The Silver Dollar 1873–1900 – Part 3

Sherman Act
Thomas Allen

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

In 1890, Congress enacted the Sherman Act or the Silver Purchasing Act of 1890. It authorized the Department of the Treasury to issue notes (Treasury notes of 1890) to buy silver. They were full legal tender and redeemable in gold or silver at the discretion of the Secretary of the Treasury.

The law ordered the Secretary of the Treasury to buy silver at the market price with Treasury notes until silver reached $1.29 per ounce, the price of silver at which the ratio of silver to gold is 16 to 1. It required him to buy 4.5 million ounces of silver each month at the market price. This silver served as a reserve for the Treasury notes. Silver dollars were only minted when necessary to redeem Treasury notes. Under the Sherman Act, the U.S. government bought 168 million ounces of silver. Of this silver, 28 million ounces were coined into $36 million silver dollars. $156 million in Treasury notes were issued.[1]

The Sherman Act sought to drive the price of silver up by having the U.S. government buy most of the silver produced in the United States. It failed in this objective. Silver continued to decline in terms of gold.

As a result of the Sherman Act, new legal tender notes, Treasury notes of 1890, flooded the markets. People began redeeming these notes in gold and exporting the gold. Large quantities of gold were shipped overseas, and the Treasury’s reserves of gold coins and bullion became dangerously low. People also substituted the new Treasury notes for gold coins in their daily commerce and exported the gold coins.

The Sherman Act differed significantly from the Bland-Allison Act in at least one important aspect. Under the Sherman Act, the Secretary of the Treasury bought a specific number of ounces of silver each month. The Bland-Allison Act required the Secretary to buy between $2 million and $4 million of silver each month. Thus, the Sherman Act was in terms of ounces of silver, and the Bland-Allison Act was in terms of the cost of silver. Therefore, under the Sherman Act, “the annual additions to the currency would grow less if the price of silver fell, while by the Bland[-Allison] Act the annual additions grew larger as the price of silver fell.”[2]

Silver dollars issued under the Bland-Allison Act did not have the same effect as the Treasury notes of 1890. During the 1880s, banks contracted their bank notes because the supply of U.S. government securities was shrinking and their prices were rising. Banks had to use U.S. government securities as collateral for their bank notes. Thus, silver dollars issued in the 1880s approximated the contraction of bank notes and merely filled the void left by bank notes. By 1890, the quantity of bank notes stabilized. The Treasury notes of 1890 were an addition to the money supply and not a substitute of one form of money for another. Being an addition, people redeemed the Treasury notes in gold and exported the gold to countries where its monetary use was more valuable. Silver dollars and Treasury notes of 1890 were legally equal to gold in the United States in purchasing power. However, gold had a higher purchasing power in the world markets than silver dollars or the Treasury notes.

Silverite opponents of the Sherman Act identified several flaws in the Act. It was written in a way to cause large quantities of silver dollars to end up in the Treasury’s vault. It required the Secretary of the Treasury to buy silver bullion and then to coin an adequate supply of silver dollars to redeem outstanding Treasury notes. (Later, when President Cleveland convened Congress to repeal the purchasing provision of the Act, he pointed to the large quantity of silver coins and bullion in the Treasury as proof that the people did not want silver money. The major reason for this large hoard of silver coins was that the Secretary of the Treasury always redeemed Treasury notes in gold unless the person redeeming specifically asked for silver. Furthermore, most people preferred using paper money rather than coins.)

Another flaw was that it set a maximum price of one dollar per 371.25 ounces of fine silver that the Secretary of the Treasury could pay for silver. However, it did not set a minimum price. Opponents saw fixing a maximum price with no minimum price as a means to suppress the price of silver. Moreover, the Act fell far short of buying the annual production of U.S. silver mines.

The Act authorized the Secretary of the Treasury to redeem Treasury notes in gold or silver instead of gold and silver. Thus, the Act gave the Secretary too much discretion.

Furthermore, the parity clause was written such that it could be construed to require the U.S. government to guarantee the bullion value in the silver dollar should its value be less than a dollar in gold. This construct made the silver dollar credit money redeemable in gold. (This construct is exactly what the pro-gold anti-silverites wanted.)

Supporters of the Sherman Act believed that it would stimulate business by increasing the money supply. Moreover, it would do so without inflation.

The Treasury notes of 1890 are commonly blamed for the Panic of 1893 and the depression that followed. As more notes were redeemed for gold and the gold exported, people in the United States and Europe began to lose confidence in the U.S. dollar. They feared that the U.S. government might not continue to redeem Treasury notes and greenbacks in gold.

They saw the New York subtreasury settling its clearing house balances in greenbacks and Treasury notes instead of gold. When the Treasury began imposing a fee on exporting bars of gold taken from its vaults, which caused gold coins to be exported instead of gold bars, more confidence was lost. Banks began inserting clauses in loans and mortgages to require payment in gold.[3]

The new Secretary of the Treasury fed these doubts when he expressed concerns about being able to continue to redeem Treasury notes in gold. He stated the next day that Treasury notes would be redeemed in gold under all circumstances, but the damage done could not be undone.

Furthermore, the Treasury’s gold reserve fell below $100 million, which was considered the minimum backing for U.S. notes. When the Treasury’s gold reserve fell below $100 million, the Secretary of the Treasury, as required by law, stopped issuing gold certificates. This action fed the fear that Treasury notes of 1890 would not be redeemed in gold. This news was followed by India’s abandoning the silver standard, which sent the gold price of silver down sharply.

The Sherman Act had made a mockery of the silver dollar. Treasury notes were used to buy silver bullion, which backed the Treasury notes. This silver bullion was to be coined into silver dollars for redemption of Treasury notes. However, the Act gave the Secretary the discretion to redeem Treasury notes in gold or silver. Unless the person presenting the notes requested silver, the Secretary always redeemed them in gold. Most people expected that he would redeem them in gold.

If the Act had not given the Secretary the discretion to redeem Treasury notes in gold and had required him to redeem them in silver, the drain on the Treasury’s gold reserve would have been greatly lessened. Treasury notes would have been treated like silver certificates.

In short, people feared that the United States were going to leave the gold standard. This fear resulted in the Panic of 1893. To assuage this fear, Congress repealed the silver purchasing provisions of the Sherman Act in 1893.

Silverites saw the repeal of the purchasing provision of the Sherman Act as a deliberate attempt to eliminate silver as money in its own right. Walbert expresses the real motivation for the repeal, “It appears, therefore, that the sole object of repealing the purchasing clause of the Sherman law was for the express purpose of depriving silver of its only support, thus lowering its value, and thereby furnishing reasons against its use as money.”[4]

A year before the Panic of 1893, major New York City banks were lobbying rural banks to support them in getting the Sherman Act repealed. Coercion was used against the rural banks as the New York City banks refused to rediscount their bills unless they supported the repeal of the Sherman Act.[5] Opportunity came for the repeal when the Panic hit a year later. (How much involvement did these banks have in causing the Panic so that they could use it to get the silver purchasing requirement repealed? Some believe that the New York City bankers deliberately caused the Panic by creating a loss of confidence in their own banks. They also sent out circulars to banks and businesses forecasting economic doom if the Sherman Act was not repealed.[6])

After the Panic hit and President Cleveland convened Congress to repeal the silver purchasing provision, the New York City banks applied pressure on Southern and Western bankers to support the repeal. The New York City banks informed these bankers that they could expect no money from New York until the purchasing provision was repealed. Moreover, the New York City banks appeared to have conspired not to lend to merchants until the silver purchasing provision was repealed. They had plenty of money in their vaults for loans.[7]

The Panic of 1893 ended with the repeal of the silver purchasing provision of the Sherman Act. A depression that lasted until June 1894 followed. Another depression occurred from October-December 1895 to June 1897 (some place the end as early as October 1896). (Some economists consider the entire period 1893-1897 as a major depression.)

As a result of the Panic, business activity slackened, and the demand for money fell. Excess money accumulated in bank vaults. This excess money became available for speculation in the stock and commodity markets. This speculation led to a rise in commodity prices in the United States. Consequently, commodities were imported and gold was exported, which caused gold reserves to shrink even more. The Secretary of the Treasury was forced to pay out more currency than he received — thus, contributing to the inflation. He sought to raise the gold reserves of the U.S. government by selling bonds. However, this action created concerns that the Treasury might not be able to continue redeeming paper money in gold. People began redeeming their paper money at an accelerated rate because they feared that the U.S. government was on the verge of bankruptcy.

