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Paper Money
Pulled this from a Limewire connect today... do not know the holder of this information. Thought it would be interesting as a primer on the subject for many of the new-comers.
Paper Money
by
Lyle Engle
"The eye hath never seen, nor the hand touched a dollar."(1) This seemingly odd statement was made by Mitchell Innes in a 1913 banking law journal. What does this have to do with the U.S. Constitution? Well, in Article 1, Section 8, we find that Congress has the power to "coin money, regulate the value thereof, and of foreign coin." Therefore, our money supply is dependent on government creation and regulation. To understand what is happening, we need to know what a dollar is, as simple as that may sound.
The fact is that the dollar is our "unit" of measurement. "Units" are concepts that exist only in our mind, like "inches," "pounds," and "gallons." You can't hold an "inch" in your hand, no matter how hard you try. You must have an "inch" of "something," like an inch of hose, or a "gallon" of "milk." What good is a unit if there is nothing to measure? It has no value! After all, an inch of nothing is just that, nothing.
So just what does the dollar measure? Our federal law, the United States Code, Article 12, Section 152 states: "The terms 'lawful money' and 'lawful money of the United States' shall be construed to mean gold and silver coin of the United States." Further, Article 1, Section 10 of the Constitution tells us: "No state shall coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts." So the dollar obviously was intended to measure gold and silver coin. While Section 10 is a limit on state power, remember that Section 8 only authorized Congress to "coin" money, not print paper. Gold and silver have intrinsic value, something that paper does not. With gold and silver coin, you cannot have inflation, because inflation is simply "inflating" the supply of paper! You can have price fluctuation, but that is controlled by supply and demand, which is not inflation.
"So what?" you might say. "What is so wrong with paper money?" The last thirty years of our economy should tell you something. What good is $20 today if you saved it in 1975? Back then; you could buy a Plymouth Duster brand new for $3100. Now the same car would be at least $12,000, so your $20 now has about 1/4th of the purchasing power it had twenty years ago. THAT is inflation! Now consider gold. In 1935, when gold was fixed at $35/ounce and could not fluctuate, a new cheap Ford cost $700, or 20 ounces of gold. What would that same 20 ounces of gold buy today? At about $400/ounce, or $8000, you could still buy a cheap car! So the gold hasn't lost ITS purchasing power, only the paper is "worth-less" than it was because it isn't backed by anything now.
Roger Sherman, who signed the Declaration of Independence, the Articles of Confederation, and the U.S. Constitution, said:
If what is used as a medium of exchange is fluctuating in its value it is no better than unjust weights and measure, both of which are condemned by the laws of God and man, and therefore the longest and most universal custom could never make the use of such a medium either lawful or reasonable. (2)
Was Mr. Sherman alone in his thinking? Consider these words of Thomas Jefferson:
Specie is the most perfect medium, because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands; and it is the surest resource of reliance in time of war. . .that it [a paper currency] is liable to be abused, has been, is, and forever will be abused, in every country where it is permitted.(3)
Why were these people so against the paper money? Because they had lived though the debilitating effects of the widespread issuance of paper. Paper money was in existence before the Revolutionary War, but a study of the notes in existence show the paper money was always redeemable in gold or silver coin. In fact, I can find no example in the United States of unredeemable paper money until 1968! For example, a Ten Dollar Federal Reserve Note printed in 1950 stated: "This note is legal tender for all debts, public and private, and is redeemable in lawful money." At the bottom of the note, it said "Will pay to the bearer on demand ten dollars." So it didn't claim to "be" ten dollars, but only a "note" for ten dollars. Get it? How could paper money ever begin to circulate unless people believed that it had value?
But back to the 18th century! From 1775 onwards, all of the colonies individually printed their own money. Metallic currency became scarce, as always seems to happen in wartime. Paper money was printed in large quantities to help fund the war. However, if there was a run on a bank, the bank would soon shut down because there was not enough coin in circulation, and the government didn't have the coin because it was printing paper to fund the war! After the war, the colonies continued to print paper money, which caused numerous problems. This was partly the reason for Shay's Rebellion in Massachusetts; people were unable to redeem their paper. In November 1786, James Madison made a speech in the Virginia House of Delegates, and noted with concern Shay's Rebellion. In that speech, he noted that "paper money was unjust, pernicious, and incompatible with the constitution"(4) of his home state, and that it would be "anti-federal." In the Federalist Papers, Madison, in trying to help sell the Constitution to the people, wrote,
The loss which America has sustained since the peace from the pestilent effects of paper money . . . constitutes an enormous debt against the States chargeable with this unadvised measure, which must long remain unsatisfied. (5)
So when the Constitutional Convention came about in 1787, one of the solutions to righting the listing ship of the Confederacy was to outlaw paper money, and this they did with the Article 1, Sections 8 & 10 of the Constitution. Jefferson said, in a letter to John Taylor in 1798, "I now deny their power [i.e., the United States Bank] of making paper money a legal tender."(6) In fact, the United States didn't print paper money until 1861, during wartime again! Incidentally, the South printed their own money during that war, which was also redeemable in specie after the war. Unfortunately for the holders of that paper, the South lost, and the 14th Amendment refused to accept the obligation and the paper was worthless, a good lesson in what is wrong with paper money!
With the passage of the Federal Reserve Act of 1913, "Federal Reserve Notes" came into existence. Before this, the notes were "United States Notes," which continued to be printed, and included Gold and Silver Certificates. The difference was that United States Notes were not loaned into existence, whereas Federal Reserve Notes were. Did you know that the Federal Reserve now creates money out of thin air, loans it to the government, and must be repaid with interest? What could be more absurd? What are we getting for the interest that we are paying? Not only that, but as mentioned earlier, the money is depreciating because of inflation. Can you start to see what is causing some of our economic problems in this country? Interest, at $300 billion dollars, is the largest single item of the federal budget, larger than even defense! Good grief, in 1980, the whole budget was "only" $550 billion! (As one Senator said, "A billion here and a billion there, and pretty soon you're talking real money!)
Schemes like this caused Thomas Jefferson to write,
I sincerely believe that banking institutions are more dangerous to our liberties than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale. (7)
Interest is now 20% of the federal budget. Would your finances be sound if you paid that much? With deficit spending an ongoing problem, what will happen when the interest reaches 50%, 80%, or 100%. Obviously, at some point the government couldn't pay its bills, so government would shut down. Either that, or the government could not keep up with the interest payments, and the banks, which they have borrowed from, will fail, with disastrous results to the economy. This creates political instability, such as what happened in Germany in the 1930's, when Hitler was elected to power partly because of an economy that was suffering from massive inflation! People were getting paid twice a day at that time so they could spend their money at lunchtime because it was going to be worth a lot less when they got off work. Many South American people prefer American paper money because theirs is so unstable and American dollars haven't reached that stage yet.
To have a sound economy, we must return to a dollar that is worth something, not "the full faith and credit of the United States," in other words, "trust me." Do you trust politicians? Until the politicians stand behind their vows to uphold the Constitution and provide this republic with some "lawful money," they are at least liars, and at most, well, you finish the sentence with your own adjective.
In the meantime, you must protect yourself. You should invest some money in gold and silver. There is no better guarantee of protecting your assets, in my opinion. You can't expect the government to look out for your best interests.
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