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”?
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| 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.
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| 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.
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| 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.