(The major argument for the repeal of the silver purchasing provision was to stop the drain of gold from the Treasury and the country. However, the drain continued unabated. About the repeal of the Sherman Act and the gold drain, Walbert states:

It was further stated that the repeal of the Sherman law was necessary to prevent the exportation of gold from the United States. This was another hypocritical plea to aid in the passage of the repeal, for, in a single year after that act was consummated, one hundred and twenty millions of dollars in gold were drawn out of the Treasury by that set of knaves who had urged repeal as a means to protect the gold reserve.[8])

Moreover, when the New York City banks bought the bonds, they did not buy them with their gold. They redeemed Treasury notes for gold and used that gold to buy bonds. “Therefore, while these banks were demanding issues of bonds to maintain the public credit, they utilized this very issue as a means to further deplete the Treasury of its gold.”[9]

Finally, in January 1895, the Secretary of the Treasury entered into an agreement with a syndicate of bankers led by J.P. Morgan and August Belmont, both of whom were associates of the Rothschilds. (Belmont was acting on behalf of N.M. Rothschild & Sons.) The bankers would buy $65,117,500 of bonds paid for with gold. (They bought $62,315,500.) Half of this gold was to come from Europe (this part of the agreement was later ignored, which caused a reduction in the U.S. money supply). The bankers were to use their influence to prevent the withdrawal of gold from the Treasury. These bankers made the exporting of gold unprofitable by controlling the rate of foreign exchange. This agreement improved the situation temporarily. However, the threat of war between Great Britain and Venezuela in 1895 led to more redemptions and exports of gold.[10] Finally, in August 1896, the monetary system stabilized and the export of gold ceased. $33 million in gold had been withdrawn in excess of that needed for export.[11]

Were banks deliberately withdrawing gold from the Treasury to force the U.S. government to sell bonds to restock its gold reserves? An editorialist of the New York World, who was an advocate of the gold standard, believed that they were. He wrote:

The banks have no apparent use for gold.

They have absolutely no obligations of any kind, near or remote, which are payable in gold.

Nevertheless these banks are hoarding gold in large quantities, at a time when to do so is to subject the Government to heavy and needless expense.

Thus the clearing house banks of New York alone, hold over $81,000,000 in gold for which they have no use. . . .

If they should turn it into the Treasury and take greenbacks instead, they would be in every respect as well equipped as now to meet their obligations, while the Government would not have to issue another $100,000,000 of bonds, which it will cost the country $220,000.000 to pay, principal and interest.

Are they serious expecting gold to go to a premium?

Or are thy and the banks all over the country in a tacit “combine” to compel repeated bond issues for their speculative profit? These banks ought to answer these questions.[12]

As a result of the Sherman Act, between July 1890 and July 1893, $156 million in Treasury notes were issued, and $160 million in gold were exported. The gold reserve of the Treasury fell from $184 million to $84 million (October 1893). In 1893 the United States government held $150 million less gold than it would have if the Sherman Act had not been enacted. From 1890 to 1896, the net export of gold was $269 million.[13]

A criticism that the silverites hurled at President Cleveland was that the Treasury held $147,000,000 in silver dollars and bullion when he convened Congress to repeal the silver purchasing provision. At the same time, money brokers and banks in New York City were buying silver dollars and silver certificates at a premium.[14] To the silverites this was proof that whatever the cause of the problem was, it was not too much silver money in circulation. This was proof that too little was in circulation. The real reason that the Treasury held so much silver was to back silver certificates and Treasury notes in circulation. (President Cleveland implied that the Treasury held this silver because people did not want silver money.)

The silverites opposed the Treasury selling bonds to replenish its gold reserve. They claimed that the Treasury had an abundantly available surplus of specie. In the Treasury was nearly $300 million in silver. The Secretary of the Treasury just needed to use silver.

Furthermore, failure to use silver violated the policy set out in the Sherman Act, which was “to maintain the two metals at a parity.”[15] It also violated the policy of the Act of 1893, which “‘declared that the efforts of the government should be steadily directed to the establishment of such a system of bimetallism as will maintain at all times the equal power of every dollar coined or issued by the United States in the markets in the payment of debts.’”[16]

The Sherman Act added a great deal of money to the U.S. economy that was not needed. It caused silver to be used domestically and gold to be exported. Without the Sherman Act, any shortage of money in the United States would have been overcome by the importation of gold.[17]

Most of the gold withdrawn from the Treasury came from the redemption of greenbacks. As the Treasury was short on gold, it was forced to payout these greenbacks as quickly as they were received. These greenbacks were soon redeemed again. Thus, the Treasury was in a cycle of having to redeem continuously the same greenbacks.

Although the greenback appeared to be the culprit causing the Treasury’s loss of gold, it was not. The real culprit was the inflation caused by the Treasury notes of 1890 and the U.S. government’s deficit.[18]

About the role of silver in the Panic of 1893, Fels writes:

How much difference did silver make? An element of speculation must enter into any judgment, but the following three statements seem justified, (1) The threat to the gold standard made the contraction more rapid and violent during the months of March through August. (2) If the silver problem had never entered the picture at all, the contraction after August would have been more rapid. This follows from the fact that money stringency bunched failures that would have occurred sooner or later anyway. (3) The silver situation probably resulted in deeper contraction by causing failures among firms and banks that could have survived if the kind of money market characteristic of cyclical contractions had prevailed. The evidence for this lies in the high ratio of assets to liabilities among the failures.

The preceding paragraph regards the silver problem as the variable, holding everything else constant. If one reverses the procedure, holding silver constant and inquiring how much difference the underlying business situation made, one might easily come to a different conclusion. The monetary and fiscal policies actually pursued, together with the banking structure, might have produced panic and severe depression in any event. The argument must be a bit arbitrary, since the result would have depended on how the President and Congress reacted to the emergency; but in the political situation of 1893 nothing short of disaster would probably have sufficed to make effective action possible. In this sense, one can assign the leading role to monetary factors, which would have caused strong firms to fail had there not been plenty of weak ones.[19]

The Sherman Act suffered the same constitutional flaws as the Bland-Allison Act. Under the Constitution, the U.S. government has no authority to issue paper money, to buy and coin silver on its own account, or to act as a deposit bank.

The silver dollars minted under the Bland-Allison Act and Sherman Act and the Treasury notes of 1890 were forms of fiat money. The silver content of the silver dollar was worth less than a dollar. The U.S. government bought silver on its own account and issued the silver coins. It decided how many to issue instead of the markets.

Opponents of silver blamed silver for the economic problems of the 1880s and especially the 1890s. They saw silver as a threat to the gold standard.

Friedman and Schwartz show that “until 1886, silver grew fairly slowly and the greater part of the increase in high-powered money consisted of gold. From then until 1893, silver grew rapidly, replacing gold almost entirely as a source of additional high-powered money. Thereafter, both silver and gold as well as total high-powered money fluctuated about a nearly constant level.”[20]

They continue:

From 1879 to 1893, the total of silver and Treasury notes of 1890 out-side the Treasury grew some $500 million, which is a measure of the strength of the silver forces. These purchases added to high-powered money and so contributed to an expansion of the stock of money. This is the effect that contemporaries pointed to as constituting a threat to the gold standard. But it is clear that the direct effect of the silver purchases on the stock of money did not, in fact, threaten the maintenance of the gold standard. In the first place, the growth in silver currency was offset to some extent by a reduction in national bank notes outstanding, a reduction enforced by debt retirement. In the second place, and more important, total high-powered money grew from 1879 to 1893 by $740 million or by $240 million more than the silver currency. In the absence of the silver purchases, the gold stock — or perhaps some other component of the money stock — would have risen more than it did.[21]

The threat to the gold standard came primarily from the actions of foreigners. Friedman and Schwartz note:

The threat to the gold standard came from the effects of the silver purchases on the willingness of foreigners to hold dollars. This evidence of the power of the silver forces discouraged the inflow of capital or produced speculative capital outflows of substantial magnitude and kept alive the possibility of very much larger outflows. The smaller inflows or actual outflows made for a lower rise in high-powered money than would otherwise have occurred, so that in their absence the growth in silver currency would have been a still smaller fraction of the total growth in high-powered money. Together with the measures taken in fear of potential outflows, they enforced monetary deflation to produce the requisite adjustments in the balance of payments. Paradoxically, therefore, the monetary damage done by silver agitation was almost the opposite of that attributed to it at the time. It kept the money stock from rising as much as it otherwise would have, rather than producing too rapid an increase in the money stock.[22]

After the 1896 election and the defeat of the silverites, the clamor for the free coinage of silver faded away as the economy improved. Prices rose as the world gold stock grew. In 1900, the free coinage of silver and the silver standard was finally killed with the Gold Standard Act.

Endnotes
1. Richard T. Ely, An Introduction to Political Economy (Revised edition; New York, New York: Eaton & Mains, 1901), p. 188. White, p. 204.

2. Davis Rich Dewey, Financial History of the United States (1922; reprint. New York, New York: Longmans, Green and Co., 2005), p. 438.

3. 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), p. 168.

4. M.W. Walbert, The Coming Battle: A Complete History of the National Banking Money Power in the United States (1899; reprint. Merlin, Oregon: Walter Publishing & Research, 1997), p. 288.

