This weeks blog is a response to a question that came up over at Blargen Blog. I made a comment to the effect that silver is truly the only Constitutional form of money. In order to keep this blog somewhat short, I ask that the readers to allow some assumptions: 1) strictly speaking, I believe, if the Constitution doesn’t authorize a power, then our government cannot do it. 2) The Constitution through articles and amendments trump statutes – in other words even if Congress passes a law, if the Constitution does not authorize it, it cannot be done. I’ll go into more detail on these later.

History of money in America (short version):

In colonial times, there were many different currencies from several different countries floating throughout the land. Over a period of time, one currency became more trusted and accepted: the Spanish Silver Dollar. Have you ever heard the nursery rhyme “shave and a hair cut, two bits”? The Spanish dollar was able to be broken down into “pieces of eight”, or eight bits. Eight bits was equal to a dollar, four bits was equal to a half dollar (later a 50 cent piece), two bits was equal to a quarter of a dollar, and so on. After the Revolutionary War when America need its own monetary system, the Founding Fathers used the widest excepted form of currency in the states as the example. Silver became the Constitutional form of legal tender in America. Later, paper bills, or certificates, were printed as promises to pay in silver or gold. Finally, and currently silver and gold were removed from the equation all together and we are left with paper money that promises nothing.

Constitution of the United States:

Article II, Sec. 8

The Congress shall have Power…        

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;

Article II, Sec. 10

No State shall…

coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;…

Here we see the Constitution only authorizes Congress to coin money as legal tender. Since the time of the Articles of Confederation and before, the Continental Congress, several states, and privates organizations (banks’ notes) all had different accepted mediums of exchange, ie. money. Having several currencies, the Founders recognized, would and did undermine the credit of the newly formed country. The fix was the afore mentioned clauses in the Constitution. Notice that nowhere is there mentioned the phrases “to print money” or “paper money”. And it was not as if printing money was not a new concept, it was being done prior to the Constitution. Also seen above, only gold and silver were to be used to pay [public] debts. Throughout human history gold and silver have been recognized as money in one form or another. Immediately after the war, America had huge debts with France and Spain. They each wanted tangible payments, not paper promises. Here comes one of those assumptions mentioned earlier: Without a Constitutional Amendment all debts owed to the government and all debts incurred by the government must be paid in gold or silver. This covers all levels of government.

Coinage Act of 1792:

Section 9

…Dollars or Units – each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenths parts of a grain of pure, or four hundred and sixteen grains of standard silver…

Section 11

And be it further enacted, That the proportional value of gold to silver in all coins which shall by law be current as money within the United States, shall be as fifteen to one, according to quantity in weight, of pure gold or pure silver; that is to say, every fifteen pounds weight of pure silver shall be of equal value in all payments, with one pound weight of pure gold, and so in proportion as to any greater or less quantities of the respective metals.

Section 16

And be it further enacted, That all the gold and silver coins which shall have been struck at, and issued from the said mint, shall be a lawful tender in all payments whatsoever, those of full weight according to the respective values herein before declared, and those of less than full weight at values proportional to their respective weights.

Section 20

And be it further enacted, That the money of account of the United States shall be expressed in dollars or units, dimes or tenths, cents or hundredths, and milles or thousandths, a dime being the tenth part of a dollar, a cent the hundredth part of a dollar, a mille the thousandth part of a dollar, and that all accounts in the public offices and all proceedings in the courts of the United States shall be kept and had in conformity to this regulation.

Here we see the important parts of the first legislation concerning legal tender and it being named the dollar. Notice that it this new dollar mirrors the value, weight, and purity of the Spanish Dollar, again a widely accepted currency at that time. This new American Dollar was also able to be broken down into smaller parts equivalent to the “pieces of eight” as in the Spanish Dollar. It may be important to point out that the quarters, dimes, etc. were to contain the equivalent value of silver in proportion to their dollar amount. As the values of the metals would rise and fall, Congress could adjust the worth of the metals or the amount of metals in the coins and the rate at which they would exchange with other currencies. The first instance was only an issue if there was a national debt and therefore less access to real money. It was imperative that the nation not be indebted to other countries in order to maintain a stronger value for the American Dollar. Also remember gold was valued at fifteen times that of silver by weight (assuming purity). In order to figure out the worth of gold, one first needed to figure out the worth of the same amount of silver and multiply by fifteen. This was the beginning of the American monetary system.

Subsequent coinage acts were passed, mostly dealing with changing the value of the dollar through 1834. With the Georgia and California gold rushes, gold was becoming more readily available. The relative value of silver to gold changed drastically. More available gold reduced its relative value so the amount of silver in coins was changed to try to keep close to the 15 to 1 ratio. Enter the Civil War and the first real direct tax on the people and the establishment of paper money redeemable in gold or silver. This era in American monetary history is very convoluted. This all came about as a way to finance the war. The practice of borrowing from private banks in order to deficit spend jump started the end of real tangible money. Another war, WWI, would lead to the Federal Reserve Act. This act cemented the power of private banks over Americas monetary system and the glutenous spending habits of Congresses. Congress could now borrow from the Federal Reserve and print promissory notes, paper money, for future payment in gold or silver. Bankers would occasionally demand interest payments, in gold of course. The stock market crash of 1929 and the Depression was the beginning of the end of redeemable gold and silver for paper dollars. With no means for the government to even make interest payments to the bankers, in 1933 President FDR made it illegal for people to own gold and demanded all privately held gold turned over to the government. This was the effective end of any resemblance to Constitutional money and allowed the printing of more dollars than known gold in the world. It was illegal to own gold until 1971, but by then paper money had assumed the role as currency in America, again without a Constitutional Amendment.

An interesting side note about American money:

Constitutionally speaking silver and gold was money acceptable to government agencies. Nothing excluded private individuals or business owners from having their own agreed upon medium of exchange, as long as they understood that any taxes or monies owed to the government as a result of the transaction was to be paid in silver.

From the Department of Treasury:

“…the Coinage Act of 1965, specifically Section 31 U.S.C. 5103, entitled “Legal tender,” which states: “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.”

This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. For example, a bus line may prohibit payment of fares in pennies or dollar bills. In addition, movie theaters, convenience stores and gas stations may refuse to accept large denomination currency (usually notes above $20) as a matter of policy.”

Conclusion:

Silver was the traditional form of legal tender throughout Americas history. The Constitution delegates the power to coin, not print, silver and gold as money to congress and to set the value of those coins. The dollar was legislated to be made of specific weight and purity of silver. The value of gold coins is to be determined by how much silver they are worth. Congress was never authorized to give the power over money to any central bank or Federal Reserve. All debts owed to the government, domestic or foreign, is to be paid in silver or gold. Congress is allowed to spend in debt as long as the debt is paid in silver or gold. As you can see, silver is and has always been the only real form of money in America.

This entry was posted on Monday, June 23rd, 2008 at 4:47 am and is filed under Constitutional Issues. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.