Source: http://www.scribd.com/doc/32165076/The-U-S-Constitution-and-Money-Part-12-The-Unconstitutionality-of-America-s-Money-and-Banking-System
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The U.S. Constitution and Money Part 12:The Unconstitutionality of America’s Money and Banking System
by Michael S. Rozeff Preface
This article summarizes Book Three of Edwin Vieira’s
Pieces of Eight: The Monetary Powersand Disabilities of the United States Constitution
, second revised edition, 2002. The relevant page numbers are pp. 1403-1524, omitting pp. 1482-1512, which excerpt congressionalcomments pertinent to the Banking Act of 1935. As in earlier parts of this series, the summary isunauthorized by Dr. Vieira. It attempts to convey what I conceive to be the essence of his thoughtand research in an understandable way. This requires distilling and sometimes introducing adifferent kind of exposition than his. The result is a hybrid that would have been impossible to produce so quickly without his extensive, detailed, and path-breaking thought. I am fullyresponsible for all errors, misunderstandings, and distortions.Obviously I would not have undertaken this project had I not thought his work of greatimportance to efforts at monetary reform. This does not mean I subscribe to his every thought,emphasis, constitutional interpretation, or recommendation. It means that I think that his work isa first-rate representative of that line of thought which is attempting to reform America within theoriginal meaning of her Constitution, and, as such, deserves respect, a full hearing, andconsideration. Providing an exposition of his thought in this form is for me more an exercise inraising my own level of understanding and sharing what truth I discover in his work with othersthan anything else.
America’s contemporary money and its banking system are both unconstitutional. Exactly inwhat ways is the
unconstitutional? Exactly in what ways is the
unconstitutional? This article analyzes each to pinpoint the distinct sources of theunconstitutionality.Over and above America’s unconstitutional coinage, there are four reasons why Federal Reservemoney is unconstitutional and three more reasons why the Federal Reserve banking system isunconstitutional. If the Federal Reserve were reformed by alteration or termination, theunconstitutional money would remain. That is to say, if the government entirely carried out themoney power as now conceived and executed, the money would still be unconstitutional.
Unconstitutionality of Base-Metal Coinage
America’s clad coins that are made of base metal are unconstitutional in several respects. Theyare declared to be legal tender at their full nominal values, but their values by weight of metal in
Defining the contemporary money supply is always a controversial problem. Fortunately,
it is not one that needs to be addressed in order to analyze the constitutionality of America’smoney. One workable definition is theTrue Money Supply. This is what I have in mind for themoney of the United States that is current and denominated in dollars. Gold and silver are theconstitutional money, but they are not current.Part 8 describes the structure of the FRS. The FRS doesn’t comprise the entire banking
system, but it’s a very important part and the part we are considering.the coins have been less than the nominal values. If a coin has lower market or “intrinsic” value
against the constitutional silver standard than its nominal value, then its legal tender qualityshould be correspondingly reduced. Congress did this in the Coinage Acts of 1853 and 1879,following a pre-Constitutional common-law tradition. The Coinage Act of 1965 departed fromthis principle. Secondly, to be legal tender at all, the Constitution explicitly requires coins to begold or silver. Third, the Treasury does not exchange clad coins for gold or silver. It couldn’twithout losing on such exchanges. This is because Congress has not properly regulated the valuesof the coins as the Constitution instructs it to do.
Unconstitutionality of Federal Reserve Notes (FRNs)
The money we use daily (or that is current or currency) is mostly hand-to-hand printed FederalReserve Notes (FRNs) and bank deposit liabilities such as demand deposits that are convertibleinto FRNs. These may be lumped together for simplicity because they are highly interconvertible.Call them simply FRNs.
FRNs and the slug coins are unconstitutional. Since most of themoney is FRNs, we consider that in depth.
To grasp the reasons for the unconstitutionality of the
and the separate reasons why the
is unconstitutional, we need to consider FRNs by themselves and the bankingsystem by itself. We need to abstract from the workings or structure of the Federal ReserveSystem (FRS), which is the banking system part. An easy way to make that separation is to think 3
about greenbacks, which were the legal-tender notes that the United States Treasury issued in theCivil War. Then there is no banking system to confuse matters. There is no Federal Reserve.Instead of the term greenbacks, I use their longer name, which is United States Notes. I call theseUSNs. Let us suppose that the United States issues United States Notes (USNs). Assume thatthey have many of the same properties that today’s FRNs possess, including mainly that they are
in precious metal and that they are
legal tender . The Treasury prints today’sFRNs and sends them on to the Federal reserve. It could just as easily print USNs and place theminto circulation. The USNs are printing-press money.Most everything we will say about USNs holds for FRNs. The FRNs are, in important respects,the same as USNs, except that they are controlled by the Federal Reserve, whereas the Treasurycontrols USNs. The similarity was recognized by Rep. Hollister in 1935 in a speech to the House
of Representatives, even though he didn’t use the terms USNs and FRNs:“If the time ever comes that the Government is in a position to force upon an unwillinglot of buyers its own obligations against their will, then the time has come when the creditof the country is beginning to fall. Most of us know that the financing of continuingGovernment deficits by fiat money is the road to ruin. By ‘fiat money’ is meant merelythe printing of greenbacks, obligations behind which there is nothing but the promise of the Government. When the Government once starts to pump out such obligations andcompels individuals to take currency of that nature instead of currency which hassomething behind it, either the Government is on the road to ruin or its people are, because it means ultimately a partial or total default, to the extent that the value of thoseobligations goes down and prices go up correspondingly.”In the above, Hollister speaks of USNs as fiat money with nothing behind it but promises. A promise is a promise to redeem in some other medium, like gold and silver. There is an evenlower form of fiat money, which is an empty or almost empty “obligation”, or a currency that hasthe form of an obligation but not its substance. This is an
fiat money. FRNs areirredeemable in any other medium of exchange but slug coins. Hollister speaks of theGovernment printing this money, which is an accurate description of USNs. In the next paragraph of his speech, he goes on to say that issuing greenbacks that must be accepted as fiatmoney is no different than a Government
compelling the purchase of interest-bearing bonds:“If the Government, by compelling buyers to acquire Government obligations which bear interest, which are called ‘bonds’, as distinguished from Government obligations bearingno interest, which are called ‘greenbacks’, forces its promises on its people, there isabsolutely no difference in the procedure or the result. It is a compulsory process, and itmeans that the credit of the Government is gone; that the Government may no longer sellits obligations in the open market.”It is uncommon to hear or think about forcing government bonds on buyers. If it were done, theinterest paid on the bonds wouldn’t matter. The government could just print more bonds withwhich to pay the interest. The difference between greenbacks and the bonds would vanish, asHollister suggests. The relevance of cramming down government bonds is that this is what theFederal Open Market Committee does when it buys bonds and makes the Federal Reserve bankstake them.
Hollister points out next that the Federal Reserve Board, acting with its money power,
the private Federal Reserve banks to buy bonds. He doesn’t mention that in the process of buyingthese bonds, the system issues FRNs (or their equivalent); but this is well-known:“One of the chief objections to this bill is through the provisions by which the FederalReserve Board is given power to compel Federal reserve banks to enter into open-marketoperations on the buying side. When that is once passed, then we have put into the control
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