5. Ibid., p. 281.

6. Ibid., pp. 281-282, 285-286.

7. Ibid., pp. 300-301.

8. Ibid., p. 306.

9. Ibid., p. 335.

10. Joseph French Johnson, Money and Currency: In Relation to Industry, Prices, and the Rate of Interest (Revised edition; Boston, Massachusetts: Ginn and Company, 1905), pp. 356-359. Walbert, pp. 337-340. Horace White, Money and Banking (Boston, Massachusetts: Ginn & Company, 1896), pp. 211-212.

11. White, p. 211.

12. Walbert, pp. 333-334.

13. Johnson, pp. 358-359.

14. Walbert, p. 273.

15. Dewey, p. 452.

16. Ibid., p. 452.

17. White, p. 209.

18. Johnson, p. 359.

19. Rendigs Fels, American Business Cycles 1865-1897 (Chapel Hill, North Carolina: The University of North Carolina Press, 1959), p. 188.

20. Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the Untied States, 1867-1960 (Princeton, New Jersey: Princeton University Press, 1963), pp. 128, 131.

21. Ibid., p. 128.

22. Ibid., pp. 131-132.

Copyright © 2010 by Thomas Coley Allen.

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Analysis of Richard Cook’s Monetary Reforms Part IV

Analysis of Richard Cook’s Monetary Reforms as Presented in We Hold These Truths
Part IV
Thomas Allen

This paper is Part IV of my analysis of Richard C. Cook’s monetary reforms as presented in his book We Hold These Truths: The Hope of Monetary Reform (Tendril Press, 2008–2009). 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.

Mr. Cook expresses utter contempt for such things as “market forces” and “law’s of economics (p. 198). He has to. They predict that his scheme will fail. He has to calm that such things as “markets,” “Say’s Law” (v.i.), and “supply and demand” are fictions. Economic laws must be merely artificial fabrications made for the benefit of the ruling elite (p. 198). Apparently, if the government wants to, it could repeal Say’s Law, which Mr. Cook’s scheme seeks to do, and the law of supply and demand. Mr. Cook seems to believe that the government can prevail over the markets. So far none have—not even Stalin’s or Mao’s regime.

Mr. Cook does admit that the money that he proposes is fiat money. However, he claims that, unlike debt-based Federal Reserve credit, his is not inflationary. Moreover, he claims that greenbacks were not inflationary (p. 201).

Greenbacks decreased in purchasing power until the late 1860s. Then Congress began withdrawing them from circulation, and they begin rising in purchasing power. In 1875, Congress declared that greenbacks would be redeemed in gold at par beginning in 1879. They continued to rise in purchasing power. Mr. Cook does not do any of these. He proposes to increase the money supply indefinitely year after year and probably at an increasing rate.

If Mr. Cook’s money is noninflationary, it is solely because of the skewed way that he defines inflation. He likes to believe that raising interest rates causes inflation (p. 192). Interest rates may rise because of inflation, but they do not cause inflation. Cost inputs do not cause inflation either. Inflation occurs when the money supply grows faster than new goods entering the markets. Mr. Cook’s scheme guarantees inflation because it guarantees that the money supply will grow at a much faster rate than new goods entering the markets.

Mr. Cook recommends restoring “private banking operations in the U.S. to the ‘real bills’ doctrine” (p. 202). With Mr. Cook, I agree. However, under his proposed system, the real bills doctrine will not work. For the real bills doctrine to work, it needs to be accompanied by a true commodity money like gold or silver. To function properly, real bills need to mature into something that is no one else’s obligation, such as gold or silver. When a real bill matures into another form of credit money, like federal reserve notes or Mr. Cook’s government notes (treasury certificates as he calls them [p. 203]), the real bills doctrine becomes dysfunctional and ceases to operate. That is why the real bills doctrine died with World War I and is not in use today.

Mr. Cook recommends establishing “a National Price Commission to work toward a system-wide fair pricing policy for the U.S. (p. 203).” In other words, Mr. Cook wants to fix the prices of everything in the country. This is one way to keep his inflation from showing in prices. On what would he blame the resulting shortage? Will a lack of money cause the shortages? That Mr. Cook would suggest price fixing is consistent with his disdain for the markets and his apparent confidence in the infallibility of politicians and bureaucrats is not surprising. (I am puzzled why he has so much confidence in them as he frequently condemns them for selling out to the bankers.)

Mr. Cook, who considers himself a progressive, describes the progressive perspective on money and related issues (pp. 210-220). He declares that the law created money (p. 210) although people were buying and selling with money before any law ever decreed anything to be money.

Like all progressives, Mr. Cook distrusts and despises freedom. (Many things in his progressive list evidence this.) Progressives are not only convinced that they know how people should live their lives, they are determined to force them to live that way. Fundamentally, progressives differ little from liberals, socialists, communists, fascists, Nazis, neo-conservatives, and the like. All of them contend that the leader, party, politicians, and bureaucrats always know best.

He claims that the financial elite considers money to be a commodity and to have intrinsic value (p. 210). If true, today’s financial elite differs significantly from the financial elite of a few decades ago. Except perhaps for progressives, no one believes that today’s money is a commodity with intrinsic value. Money has had no direct connection with any commodity since 1971 when President Nixon severed its last connection with a commodity, gold.

Mr. Cook objects to the notion that money may be used “for anything the owner desires, including usury and speculation” (p. 210). He implies that money is not the property of the person who holds it. By inference, he is asserting that money always remains the property of the government regardless of who holds it. Under the monetary system recognized by the founding fathers in the Constitution, the money belongs to and is owned by whoever holds it. The government only gets ownership of the money that it collects in taxes, fees, and fines. It loses ownership when it spends the money.

Mr. Cook states that “the progressive definition of money has prevailed when the government has controlled or strongly influenced the creation of money. The elitist definition has prevailed when private bankers have controlled or strongly influenced the creation of money, particularly during the century since the Federal Reserve was created in 1913” (pp. 210-211). Using Mr. Cook’s criteria, the U.S. monetary system was neither progressive nor elitist before Lincoln’s war to destroy the Constitution. It was the barbaric silver and gold standards. During the greenback era of 1862 to 1879, the monetary system was highly progressive. The exception was the West Coast where the barbaric gold standard remained in use. Between 1879 and 1913, it was a mixture of progressive and barbaric. The barbaric gold standard remained in place. The progressive component was the fiat part: greenbacks, silver dollars, and Treasury notes of 1890. National bank notes should be included in the progressive part as the U.S. government indirectly controlled their quantity. Furthermore, since the government has strongly influenced the creation of money since 1913, that money is also progressive or at least a mixture of progressive and elitist. (The U.S. government has had much more control over money since 1913 than it had anytime before 1860.)

According to Mr. Cook, “the main underlying cause of the American Revolution was refusal by the British Parliament to allow the colonies to issue their own paper money” (p. 211). If true, why did these colonies not only deny themselves the authority to issue their own paper money, but they also denied the U.S. government this authority when they adopted the Constitution? This prohibition cannot be blamed solely on the pro-banker Hamilton and his followers. Anti-banker Jefferson and his followers were even more adamant in their opposition to paper money.

Like all fiat money reformers, Mr. Cook asserts that the Constitution allows the U.S. government to issue money (p. 211). As mentioned above, it does not. The original draft contained this authority, but the drafters removed it. By removing it, they were convinced that they had denied Congress the authority to print and issue paper money.

Mr. Cook claims that Democrats “have held a more progressive view of money. It has been the Federalists/Whigs/Republicans who have held the pro-bank view” (p. 211). Again, Mr. Cook shows his ignorance of history. Before 1860, most Democrats were staunch supporters of the barbaric gold and silver standards. Under the gold and silver standards, the government does not own or issue money, coins, except perhaps subsidiary coins. Money as coins is created by whoever brings the metal to the mint for coinage, and the coins minted belong to that person, and not the government. Such a monetary system is highly unprogressive. Progressive money was a Republican invention. Greenbacks came into being during under a Republican president. The Republican party dominated the U.S. government during the last part of the nineteenth century when more progressive money as silver dollars and Treasury notes of 1890 came into being. Democratic President Wilson brought in the Federal Reserve System. Democratic President Roosevelt made the federal reserve note legal tender.

Mr. Cook writes, “Until around 1873, banks were required to hold their reserves in specie, i.e., gold or silver, until silver was demonetized by Congress. . . . From 1873-1933, gold was the only metallic reserve allowed” (p. 212). Again, Mr. Cook errs. Banks could and did hold greenbacks as reserves. Like gold, greenbacks were legal tender. Between 1879 and 1933, greenbacks were redeemable in gold on demand and had a gold backing of about one-third to one-half.

Mr. Cook states, “A gold standard cannot prevent bank failures or guarantee the value of the currency” (p. 212). He is correct in that a gold standard cannot prevent bank failures. Neither can his progressive money prevent bank failure. Bank failures even occurred under the greenback standard, a governmentally issued fiat monetary standard. Bank failures depend on how banks operate.

