia would make it much more financially feasible and reduce risk significantly for banks to lend so that they can begin financing new capital formation again.
A capital credit insurance and reinsurance program would encourage investment in new, broadly owned capital formation, focusing on current federal law that encourages up to 100% leveraged Employee Stock Ownership Plans or “ESOPs.”
At present, for example, a Subchapter S corporation that is 100% owned by the workers through an ESOP trust pays no state or federal corporate income tax. According to studies reported by the National Center for Employee Ownership in Oakland, California, worker-owned companies that have profit sharing and participatory management are significantly more profitable than otherwise comparable enterprises.
Restricting the capital credit insurance program to companies that broaden capital ownership would create jobs, create a private sector asset-backed money supply generated locally through Virginia-based commercial banks, and increase incomes to secure the independence of individuals and families.
I urge you to talk to Norman Kurland at your earliest convenience about structuring a capital credit insurance and reinsurance program for Virginia.