America’s Adulteration of the Gold Standard

America’s Adulteration of the Gold Standard

Thomas Allen

    Between 1879, when the United States returned to the gold standard, and 1914, when World War I began, was the peak of the gold-coin standard. However, a pure gold coin standard did not exist. Perhaps the United States had the most adulterated gold standard among the major countries. The United States adulterated the gold standard with various forms of fiat money.
    In 1789, Congress adopted a silver standard with a bimetallic silver-gold system. It defined the dollar as 371.25 grains of fine silver. It fixed the silver-to-gold exchange rate at 15 to 1 (the value of 15 ounces of silver equaled the value of 1 ounce of gold).  This ratio overvalued silver relative to gold. Thus, gold coins did not circulate.
    To encourage the circulation of gold coins, Congress changed the silver-to-gold ratio from 15 to 1 to 16 to 1 in 1834. It did so by reducing the weight of gold in a dollar to 23.20 grains of fine gold from 24.75 grains. Three years later it changed the weight of gold in the dollar to 23.22 grains of fine gold. (Thus, a $10 gold coin with 232.2 grains of fine gold was equivalent as legal tender to 10 silver-dollar coins with a total of 3721.5 grains of fine silver.) These changes placed the United States on a de facto gold standard. As the dollar continued to be defined as 371.25 grains of silver, the United States remained on a de jure silver standard. (They remained of a de jure silver standard until 1900 when Congress changed the definition of the dollar to 23.22 grains of fine gold.)
    In 1837, Congress changed the gold content of the dollar to 23.22 grains. It remained at this weight until 1933 when the United States abandoned the gold standard.
    In 1863, Congress enacted the National Banking Act. A key part of the Act was requiring banks charted under the Act to secure their bank notes with U.S. government bonds. (Later bank notes of State-chartered banks were taxed out of existence.) Thus, the Act guaranteed a market for U.S. government bonds. As a result, bank notes represented U.S. government bonds instead of the gold value of goods on which real bills of exchange were drawn — the real bills doctrine. Bank notes did not increase or decrease in response to the market demand for them pursuant to the real bills doctrine. They increased and decreased in response to the expansion and contraction of U.S. government debt. (As hard as it is now to believe, there were times when the U.S. government’s debt actually decreased.)
    The first major adulteration came in 1862 when Congress authorized the issue of legal-tender government notes, called U.S. notes and nicknamed greenbacks. These notes immediately became undervalued relative to gold. Thus, the United States quickly converted to the U.S. note standard.  (The West Coast remained on the gold coin standard. In the East, gold traded at a premium to U.S. notes. In the West, U.S. notes were discounted against gold.)
    After reducing the quantity of U.S. notes during the late 1860s and early 1870s, Congress fixed the quantity of U.S. notes at $346,681,000. It required the Secretary of the Treasury to maintain this level.
    Pursuant to an 1875 law, U.S. notes became redeemable at par with gold on January 1, 1979. In anticipation of redemption, the U.S. government acquired enough gold to back about a third of the U.S. notes.
    After U.S. notes became redeemable in gold, U.S. notes remained a fiat currency for two reasons. First, the government instead of the markets determined the quantity issued. Second, they were never fully backed by gold.
    The next major adulteration came in the form of the silver dollar. With the Coinage Act of 1873, Congress ended the free coinage of silver. (This Act became known as the Crime of  ’73.) Ending the free coinage of silver ended bimetallism in the United States. However, under the Act, silver dollars continued to be full legal tender in unlimited amounts. (No rational person would have used silver dollars to pay a debt when this law was enacted. Then the silver content of a silver dollar was worth more than a dollar in gold, which was worth more than a U.S. note dollar.)
    Soon after the enactment of this law, the value of silver began to fall relative to gold. Thus, if the free coinage of silver had remained, the United States would have returned to the silver standard.
    Because of the fall in the value of silver, the sliver mining interest, greenbackers (people who wanted the country to remain on the irredeemable U.S. note standard), populists (most of whom came out of the greenbackers), and debtors agitated for the free coinage of silver at the 16 to 1 ratio. In response, Congress passed the Bland-Allison Act in 1878.
    The Bland-Allison Act ordered the Secretary of the Treasury to buy silver bullion and coin it into silver dollars. It declared the silver dollars legal tender. Moreover, they were not directly redeemable in gold. It required the Secretary to buy between $2 million and $4 million of silver bullion each month for coinage.
    Although each of these silver dollars contained 371.25 grains of silver, they were fiat money — albeit expensive fiat money. Instead of the markets deciding the quantity of silver dollars to issue, Congress and the Secretary of the Treasury decided. Furthermore, the monetary value of a silver dollar exceeded the value of its silver content. Unlike silver dollars coined under free coinage, these silver dollars were the property of the U.S. government. (Silver dollars coined under free coinage were the property of the person presenting the silver bullion for coinage.)
    In 1890, Congress revised the Bland-Allison Act with the Sherman Act, also called the Silver Purchasing Act of 1890. The Sherman Act created a new fiat money: legal-tender Treasury notes of 1890. It ordered the Secretary of the Treasury to buy 4.5 million ounces of silver bullion each month at the market price with Treasury notes until silver reached $1.29 per ounce. This was the price at which 16 ounces of silver had the same value as 1 ounce of gold, i.e., the 16 to 1 ratio. The purchased bullion was coined into silver dollars as necessary to redeem the Treasury notes. However, the Secretary had the discretion to redeem them in gold. In 1893, Congress repealed the silver purchasing provision of the Sherman Act and by that the issue of Treasury notes.
    With the enactment of the Gold Standard Act in 1900, Congress placed the United States formally and clearly on the gold standard. It defined the dollar as 23.22 grains of gold. It required the redemption of U.S. notes and Treasury notes of 1890 in gold only. Thus, it converted Treasury notes into government notes redeemable in gold. Treasury notes were to be replaced gradually with silver certificates. As silver dollars became convertible in gold on demand, the Act made the silver dollar a subsidiary coin like dimes, quarters, and half-dollars. However, silver dollars remained full legal tender. However, even with the enactment of the Gold Standard Act, the silver dollar because of its legal-tender status remained a fiat currency along with the U.S. note.
    The monetary system of the United States began as a bimetallic silver-gold system with the dollar defined as 371.25 grains of silver. Between 1862 and 1879, the United States were on the fiat U.S. note monetary standard. As long as the United States remained on the gold standard, the U.S. note and the silver dollar adulterated the gold standard. The United States never operated on a pure gold coin standard.

Copyright © 2015 by Thomas Coley Allen.

National Banking System

National Banking System
Thomas Allen

[Editor's note: Footnotes in original are omitted.]

In his report to Congress in 1861 on tax increases to finance Lincoln’s war to destroy the Constitution, Salmon P. Chase, the Secretary of the Treasury, suggested a national banking system to provide a safe and uniform bank note.[1]

"In 1863 Congress enacted the National Banking Act. It was promoted as a means to overcome the problem of bank notes fluctuating in value and losing all value by failure of the issuing bank. The ostensible objective was to provide a uniform and safe currency. The act did provide a uniform and safe currency and brought uniformity to banking.”[2]

Some, such as Anthony Sutton[3] and M.W. Walbert,[4] claim that the major banks were behind the National Banking Act. They wanted to gain control of the U.S. government by getting it indebted to them. (If they had enough control of the U.S. government to get the National Banking Act enacted, did they not already have control of the government? )

According to Sutton, Chase was an ally of the banking interest. He presented Congress with banking legislation favorable to the banking interest. Senator John Sherman was the frontman for the bankers in the Senate and got the Senate to adopt the National Banking Act.

Sutton writes, “What bankers wanted the government to undertake was transfer the right to issue money to banking interests, i.e., to allow bankers to act as agents of the Federal Government. The U.S. Government would then be a perpetual borrower required to borrow funds at interest from a private money monopoly—which had obtained the monopoly power from the government itself.”[5]

Banks issuing bank notes were nothing new. Establishing a system to charter national banks and requiring them to secure their notes with U.S. bonds was new. (The requirement to cover bank notes with bonds was a common practice in most State banking systems.)

Before the enactment of the National Banking Act, States chartered all banks. These State-chartered banks (State banks) could issue bank notes. Thus, no bank had a monopoly to issue bank notes. The National Banking Act created a note-issuing cartel of national banks (banks chartered under the National Banking Act). Even this monopoly was not secured until 1866 when Congress levied a 10 percent tax on notes issued by State banks.

Sutton claims, “The purpose of the National Banking Act was to give control of the money issue to bankers.”[6] Some bankers may have thought or hoped that the National Banking Act would do this. However, if this were its purpose, it was a failure. It did not give bankers monopolistic control of money issuance. Free coinage of gold and silver remained in place after the adoption of the National Banking Act. (Free coinage of silver ended in 1873.) National bank notes were redeemable in gold or silver (later only gold) and U.S. notes, which remained in circulation throughout the life of national bank notes, on demand. (Before 1879, except for banks on the West Coast, banks nearly always redeemed bank notes in U.S. notes as a dollar in gold was worth more than a dollar in U.S. notes.) Free coinage and mandatory redemption hampered any monopolistic privileges that the bankers may have wanted—hence, Roosevelt’s ending of the gold standard in 1933. Furthermore, national bank notes had to compete with fiat money issued by the U.S. government. With the adoption of the Bland-Allison Act in 1878 until the adoption of the Gold Standard Act of 1900, they competed with fiat money in the form of silver dollars. After the adoption of the Sherman Act, they also competed with the Treasury notes of 1890, another form of fiat money issued by the U.S. government.[7] Moreover, throughout their life, they competed with fiat money in the form of U.S. notes. If the bankers wanted a monetary monopoly, they did not get it until 1933. If the bankers had such control over the U.S. government, why did they wait from 1863 to 1933 to secure their monopolistic control of the monetary system?

Sutton supports his argument by citing correspondence between the Rothschild Brothers and Ikleheimer, Morton, and Vandergould of Wall Street about the National Banking Act.[8] As discussed below, the National Banking Act did benefit the Rothschilds and other major international European bankers. It did so to the detriment of U.S. commercial banks. As discussed below, the primary purpose of the National Banking Act other than forcing banks to buy U.S. bonds was to restrict greatly American banks to prevent them from becoming competition for the major European banks. Nevertheless, the National Banking Act did contain provisions to make it acceptable to large commercial bankers by restricting their competition domestically. (Within a decade State banks had discovered a way to overcome the advantages that the National Banking Act gave national banks. They successfully promoted the use of checking accounts, checkbook money, instead of bank notes.)