If Mr. Cook means that a gold standard cannot guarantee absolute, never varying value of the currency, he is correct. Neither can his progressive money. Whatever he means, gold will do a much better job of maintaining the value, purchasing power, of the currency than his proposed alternative.

Mr. Cook claims that by 1900 the country had returned to the bimetallic standard (p. 213). Again, Mr. Cook is wrong. The Gold Standard Act of 1900 clearly placed the United States on the monometallic gold standard. Bimetallism ended with the Coinage Act of 1873, which closed the mint to the free coinage of silver. With this Act, Congress ended the silver standard—erroneously called demonetizing silver. With the Bland-Allison Act of 1878, Congress began issuing fiat money in the form of silver dollars. Fiat silver dollars lasted until 1900 when silver dollars were made subsidiary coins of gold.

Mr. Cook writes, “Neither banks nor government are needed in order to have money” (p. 214). He is correct. However, he contradicts himself. He has consistently insisted that law creates money. If law creates money, money cannot exist independently of a governmental decree.

Mr. Cook contends that laissez-faire economics “was the basis for the monetarist policies of the 1970s and the ‘Reagan Revolution’ of the 1980s” (p. 214). If so, why did government regulations continue to grow unabated? Laissez-faire economics would have slashed economic regulation to the bone. It would have reduced the U.S. government enormously. Instead, the U.S. government continued to grow. Laissez-faire economics would have returned the country to the gold standard. The Federal Reserve System would have ceased to exist. The economic and monetary policies of the 1970s and 1980s and the two following decades are much closer to the interventionist progressive economics, which Mr. Cook calls the “American System” (pp. 214-215), than they are to noninterventionist laissez-faire economics.

Although Mr. Cook would deny it, the Federal Reserve System is a creation of progressive economics, the American System. It is like the other programs that he praises as progressivism and the American System (p. 215).

Mr. Cook contends that money is an abstract concept (p. 228). He is correct about today’s money being an abstraction. His replacement progressive money is also an abstraction. However, money has not always been an abstraction. Under the gold standard, money is not an abstraction. It is a definable tangible. Under the Gold Standard Act of 1900, Congress defined the dollar as 25.8 grains of gold nine-tenths fine, or 23.22 grains of pure gold. The dollar was a unit of weight of gold. Unlike today’s money and Cook’s money, which are vague abstractions, the dollar was a concrete tangible. Under the gold standard, people knew exactly how much a dollar was worth. It had a value of 23.22 grains of gold. With today’s money, no one knows how much the dollar is worth without valuing it in terms of itself (a dollar equals a dollar worth of goods). The same is true of Mr. Cook’s progressive money.

Mr. Cook is correct in that the economy of the United States “is not free-market capitalism. Rather it is control by financial and industrial cartels . . .” (p. 229). However, he fails to note that cartels depend on the government to survive. Without governmental coercion, they are short-lived. Today’s financial and industrial cartels result from progressive economics, the American System. Many grew out of public-private partnerships, which Mr. Cook supports.

Mr. Cook abhors the control that these cartels have over the government (p. 229). If Mr. Cook really wants to eliminate the control that these cartels have over the government, he would promote severe restrictions on the power of government instead of promoting its expansion. Cartels first seek to control the government to protect themselves from their competition and the government. Second, they seek to control the government to receive subsidies from it. Stripping the government of its power to destroy a business arbitrarily and its power to reward through subsidies, exclusive grants, and so forth would eliminate cartels dominating the government. They would have no incentive to do so. Mr. Cook’s system of heavy governmental intervention and subsidies gives these cartels plenty of incentive to seek control of the government.

Mr. Cook contends that Say’s Law is a myth (p. 230). “Say's Law states that the production of goods by an economy automatically generates the wherewithal for society to purchase those goods, because earnings from their sale is immediately recycled as purchasing power” (p. 231). “According to Say’s Law, productivity gives people their purchasing power; production is the cause of consumption; people’s consumption depends on their production; products are bought with products.”[1] Thus, a person has to produce something or provide some service in order to buy something. He buys with what he produces; money serves as an intermediary. A person cannot get something for nothing: “There is no free lunch.” Mr. Cook argues otherwise. He wants to enable a person to consume even if he produces nothing. His system eliminates the need for an individual to produce anything in order to buy stuff. Each individual receives a minimum income whether he ever produces anything or not. Although he probably would disagree, he is really advocating taking property from producers and giving it to nonproducers. He conceals his theft via dilution of the currency, i.e., depreciating the purchasing power of the monetary unit. To conceal his theft further, he avers that Say’s Law is a myth.

Mr. Cook claims that Say errs because he “overlooked the fact of capitalist economics which is that of retained earnings” (p. 231). Retained earnings are a form of savings. The manufacturer retains earnings today to spend tomorrow to improve and expand his production (p. 231). Unlike the miser, he does not bury his money with the intent of never using it. Mr. Cook seems to disdain saving as much as Keynes. Both view savings as detrimental to the economy instead of beneficial. Both seek to overcome savings by artificially expanding the money supply. Money must be spent as quickly as it is received. The demand for money must be pushed to zero to prevent economic collapse—so Mr. Cook implies. Mr. Cook must argue that Say’s Law is invalid. If it is valid, his system collapses just as the current Keynesian economic system is collapsing. It, like Mr. Cook’s scheme, rests on the presumption that Say’s Law is false. Wealth can be obtained merely by expanding the money supply.

Mr. Cook considers banking “tied to specific commercial activities” (p. 243) to be the “real bills” doctrine. Thus, under the real bills doctrine, banks “provide working capital for commercial transactions, such as stocking of inventory, or for business expansion” (p. 243). This is not the real bills doctrine. The heart of the real bills doctrine is the real bill of exchange. A real bill of exchange (a real bill) is drawn on real goods that are ready to be sold (sitting on the retailer’s shelf) or are on the way to the retailer to be sold. The real bill expires within 90 days or less. It is self-liquidating, i.e., the merchandise that it represents pays the bill when it is sold.

Under the real bills doctrine, a real bill of exchange occurs when the supplier draws a bill on a retailer to give the retailer time, 90 days or less, to sell the merchandise and get the money to pay the bill. If the retailer accepts the bill, a real bill or commercial money has been created. Now the supplier can use the bill to pay his creditors or sell it to a bank. If a bank buys the bill, it converts the bill to banknotes or checkbook money.

Unlike the two examples that Mr. Cook gives, a real bill of exchange is not a loan. No lending or borrowing is involved. Also, unlike Mr. Cook’s example, a real bill is a self-liquidating credit instrument.

If a bank treats loans for stocking inventory and business expansion like real bills, it is operating unsoundly and risks bankruptcy. (Many loans for stocking inventory are for purposes of speculating on future demand. Mr. Cook wants to outlaw loans for speculation. How is he going to distinguish between lending for speculative stocking and lending for nonspeculative stocking?) Bank lending for inventory and expansion should come from savings. Furthermore, the loans should be for a duration of no greater than the time that the savings are required to be deposited at the bank. Such are sound banking practices.

Mr. Cook contends that “credit should belong to the public and be administered by the government in some equitable way” (p. 248). It is amazing how Mr. Cook can trust the government after he frequently describes the disastrous things that it has done. He offers no solutions to prevent the government from doing these things in the future. What would prevent the government from repeating its miscreant deeds of the past in the future? Leaving credit and its creation in the hands of the people individually instead of entrusting it to the government makes more sense.

Mr. Cook does recognize that the monopolistic power that the corrupt banks have over the monetary and credit system comes from the government (p. 248). Yet he wants to give the government even more power to corrupt. If political leaders betrayed the trust of the people once, what will prevent them from doing it again? Does not common sense dictate that political leaders, and therefore, government, should be stripped of their power instead of given more as Mr. Cook wants to do?

Like most fiat monetary reformers, Mr. Cook provides a good description of today’s economic and monetary problems. He does a fairly good job of describing the causes. However, he fails to identify the most important ones: fiat money and the concentration of political power. To him, these are not part of the problem. They are part of the solution.

Mr. Cook is correct in that the current monetary and financial system is a disaster that benefits a few powerful people. It is in need of a major reconstruction. However, his solution is not the answer. His solution is a disaster that will continue to benefit these few powerful people. Instead of controlling the people through a collaboration of banking and government as they currently do, they would control them solely through the government under Mr. Cook’s reforms. Mr. Cook streamlines the control.

Mr. Cook seems to believe that when the government usurped from the markets the prerogative of creating and regulating money and credit, it did so for the benefit of society. (Actually, Mr. Cook implies that money and credit did not exist until some government invented them.) Thus, governments never claimed the prerogative of creating and regulating money and credit for the benefit of the ruler. (Being a statist, Mr. Cook may believe that the ruler and society are the same.)

