Thursday, August 13, 2015

Flexible Standards, II: Making Money

Yesterday we looked at the whole concept of “flexible standard.”  We decided that having a flexible standard is another way of saying we have no standard at all.  After all, what is a yard if yesterday it was 36 inches, today is 18 inches, and tomorrow it is 83 inches?  And what do you mean by “inch”?

If you can read this . . . you're not too close.  You're lying.
Now on to our particular area of interest: money and credit.  In Article I, § 8 of the U.S. Constitution (see yesterday’s posting), it states that Congress has the power to set the standard of the currency.  Nowhere, however, does it say that Congress has the power to alter that standard at will, or even create money.

That’s right.  Read that portion of the U.S. Constitution very carefully.  It says, “The Congress shall have Power . . . . To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.”

In other words, Congress has the power to establish a mint, and either accept bullion from the public to strike coins, or purchase bullion out of tax revenues.  In the early days of the U.S. mint, nearly all gold and silver struck into coins came from private citizens.  If they were willing to wait for the actual gold and silver to be turned into coins, the government (meaning the taxpayer) covered the cost of minting.  If someone wanted coin right away, there was a small fee charged.  Later, with the expansion of coinage as the demands of commerce increased, it was more usual simply for the government to purchase gold and silver out of a revolving fund that was replenished as the coins were struck, passing into circulation when additional bullion was purchased.

David Rittenhouse, First Mint Director.
It is important to note that nowhere in the Constitution does the Congress have any power whatsoever to create money, for which there is a special constitutional term: “emit bills of credit.”  (Actually, nowhere does the Constitution give Congress sole power to coin money, either.  Private coinage was, in fact, legal until the mid-nineteenth century, as long as it was to the standard set by Congress.  It was then made illegal by statute, not constitutional amendment.)

The language permitting Congress to create money was in the Articles of Confederation.  Both the individual states and the federal government had the power to set standards, coin money, and emit bills of credit.  The language was also in the first draft of the Constitution, but it was struck as it was feared it would allow the government to manipulate the currency and assume debt that could not be paid out of future tax revenues.

Salmon P. Chase, a fishy character.
“Sound money” — that is, a currency that adhered to a specific standard — was almost an obsession with the U.S. government prior to the advent of Keynesian economics in the early 1930s.  The idea that a country could be stable or even honest if the value of the currency constantly fluctuated was anathema to any politician until Abraham Lincoln’s Secretary of the Treasury, Salmon P. Chase, figured out how to emit bills of credit to finance the Civil War, circumventing the Constitution by asserting that because the enumerated powers did not mention bills of credit, it was okay.  This caused triple digit inflation during the war, and suspension of convertibility into gold until 1878.

So, isn’t this whole “standard” thing a bad idea?  After all, just look at all the problems that result from trying to maintain standards.

Really?  On Monday we’ll take a peek at what happens when you get rid of the whole idea of standards, especially for money.


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