Murray Rothbard describes the role of Jay Cooke and his brother Henry in establishing the national banking system. Jay Cooke was a banker. Henry Cooke was the editor of the leading Republican newspaper in Ohio and a close friend of Senator Chase. The Cookes successfully lobbied Lincoln to appoint Chase as Secretary of the Treasury. Then the Cookes used their relationship with Chase to get a monopoly on selling U.S. bonds through Jay Cooke’s investment bank. Except for one year, he maintained this monopoly from 1862 to 1873 when his company went bankrupt. The Cookes and Chase promoted the national banking system as a means to create a market for U.S. bonds.[9]

As noted above, the National Banking Act was promoted as a means to provide a uniform and safe currency. “However, the primary reason for establishing the national banking system was to finance the U.S. government. It created a market for U.S. government bonds. Under this system, bank notes of national banks were required to be backed by U.S. government securities. Any bank that wanted to issue bank notes had to buy U.S. government bonds.”[10]

Originally, Secretary Chase wanted “to make a market for [U.S.] government bonds by requiring State banks to secure their circulating notes with such bonds, imposing a tax on all notes not so secured.”[11] This proposal evidences that elements of the U.S. government pushed the National Banking Act as a means to create a market for government bonds instead of a move by bankers to create a banking cartel. However, some bankers could have seized the opportunity to create a banking cartel at least in note issuance in exchange for guaranteeing a market for U.S. bonds.

When the revised National Banking Act passed in 1864 (it replaced the flawed 1863 National Banking Act), some also promoted it as a means to end U.S. notes. Congress would redraw U.S. notes, and national bank notes would replace them as the sole paper money. Bankers must have liked this plan. Unfortunately for them, only a fraction of the U.S. notes was ever withdrawn. Moreover, Congress invented additional competing paper money in the form of gold certificates, silver certificates, and Treasury notes of 1890.

“The law did give the country a uniform paper currency, the national bank note, so that bank notes issued on the east coast were acceptable on the west coast. National bank notes were not legal tender. Even so, they could be used to pay taxes except tariffs on imports.”[12] All tariffs, which were a major source of governmental revenue, had to be paid in gold.

Dunbar remarks, “There is no doubt that, in adopting the national bank system, Congress understood that it was establishing the agency by which the sole paper currency of the country should be issued in the future.”[13] This goal was never achieved because the U.S. government issued too much paper money in the form of U.S. notes (which stabilized at $347 million), gold certificates, silver certificates, and Treasury notes of 1890. If national bank notes were to become the sole paper currency, how and when did the bankers lose control of Congress? If bankers had enough control over the U.S. government to get it to enact a cartel that gave banks absolute control over money issuance, why did they not prevent the U.S. government from issuing paper money of all kinds? Why did they not get the U.S. government to phase out all paper money and make bank notes legal tender, which they eventually achieved under the Federal Reserve System?

Bankers were wrong if they thought that the National Banking Act was giving them control of the monetary system in the United States. The National Banking Act was highly ineffective at giving them such control. They would have to wait until 1933 for this control.

Now let’s review some features of the National Banking Act.

The National Banking Act provided for a system of free banking. That is, any association that met the minimum statutory requirements to establish a national bank could do so without a special charter from Congress. The Comptroller of the Currency had general supervision of chartering national banks.

The Comptroller was not compelled to grant a charter to any association that met the statutory requirement for forming a national bank. He could reject a request for a charter without giving any reason. Such power did offer the established banks the opportunity to limit their competition by corrupting the Comptroller.

A national bank in cities of more than 50,000 inhabitants needed a subscribed capital of $200,000. The minimum capital in cities of less than 50,000 inhabitants, was $100,000. With the approval of the Secretary of the Treasury, a bank needed only $50,000 in capital in towns of less than 6000. At least “one-half of the subscribed capital had to be paid in before beginning business, the remainder to be paid in monthly (or more frequent) installments of 10 per cent of the whole-amount.”[14]

This large capital requirement confined national banks to large towns and cities. Their absence from rural areas contributed to the financial plight of farmers during the latter part of the nineteenth century. It also fueled the inflationist movement, first the greenback promoters and then the silver promoters of that era.

“The, stockholders were made doubly liable for the debts of the bank in case of the insolvency of the latter.”[15] That is, shareholders were liable for an amount equal to the par value of their stock in addition to the amount invested. If bankers wrote this law or were the power behind its writing, why would they want to subject themselves to this additional liability? (Such a provision was common in State banking laws.)

The Act allowed national banks “to institute suits at law in U.S. courts as courts of original jurisdiction.”[16] According to Walbert, “This provision gave the national banks an advantage over the ordinary citizen, and placed these associations beyond the jurisdiction of the State courts; in other words, these banks could select whatever court their interest dictated.”[17]

When organized, a national bank had to deposit U.S. bonds with the Secretary of the Treasury equal to at least one-third of its capital stock or $30,000, whichever was greater.[18] Why would bankers impose this restriction on themselves? Would not they want to be free to decide the quantity of bonds to deposit?

With the deposit of this security, the bank could obtain circulating national bank notes from the Comptroller of the Currency up to 90 percent of the value of the bonds. It could obtain additional notes by depositing additional bonds. However, the quantity of notes that it obtained could not exceed its paid-in capital. The deposited bonds remained the property of the depositing bank.

Whenever the value of deposited bonds decreased, the bank had to deposit additional bonds. A bank could withdraw its bonds by retiring its circulating notes or by depositing an equal amount of lawful money in the Treasury.

Why would bankers want to restrict the quantity of notes that they issued to 90 percent of the value of U.S. bonds deposited with the Secretary of the Treasury? Would not they want the full amount? (The Act was later amended to allow banks to use the full total of bonds on deposit.) Furthermore, why would they want to tie their note issuance to U.S. bonds? This feature of the National Banking Act was a major contributor to the deflation between 1870 and 1900. Under sound banking, note issuance is tied to real bills of exchange and not to financial bills like U.S. government bonds.

Nevertheless, according to E. Edward Griffin and Sutton, banks did receive at least one benefit from this system. A bank received back 90 percent of the value of the bonds in notes. Thus, a bond costs the bank 10 percent of its value. These notes it could lend at interest. Moreover, it received interest paid in gold on its deposited bonds. By receiving interest on its deposited bonds and interest on lending bank notes received for the deposited bonds, the bank could significantly increase its income without increasing its capital. In essence, bankers conspired with the U.S. government to convert U.S. debt into money. Bankers received a handsome fee for their services.[19] (This double profit argument was a favorite of the critics of the national banking system during the latter part of the nineteenth century.)

Dunbar rebuts this claimed advantage:

Every bank, then, as a consequence of its use of its credit in any form, must receive interest earned by the investment of its capital and also interest earned by what we may call the investment of its credit; and the fact that the national banks, like others, have the opportunity for making credit as well as capital yield a profit, neither springs from the system on which their notes are secured, nor depends upon it. Indeed, it must be manifest that their deposits yield them a profit in precisely the same way as their notes, and usually much greater in amount. The conclusive practical answer to the idea of a supposed extraordinary profit is to be found, however, in the conduct of the banks themselves, especially after the passage of the act of 1874. This, recognizing the desire of many banks to reduce their circulation and secure possession of their bonds, provided that any bank might deposit “lawful money” with the Treasurer of the United States to enable him to redeem its notes, and thereupon withdraw pro tanto the bonds deposited, provided the amount of its bonds left in deposit were not reduced below $50,000. Several important national banks had never chosen to issue notes, although required by the law to maintain a deposit of bonds; under this provision a considerable number of others reduced their notes to the $45,000 which the required minimum deposit of bonds would support.[20]

This feature of securing bank notes with U.S. bonds caused bank notes to expand and contract as the U.S. government debt expanded and contracted. Instead of bank notes expanding and contracting as the needs of the markets for bank notes expanded and contracted, they expanded and contracted with U.S. government debt.

Contrary to Walbert’s claim, the Act did not place “in the hands of the money power [the ability] to contract or expand the volume of money at its pleasure, and, therefore, enhance or depreciate the value of stocks, bonds, and all other forms of property in the United States.”[21] At least it did not give them the power to expand and contract bank notes at will. The Act limited their ability to contract, and they could not expand any faster than the U.S. debt expanded. Although the Act did not restrict checkbook money except with the mandatory reserves, national banks had to compete with State banks. This competition thwarted the manipulative restriction of checkbook money, which is functionally the same as bank notes.

Walbert also errors when he claims that the Act deprived “greenbacks of their legal tender power.”[22] It did not. Before and after the enactment of the National Banking Act, U.S. notes (greenbacks) remained legal tender for all debts public and private except for payment of tariffs and interest on U.S. bonds. Bank notes could not be used for these payments either. They had to be paid in gold.

Requiring bonds to secure bank notes introduced an investment element. It prevented “banks from issuing notes in response to monetary needs.”[23] Johnson remarks:

National banks in the United States have been issuing notes in accordance with this system ever since the Civil War, and their experience furnishes abundant evidence that notes thus issued perform no useful service. They are elastic enough, but their elasticity is perverse, even vicious, for they expand in volume when contraction is needed and contract when expansion is called for. In dull times, when the supply of currency is already excessive and the rate of discount low, banks are tempted to increase their investments in bonds and to enlarge their circulation. . . . On the other hand, in good times, when banks are able to lend all their credit at high rates of interest, they are prone, no matter what the need for currency, to reduce their circulation and sell their bonds in order to increase their money reserve.[24]

Furthermore, banks could not increase their supply of bank notes to meet seasonal needs (more money was demanded during the fall harvest than during summer) without assuming an investment risk.[25] Thus, requiring bonds to back bank notes led to a flawed monetary system.

Requiring U.S. bonds as security for bank notes was a great benefit to the U.S. government. It gave the government a guaranteed market for its debt. Banks had to buy U.S. bonds if they wanted bank notes to issue.