Seldom, if ever, has any government ever created and regulated money and credit for the benefit of society (the people) as a whole. They have always done it for the benefit of those who really control the government. In many respects, Mr. Cook’s scheme makes the creation and control of money easier for the rulers. As his system gives the real rulers unlimited money and credit, they have unlimited funds for their pet projects including wars. His system frees them from unpopular taxation and the need to borrow. Moreover, his system requires the rulers to bribe the people and make them dependent on the government. Thus, it makes the control of the people easier. It gives the rulers total control of the economy. They can favor their toadies, lackeys, and apologists with subsidized loans with below-market interest rates. His system breeds corruption.

Mr. Cook must believe that politicians, who are the easiest people on the planet to corrupt, will remain incorruptible. They will always remain altruistic and will never do anything for selfish reasons. He must populate the government with people of high integrity and probity, the likes of which the United States have rarely seen in positions of power since 1860. Even if such saintly people control the government, Mr. Cook’s scheme would fail. For it to work the committee or person in charge has to be omniscient.

Mr. Cook’s scheme makes people dependent on the government. By becoming dependent on the government, they are much less likely to object even to the most egregious actions of the government. His scheme strips them of their freedom and independents by reducing them to the chattel of the ruling elite. It denies them their dignity. It turns them into domesticated animals begging for more handouts.

Mr. Cook’s money like all fiat money is politically driven instead of economically driven. Although he probably would deny it, his money is independent of market needs, i.e., economic demand. If the gap between gross domestic product and national income is of economic importance, the markets would generate the money to fill the gap unless the government intervenes to prevent it. If Mr. Cook believes that the gap is detrimental to the economy, he should find the government’s action preventing closing the gap and work to eliminate it. If the gap needs filling, the markets will do it more efficiently and accurately than any governmental action. His proposal is an artificial political contrivance that will damage the economy and reduce the standard of living of the people.

If Mr. Cook’s perceived gap between GDP and national income is a real problem, it can easily and quickly be solved by returning to the gold and silver standard accompanied by the real bills doctrine (commercial money principle). This system places the creation of money and credit directly in the hands of the people with little governmental oversight. Unlike Mr. Cook’s proposal, the concentration of power in the hands of the U.S. government is unnecessary. Furthermore, it does not make the people wards of the government as does Mr. Cook’s system.

The classical gold standard eliminates the debt-based monetary system that Mr. Cook abhors. Mr. Cook’s scheme does not; it is also a debt-based system. It merely changes the form of the debt-based monetary system. It uses noninterest-bearing and nonrepayable debt-based money.

Moreover, under the classical gold standard without centralized banking, interest rates are low with little fluctuation. They do not have to be suppressed to be artificially low as Mr. Cook promotes.

Some day you will see that there is no man so truly disinherited, as the man who once takes a State-bribe. – Auberon Herbert[2]

Endnotes

1. Thomas Allen, Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money (Franklinton, N.C.: TC Allen Co., 2009), p. 49.

2. Leslie Synder, Justice or Revolution (New York, N.Y.: Books in Focus, Inc., 1979), p. 161.

Copyright © 2009 by Thomas Coley Allen.

 Part 3

 More articles on history.

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 the American Monetary Institute’s American Monetary Act

Analysis of the American Monetary Institute’s American Monetary ActThomas Allen

This paper analyzes of the American Monetary Institute’s (AMI) August 18, 2008, version of "The American Monetary Act" and AMI’s description and explanation of the Act. This Act and description can be found at http://www.monetary.org/amacolorpamphlet.pdf, which can be found at http://www.monetary.org/index.html.

I have italicized words of the Act and AMI’s explanation of the Act and my paraphrases and summaries of its words. My commentary is in roman letters. I have provided references to pages of the article containing the Act and sections of the Act and have enclosed them in parentheses at the end of the line or lines.

This Act is an unconstitutional piece of fascist legislation. Any statist would be enamored of it. It gives the U.S. government total control of the money and by that control of the economy and by that control of the people.

Like most fiat monetary reformers, AMI correctly describes the current fiat monetary system and identifies its flaws. However, like most fiat monetary reformers, AMI fails to identify the real cause of the problem. The real cause of the country’s monetary problem is fiat money. (The current banking system is a secondary problem and, as AMI notes, also needs reconstruction.)

To AMI and most other fiat monetary reformers, the problem is not fiat money itself. The problem is the entity creating and issuing the money. If the government were to create and issue the money directly instead of banks or other private entities, then monetary nirvana would be achieved.

AMI is of the school that money is a creation of government and not of the markets. Money is what the government declares it to be. Apparently, people never used money until some monarch thought of it. Money is not a market (economic) concept; it is a political concept.

AMI believes the ancient and medieval monetary philosophy that the king’s (government’s ) decree creates money and fixes its value. AMI like the peasants of old lives in superstitious awe of the government and believes that its effigy and stamp give money its value, and not the material of which it is made.

If the government’s decree really did give money its value, then debasement of coins would have worked. For example, the government reduces the weight of silver in a coin from 20 pennyweights to one pennyweight and stamps the one-pennyweight coin as having 20 pennyweights of silver. The markets, i.e., the people in their commercial activities, would soon discover that their new coins were short 19 pennyweights of silver. They would then require payment of 20 new one-pennyweight coins though they were stamped as 20-pennyweight coins to pay for items that used to sell for one 20-pennyweight coin. The government would have to use draconian laws to force the people to accept its under weight coins as having the same value as full weight coins. Even then the people would refuse whenever they could. Only with the payment of debt could the government force its underweight coins on the people at its nominal value. As its courts enforce contracts, its courts usually would allow debtors to force their creditors to accept a one-pennyweight coin stamp as having 20-pennyweights of silver in payment of a debt of 20-pennyweights of silver.

AMI acknowledges that "the power to create money is an awesome power" (p. 2). Because of this awesome power, the founding fathers did not give the U.S. government the power to create and issue money. They also denied the States such power. They dispersed the power among the people. Instead of entrusting the government with the power to create money, they entrusted this power to the people. (They did not entrust it with a banking monopoly either although the Hamiltonians corrupted the Constitution to create one.)

AMI remarks that the power to create money is like having "a ‘magic checkbook,’ where checks can’t bounce" (p. 2). As show below, AMI wants to give the U.S. government such a checkbook. However, under the monetary system envisioned by the Constitution, no person, no bank, and no government have such a "magic checkbook."

Under the constitutional system, the people acting in their individual capacities decide how many gold and silver coins are needed by the gold and silver that they have coined and by the quantity of coins that they melt for other uses. The people decide how much commercial money to create through their productivity and business activities. They, not the banks, decide how much commercial money (real bills of exchange) to convert to bank money (bank notes and checkbook money). With their consumption, they remove commercial money and bank money into which it has been converted from the economy. Thus, the supply of money automatically equals the demand for money. (See the appendix for a description of the commercial money.)

Under the monetary system set out in the Constitution, economics governs the creation and supply of money. Under fiat monetary systems, including the one that AMI promotes, politics governs the creation and supply of money.

AMI notes that when money is "controlled privately it can be used to gain riches, but more importantly it determines the direction of our society by deciding where the money goes – what gets funded and what does not" (p. 2). Does AMI really believe that politically powerful interest groups will not direct what gets funded under its system? They will follow the Israeli model. Israeli front groups lobby Congress to appropriate large sums of aid for Israel. Part of this aid is indirectly rebated to the Congressmen supporting it via campaign contributions and support, favorable reviews in the news media, and lucrative jobs for friends and relatives and even the Congressmen themselves. Likewise, private benefactors of infrastructure appropriations will use, as they currently do, similar tactics.

Furthermore, AMI implies that if money is privately controlled, it will go into warfare. Contrarily, it implies that if the government controls the money; it will not go into warfare (p. 2). Does anyone really believe that a war mongering administration will not create money to spend on its pet wars?

AMI cites Article 1, Section 8 of the Constitution and claims that it gives the U.S. government "power to issue money and spend it into circulation to promote the general welfare through the creation and repair of infrastructure, including human infrastructure – health and education . . ." (p. 2). It does not. Except for training and treating military and naval personnel, the Constitution gives the U.S. government no authority to appropriate money for health or education. The Constitution denies the U.S. government any authority to create or issue money.[1]

Moreover, AMI reduces people to the level of buildings and roads. It considers them just so much infrastructure. When the power that it wants to give the U.S. government is considered, people become slaves of those who really control the government. In that sense, the people are infrastructure like roads and buildings.

AMI claims that money "is not tangible wealth in itself, but a power to obtain wealth. Money is an abstract social power based in law; and whatever government accepts in payment of taxes will be money" (p. 2). True, fiat money like the one that AMI promotes has no tangible value. However, real money, Scriptural money (see Genesis 23:16), has tangible value. Tangible value is what gives real money its value. Its value is the value of the material of which it is made. Fiat money is an abstract based on law. Its value relies on the weapons of the government that creates it. Once its government dies, its value vanishes. Real money’s value transcends governments. Its value is independent of any government. Would people prefer to hold money that dies with their government? Conversely, would they prefer to hold money that is independent of time and place and that survives the death of their government?

