Ron Paul and Creating Money

The other day the Washington Post (which has been running a series of articles on potential contenders to President Obama) did a piece on Ron Paul. Paul has made quite a name for himself by advocating various measures designed to "End the Fed" and turn the power over monetary policy back to Congress. As Paul has declared, "The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank." ("End the Fed," by Ron Paul)

Well . . . not according to Alexander Hamilton ("Opinion as to the Constitutionality of the Bank of the United States," 1791) and Justice John Marshall (McCulloch v. Maryland, 1819). According to the first Secretary of the Treasury and the fourth (and longest-serving) Chief Justice of the United States Supreme Court, Congress had and has every right to establish a private corporation and delegate public business to that corporation, particularly with respect to money and credit.

Whether Congress should do that, or whether the power has been misused or corrupted is a different question. What is beyond the shadow of a doubt is that the Federal Reserve is a fully legal and duly authorized private corporation that is charged with carrying out the functions of any other central bank. Even though we contend that the powers of the Federal Reserve have been misused and diverted to serve dubious political ends, the central bank of the United States fills a necessary role in the economy and the financial system. As it functions today, the Federal Reserve is subjected to a bad use of a very good thing.

The United States has, in fact, had some institution that filled the central banking role for most of its history. The longest period without a central bank was from 1837 to 1862, inclusive, following Andrew Jackson's "war" against the Second Bank of the United States and the passage of the National Bank Act of 1863. The National Bank system was badly designed and functioned mostly to make the rich richer while draining the country of liquidity available to farmers and small businesses. Had it not been for the Homestead Act, the United States would probably not have even the token small ownership it has today.

What we want to look at today, however, is not Ron Paul's shaky historical facts, but his dubious understanding of money and credit. Evidently as part of his campaign to undermine the Federal Reserve (as if others hadn't already beaten him to the punch), he wants to give the Federal Reserve some competition, and give private individuals the right to coin money. He has sponsored a bill to that effect, H.R. 1098, "The Free Competition in Currency Act of 2011."

From 1787 to 1863 many people believed that it was legal for U.S. citizens to strike their own coinage. Individual state governments could not issue coins, but private individuals and companies seemed to be okay. The federal government seems to have concurred — at least, there were some federal investigations of the Bechtlers, a family that owned a private mint and struck gold coins to the U.S. standard, and the business was not shut down. The Confederate States of America made the Bechtler's coinage legal tender. Moffat and Company became the San Francisco Assay Office, which later evolved into the San Francisco Mint, and Moffat's coins seem to have had a quasi-legal tender status, being accepted in payment of customs duties.

What Ron Paul evidently doesn't understand is that Federal Reserve notes and demand deposits are not the entire money supply. They are actually the smaller part of it. The bulk of the money supply is comprised of bills of exchange issued by private individuals and companies. As late as 2008, a crude calculation puts the amount of the money supply represented by bills of exchange at more than 60%.

The vast majority of these bills fall into the category of "real bills," that is, they are backed by the general creditworthiness of the drawer. They are money once they have been accepted. Every individual or business that has purchased anything on credit has "drawn a bill," and — given that it was accepted — has thereby created money. American commerce, industry and agriculture could not possibly function if people couldn't create money in this fashion. The productive economy — or what's left of it — runs largely on bills of exchange. Most new capital is financed using some form of a bill of exchange, and repaid out of the future profits of the capital itself. Credit used to purchase capital that pays for itself is a good use of a good thing.

And, yes, you too create money every time you purchase something on credit. The problem is that, while consumer bills of exchange, most often drawn by using a credit card, are real bills (obtaining credit that you know you can't repay is a crime) consumer bills are a bad use of a very good thing.

The trick is not to give citizens the right to do what they are already doing, and to their own detriment. If Ron Paul wants to help America and put the economy and the financial system back on a solid footing, he should sponsor legislation that would help citizens create money to purchase capital that pays for itself, not consumer goods.


Such a proposal is the Capital Homestead Act. It contains a number of provisions that Ron Paul should find very attractive — such as no more monetizing of government debt by the Federal Reserve. Instead, return the Federal Reserve to its original purpose of providing credit to the private sector by discounting eligible industrial, commercial and agricultural paper.

And one more thing: give each citizen the right to participate in the ownership of all new capital financed in this way. Permit each and every child, woman, and man to create money to finance new capital formation. This would end the debt-backed currency we now have, and replace it with an asset-backed currency.

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