All national banks had to receive all national bank notes at par. Thus, sound banks could not discount or refuse bank notes of unsound banks. The issuing bank had to redeem its notes in lawful money (nearly always U.S. notes before 1879 except on the West Coast). Except for tariffs, the U.S. government accepted them in payment. It could use them for payments except interest on its bonds.

Although the Act required national banks to receive each other’s bank notes at par, it made redeeming them in specie difficult. A person could only force a national bank note to be redeemed in specie at the issuing bank’s home office. Furthermore, the Act limited the quantity of notes that could be contracted (retired) to $3 million per month.

Congress later amended the act to make the U.S. Treasury the sole redeeming agency for all bank notes. It required each bank to maintain funds equal to 5 percent of its circulating notes at the Treasury to redeem its notes. Thus, imprudent bankers could speculate to the point of irrevocable insolvency with little effective check.

Although notes were a liability of the issuing banks, making the Treasury responsible for redemption made them obligations of the U.S. government. The Treasury was responsible for redeeming all bank notes of insolvent banks. It used the bank’s funds and bonds on deposit to redeem the bank’s notes. Also, the Treasury had a first lien on the insolvent bank’s assets and the personal liability of stockholders.

Originally, the Act limited national bank notes to an aggregate of $300 million.[26] Why would bankers want to limit the quantity of notes that they could issue? Congress later raised this restriction and then removed it.

After Congress taxed State bank notes out of existence, State banks had to keep deposits at national banks to obtain bank notes. These deposits gave the national banks more money to lend. Many State banks converted to national banks so that they could continue to issue bank notes.

Banks paid a tax of one percent per year on the average amount of notes in circulation. This tax was to offset the government’s expenses in printing the notes, keeping the mandatory deposited bonds, and supervising of the system. This tax was in place of all existing taxes on their notes. Congress also levied taxes on deposits and capital of national banks and allowed States to tax their shares.

Unlike U.S. notes, national bank notes were not legal tender. No one had to accept them in payment of debt. Therefore, banks could not count them toward their reserves and could not use them to extend credit. Thus, national bank notes did not have nearly the impact on prices as did an equivalent quantity of U.S. notes. As these bank notes replaced U.S. notes in daily trade, they made more U.S. notes available for use as bank reserves. Consequently, they contributed to price stability.[27]

One argument used by critics of national banks issuing bank notes was that only Congress can issue paper money. The argument used by the proponents of the national banking system to counter this objection was “that national banks do not ‘issue’ notes, but only use such as furnished them in such quantities and under such restriction as are prescribed by Congress.”[28]

People like Walbert error when they claim that with the National Banking Act, the U.S. government gave away “the power to issue legal tender paper money.”[29] It did not. Bank notes were never legal tender although the U.S. government accepted them for payment of taxes and fees. Furthermore, a strict reading of the U.S. Constitution reserves the right to declare legal tender to the States, and it restricts such declaration to gold and silver. The U.S. government has no authority to declare anything legal tender. Thus, it can give no entity the power or ability to issue legal tender currency. Although it can coin money, it cannot issue money or regulate its volume.[30]

A major flaw in the national bank note system was that it prevented the U.S. government from paying off its debts without a significant negative impact on the country’s monetary system. If it were to pay off all its debts, all bank notes would go out of existence.

Banks made little profit from issuing bank notes. They made their profits from buying securities and making loans with their credit. They could buy and lend with demand deposits (checkbook money) or bank notes with equal profitability.[31] To the contrary, the requirements for note issuance might make demand deposits more profitable. Some national banks found note issuance so unprofitable that they ceased issuing them.

In that the National Banking Act established a system where bank notes were tied to U.S. government debt, it followed the example of the first and second Banks of the United States—and which the Federal Reserve System would later follow. Also, to a great degree, it centralized control over banking. Like the two Banks of the United States and the Federal Reserve System, it continued the Hamiltonian philosophy of encouraging governmental indebtedness, especially to banks, and the concentration of power in the U.S. government.

The National Banking Act imposed minimum reserves. The reserves varied with the size or importance of the city in which the bank was located. Central reserve city banks, originally only natural banks in New York City, had to maintain minimum reserves of 25 percent cash in their vaults for their notes and deposits. National banks in reserve cities also had to maintain a 25 percent reserve. However, they could keep up to half their reserves deposited in New York banks as checkable deposits (demand deposits) and the remainder as cash in their own vaults. Country banks had to maintain a 15-percent cash reserve for their notes and deposits. They could keep up to 60 percent of their reserves as demand deposits in central reserve city or reserve city banks. All cash reserves were to be held in lawful money, i.e., U.S. notes, gold, and silver. Reserves restrict lending. Why would bankers want to impose statutory reserves on themselves? Why did they not leave each banker to decide the prudent amount of reserves to keep based on custom and experience? (An answer is that a statutory floor quickly becomes a ceiling. Many banks probably would have maintained higher reserves without the law fixing reserves. Thus, these banks acted less prudently than otherwise and lent more.)

Allowing smaller banks to keep reserves in larger banks did benefit large banks by giving them more money to lend. The way the system was designed, the New York City banks ended up controlling much of the country’s money. It also strained the New York City banks during financial crises as small banks withdrew their money.

When the smaller banks kept reserves in the larger banks, the larger banks became vulnerable to the actions of the smaller banks. Large banks typically lent these reserves as call loans, loans that the banks could call in at any time. Banks usually made call loans to stock speculators. When a small bank withdrew its reserves, the large bank would call the loans. To raise the money to pay the loans, speculators had to sell their stocks. The result was often a crash in stock prices.

On the other hand, the larger banks could engage in inflationary speculative lending with little concern about other banks checking the expansion. Thus, the system enabled the banks “to inflate uniformly and relatively unchecked by pyramiding on top of a few New York City banks.”[32]

Later, Congress removed the reserve requirement for bank notes in circulation. (Banks still had to maintain reserves for deposits. Money deposited with the Treasury counted toward these reserves.) It replaced this requirement with a requirement to keep a redemption fund in lawful money with the Treasury equal to 5 percent of the notes in circulation. This change benefitted bankers as it removed $20 million from reserves and made it available for loans.[33]

The reserve requirements were probably less than what most banks would have kept if the banks were freely competing. Thus, the National Banking Act allowed banks to operate with fewer reserves.[34]

The National Banking Act allowed national banks to conduct general commercial banking business. They could accept deposits and make loans on personal securities and discounts for promissory notes, drafts, bills of exchange, and other evidence of debt. However, they could not make loans for real estate and deal in real estate. They could not lend on the securities of their own stock.

A bank could not buy or hold its own stock unless taken as security on a failed loan; such stock had to be sold within six months. The Act also imposed several other restrictions including a prohibition against opening savings departments.[35]

The maximum amount that a bank could lend to a single borrower was restricted. This restriction forced industrial corporations to borrow from many lenders, finance their own growth by borrowing from themselves or from other industrial companies (which banks did not like as it decreased their power), or turn to the great investment banks. Two of the major investment banks were J.P. Morgan and Co. and Kuhn, Loeb and Co. Both were associated with the Rothschild banking empire. Again restrictions in the National Banking Act benefitted the Rothschilds and their associates at the expense of the American commercial banks.

The most important of these other restrictions was that national banks could not accept drafts drawn on themselves by foreign or domestic merchants. This prohibition prevented national banks from financing American exporters and importers. Importers and exporters had to use London banks to finance their trade.[36] Why would bankers deny themselves such a lucrative market? This prohibition was highly beneficial to the London bankers, Rothschild being the dominant London banker. This restriction does suggest the involvement of the Rothschilds and other European international bankers in the National Banking Act.

The Act made the merger of national banks difficult. To control other banks, the big banks often had to resort to the unreliable method of interlocking directorates.

Why would bankers want to place these restrictions on themselves? To get around some of these restrictions, such as the real estate restrictions, many national banks formed affiliated State banks.

The Act also prohibited branch banking. Prohibiting branch banking did reduce competition. But why would bankers want to lock themselves out of new and potentially lucrative markets? Prohibiting branch banking also reduced the redemption of bank notes. Noteholders did not have many locations where they could redeem notes issued by non-local banks. Thus, notes circulated longer than they otherwise would. As notes spend more time in circulation, the bank’s potential for profit rises.

Later to entice State banks with branches to join the national banking system, Congress allowed them to keep their branches if they became natural banks.

With the enactment of the National Banking Act, the independent treasury system that President Van Buren had established ended. (Under the independent treasury system, the U.S. government kept its money solely in specie in its own Treasury vaults.[37]) Now the U.S. government deposited its money in selected national banks. These banks were depositories for all government revenue except customs. They also served the U.S. government as financial agents. To be a chosen bank was a great benefit. These banks received large sums of money, which they could lend. Their influence in Washington also rose.

The National Banking Act provided for, according to Rothbard, “governmental control and sponsorship of inflationary banking.”[38] Consequently, “the Republican Party was able to use the wartime emergency to fulfill the Whig-Republican dream of a federally-controlled centralized banking system able to inflate the supply of money and credit in a uniform manner.”[39] Along with the greenback, it implanted a desire for soft money.

A major defect of the National Banking System was the lack of elasticity of bank note issuance. Bank notes were not and could not be issued and contracted as the needs of commerce demanded more or fewer bank notes.

The National Banking Act failed to satisfy both the currency principle and banking principle of note issuance. Under the currency principle, bank notes above a statutory fixed amount have to be fully backed by specie. Above this fixed amount, bank notes are merely warehouse receipts for gold or silver, i.e., they are the same as gold or silver certificates. Under the banking principle, banks convert bills of exchange into bank notes. Although bank notes are redeemable in specie, bills of exchange back them. Bank notes expand and contract as bills of exchange expand or contract. Bills of exchange expand and contract as new goods offered for sale expand and contract. Bank note issuance responds directly to the needs of commerce.

Under the National Banking Act, bank note issuance responded to the expansion and contraction of U.S. government debt. They were essentially government debt cut into small pieces.[40] The national banking system monetized U.S. government debt.

The currency school considers bank notes as a form of money—a substitute for metallic money. They are merely warehouse receipts for gold, i.e., paper gold. The banking school correctly considers bank notes as credit instruments that are functionally the same as checks and bills of exchange. They are not gold substitutes; they facilitate the movement of gold and enable one ounce of gold to do the work of several ounces of gold without fractionalizing gold. In this respect, the National Banking Act followed the currency school and considered bank notes as money proper like U.S. notes instead of credit instruments like bills of exchange. Bank notes were to be covered by gold, U.S. notes, or U.S. bonds, but not by bills of exchange. Thus, they lost their flexibility (elasticity) to respond to the needs of trade.