When money’s value comes primarily from its use to offset tax liabilities, the country has a primitive monetary system "in the sense of being stripped of much of its usefulness and value as a medium of exchange for all transactions within society."[2] Legal tender laws are necessary to force its use in other transactions.

When money derives its value from taxation, it has been politicized. A politicized monetary system locks "the individual into a relationship with his government that smacks of economic serfdom."[3]

AMI constantly identifies flaws and abuses of the current monetary system. It asserts that the cause of these problems is that banks have privately created and issued the money (p. 2).

The current monetary and Federal Reserve banking systems are unconstitutional. With this AMI would agree. However, AMI argues that it is unconstitutional because banks are creating private money instead of the U.S. government creating the money. That is not why they are unconstitutional. They are unconstitutional because Congress does not have the authority to delegate any entity monopolistic powers that the Constitution does not give Congress. Congress has no authority to establish banks, and the U.S. government has no authority to function as a bank. The Constitution gives the U.S. government no authority to create and issue money.[4]

AMI promotes printing new money and spending it on infrastructure instead of paying for these projects with borrowing or taxation. It claims that such new money will not be inflationary (p. 2). It wants to create and spend money on education and healthcare. Also it claims that these expenditures will be noninfltionary (p. 3). Why will this new money not be inflationary? Hazlitt defines inflation as "an increase in the supply of money that outruns the increase in the supply of goods."[5][6] Thus, inflation occurs when money is created in excess of new goods being offered in the markets for sale. Inflation and deflation are monetary phenomena. A rise or fall in general prices often results from inflation and deflation. Spending money on infrastructure has no relationship to new goods being offered for sale. It does not immediately increase the volume of new items ready to be sold. More money is available to buy the same number of items. This is inflation. As more money is chasing the same quantity of goods, a rise in general prices can be expected.

If creating money to pay for roads, bridges, dikes, education, healthcare, etc. is not inflationary, then creating money to build factories, apartments, shopping centers, machinery, etc. would not be inflationary. They are all investments in capital or personnel. Why would a private entity creating money to pay for things like these be inflationary as AMI implies whereas when the government does the same thing, it is not inflationary? What can the government create and spend money on that would be inflationary?

AMI asserts that its proposal is not inflationary (p. 13). By its definition of inflation, it is not and cannot be inflationary. AMI seems to declare that any money created and spent by the U.S. government, except for warfare, is by definition noninflationary. Anyone who claims that it is, is deluded. He is having a knee-jerk reaction caused by the propaganda and mythology (the reigning error) "that government issued money has been irresponsible, and inflationary" (p. 13).

AMI claims that under its proposal, "The reason that inflation is avoided is that real wealth is created with the money spent into circulation on infrastructure, and education and health care. It results in the provision of real goods and vital services and the existence of these serves to control inflation" (p. 13).

Thus, AMI believes that printing numbers and the sacred words "legal tender" on paper can create wealth. If AMI’s money does create real wealth, which it does not, no one can convert his money into that wealth. With the true gold and silver standard accompanied by the commercial money principle (real bills doctrine), a person can convert his paper money to the real wealth represented by that paper money. He can convert his bank notes into consumer goods or into gold or silver. With AMI’s money, no one can redeem it into a few square feet of road or a hospital and use these few square feet as he pleases.

AMI does state that expenditures on warfare are inflationary. Military expenditures are inflationary in part because money is not directed to create values for life (p. 13). The creation of money spent on the military may be about the only thing that AMI recognizes as inflationary when the government creates the money. Thus, money spent to defend live and property, a primary duty of government, is inflationary. Expenditures for the police, fire departments, emergency management, ambulances, and the like appear to be inflationary. Or does AMI arbitrarily declare that one form of defense is inflationary and another form is not? Why is spending money to protect people from natural bacteria through governmental funding of healthcare not inflationary whereas spending the same amount of money to protect people from weaponized bacteria through governmental funding of the military is inflationary? Either both should be inflationary or neither should be.

Further, AMI claims that military expenditures are inflationary because it destroys the values of life (p. 13). When roads, schools, hospitals, and the like are built, they often destroy the values of life. They destroy forests, farmland, homes, and people’s lives (emotionally and psychologically if not physically although that occasionally happens) among other values of life. Sometimes they destroy whole communities as with urban renewal. (Is AMI going to oppose condemnation of property to protect these values of life?) Although their destruction is usually on a much smaller scale than war, the destruction is just as real. AMI might argue that the value of a forest, farm, or home is destroyed to build a road, but that lost value is replaced by the greater value of the road. (As value is subjective and varies with each individual, such an assertion cannot be emphatically made.) Perhaps this is true overall, but for the people forced from their ancestral home place, it is not. Likewise, warmongers could argue that their action may destroy the value of some old property and a few undesirable people, but they will be replaced with new, higher valued infrastructure. This replacement will generate enormous wealth—using AMI’s logic. All that the army has done is to remove the slums as in urban renewal. Why is one inflationary and the other is not?

Let’s apply AMI’s reasoning to projects of the Department of Defense (DOD). DOD projects do not seem to be infrastructure as they are involved with warfare, either present or future. Therefore, a road open to the public built on a military base is not infrastructure. Yet a road closed to the public built in a national park is considered infrastructure. Thus, using printing press money to build the military road is inflationary whereas using it to build the park road is not. At least this seems to be AMI’s claim. Presumably, all money spent on the DOD has to be tax money to prevent inflation, but AMI is not clear on this point.

Money is fungible. If part of the appropriated money is printing press money and part of it is tax money, as far as the economy is concerned, which type of money goes where is unimportant. From an inflationary perspective, where the money comes from (taxes or printing press) is the important thing, and not where it goes (defense or domestic infrastructure). The economy sees no difference between spending a billion dollars of tax money on tanks and a billion dollars of printing press money on dams and spending a billion dollars of printing press money on tanks and a billion dollars of tax money on dams. In both situations the same amount of money from the same sources is spent on the same things.

AMI is correct that expenditures for warfare can be inflationary. If printing press money pays for it, it is inflationary. If taxation pays for it, it is not inflationary.

AMI seems to have a unique definition of inflation. Its definition appears to be that any amount of money created by the government is noninflationary. The exception is money spent on defense (warfare); that money is inflationary. That is, the government can create and spend all the money that it wants to, and none of that money will be inflationary if it is spent on infrastructure. AMI’s definition of infrastructure is broad enough to cover everything except defense. However, any amount of money created by private bankers, counterfeiters, and other private parties, including the people, is highly inflationary even if spent on infrastructure because the people, and not the government, created the money.

AMI claims that governments do a better job of "issuing and controlling money than the private issuers" (p. 2). I presume that by private issuers AMI means privately owned banks, especially privately owned central banks and not the people in general. However, considering AMI’s animosity toward and mistrust of the people, I may be making an incorrect presumption. It may intend to include the people in general. If so, it is opposing the Constitution. As noted above, under the Constitution, the people acting in their individual capacities create money and spend it into circulation. As for private banks causing inflation, they cause it in collaboration with the government. With the consent and often at the command of the government, they create money to buy government securities. To protect its banker benefactors who have issued too much money, the government suspends redemption. (In the United States, the U.S. government has suspended redemption domestically since 1933 and internationally since 1971.) Thus, the government allows banks to violate their contract to redeem their paper money. Without government collaboration, inflation of privately issued money is shallow and short-lived.

As for central banks, they are creatures of the government creating them. They live at the pleasure of their creator government. (AMI is aware of this because it abolishes the Federal Reserve, the central bank, by incorporating it into the U.S. Treasury [p. 2].) Whenever the central bank ceases to do what its creator government wants it to do, it ceases to exist.

AMI’s monetary reform has three parts and all three must be enacted for its system to work (p 3). They are:

First, incorporate the Federal Reserve System into the U.S. Treasury where all new money could be created by government as money, not interest-bearing debt, and spent into circulation to promote the general welfare (p. 2).[7]

Second, halt the bank’s privilege to create money by ending the fractional reserve system in a gentle and elegant way. All the past monetized private credit would be converted into U.S. government money. Banks would then act as intermediaries accepting savings deposits and loaning them out to borrowers (p. 2).

Third, spend new money into circulation on infrastructure, including the crucial "human infrastructure" of education and healthcare needed for a growing society. . . . This would create good jobs across our nation, re-invigorating local economies and re-funding government at all levels (p. 3).

Let’s look at this three proposals. Incorporating the Federal Reserve System into the U.S. Treasury does not really solve anything. The British government nationalized the Bank of England in 1946.[8] Thus, the Bank of England was incorporated into the British government. Not much changed after that except a governmental bureau controlled the creation and issuance of money instead of a privately owned central bank. The problem is not the organizational structure or ownership of the entity in charge of the creation and issuing the money. The problem is the centralization of monetary creation and issuance and the money itself.

