Saturday, January 25, 2014

Is Paper Money Constitutional?

If you know Rob Faust, you would describe him as a man who’s deeply twisted, an aficionado of adult films, and has warped views of women. However, if you really know Rob Faust, you would also describe him in the same way, but add he’s extremely intelligent on U.S. history, the Constitution, and libertarian philosophy. So, when he says, in polite conversation as he’s wont to do, that the U.S. dollar, and all paper money in general in the U.S., is unconstitutional, he’s 100% correct.

You see, at the conventions where men gathered together to increase the size and power of government (sorry, but that’s exactly what they were doing when they decided to scrap the Articles of Confederation and create the Constitution), they had some worries, one of them the danger of paper money, commonly called Bills of Credit because the paper was unbacked by gold. During the War for Independence, the U.S. financed the war with paper money; after the war, the State of Rhode Island and Providence Plantations (if you’re ever playing Trivial Pursuit and asked, “What’s the state with the longest name in the Union?” that’s the answer) was issuing paper money like it was going out of style. The result was hyperinflation in both instances. In 1779, the Continental, as the paper money was called, was worth a penny, and George Washington wrote, “A wagon load of money will scarcely purchase a wagon load of provisions.” Hence the term “not worth a Continental.” In Rhode Island’s case, the paper money was so worthless, nobody wanted to trade with the damn place.

Having first-hand knowledge of the economic danger of paper money, these founders decided to eliminate it from their new country. Thus, the constitution states the following: “No State shall… coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts…”

As far as the federal government itself, it has the power to coin money, not print money. The federal government can create gold and silver coins, not print paper. Now, you may say, “Sergio, the Constitution says states can’t emit Bills of Credit or make paper money tender; it doesn’t say the federal government can’t.” That’s correct; however, look at the Tenth Amendment: “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.” Nowhere in the Constitution does it give the power to issue Bills of Credit, or accept anything other than gold or silver as tender to the federal government. Therefore, paper money is forbidden in these United States by the states themselves and the federal government.

As you can see, the founders knew the economic consequences of paper money. Paper money creates the boom bust cycle. Sure, expanding the money supply unbacked by an actual good (gold is a physical good) creates an economic boom, but the expansion also creates the bust, as there is not enough of the good (gold) to redeem when people want it. And let’s not forget hyperinflation. Knowing all this, the founders made paper money illegal. Look at the U.S. dollar today created by the bank known as the Federal Reserve. Do you really think all the paper money in circulation today is backed by all the gold in Fort Knox? If you do, then you must think my studio apartment is a mansion.

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