Money and Morality
January 2, 2001
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 wasnt 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
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
Lincolns 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
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. Weve forgotten that
it was ever anything else, and that there was a time when the steady
erosion of its value wasnt considered inevitable when the
debasement of the currency with the blessing of the government was
recognized as criminal.
Inflation doesnt just
happen, like lousy weather. Its the result of human
choices, and those who inflict it should be held responsible. Better yet, we
should return to money that cant 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
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