AMI is correct in that the money that it proposes will not be interest-bearing debt. It conceals that its money will be noninterest bearing debt forced on all the people—rich and poor alike. It is borrowing from the people just as surely as it would have if it had sold them bonds and took the money. When the government issues paper money or its electronic equivalent, it takes capital from all classes without regards to their ability to forgo the use of their capital.[9]

Ending fractional reserve banking, i.e., lending demand deposits or using demand deposits as reserves for loans, is desirable and needed.

As noted above, the U.S. government has no constitutional authority to spend money on "crucial ‘human infrastructure’ of education and healthcare." AMI’s proposal is little more than the Keynesian notion that a country can spend itself into prosperity.

One of greatest tax revolts that the world has ever witnessed occurred because Congress was taxing one region, the South, to pay for infrastructure in another region, the North. When Lincoln was elected President on a platform of transferring more wealth from the South to the North by significantly increasing tariffs, the Southern States seceded. They saw their choices as seceding or sending evermore wealth to the North in the form of paying higher prices on northern goods or paying higher tariffs, which were used to build northern infrastructure.[10] At least AMI solves the problem of taxing one part of the country for the benefit of another. It taxes the whole country with its forced loans of United State money and its accompanying inflation for the benefit of the politically powerful.

AMI does use a per capita basis for grants to States (p. 11 [§503]) and to a lesser extent for interest-free loans to States and local governments to minimize "playing politics over expenditures" (p. 11). Such per capita formulation may reduce politics or at least the appearance of politics. However, the per capita consideration does not apply to Congress’ direct funding of infrastructure projects. No such restriction can be forced on Congress statutorily; when it enacts a law that conflicted with the statute, the new law overrides the earlier statute. Congress’ direct funding is where the corruption will be the fiercest and most vicious. The Act has no check against this corruption and cannot have any check. Congress can and will play favorites and benefit one region or group at the expense of another. (Those who receive United States money first receive it at full value. Those who receive it later receive it at its reduced inflationary value.)

AMI claims that if the U.S. government creates and issues money for levees that money will be spent to build levees (p. 4). Granted, such money will be spent to build levees. However, AMI goes on to imply that money would not be lent for speculation (p. 4). As AMI allows private banks to lend savings (p. 2), people could borrow money for speculations. Only if the government dictates to banks the things for which they can lend can speculative loans be avoided. Such micromanagement of banking is fascism.

Like the Hamiltonians and other statists who have controlled the U.S. government for at least a century, AMI gives the clause "to promote the general welfare"[11] an extremely broad interpretation (p. 4). In the name of promoting the general welfare, the U.S. government can do just about anything that it wants to do. This interpretation makes the specific delegation in Article 1, Section 8, and the Tenth Amendment irrelevant. Why did the writers of the Constitution bother with specifically delegating anything to Congress if the general welfare provision gave it such broad powers?

The general welfare provision should be understood as a limiting provision instead of an empowering provision. Whenever Congress appropriated money, it was to be spent for the benefit of the country as a whole instead of for the benefit of one section of the country. The appropriation was to be for the benefit of all the people in the country instead of a select group of people. For example, appropriating money to establish and operate a mint to coin gold and silver benefits the country and the people as a whole. Appropriating money to build levees along the Mississippi benefits people who live and work along the Mississippi, but it does not benefit the people in Alaska. Thus, the proper use of the general welfare clause prohibits appropriating money for these levees. (Furthermore, appropriating money to build levees is unconstitutional anyway. The Constitution does not delegate Congress the power to build levees.)

AMI’s Monetary Act begins with a false premise. Section 2, Paragraph 1, reads, "The Federal Reserve Act of 1913 effectively ceded the sovereign power to create Money delegated to Congress by the Constitution to the private financial industry" (p. 4). The Constitution delegates Congress the power to "coin" money. It does not delegate Congress the power the power to "create" money. As noted above, the people "created" money when they brought their gold or silver to the mint to have it "coined."

Section 2, Paragraph 4, reads, "The power of Government to create Money and spend or loan it into circulation as needed is similar but different in nature from the power to create and market instruments of indebtedness; it eliminates the need to pay interest charges on the nation’s money supply, to financial institutions and removes their undue influence over public policy" (p. 4). How does the government know how much money is needed? Just as the Federal Reserve has no way of knowing how much the economy needs, the U.S. government likewise has no way of knowing.

AMI promotes its system as away to eliminate interest payments from the U.S. government’s budget (pp. 4, 7). It does do that. Contrary to what AMI may assert, it does so by substituting noninterest-bearing debt, AMI’s United States money, for interest-bearing debt.

Elimination of paying interest on debt from the U.S. government’s budget can be effectively achieved under the current system. All Congress has to do is to require the Federal Reserve to buy all U.S. government securities. As the current law requires the Federal Reserve to rebate to the U.S. Treasury all interest that it earns above its operating costs, these securities become interest-free loans.[12] If Congress believes that the Federal Reserve is keeping too much money, it can cap the amount that the Federal Reserve retains to cover its operational costs.

AMI claims that its reforms will greatly reduce the influence of private lenders over public policy decisions (p. 7). It probably will. However, it will increase the influence of the construction, educational, healthcare, and many other industries that will be competing for free money. As Congress can give all these groups all the money that they want under AMI’s proposal without borrowing or raising taxes, Congress will seldom say "no." (Congress probably will not make what it is doing blatantly obvious by appropriating money directly to the favored firm. It will conceal it as contracts, subsidies, and the like.)

AMI calls its money United States money. Its "nominal unit" is "the U.S. dollar" (p. 6 [§101]). AMI comments, "It does not prescribe a value for the dollar in terms of commodities, or labor or any other thing. The value of the currency unit is already known in the market in terms of its relation to assets and goods and services and existing obligations" (p. 6). So, the value of a dollar is what a dollar will buy. Whatever AMI’s dollar is, it is not the dollar of the Constitution. The dollar of the Constitution is the weight of silver in the Spanish milled dollar.[13]

AMI admits that, unlike Scriptural and constitutional money, its money has no substance. Its money is an undefined and undefinable abstraction. It does not differ from the current federal reserve note.

According to the Bible, money has three components: quantity, measurement, and substance. Genesis 23:16 illustrates this idea. Abraham bought a burial plot. He paid 400 (quantity) shekels (measurement of weight) of silver (substance). In pre-1933 money, if a person bought something with a $20 gold coin, he paid with money that had quantity (20), measurement (dollar, a unit of weight equal to 23.22 grains), and substance (gold). If he paid with a $20 gold certificate, his currency promised to deliver money containing these three components on demand.

AMI’s money like the current federal reserve note lacks two of these three components. For example its $20 of United States money has quantity (20). The dollar appears to be its measurement. However, it is not. AMI claims that money is that abstraction. Therefore, its dollar is an abstraction. It measures nothing. A unit of measurement has to be something concrete and definable like the foot, ounce, minute, or horsepower so that things can be compared to it. It has to be something that instruments can determine.

With pre-1933 gold money, $20 in gold weighed twice as much as $10 in gold. Even if the disks had no inscription on it, a disk containing 464.4 grains of gold had twice the purchasing power of a disk containing 232.2 grains of gold. It was twice as large and weighed twice as much.

AMI’s money cannot be measured. If the inscriptions are removed from AMI’s money, its $20 would look like its $10. They would both have the same value: nothing.

According to AMI, "This value [of its money] is not fixed but adjusts to continuous changes in supplies and desirability of goods and services and is also influenced by the existing supply of money" (p. 6). This is true. Like the federal reserve dollar, the value (purchasing power) of AMI’s money will trend downward. Most likely its value will decline even more rapidly as creating and spending money will be easier for the U.S. government under AMI’s system than under the present system. When given the choice between raising taxes and printing money, most politicians will choose to print money because it is much less painful—they receive much less opposition.

AMI’s proposal seems to lack any effective way to remove any excess money. The only way that excess money can be removed under its system is for the U.S. government to have a budgetary surplus. It would have to collect more taxes than it spends. As AMI’s system is designed for deficit spending, having a surplus is highly unlikely.

Of coarse, AMI may argue that if money is being created to pay for infrastructure, no excess money can be created. However, its definition of infrastructure is so broad that it could be construed to cover nearly everything. Contrary to AMI’s assertion, its monetary system is highly inflationary, i.e., it creates large quantities of excess money.

Like all fiat money, AMI’s money is forced on the people with legal tender laws (p. 6 [§102]). By resorting to legal tender laws, AMI is admitting that its money is overvalued and inferior and as such cannot stand competition—especially from real money. Money that satisfies the needs of the people best needs no protection from competing types of money. As AMI wants to give its money a legal monopoly, it is admitting that its money fails to satisfy the needs of the people best.