Furthermore, the Act demanded that the U.S. government remain indebted to bankers, which bankers may like, to maintain a supply of bank notes. The system prevented the U.S. government from paying off its debt. If it did so, the supply of money in circulation would contract unnecessarily.

The restrictions in the National Banking Act did lead to the growth of State banks. During the decade following its enactment, State banks appeared on their way to extinction. However, by the end of the century, more than 60 percent of the banks were State banks. State banks contributed more than half the total banking reserves.[41]

The flaws inherent in the national banking system were so great that the United States were given one of two choices. They could return to decentral banking, which was beginning to reassert itself or move onward to full central banking. The big bankers (the money interest) deceived and tricked the people into central banking with the Federal Reserve Act.

Regardless of any conspiracy by the bankers, the underlying force behind the adoption of the National Banking Act was the desire of Republicans to destroy States’ rights and sovereignty and to consolidate all power in Washington. (The Republicans came out of the nationalist Whigs, who came out of the nationalist Federalists.) It epitomized Lincoln’s successful war to destroy the Constitution. Such a mood played into the hands of the international financiers like the Rothschilds.

Once power was centralized and consolidated in Washington, these bankers and their associates, through bribery and extortion, could and did gain control of it. Dewey remarks that having the U.S. government chartering banks instead of States:

appealed to the growing feeling of nationalism in all departments of political action; it appealed to those who were jealous of the power of private corporations; it appealed to those who wished to relieve the government from distressing bargains, and who hoped the government would thus gain the ascendancy in the control capital; and finally it appealed to those who feared that further issues of United States notes would ultimately ruin both government and private credit.[42]

Senator Sherman, who rammed the National Banking Act through the Senate, saw the national banking system, especially the national bank note, as achieving the major goal of Lincoln’s war: the destruction of States’ rights. States’ rights were the bulwarks that prevented those who really controlled the U.S. government from absolute despotic control of the country and its people.

The National Banking Act did destroy the decentralized banking system of State banks. It replaced that system with one that was highly centralized. Bureaucrats in Washington and the major banks in New York gained a great deal of control over the U.S. banking system. It greatly increased the power and influence of the New York City banks (the Wall Street banks). However, with the growth of State banks, decentralized banking was again beginning to reassert itself.

The many defects that the National Banking Act created in the banking system led to the Federal Reserve Act of 1913. “With the National Banking Act, the currency had lost much of its elasticity because the quantity of bank notes was based on the quantity of U.S. securities and not on market demand. Because of the shortage of bank notes, depositors often had to withdraw gold coins or gold certificates, which served as reserves. Thus, banks had to maintain a higher level of reserves. To overcome the problems caused by the National Banking Act, the big bankers and their politicians decided further to concentrate and centralize control over the banking system. They created the Federal Reserve to manage the gold standard, which it did until 1933, after which it managed the fiat-federal-reserve-dollar standard.”[43] Furthermore, the major banks needed to do something to stifle the growth of State banks and to bring them under their control.

To the extent that a conspiracy involving the big bankers was behind the development and enactment of the National Banking Act, it was by major foreign bankers. If leading American commercial bankers were conspiring to get the Act enacted to receive special privileges, they failed. The Act did not really benefit them and gave them no great privileges. They would have to wait until the Federal Reserve System was established.

Endnotes1. Davis Rich Dewey, Financial History of the United States (1922; rpt. Adamant Media Corp., 2005), pp. 280-281. Robert P. Sharkey, Money, Class, and Party: An Economic Study of Civil War and Reconstruction (Baltimore, Maryland: The Johns Hopkins Press, 1959), p. 224.

2. Thomas Coley Allen, Reconstruction of America’s Monetary System: A Return to Constitutional Money (Franklinton, North Carolina: TC Allen Company, 2009), p. 144.

3. Antony C. Sutton, The Federal Reserve Conspiracy (Boring, Oregon: CPA Book Publishers, 1995), pp. 49-59.

4. M.W. Walbert, The Coming Battle: A Complete History of the National Banking Money Power in the United States (1899; rpt. Merlin, Oregon: Walter Publishing & Research, 1997), pp. 35ff.

5. Sutton, p. 51.

6. Ibid., p. 51.

7. Allen, pp. 86-89.

8. Sutton, pp. 52-56.

9. Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II (Auburn, Alabama: Ludwig von Mises Institute, 2005), pp. 132-135, 145-147. Murray N. Rothbard, The Mystery of Banking (Second Ed. Auburn, Alabama: Ludwig von Mises Institute, 2008), pp. 220-224, 228-230.

10. Allen, p. 144.

11. Horace White, Money and Banking (Boston, Massachusetts: Ginn and Company, 1896), p. 408.

12. Allen, p. 145.

13. Charles F. Dunbar and Oliver M.W. Sprague. The Theory and History of Banking (Fifth ed. New York, New York: G.P. Putman’s Sons. 1929), pp. 238-239.

14. Frederick A. Bradford, Money and Banking (Fourth ed. New York, New York: Longmans, Green and Company, 1938),p. 288.

15. Bradford, p. 288.

16. Walbert, p. 37.

17. Ibid.

18. Bradford, p. 288.

19. G. Edward Griffin, The Creature from Jekyll Island: A Second Look at the Federal Reserve (Fourth ed. Westlake Village, California: American Media, 2002), pp. 386-387.

20. Dunbar, pp. 245-246.

21. Walbert, p. 38.

22. Ibid., p. 44.

23. Joseph French Johnson, Money and Currency: In Relation to Industry, Prices, and the Rate of Interest. (Revised ed. Boston, Massachusetts: Ginn and Company, 1905), p. 334.

24. Ibid.

25. Ibid.

26. Bradford, p. 226.

27. Johnson, p. 275.

28. Dewey, p. 325.

29. Walbert, p. 41.

30. Allen, pp. 72-81.

31. J. Laurence Laughlin, The Elements of Political Economy (New York, New York: American Book Company, 1887), p. 342.

32. Rothbard, History, p. 138.

33. Rothbard, History, p. 141. Rothbard, Mysteries, p. 227.

34. Rothbard, History, pp. 143-144. Rothbard, Mysteries, p. 227.

35. Bradford, p. 345-346. Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916. (Paperback ed. Chicago, Illinois: Quadrangle Books, Inc., 1967), p. 140.

36. Bradford, pp. 325-326.

37. Rothbard, Mysteries, p. 214.

38. Rothbard, History, p. 122.

39. Ibid., p. 135.

40. White, p. 416.

41. Kolko, p. 140. Rothbard, History, p. 144.

42. Dewey, p. 321.

43. Allen, p. 148.

[Editor note: The original contains an appendix that shows the quantities of various types of paper money for the years between 1865 and 1912 and a list of references. These are omitted.]

Copyright © 2009 by Thomas Coley Allen.

More articles on money.

Analysis of Charles Norburn’s Monetary Reforms

Analysis of Charles Norburn’s Monetary Reforms as Presented in Honest Money
 Thomas Allen

This paper is my analysis of Charles S. Norburn’s monetary reforms as presented in his book Honest Money: The United States Note (New Puritan Library, 1983). His words and my paraphrases or summaries of his words, I have italicized. My commentary is in roman letters. I have provided references to pages in his book and have enclosed them in parentheses.

Norburn advocates following Lincoln’s example and having the U.S. government print U.S. notes without the restrictions placed on Lincoln’s notes. He claims that his monetary system eliminates high interest, overwhelming debt, and high taxes (p. xi).

He proposes (1) to abolish the Federal Reserve and replace it with a system run by honest men who place the interest of the country above personal gain, (2) to cease issuance of interest-bearing U.S. government securities, (3) to have the U.S. government to print its own money to pay its expenses and to lend it at interest, (4) to replace all existing money with new money, U.S. notes, and (5) to cancel interest as it is paid in (pp. 123-124). U.S. notes are to replace federal reserve notes and be the only paper money in circulation (p. 127).

Norburn’s proposal is a typical fiat monetary reform. He differs from others in some details, but not in fundamental principles. Like all other fiat monetary reformers, he believes that politicians, bureaucrats, and "experts" can manage the country’s money better than the people as a whole. Thus, he trusts politicians, bureaucrats, and "experts," but distrusts the people. As do most fiat money reformers, he highly distrusts, if not despises, bankers and wants to abolish the Federal Reserve. Like other fiat money reformers, he wants to transfer the powers of central banking vested in the Federal Reserve to the U.S. government. Unlike many fiat money reformers, he does not offer any real criteria or guidelines for the money managers to use to control the money supply to prevent inflation or deflation. He seems to allow Congress to create and spend money on whatever it desires. As are all fiat monetary systems, his proposal is unconstitutional.

Norburn expresses his belief that before an item can function as money, governmental compulsion is necessary. He does admit that gold and silver were used as money centuries before any government minted the first gold and silver coins (p. 4). Gold and silver have been used as money until recent times even without a government’s seal on it. Before World War I in parts of Asia, purchases were made by cutting silver from a bullion bar of silver.[1]

When the value of the money equals the value of the material of which it is made, such as silver coins under the true silver standard or cigarettes in prisons, governmental coercion is not needed. When a government mints coins, it makes the circulation of coins easier as it certifies the metal content of the coin—assuming that the government is honest. Force is only needed to get people to accept overvalued (underweight) coins. Thus, force is needed to get people to accept irredeemable paper as paper money has no substances or value in and of itself.

Norburn gives a lengthy discussion of Lincoln’s U.S. notes as this is the primary model of his proposal (19-27). When Lincoln could not borrow money at a low enough interest to finance his unconstitutional war to destroy the U.S. Constitution, he resorted unconstitutional money in the form of noninterest bearing, irredeemable forced loans[2] called U.S. notes or greenbacks.

