Money and Morality

January 2, 2001

The Third Millennium is finally here, for real, but the Second Millennium has left a lot of loose ends. Funny money, for example.

During and after the Revolutionary War, the states issued their own money: paper money with no fixed value. Inflation — which amounts to official counterfeiting — exploded, and creditors were left holding the bag.

In order to remedy this situation, the Constitution gave Congress the exclusive power to “coin” money (not “print” money) and to “regulate” its value. To regulate meant to regularize, not to manipulate. The idea was to stabilize value.

In Federalist No. 44, James Madison mourned “the pestilent effects of paper money” — also called “bills of credit” — “on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of Republican Government.” The Framers of the Constitution understood that sound money was a profoundly moral issue. And paper money, unbacked by gold or silver whose value was beyond the reach of foxy manipulators, was bound to corrupt public life.

As the economist and constitutional scholar Edwin Vieira Jr. points out, a “dollar” wasn’t a piece of paper with a picture of a president on it. It was a firmly established quantity of silver: 371 grains (troy weight). In most respects the United States adopted or adapted British legal traditions and political institutions; but not in the area of money. They distrusted the British pound, so they adopted the Spanish dollar, a widely accepted unit of currency. Old-timers may recall the expression “sound as a dollar.”

As Vieira says, Congress could no more change the value of a dollar than it could change the length of a week. By anchoring the United States to the dollar, the Constitution assured all Americans that their money would be safe from government machinations. Without this assurance, the Constitution might have been rejected. (The market value of gold and silver could fluctuate slightly, but not enough to create the chaos of government-induced inflation.)

In order to pay for the hideously expensive Civil War, the Union issued “greenbacks” — paper money whose value depreciated — and made them obligatory as “legal tender.” The Confederacy also financed the war with funny money. These measures were widely recognized as tyrannical impositions that systematically robbed the public; the U.S. Supreme Court later ruled that legal tender laws were unconstitutional. Chief Justice Salmon Chase, who wrote the majority opinion, had been Lincoln’s secretary of the treasury when the laws were enacted and enforced, so his view carried special weight, not to mention irony.

But in the twentieth century paper money made a roaring comeback. Congress abdicated its constitutional duty by assigning the authority to print paper money to the Federal Reserve Bank; in time, Federal Reserve notes became legal tender with no backing in precious metals. The Fed gained an arbitrary power over economic life that Congress itself was never supposed to have. In effect it had the authority not only to “coin” money, but to counterfeit it.

Inflation and all its consequent unpredictability, with wild swings in the “business cycle,” became permanent facts of American life. Today, when the Fed talks, the economy trembles. There was no such instability when money was tied to gold and silver. The Federal Reserve System represents the rule of men rather than the rule of law.

Few of us complain, because this has come to seem the natural state of things. We still think a “dollar” is a mere piece of paper. We’ve forgotten that it was ever anything else, and that there was a time when the steady erosion of its value wasn’t considered inevitable — when the debasement of the currency with the blessing of the government was recognized as criminal.

Inflation doesn’t just “happen,” like lousy weather. It’s the result of human choices, and those who inflict it should be held responsible. Better yet, we should return to money that can’t be inflated.

Someone has quipped that “dollars to doughnuts” is far from the odds it used to be. Not far into the new millennium, we may have to speak of “doughnuts to dollars.”

Joseph Sobran

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