As regular
readers of this blog may recall — at least, regular readers of the captions
under the illustrations — we recently made a comment to the effect that, while
all coin may be money, not all money is coin.
Not unexpectedly, this brought a response from the original questioner .
. . who continued to assert rather than question, but we answered, anyway.
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| Does Congress have sole power to "create money"? |
In this instance,
the assertion was that only Congress has the right to create money. Is that, in fact, the case that the federal
government of the United States (“Congress”) has the power under the
Constitution to “create money,” and is this power granted under Article I,
Section 8? The actual language is,
The Congress shall have Power .
. . To borrow Money on the credit of the United States; . . . To coin Money, regulate the Value thereof,
and of foreign Coin, and fix the Standard of Weights and Measures.
Specifically,
does the phrase “to coin money” mean the same thing as “create money”? CESJ contends that it does not.
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| United States Half Eagle ($5 gold piece) |
In refutation of
CESJ’s position, the questioner (asserter) cited Juilliard v. Greenman (110 U.S. 421 (1884)). The issue in Juilliard was whether United States Notes (“Greenbacks”) and coin
were both legal tender and therefore could both be used to settle a debt when
offered in payment. The Court upheld the
legal tender status of the United States Notes, that is, whether the tender
consisted of coin or paper notes, the legal status of the currency was the same,
and could not be refused. The phrase “to
coin money” therefore reasonably includes “to print notes” and (in certain
circumstances) “create demand deposits” — something that CESJ has never denied.
The problem is
that the Juilliard decision does not
address CESJ’s concerns. The questioner
cited a decision that established an equivalency between “to coin money,” and
“to print notes” and “create demand deposits,” and claimed that it established
an equivalency between “to coin money,” and “to create money.” It does not.
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| Five Dollar United States Note, convertible into gold. |
To explain, when
a government issues currency in any form, it assumes a liability. That is, it guarantees that it will honor the
face value of the currency in full.
Thus, everything else being equal, the government or its authorized
agent must accept in payment of taxes or anything else its own currency at face
value, or convert it into something of equal value.
The difference
between the face value of a piece of currency, and the intrinsic value of the
“fabric” (metal or paper) is thus not a profit, as many people suppose, to be
put into “retained earnings,” but a liability that must be redeemed. The confusion results from the fact that both
liabilities and retained earnings are on the same side of the balance sheet,
but — although both are claims on assets — are exact opposites: a liability is
a claim on an asset from outside the accounting entity, while owners equity
(under which retained earnings go) is a claim on an asset from inside the
accounting entity. The two added
together must equal total assets, hence the accounting equation: Assets =
Liabilities + Owners Equity. “Money”
properly goes into Liabilities for the issuer, but into Assets for the
recipient.
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| Confederate $5 note, not convertible into gold. |
The real issue
here is what is behind the money, i.e.,
what “backs” it, what in finance is called “the underlying,” signifying
“underlying asset.” From 1879 to 1933,
the question of what backs government paper currency was avoided by maintaining
convertibility. A dollar in gold and a
dollar in paper were legal equivalents, as Juilliard
maintained. The individual Juilliard was
being unnecessarily cautious in refusing paper money, probably fearing another
suspension of convertibility as had happened from 1862 to 1878, and the paper
dollar depreciated, no longer passing at par with the gold dollar, or simply
did not trust paper money, likely having experienced the inflated Confederate
currency or the various private “wildcat” bank issues that flooded the country
prior to the National Banking Act of 1863.
Paper money and
demand deposits backed by government debt became a serious problem with the
rapid expansion of the deficit during the New Deal and the termination of
convertibility of the paper notes into gold.
There was no longer any natural brake on government indebtedness, the
politicians no longer having to be concerned with a sudden drain on gold
reserves if people started converting their paper notes into gold. They could print all the money the public
would accept before catching on to what was happening.
Thus, in order to
issue either coin or notes within the constraints imposed by the U.S.
Constitution, the government or its delegated agent (the Mint or the Federal
Reserve) must first purchase or borrow what stands behind the coin or notes,
all of which comes out of existing wealth, i.e.,
marketable goods and services. Money
being defined as “all things transferred in commerce,” the government cannot be
said to be “creating” money when it issues coin or notes. It is only changing the form of money, from a
thing transferred in commerce, to a negotiable claim on a thing transferred in
commerce, or from “money” to “current money,” i.e., “currency.”
Thus, we conclude
that the Constitution does not give Congress sole power to create money for the simple reason that Congress
doesn’t have any power to create
money — not constitutionally, anyway. It
does have the power to change one form of money to another and the
responsibility of setting and maintaining a standard and uniform currency, but
that is all.
#30#