When the government issues notes for use as money, e.g., U.S. notes, it is forcing a loan on the people. It is borrowing from the people just as surely as it would have if it had sold them bonds and took their money. This forced loan of government notes falls on the poor and rich alike. When the government borrows by selling bonds, it takes money only from those who can afford the investment. It takes the capital that can best be spared from the country’s wealth. With notes it takes capital from all classes and disturbs, at least temporarily, the normal conditions of every business.[3]

According to Norburn, U.S. notes were printed as notes: "Because these notes were obligations of United States government—promises to eventually pay for the goods and services the government would buy on credit. On each note was printed the exact amount of dollars government owed its bearer" (p. 20). Gold or government bonds did not back them. They were merely a promise to pay (p. 20). To pay what? If the government were to pay them in dollars, it would have paid the bearer upon redemption, 371.25 grains of pure silver[4] for each U.S. note dollar presented. Lincoln had no intentions of doing this.

Norburn asserts that "they we authorized by the Constitution and were backed by wealth, strength and integrity of the nation" (p. 20). Whatever these U.S. notes were, the U.S. Constitution definitely did not authorized them—at least not in the minds of the writers of the Constitution. The writers of the Constitution actually discussed granting Congress the power to print and issue paper money and voted against giving it that power. Thus, the writers of the Constitution never delegated Congress any authority to print or issue paper money of any kind[5]

If the "wealth, strength and integrity of the nation" backed these U.S. notes, that backing was a meaningless, nebulous intangible. If something really backs money, the issuer can redeem it on demand for whatever it represents. Thus, a silver certificate is redeemable on demand in the amount of silver specified on the certificate. A bank note under the gold standard is redeemable on demand in the amount of gold specified on the bank note. How could one redeem a U.S. note on demand in the "wealth, strength and integrity of the nation"? He could not. He could pay excise taxes, but not tariffs (tariffs could be paid with Norburn’s U.S. notes) with it. He could force his creditors to accept it in payment of debt. The debt paying attribute was a windfall for bankers who got to pay depositors who had deposited gold dollars with heavily depreciated U.S. note dollars. This "wealth, strength and integrity of the nation" seems to be no more than the ability to pay taxes and to cheat lenders and creditors, including bank depositors.

Norburn remarks, "The notes were enthusiastically accepted at face value" (p. 20). If they "were enthusiastically accepted," why did Congress have to declare them to be legal tender so that debtors could force their creditors to accept them as payment of debt?

U.S. notes traded at face value, but they did so because the North replaced the gold-dollar standard with the U.S. note-dollar standard. Items were priced and wages paid in the U.S. note-dollar standard instead of in the gold-dollar standard. If someone bought an item with gold, the sales price was discounted.

The opposite was true on the West Coast. Unlike the North, men of integrity and honor inhabited the West Coast. They did not tolerate a debtor cheating his creditor with cheap money. The West Coast remained on the gold-dollar standard. If some bought an item with U.S. notes, he paid a premium above the list price.

U.S. note dollars did depreciate against the gold dollar. The table below, which is from Johnson, shows the price of gold in U.S. notes and the price of U.S. notes in gold. (Johnson uses “greenbacks”; I have changed greenbacks to “U.S. notes.”) The price of gold is the average for each year.

Norburn claims that one virtue of "the government’s issue of its own notes was that all this took place without a middle man" (p. 21). Except the insignificant cost of printing, no costs were involved. These notes were interest-free loans. "No extra taxes had to be collected to pay a profit [interest] to the bankers" (p. 21). At least here he does admit that U.S. notes were interest-free loans although he seems to deny it elsewhere.

If the government were to live within its means, it would never have to collect extra taxes "to pay profit to the bankers." It would never have to borrow. If Lincoln had the testosterone to levy sufficient taxes to fight his war, he could have fought his war to destroy the Constitution without debt and without resorting to unconstitutional forced loans in the form of U.S. notes. He issued U.S. notes because the people in the North would have rebelled against him if they saw how much the war cost. Like most "great" leaders, Lincoln concealed the cost of war by resorting to the inflation tax. The people ended up paying for the war as they fought it; only they did not realize it because much of the cost was concealed from them.

Norburn objects to the prohibition against using U.S. notes to pay tariffs and interest on U.S. government securities (pp. 21-22). If, as Norburn claims, U.S. notes were really accepted at full face value, no difference would exist between the face value of a $10 U.S. note and a $10 gold coin. Thus, these prohibitions should have not mattered. However, they did because a $10 U.S. note always traded at a discount against a $10 gold coin until 1879 when it became redeemable in gold at par.

Norburn blames the bankers for the depreciation of U.S. notes (p. 127). If he were a true fiat money adherent, he would claim that his beloved U.S. note did not depreciate. They never changed value. Gold appreciated; it changed value. (Being true fiat money adherents, Friedman and Schwartz assert in A Monetary History of the United States that gold traded at a premium to U.S. notes.[6])

Norburn contends that among the 7000 different kinds of bank notes in the country then, only U.S. notes carried an inscription that they could not be used to pay import duties or interest on U.S. government bonds. He implies that these restrictions contributed to, if not out right caused, their lost in value (p. 127). Norburn is being disingenuous. He is deceiving with a half truth. True, these 7000 bank notes did not declare that they could not be used to pay import duties or interest on U.S. government bonds. However, he does not mention that unlike U.S. notes, they were not legal tender. No one had to accept them as payment for anything including import duties and interest. With the two aforementioned exceptions, U.S. notes were legal tender for all debts. Thus, a debtor could force a creditor to accept them as payment. A debtor could not do that with bank notes.

Norburn is also being disingenuous by implying that U.S. notes were unsecured, i.e., not backed by gold (p. 127). Again, he deceives with a half truth. Gold did not back U.S. notes between 1862 and 1879. In 1879 U.S. notes became redeemable in gold on demand. In preparing for this redemption, the U.S. government accumulated enough gold to redeem (back) about a third of the outstanding U.S. notes. In 1932, gold backed about half the outstanding U.S. notes. U.S. notes remained at par with gold between 1879 and 1933 not because of anything inherent in U.S. notes or that the U.S. government issued them. They remained at par for the same reason that national bank notes issued by national banks remained at par between 1879 and 1933 and federal reserve notes remained at par between 1914 and 1933. All remained at par with gold because all were redeemable in gold on demand.

If U.S. notes possessed any inherent property that gave them value in and of themselves as gold and silver coins do, they would have traded at a premium to federal reserve dollars after 1933. They never did. They always traded at par. If being issued by government and being accepted as payment for taxes gives money certain inherent properties that give it value, why were not U.S. notes more valuable than federal reserve notes? After all, the evil bankers and Federal Reserve issued federal reserve notes. After 1933 the quantity of federal reserve notes (and their electronic equivalent) steadily grew. The quantity of U.S. notes remained the same or declined. As the excessive growth of federal reserve notes lead to their decline in value, why did U.S. notes also decline in value? Could it be that U.S. notes have no inherent property that gives them value in and of themselves? Could it be that the problem is fiat money and not who issues it or how it is issued?

Norburn seems to find nothing immoral or unethical about paying a loan made in high-valued money (gold) with low-valued money (U.S. notes). If the debtor pays the nominal amount (one U.S. note dollar for each gold dollar due), no harm has occurred. The debtor has not cheated the creditor. Apparently, those who had made loans in gold believed that they were being cheated or else they would not have demanded that interest payments on U.S. bonds be in gold and later that the bonds themselves be paid in gold. (After the value of the U.S. note dollar came close to the gold dollar, the banks agreed to accept U.S. notes as payment for their U.S. government bonds.)

However, Norburn does believe that it was immoral and unethical for bankers to accumulate U.S. notes when they traded at a steep discount to gold and use them to buy U.S. government bonds and then accept payment for these bonds in U.S. notes that had greatly appreciated, i.e., traded at a slight discount to gold or in gold dollars (pp.24-25).

Strangely and somewhat hypocritically, but not surprisingly, Norburn can see the injustice in buying bonds with inferior U.S. notes and being paid with superior gold. Yet he seems not to see the even greater injustice of buying bonds with superior gold and being paid with inferior U.S. notes.

His complaint about buying bonds with U.S. notes whose exchange rate with gold is low (say $1 U.S. note equals 35 cents in gold [p. 25]) and receiving U.S. notes when the exchange rate is high (say $1 U.S. notes equals 95 cents in gold) is uncalled for and shows his ignorance or his subconscious denial of fiat money. Making such comparisons with gold shows that he truly sees gold as the monetary standard and not U.S. notes. A true adherent of fiat money would see the value of U.S. notes remaining constant and the value of gold fluctuating. By making such a complaint, Norburn, like gold standard adherents, sees the value of gold remaining constant and the value of U.S. notes fluctuating. He shows his doubts that the money that he is promoting is really honest money. A true adherent of fiat U.S. notes sees no injustice in buying a $1000 bond with U.S. notes and receiving a $1000 in U.S. notes in payment when the bond matures. If Norburn sees any injustice in this, he does not really believe in what he is advocating.

If fiat money like U.S. notes is the standard money, then its exchange rate with gold is no more relevant than its exchange rate with salt, iron, or corn. Like salt, iron, and corn, gold is just another commodity bought and sold with the fiat currency.

When he writes that U.S. notes fell to 35 cents, he is saying that the gold dollar remained constant in value and the value of the U.S. note dollar fell. A true fiat money adherent would have written that gold rose in value. He would have claimed that the value of U.S. notes remained constant. If Norburn were a true fiat money man, he would have said that gold sold for $59 per ounce instead of saying the U.S. notes sold for 35 cents. Instead of the value of U.S. notes changing, the value of gold changed.

Norburn presents the national banking system as a great coup for bankers because it gave banks the power to issue money (p. 23). Although it did give national banks the power to issue money, that power was nothing new—even as Norburn notes (p. 19). State banks had been printing and issuing bank notes since the adoption of the U.S. constitution. They continued to print and issue bank notes until Congress levied a tax on them sufficient to end them.

When all the restrictions that the National Banking Act placed on national banks are considered, this law was hardly a victory for bankers. It prevented national banks from accepting savings deposits and prohibited domestic and foreign branch banking. It limited the quantity of bank notes that banks could issue and established reserve requirements. National banks could only conduct general commercial banking business. Restrictions were placed on their lending activity. The law prevented national banks from financing exporters and importers as it prevented them from accepting drafts drawn by them.[7]

To establish a mechanism for Lincoln and the U.S. government to force banks to buy U.S. government securities was the primary purpose of the National Banking Act. The law required bankers to back their bank notes with U.S. government securities. They had to buy U.S. bonds if they wanted to issue bank notes.[8]

Contrary to what Norburn believes, the National Banking Act did give the U.S. government control of the country’s money supply albeit indirect control. It could control the money supply by controlling the quantity of its outstanding debt. It could increase the money supply (bank notes) by expanding its debt and contract it by contracting its debt. (With the various silver coinage acts that Congress enacted between 1878 and 1900, the U.S. government also acquired additional control over the money supply.)

