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.
Yours, etc.
#30#
