“U.S. Economy Grinds to Halt as Nation Realizes Money Just a Symbolic, Mutually Shared Illusion.”

-The Onion News Network

Unfortunately, that is just a satirical newspaper heading, but in many ways, it describes perfectly the situation with which the United States is faced with today. Our whole monetary system is based upon the public’s unwitting faith in pretty pieces of paper. The dangers of allowing a government to have complete control over the currency are uncountable and Baron M.A. Rothschild once said it best, “Give me control of a nation’s money supply, and I care not who makes the laws”.

Those who strive to gain power over other men know that the most important thing of all is to control the money supply. If any entity (public or private) has a monopoly on the money supply, economic freedom is in mortal peril. However, what kind of money that the entity has a monopoly on makes a very large difference. Prior to 1913, the government had central banks, but none were set up in a way that allowed them to retain their power over the long run. By and large, people mistrusted them. In the Federal Reserve Act of 1913, however, the statists of the day really did things right. Most people do not know that the Federal Reserve is an unconstitutional organization that is neither federal nor a holder of any reserves.

I have become increasingly aware over the last few years that saying this or that is unconstitutional really has no meaning anymore. There is such widespread and blatant disregard for the Constitution that it is almost a waste of breath to try to explain to someone why the federal government has no business trying to enforce laws that it has no authority to create in the first place. However, since the Constitution is still technically the law of the land and Congress is bound to uphold it, it is necessary to examine what it says about the nature of money.

First and foremost, the most important thing to realize is that the Constitution is not a list of things that the federal government cannot do. It is a list of things that the federal government can do. Here is what the 10^th Amendment says:

“The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the States respectively, or to the people.”

Clearly, the Constitution is no list of prohibitions on the federal government. Indeed, anything not specifically authorized is denied by default. In order for the federal government to enforce something that is not in the Constitution, it must pass a Constitutional Amendment. As I mentioned before, this process has been largely ignored. Even so-called “conservatives” will look the other way if it is legislation that they agree with. The government is growing at an ever-increasing rate, and I believe that the process was set in motion the first time a law was passed that Congress had no authority to make.

It is also important to look at what the Constitution says about money. Here are two more very important excerpts:

Article I, Section 8, Clause 5: “The Congress shall have power… To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.”

Article I, Section 10, Clause 1: “No State shall… coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debt.”

An interesting distinction presents itself here. The federal government is authorized to coin and regulate the value of money but states are not. States are prohibited from making anything but gold or silver coin legal tender in payments of debts. States, do, however, have the power to determine what can be used as tender by default, because the federal government is not given that power of determination. This means that as long as the states are using some form of gold or silver, the federal government has no say in the matter.

It is easy to see that the Federal Reserve is in clear violation of several different clauses in the Constitution. Our currency is not backed by gold or any other commodity anymore. Although originally the Fed did resolve to keep our currency backed by gold, it soon became apparent that they could not truly manipulate the economy without having the ability to create an unlimited supply of dollars. More disturbingly, the federal government did not even have enough respect for the Constitution to make an amendment. The power to coin and regulate money is reserved only for Congress. It did not even have the power to give this responsibility away. The Federal Reserve is made up of private bankers who answer to Congress only in theory, but not in practice. Also, since our money is backed only by trust in the federal government, there are no reserves for the Fed to safeguard. Truly, the Federal Reserve is a “federal reserve” in name only.

The most insidious act that the Fed commits is one that is done day in and day out, year upon year. The continual growth of the money supply constantly rewards bankers and the politically well connected. What happens is that at any given time, our dollars are worth a certain amount. When the Fed decides to increase the money supply, the very first people who receive the new dollars get to spend that money at its current value. As the money trickles through the economy, equilibrium is again reached, and every dollar is worth less than it was before. As if that weren’t bad enough, the process does not even happen all at once. Wages are the last thing to increase, so for an extended period of time, Americans pay an increased price for goods and services while their income remains static. Even without the Constitutional problems, this simple fact alone should be enough to warrant a close examination of what should and shouldn’t be happening in our country today. It is no wonder that the value of today’s dollar in terms of the 1913 dollar is $0.05. The constant expansion of the money supply means bankers and politicians become constantly wealthier. Interestingly, one ounce of gold will purchase the exact same amount of goods and services today that it would in 1913, and even hundreds of years before that.

Now that I have presented the case for complete abolition of the unconstitutional Fed, it is important to introduce a system that can correct the deficiencies of the current system while still remaining Constitutional. When I started researching for this project, I was convinced that the best thing to do would be to return to a gold-backed dollar and essentially be done with it. There is a problem with this solution, though. It gives a monopoly on the money supply to the federal government, which in the long run will fail one hundred percent of the time. Eventually, politicians would find a way to regain their power by creating another central bank or by some other more crafty method. The only way to keep people honest is for no one to have the power. Therefore, I submit that the best solution is to have a system of competing currencies.

In Denationalisation of Money, F. A. Hayek laid out a plan to rip the state of their monopoly control of money. He wrote it in 1976 and to date, it is the most free market approach ever conceived. Even though many libertarians disagree with some of the facets, the danger remains that any other plan would still allow someone to eventually regain monopoly control. There are two main characteristics that a system of competing currencies would have.

First, banking would be completely “free”. Services would not be provided free of charge, but banks would have no restrictions placed on them by the state, such as reserve ratio requirements. They would have to act completely in their own interest in order to stay in business. They would also be able to issue their own currency. This is one of the fundamental requirements of a free banking system. If banks are allowed to issue currency backed by their own reserves, then they have every incentive in the world to not devalue their currency. If a bank starts increasing the amount of currency it has in circulation at a rate that the market cannot sustain, then that currency will be discounted and the bank will have a real problem keeping its currency in circulation at all. In the event that this should happen, the bank would have to take steps in order to regain value in its currency, so the money supply would decrease and equilibrium would be restored.

Second, the state should not force banks to denominate all currencies into a single unit. Free market trading could not occur if the system were designed this way. With modern computers and cell phones, there is not reason at all why currencies could not quickly and effortlessly be exchanged for each other. Citibank’s Wristons and Chase Manhattan’s Rockefellers would be traded in the market just as dollars and euros are traded today. There is no need for any denomination to be required to be backed by anything. Some currencies could be backed by faith in the bank only, others gold and silver, and maybe even some with oil or other commodities. Market efficiency would most likely dictate that only a few currencies would be universally accepted, though, and because gold and silver are such wonderful commodities to back currency with, it is very likely that they would become the standard. The point is that the market would figure out the best way to do it, not the state.

As you can see, this is not exactly the plan that I would have come up with at the beginning of the semester, but after careful research, I believe that there is just no matter what kind of currency a government may choose to nationalize, it will never be the best and most efficient way to promote economic freedom.

Works Cited

Brimelow, Peter. “Ron Paul’s Competing Currencies.” LewRockwell.com. Lew Rockwell, 29 Jan 2008. Web. 5 Apr 2010. http://www.lewrockwell.com/orig/brimelow3.html>.

Greenspan, Alan. “Gold and Economic Freedom.” Objectivist. 5.7 (1966): 11-16. Print.

Paul, Ron. Freedom under Siege: the U.S. Constitution after 200 Years. Auburn, Ala.: Ludwig Von Mises Institute, 2007. Print.