Norburn describes the Federal Reserve (pp. 37ff, 51ff, 111ff). He supports the objectives of the Federal Reserve. These objectives were to provide an elastic currency, to rediscount commercial papers, and to supervise banking in the United States (p. 37). The country’s banking reserves were also centralized and concentrated in the Federal Reserve. Norburn contends that if the Federal Reserve "was to be the nation's central bank, operated for the benefit of all its people, the Treasury should have provided money to start operation" (p. 37). However, the Federal Reserve Act required the Federal Reserve to "be financed by sales of Federal Reserve stock to commercial banks" (p. 37).

Norburn does not object to centralized banking. His system requires it. His objection is to ownership and control. He objects to the apparent private ownership and the control that bankers have over it (pp. 38-39).

Norburn points out that the Federal Reserve’s monetary management, or perhaps more correctly mismanagement, caused the recession of 1921 (p. 41) and the Great Depression (p. 42). It expanded credit to finance the boom of the 1920s and then contracted it (pp. 41-42). A similar pattern of credit expansion and contraction is seen in other economic contractions. Norburn seems to be suggesting that once the monetary authority (either the government or its central bank) begins to expand credit, it should never stop expanding—at least not until the money is inflated to zero. To do so leads to a recession or a depression.

Norburn is absolutely right about one thing. He remarks, "In going off the gold standard, there was no honest reason to take the peoples’ (sic) gold" (p. 42). Along with stealing the people’s gold, he discusses several other monetary reforms that Congress made. One was legalizing the open market operation. With the open market operation, Congress gave the Federal Reserve control of the U.S. government bond market (pp. 43-44). The Federal Reserve can expand and contract the money supply by buying and selling U.S. government bonds. The Federal Reserve had been illegally buying U.S. government bonds since its beginning. As it was doing the U.S. government a favor, the government ignored the violations. The Federal Reserve’s declared purpose of discounting eligible bank paper, which eventually fell into disuse (p. 49), was replaced by dealing in government bonds (pp. 44, 49).

Norburn laments the death of the U.S. note (pp. 46-48). The U.S. government ceased printing $5 and $10 notes in 1968 and $100 notes in 1971 (pp. 47-48). Norburn believes that "The very perfection of the note was its undoing. Its threat to the bankers was short lived" (p. 47). It threatened the bankers, so they had to terminate it (p. 47).

As the bankers control the U.S. government as is evident by the establishment of the Federal Reserve and expansion of its powers, they controlled the issuance of U.S. notes. They also controlled the President, as Norburn notes, and the Secretary of the Treasury. (Most Secretaries of the Treasury have been bankers or connected with banking [pp. 81-83].) U.S. notes died for the same reason that national bank notes died. They died because they were redundant. Nothing important differentiated them from federal reserve notes.

About reserves held by banks after 1933, Norburn remarks that they have "neither substance nor intrinsic value" (p. 56). These reserves are "nothing more than magnetized particles (bits and bites), on computer discs" (p. 56). Norburn seems not to realize that in the monetary system that he proposes as a replacement for the current system, bank reserves will have "neither substance nor intrinsic value." In the current system, reserves are computer data based on interest-bearing governmental debt. Under his system, reserves are computer data based on noninterest bearing government debt. (The way Norburn sets up the banking system, banks may not need reserves.) Norburn does acknowledge that like the current system, most of the money in his system will be electronic money, i.e., "magnetized particles . . . on computer discs."

Norburn comments on the extravagant expenditures of the Federal Reserve (pp. 61-62) and concludes, "In reality, the Federal Reserve System is a private banker's bank, controlled by international financiers, totally independent of our government, and in its many aspects and connections, largely run for private profit (p. 62)."

The way that the system is set up, the Federal Reserve is encouraged to spend extravagantly on itself. Whatever it fails to spend goes to the U.S. Treasury. If Congress finds that the Federal Reserve is spending too much, it can always amend the Federal Reserve Act to cap its expenditures.

As for the independence of the Federal Reserve, if it fails to please the people who really control the U.S. government, it will cease to exist or be modified to make it more subservient. The Federal Reserve exists at the pleasure of the U.S. government. Congress can abolish it anytime for any reason as Norburn admits when he has Congress abolishing the Federal Reserve. The people who control the U.S. government are the same people who control the Federal Reserve. The independence of the Federal Reserve is a myth.

Norburn discusses the confusion about the ownership of the Federal Reserve and comments on the private ownership of the Federal Reserve (pp. 64-67), which he finds abominable. Economists disagree about whether the Federal Reserve is privately owned and controlled or publically owned and controlled. Economists representing the U.S. government or the Federal Reserve usually argue that it is publically owned and controlled. Most other economists who express an opinion claim that it is privately owned and controlled. A few economists contend that the ownership is irrelevant because the Federal Reserve does mostly what the U.S. government wants it to do. Others disagree about the Federal Reserve doing the bidding of the U.S. government; they aver that the U.S. government does the bidding of the Federal Reserve.[9]

As the Bank of England shows, the ownership structure of the central bank matters little. The British government nationalized the Bank of England in 1946[10 ] and made it part of the government. Not much changed.

As Norburn states, the Ninth Circuit Court ruled that the 12 regional Federal Reserve banks are privately owned (p. 64). He also notes that Marriner Eccles, Chairman of the Federal Reserve Board of Governors, and later William Martin, also chairman of the board, claim that member banks do not own the Federal Reserve (p. 65). The ownership of the Federal Reserve is confusing.[11] Is this confusion deliberate?

Norburn discusses the Federal Reserve as it stood in 1983 and the economic crisis of the early 1980s (pp. 111-115). He argues, "The Federal Reserve has ultimate control of all the wealth of this nation, and those bankers who control the system use it as their own personal tool to enrich themselves at the expense of the nation" (p. 111). He is correct about the first loyalty of the Federal Reserve is to the bankers and not to the country.

Like most fiat money reformers, Norburn condemns interest (pp. 76-77), yet his system calls for interest (p. 138, 148). As Howard Katz has explained in his blogs and articles (http://thegoldbugnet.blogspot.com/ and http://www.gold-eagle.com/ research/katzndx.html), without interest the industrial revolution would not and could not have occurred. Interest encouraged people to save and to turn their savings over to middle men, bankers, who paid them interest (the evil compound interest at that) on their savings. Banks could pool many small savings into the large sums that entrepreneurs needed to build their factories, railroads, power plants, and the like.

Like many foes of interest, especially compound interest, Norburn uses an example of a penny lent at compound interest when Jesus was born would earn an incomprehensibly astronomical amount of money (pp. 76-77). Of coarse, they never show a real case where this happened because they cannot. I am not aware of anyone showing an incident of a person receiving compound interest on a loan for a century. Too many things can happen before the person or his descendants own the universe with the interest earned. The borrower may pay off the loan or go bankrupt. The lender may call in the loan to spend it. If he does not, his heirs most likely will. Also, the lender must avoid all sorts of disasters, especially wars, and thefts, especially theft by government.

Norburn’s problem with interest, including compound interest, is not with interest itself. It is who receives the interest. He has a low opinion of the bankers receiving interest. Nevertheless, he advocates the U.S. government receiving interest (pp. 138, 148). He does, however, oppose the U.S. government paying interest (p. 138). Thus, he advocates forced interest-free loans in the form of U.S. notes and their electronic equivalent.

Norburn gives an incorrect description of the gold standard. He writes, "Its high price came about because its connection with money" (p.91). Apparently, Norburn was among those who believed that when Nixon stopped redeeming dollars in gold, the price of gold would collapse. To the contrary, it soared when freed from the chains of the dollar. Norburn knew this because he wrote his book in 1983. True, using gold as money adds value to it. However, gold had a high value per unit of weight before it was used as money. This high unit value contributed to the market choosing gold for money.

Norburn cites several examples of what he considers abuses of gold money and the gold standard. One was financiers demanding redemption in gold of large quantities of paper money issued by the U.S. government (p. 92). Apparently, people should not expect the U.S. government to keep its promises. It had promised to redeem its U.S. notes in gold and its Treasury notes of 1890 in gold or silver at its desecration. It chose to redeem the Treasury notes in gold to maintain the dollar’s standing in world commerce as most of the world was on the gold standard. Both U.S. notes and Treasury notes of 1890 were fiat money. Congress and the Secretary of the Treasury decided how much to issue instead of the markets. Furthermore, neither were fully backed by gold although the Treasury notes of 1890 were supposed to be fully backed by silver. Without these fiat moneys, the financiers could not have executed the schemes of which Norburn accuses them.

Norburn states that these financiers redeemed the notes for gold. Then when the Treasury needed to replenish its gold, they sold it the gold back at a profit (p. 92). For each $100 in Treasury notes, which were mostly what was redeemed, that they redeemed, they received five double eagles ($20 gold coins) or 2322 grains of gold (the law defined the dollar as 23.22 grains of gold). When they "sold" this gold back to the Treasury, they received $100 in U.S. notes or $100 in gold certificates for each 2322 grains of gold "sold." That is the "price" that the Treasury by law "paid" for gold. Where was the profit?

Norburn notes that when the U.S. government discontinued using silver coins, it allowed the people to keep their silver coins and allowed silver certificates to continue to circulate although they were no longer redeemable in silver. He states that should have been way to go off gold. The people should have been allowed to keep their gold coins (pp. 92-93). People with advance knowledge of Roosevelt’s theft of the people’s gold profited handsomely. They redeemed their U.S. notes and federal reserve notes at the rate $20.67 per ounce of gold. Later they sold this gold for $35 per ounce. They could not tolerate ordinary people sharing in this profit. Perhaps this was the main reason for Roosevelt’s theft. Here was their profit. It was not returning to the gold standard as Norburn surmised (p. 92).

Norburn discusses returning to the gold standard (pp. 117-121). Like many people who consider returning to the gold standard, Norburn thinks of returning with the dollar equal the approximate current dollar value of gold, which was about $500 per ounce at his writing. He comments on the absurdity of minting $5 (0.01 ounces), $10, and $20 gold coins and concludes that paper money would be used in place of gold coins (p. 118). There is no reason to fix the "price" of gold at some absurdly high level of federal reserve dollars. No reason exists even to fix the "price" of gold in the federal reserve dollar. A return to sound money does not require this fixed conversion. To return to sound money requires opening the mint to free coinage[12] of gold and silver, stripping the federal reserve dollar of its legal tender status, and letting the markets decide the exchange rates. Furthermore, the U.S. government should cease printing federal reserve notes except to replace worn out notes or if necessary to pay its obligations contracted in federal reserve notes. It should immediately cease contracting in federal reserve notes and start contracting in gold and silver and pay its employees in silver. All contracts and obligations made for federal reserve notes would be paid in federal reserve notes. After a certain date, banks would cease lending federal reserve dollars.[13]

Norburn notes that the gold standard does not limit the money issued (pp. 118-119). This is true to a certain extent. The gold standard does regulate the quantity of credit money (paper money and electronic money) issued if the issuer of the credit money has to redeem it in gold on demand.

He remarks that the gold standard did not prevent the inflation of the 1920s (p. 119). Again, this is true. However, governments had made the gold standard dysfunctional when they abandoned the real bills doctrine. Abandoning the real bills doctrine made producers the servants of the bankers instead of the consumers. Like most other governments and central banks, the U.S. government and Federal Reserve insisted on following monetary policies that were incompatible with the gold standard. When they had to choose between the gold standard and their manipulative monetary policies, they chose their manipulative monetary policies.[14]

Furthermore, the United States did not have a pure gold standard. It had a gold standard accompanied by fiat money, U.S. notes. Federal reserve notes also accompanied it. Although they were not fiat money at this time as they were not legal tender, to some extent they acted like fiat money. Because the central bank issued them, they circulate for a much longer time before redemption than a common bank note issued by a local bank would have. Thus, they could be over issued with little threat of redemption. Originally, federal reserve notes were to be issued to rediscount real bills of exchanges. That principle was abandoned at the beginning of World War I when the U.S. government wanted to finance its war effort with credit money, which the Federal Reserve provided.

Norburn erroneously believes that bankers want a return to the gold standard. He is convinced that people who want to return to the gold standard are under the spell of bankers’ propaganda (p. 120). Bankers prefer fiat money to gold. Fiat money gives them more power. Gold restricts their power. Bankers may promote a fiat monetary system that incorporates gold, but they will never promote the true gold standard. Under the true gold standard, the markets determine the quantity of money instead of bankers and governments. The true gold standard frees the people and businesses from the control of bankers.

Norburn claims that bankers perverted and destroyed the gold standard (p. 120). Bankers may have perverted the gold standard, but they did not destroy it. They had no power to destroy it. Only the President and Congress could destroy the gold standard. Only they could outlaw it. Outlawing it Congress and the President did in 1933.

Furthermore, government is as guilty, if not more so, as the bankers at perverting the gold standard. If governments had sent bankers to prison for failure to redeem their notes instead of protecting them by allowing them to suspend redemption, the corrupting influence that bankers had over money and the economy would have ceased long ago.

Norburn asked how would the country return to the gold standard? Would the government buy gold from the bankers (p. 120)? Here Norburn shows his ignorance of the gold standard. (Or does he really understand the gold standard, and is he trying to deceive people into supporting his scheme?) The government would buy gold from no one. It would merely open the mint to free coinage of gold and strip the federal reserve notes of its legal tender status. Furthermore, the government would not own any of the coins that it minted except those it received in payment of taxes and fines. If bankers wanted to convert their gold to coins, they, like everyone else owning gold bullion, would bring it to the mint for coinage. The gold after coinage would be worth no more than it was before coinage. It could, however, be easier to use as money.

Norburn seems to reject the notion of free coinage (p. 120), which is essential to the gold standard. It does not exist without free coinage. He objects allowing bankers "to coin their own tremendous hoard" (p. 120). He also seems to reject monetizing gold (p. 120). Under the gold standard gold is money. One cannot have a gold standard without gold being money.

He claims that gold cannot be free market money because a small group of men in London sets its price daily (p. 120). A small group of men in London may set the price at which they will buy and sell. However, they cannot force anyone in the United States to buy or sell at that price. If they set the price much above the market value, people will rush to sell them their gold. If they set it much below the market value, people will rush to buy their gold. The markets set the price of gold, and not a small group in London.

Norburn writes, "The amount of money issued depends upon the character of the men in charged of the system, not on hard money backing" (pp. 118-119). A fiat monetary system will work better when managed by men of integrity, but it will still fail because even men of integrity are not omniscient. A true gold standard was designed for sinful men; it does not depend on men of integrity to decide how much money to issue. The quantity of money is independent of the decisions of any one group of men.

Furthermore, this statement shows Norburn’s ignorance of the gold standard. Gold may back fiat money as it did U.S. notes between 1879 and 1933. However, under the gold standard, gold never backs the money. Gold is the money! The money is gold! It does not back itself; it is itself.

Norburn claims that the Rothschild-Rockefeller axis controls most of the world’s gold. Therefore, gold should not be used as money because the Rothschilds and Rockefellers would use their vast gold hoard to oppress the people (pp. xiii-xiv, 120-121).

The Rothschilds and Rockefellers and their associates may own large hoards of gold, but such ownership is unknown and uncertain. If they do own large hoards of gold, what will they do with it? They really have only three options. They can spend it, lend it, or hold it. If they dump (spend) large quantities in the markets quickly, they may create economic turmoil. However, any turmoil created would be short-lived if the government does not intervene to soften the crisis. Moreover, they lose control of all the gold that they dump. If they chose the lending route, they can lend no more than the markets want to borrow. As they try to lend more, interest rates fall. An economic contraction may follow as these loans are paid—especially if bankruptcy cancels them. However, such contraction is unlikely as they are lending real money, gold, instead of credit money, paper. If they used their gold to support the issuance of bank credit money (checkbook money or bank notes), they could create economic dislocation if the created money is used for things other than real bills. Nevertheless, such credit expansion is short-lived as people will soon begin redeeming the credit money for gold. The bankruptcy of some banks may result with loses to depositors. Nevertheless, the crisis will be short-lived if the government does not intervene to soften the crisis or worse intervene to suspend redemption. The bankers would lose much of their gold from the crisis. If they just hold the gold, they would not affect the monetary system. The value of gold as money would adjust to the supply available for money.

The manipulation that Norburn describes (pp. 25, 26) could not have occurred under a pure gold standard. With what could they have bought the gold? Under a pure gold standard, they could only buy gold with gold or paper money redeemable in gold on demand. Since 1862 when the U.S. notes were first issued, the United States has had fiat money accompanying gold money—until 1933 when the gold standard was abandoned. Even after 1879 when U.S. notes became redeemable in gold, they remained fiat money. Congress, not the markets, decided how many to issue, and gold never fully backed them. From 1873 when Congress abolished the silver standard until 1900 when Congress made the silver dollar a subsidiary coin of gold, silver dollars were fiat money. Congress and the Secretary of the Treasury decided the quantity issued, and the metal content was worth less than a dollar. (Between 1878 and 1900, silver dollars were legal tender in their own right and were not directly redeemable in gold.) The same is true of silver certificates and Treasury notes of 1890; they were fiat money. Without these fiat moneys, Gould, Fisk, Morgan, Rothschild, and others could not have manipulated gold. With these fiat moneys, they could "buy" gold and "sell" gold. Norburn describes what these manipulators did, but he blames the gold standard instead of the fiat moneys, as the U.S. government issued them.

A cabal could possibly manipulate gold under the gold standard with bank notes. However, manipulation with bank notes is much more difficult than with U.S. notes and is short-lived. Unlike U.S. notes, bank notes are not legal tender. No one is required to accept them. They are redeemable in gold on demand. Unlike legal tender U.S. notes, which were redeemed infrequently, bank notes are typically redeemed frequently. If bank notes were used to manipulate gold, people soon find themselves holding too many bank notes. They will redeem the excess bank notes for gold and end the manipulative expansion. The result could be a classic bank run.

When banks follow sound banking practices, gold manipulation is virtually impossible under the gold standard. Only gold and commercial money (real bills of exchange) are converted to bank notes. Only when banks issue bank notes to buy bills of acceptance, financial bills, treasury bills, and the like do bank notes become available to manipulate gold. Thus, unsound banking practices can lead to gold manipulation. However, manipulation will be short-lived as the note holders rush to convert the excess notes in gold.

On the other hand, the primary purpose of having fiat money like U.S. notes is to have a money that is easily manipulated. Furthermore, fiat money, including U.S. notes, can be manipulated cheaply and stealthy. Anyone who fears the manipulation of money should support the gold standard and oppose fiat money.

Most of the money issued under Norburn’s system would be electronic money (computer entries) as is most of today’s money (pp. 127-128).

Norburn’s proposes to strip bankers of their power, ability, and privileges of creating money and give it to the U.S. government (p. 128). Somehow this action gives the people the power, privilege, and ability to create money (p. 128). Norburn, like most fiat money reformers, confuses the government with the people. Although the proclaimed underlying principle of the government of the United States is that it is of, by, and for the people, it never has been and probably never will be. The founding fathers knew this. For that reason when they wrote the Constitution, they placed the power, privilege, and ability to create money directly in the hands of the people. They did this by adopting the true classical gold and silver standards.

Norburn quotes Article 1, Section 8, Paragraph 5 of the Constitution, which states, "Congress shall have power . . . to coin money, regulate the value thereof, and of foreign coin. . . ." He declares that only Congress can exercise the powers listed Article 1, Section 8 (pp. 133-134). If true, why did the writers of the Constitution bother with including some, but not all, of the powers delegated in Article 1, Section 8 in Article 1, Section 10, which lists powers denied the States? Norburn asserts that Congress has no implied power to delegate any of its powers (p. 134).

He cites the Supreme Court ruling in 1870 that Congress has the power to issue legal tender notes to circulate as money (p. 134). This ruling violated contracts by declaring that U.S. notes could be used to discharge debts contracted in gold or silver coins or contracted before the legal tender laws. This ruling overturned an earlier Supreme Court ruling on U.S. notes that declared that Congress could not make U.S. notes legal tender for debts contracted before the enactment of the legal tender laws.[15] This 1870 ruling was also contrary to the intent of the writers of the Constitution.

Norburn, agreeing with Supreme Court rulings,[16] declares that Congress has absolute dictatorial powers over the country’s money and may do whatever it pleases except delegate that power (134-135). He supports Congress’ possession of these dictatorial powers; his system demands such power. Not only must Congress have absolute power over the country’s money, it must also have absolute power over all financial institutions that handle money (p. 135). He asserts that all benefits of his system must go to the people (p. 135). In reality, that means that the people who really control the U.S. government get to spend this free money on their wars, vote buying welfare programs, pet projects, cronies, and self aggrandizement. Of coarse, they do it in the name of the people; thus, the benefits go to the people. Like all fiat money reforms, his reform breeds corruption.

Norburn advocates repealing the Federal Reserve Act and associated laws and by that abolishing the Federal Reserve. The U.S. government would take over all assets of the Federal Reserve. A new agency of the U.S. government called the "United States Treasury Bank" becomes the sole creator of money. Under the current system, banks create bank credit by entry in ledgers or computers and lend the credit at interest to the government or the people. Under Norburn’s proposal, the U.S. government creates credit by entry in its ledgers or computers. It prints its own notes and uses these notes and credit for its purchases. The U.S. government accepts these notes as payment for taxes (pp. 136-137).

If the government can create all the money that it needs, why would it need to tax? When the typical politician has a choice between taxing and printing money as Norburn gives them, they choose printing money. Rasing taxes can galvanize hostile opposition. Printing money seldom does. Norburn gives politicians the ability to print all the money that they need to buy votes, benefit lobbyists, and please their constituents. The temptation to open the printing presses, or worse the computers as electrons move faster, full throttle is too much for the typical politician to resist.

Norburn does recognize that politicians, bureaucrats, and citizens may see his system as an unlimited source of money for their aggrandizement (p. 147). However, he does not offer any solution to prevent this other than fill Congress with men of integrity. If that were a viable solution, he would not have written his book offering a solution to the country’s monetary and economic problems. The country would not be having monetary and economic problems. Congress would have strengthened instead of abandoning the gold standard.

Norburn’s United States Treasury Bank creates credit and money for agencies of the U.S. government interest free. Loans to States and local governments for Congress-approved needs are at low interest, and they can only borrow from the United States Treasury Bank (pp. 138-139). So much for the Tenth Amendment. Norburn wants to give the U.S. government absolute control of the States and local governments. As States and local governments do most of their construction and capital improvements with borrowed money, Norburn gives the U.S. government absolute veto over construction by the States and local governments.

Norburn’s United States Treasury Bank can lend money to banks at interest for relending. This money is the only money that banks can lend (p. 139). He does not allow banks to lend their capital or their customers’ deposits (p. 139, 170). If they cannot lend deposits, which includes savings accounts, why should they offer savings accounts? Thus, Norburn’s system seems to end traditional savings accounts.

Furthermore, other than the integrity of politicians, what prevents Congress and the President from giving their friends, lackeys, toadies, apologists, and cronies low interest loans? Norburn’s proposed bill, which he includes as an appendix (pp. 159-175), forbids the U.S. government from making such loans (p. 171). Such a statutory prohibition is meaningless against a Congress that wants to reward certain people with low-interest loans. It can merely change the law. The founding fathers strongly advised against trusting men, especially governmental officials.

The United States Treasury Bank assumes the responsibility of the Federal Reserve of providing banks with currency (p. 141). Federal reserve notes are removed from circulation and replaced with new U.S. notes (pp. 141-142).

Norburn states, ". . . the governors of the United States Treasury Department of Money have the information to control money; the power to supply money when and where needed; to withhold money when there is too much in circulation, and to calculate the tax required to keep the system in balance" (p. 142). Unfortunately, no matter how intelligent, honorable, and honest they are and no matter how much information and power they have, this group will be unable to do the task that Norburn gives them. To do this task, they have to be omniscient. They have to know the subjective evaluation of all the participants and potential participants in the markets of all items, goods and services, being offered or may be offered in the markets. They would have to know this not only for the United States, but for the entire world. Worse these subjective evaluations are continuously changing. (When a person is hungry, he places a much higher value on a meal than he does when he is full.) Otherwise, they will never know how much money is needed, when it is needed, and where it is needed.

Norburn should have known better than to believe or advocate such a scheme. A few years before he wrote his book, a United States agency decided how much gasoline was needed, when it was needed, and where it was needed instead of letting the markets decide. This system was a disaster as this group of deciders never knew how much was needed and when and where. Some places had an abundance of gasoline. Most places had shortages and long lines of cars waiting to get fuel. Money is more complex than gasoline distribution. Why should we expect some group of governmental bureaucrats to manage money any better than they managed gasoline?

The great advantage of the true gold standard, especially when it is accompanied by the real bills doctrine (commercial money principle) is that it quickly adjusts the money supply to match the real demand for money. It quickly delivers the right amount of money where it is needed and when it is needed. Whenever it fails to do so, it is because of governmental intervention. The gold standard automatically accounts for and adjusts to meet the ever changing subjective evaluations of market participants.

Norburn writes, "Under the proposed plan, the interest you might pay would be paid on your own money, used for your own benefit, and obliterated" (p. 146). This claim is pure fiction. The interest that a borrower pays does not end up in his pocket. If it did, why pay it. If the interest is used for the benefit of the borrower, it is used for his benefit as politicians and bureaucrats declare what his interests are. Rarely would their declaration correspond with what the borrower considers his benefits to be.

Norburn does make one proposal that is long overdue. He recommends eliminating most regulatory agencies of the U.S. government because most of them are unconstitutional. Such regulatory activity, if any, rightfully belongs to the States (p. 148).

He believes that the U.S. government can be adequately operated with interest earned from its loans, tariffs and taxes, and royalties from leasing mineral rights to the lands that it owns (pp. 148-149). When the vast amount of money that Norburn’s system offers is considered, believing that the U.S. government would restrict itself only to activities that this revenue could fund is difficult.

Norburn identifies some benefits that his proposal would deliver (pp. 151-155). Among these are, "A stable dollar. Never again either inflation or deflation. No more recessions or depressions" (p. 151). If his system accomplishes this, it will do something that no fiat monetary system has ever done.

Another benefit is that "interest, once paid, . . . would be canceled and the money paying them return to nothingness" (p. 152). If interest received by the government is "canceled and the money paying them return to nothingness," how can interest be considered as a source of revenue for the government as Norburn claims? One benefit that he identifies for his system is that interest paid to the government will lower taxes and the benefit will be extended to the interest payer (pp. 151-152). The statement implies that the government is going to spend the interest that it receives on something. Whatever it spends the interest on presumably will benefit the tax payers.

Norburn should have titled his book "Dishonest Money" instead of "Honest Money" for that is what he proposes to give America. Although he advocates a significant reduction in the size of the United States government, he gives those who really control the government absolute control over the American people. He gives them this control by giving them absolute control of the money, which gives them absolute control of the economy. The only good aspect of his proposal is the abolition of the Federal Reserve and most regulatory agencies of the U.S. government. Norburn promotes tyranny instead of freedom.

Endnotes

1. Carl Menger, Principles of Economics, trans. James Dingwall and Bert F. Hoselitz (New York: New York University Press, 1976), p. 281.

2. U.S. notes do not really deserve to be called loans, forced or otherwise. They were worse than forced loans. A loan implies payment sometime in the future. The U.S. government had no intension of ever paying off its U.S. notes. Only a small part was ever paid, i.e., only the notes redeemed in gold and extinguished were ever really paid.

3. Thomas Coley Allen, Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money (Franklinton: TC Allen Co., 2009), p. 240. Joseph French Johnson, Money and Currency: In Relation to Industry, Prices, and the Rate of Interest, rev. ed. (Boston: Ginn and Co., 1905), p. 325.

4. At this time the dollar was defined as 371.25 grains of pure silver. Also, at this time a dollar in silver was worth more than a dollar in gold, which is why silver dollars did not circulate.

5. Allen, pp. 74-75. George Bancroft, A Plea of the Constitution of the United States, (Rpt. Boring: CPA Book Services, Inc.), pp. 40-43. Luther Martin, Secret Proceedings and Debates of the Convention (1838; Rpt. Hawthorne: Omni Publications, 1986), pp. 55-56.

6. Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960 Princeton: Princeton University Press, 1963), p. 58ff.

7. American exporters and importers had to finance their trade through London bankers. Rothschild was the dominate London banker.

8. For a more detailed discussion of the National Banking System, see Allen, pp. 144-148.

9. About the Federal Reserve, Congressman Louis McFadden, Chairman of the Banking and Currency Committee, said, "Every effort has been made by the Fed (the Federal Reserve System) to conceal its powers, but the truth is the Fed has usurped the government. It controls everything here and it controls all our foreign relations. It makes and breaks governments at will" (p. 111). Even today, some Congressmen are convinced that the bankers and Federal Reserve control the U.S. government.

10. "Bank of England," Funk & Wagnalls New Encyclopedia (1983), 257. William Bridgwater and Seymour Kurtz, ed., The Columbia Encyclopedia, 3rd ed. (New York, 1963), p. 162.

11. For a more detailed discussion of the ownership of the Federal Reserve, see Allen, pp. 150-153.

12. Free coinage means that any private person may bring any amount of gold or silver to the mint for coinage, and the mint coins all the gold and silver presented to it.

13. For an outline of steps to take to return the gold standard, see Allen, pp. 264-268.

14. Allen, pp. 42-43, 58, 121-124.

15. Hoarse White, Money and Banking (Boston: Ginn & Co., 1896), pp. 231-232.

16. The Supreme Court is notorious for its ability to construe clear language in the Constitution limiting the power of the U.S. government to increase the powers of the U.S. government. Like all U.S. court, the Supreme Court seldom lets the Constitution stand in the way of political expedience and personal biases. Any ruling that increases the power of the U.S. government increases the power of the Supreme Court. Consequently, the Supreme Court can never be impartial when judging a State law or when an individual contests a federal law.

Copyright © 2009 by Thomas Coley Allen.

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