AMI has to force its money on the people because it would have no value otherwise. If its money had real value, people would accept it without legal tender laws. AMI knows, perhaps subconsciously, that its money is overvalued and, therefore, people must be forced to accept it. Like the current monetary system, its monetary system can only function through coercion and cannot survive open completion with real money. Legal tender laws are unnecessary for true and honest money. Superior money will circulate without legal tender laws.[14]

Sennholz summaries the evils of legal tender laws as follows:

To declare paper money legal tender may be one of the greatest evils government may inflict upon its subjects. It confers terrible financial power on government—far greater, indeed, than the power to tax. It affects economic production and distribution, influences the formation of prices, and makes all private property easily accessible to government. Legal tender laws permit government to take income and wealth without the people's consent. usually even without their knowledge. In the end, it is bound to destroy the private-property economy.[15]

Supreme Court Justice Stephen Field warned against the evil of making paper money legal tender. He wrote:

The arguments in favor of the constitutionality of legal tender paper currency tend directly to break down the barriers which separate a government of limited powers from a government resting in the unrestrained will of Congress. Those limitations must be preserved, or our government will inevitably drift from the system established by our Fathers into a vast, centralized, and consolidated government.[16]

History has shown that Field was correct. Irredeemable legal tender paper money has led to "a vast, centralized, and consolidated government." AMI not only aims to maintain the "vast, centralized, and consolidated government," but it wants to expand it.

About legal tender laws, Parks asks, "If the money is good, and would be preferred by the people, then why are legal tender laws necessary? If the money is not good, then why in a democracy should people be forced to accept it?"[17]

Section 103 authorizes the Secretary of the Treasury to finance budgetary deficits by creating and spending money (p. 6). Thus, printing press money or its electronic equivalent will finance deficits. No real restraints are placed on exploding the expenditures of the U.S. government and funding them with printing press money.

Section 105 sets forth provisions that will presumably control the money supply. The Secretary of the Treasury "shall pursue the policy that the supply of money in circulation should not become inflationary nor deflationary in and of itself" (p. 6 [§105, ¶1]). A Monetary Authority, a board of nine people, establishes targets (p. 7, [§105, ¶2]) for the Secretary to use (p. 7, [§105, ¶3]). If the targets are not met, the Secretary reports this discrepancy to Congress (p. 7 [§105, ¶4]).

What are these monetary targets? Are they solely the quantity of new money created and spent without observation of effects? This does not seem to be AMI’s intent. Are these targets related to price levels, wage rates, or interest rates? AMI emphatically states more than once that money created by the government and spent on infrastructure is not inflationary and presumably cannot be deflationary. So, why have targets anyway?

Do these nine elite "experts," whose knowledge on monetary needs must exceed that of the entire country, have the authority to decide what these targets should be? It seems so. Once they decide what the targets should be, how are they going to decide what the appropriate level or range should be? Are they going to use aeromancy, anthropomancy, astrology, cartomancy, hydromancy, oneiromancy, or pyromancy? Whatever they use, it is not going to be scientific unless someone develops a scientific methodology to foretell the future. To be sure, they will certainly dress it in scientific and economic garb.

Regardless what these targets are, the whole exercise of setting them is superfluous and meaningless. (Is their purpose to deceive the people into believing that the U.S. government is properly tending to and regulating the money?) If the money supply or whatever exceeds the targets or causes the targets to be exceeded, the targets can be ignored. Congress does not require itself to raise taxes or cut spending to bring the money supply or its effect in line with the targets. Congress does not direct the President or the Secretary of the Treasury to cut spending or raise taxes to bring its money supply or its effect back to the targets. (Possibly, taxes would have to be cut or spending increased to meet the targets. However, unless the Monetary Authority sets highly inflationary targets, the money creation under AMI’s system is going to be excessive instead of deficient.) Congress can simply ignore the targets and keep pleasing its constituents by appropriating them more money without corresponding tax increases—if the inflation tax is ignored.

Section 301 sets out the procedures for converting federal reserve notes into AMI’s new United States money. AMI comments, "We won’t call them notes because that indicates debt, and they are not debt (p. 8). Yes they are debt! AMI’s new United States money may be noninterest bearing debt, but it is still debt. It may be nonpayable debt, but it is still debt. Paper money is representation of something beyond itself.[18] Therefore, it is a promise or obligation—hence, debt. AMI is merely trying to deceive the people by substituting "money" for "note."

Section 302 sets forth provisions to eliminate fractional reserve banking (p. 8). Elimination of fractional reserve banking is one of the few good proposals offered by AMI. No longer would banks be able to create money "out of thin air." (AMI does not object to creating money "out of thin air." Its objection is who gets to create it. Its proposal allows the U.S. government to create money "out of thin air." Under the gold and silver standard, no money is ever created "out of thin air.")

AMI proposes to allow banks to borrow money at interest from the U.S. government (p. 8 [§302, ¶4]). This provision is among the many unconstitutional provisions of this Act. No where does the Constitution authorize the U.S. government to lend money to banks.

Section 303 limits interest rates (p. 9). Presumably, if inflation drives the market rate above the 8-percent maximum rate inclusive of fees, legal lending ceases. (Of coarse, AMI argues that the creation of its money, which has no relationship to the markets’ demand for money, would not and cannot be inflationary. Therefore, inflation need not be considered.) When legal lending ceases, the U.S. government has yet another excuse to extend its power and control over the people. (AMI seems to believe that if the dictator is elected, the power that he possesses is irrelevant.)

Title V of the Act sets out the requirement to create money to fund infrastructure (pp. 9-12), which AMI defines broadly to cover nearly everything not related to warfare.

Section 502 provides for interest-free loans to States and local governmental entities for infrastructure improvements (p. 11). No where does the Constitution authorize such loans.

Section 503 requires giving the States grants for them to use "in broadly designated areas of public infrastructure, education, health care and rehabilitation, and paying for unfunded Federal mandates" (p. 11). Again, no where does the Constitution authorizes such grants.

Many problems, especially those related to the centralization and consolidation of political power, have grown out of the U.S. government giving States grants. These grants have stripped States of their independence and make them subservient to the U.S. government bureaucrats. State legislators and governors no longer serve the will of their people. They serve the will of the U.S. government. In their lust for "free" money, the States have enslaved themselves. The creators have become the vassals of their creation. AMI wants to continue their bondage.

Under Section 504, AMI set out its farming parity program (p. 11). It proposes to continue the enslavement of farmers. In the name of protecting the family farm, parity programs have nearly made the family farmer extinct. AMI gives no valid reason that its program will succeed where all others have failed—at least failed in their ostensible objective. They have been highly successful at concentrating agriculture under the control of a few giant agribusinesses.

Under Section 505, AMI sets forth a funding requirements for education. Congress is to fund a program for "our educational system that will at least put the United States on par with other highly developed nations, and create a learning environment so that every child has an opportunity to reach their [sic] full educational potential" (p. 12). This has been the professed objective of nearly every educational program that Congress has funded. As government, especially the U.S. government, spends more money on education, the country moves farther away from this objective. Its real objective has been to dumb down Americans to make them obedient slaves of the people who really control the U.S. government. Its objective is to dumb them down so that they will believe this idiotic proposal of AMI—that they will believe that a people and a country can really make themselves rich by having the government print words on paper, call it money, spend it, and force the recipient to accept it at the point of a gun (legal tender laws).

AMI wants evermore federal control over education. It wants to expand pre-kindergarten programs (p. 12). It wants to capture and indoctrinate children as young as possible. Enthralling children earlier to the government makes them easier for their rulers to control.

At least AMI is right about one thing. "We shouldn’t rely on local property taxes to solve a problem that has for so long been a national short-coming" (p. 12). AMI wants to substitute printing press money for local property taxes to fund education. No tax money should be used to fund education.

History has shown that the more money that the U.S. government has spent on education, the less educated the people have become. If AMI really wanted to improve education, it would forbid Congress to appropriate or lend any money for education. Moreover, it should demand complete privatization of education.

Section 506 is a provision to give each citizen a tax-free grant. This would be a one time payment (p. 12). This is nothing more than using printing press money to bribe the people into accepting AMI’s imbecilic plan. It wants to create money to pay the people to accept their own enslavement. Sadly, most probably would accept the bribe.

AMI’s purpose for giving these grants is to prevent deflation until Congress get its money machine going to fund infrastructure (p. 12).

AMI seems to be arguing that if Congress fails to create and spend enough money on infrastructures or dump enough money into the economy, deflation will occur. Deflation is possible. On the other hand, Congress cannot create and spend enough money to cause inflation by definition. If AMI is correct and if deflation occurs, the U.S. government could never overcome the deflation by creating and spending enough new money on infrastructure. The country would have to go to war because only military action is inflationary. Alternatively, the government would have to force private banks and counterfeiters to create money and spend it. Money created and issued by private banks and counterfeiters cause inflation. At least this is the conclusion that one derives from AMI’s presentation.

Section 507 sets out the requirement for universal healthcare (p. 12). This is more proof that AMI aims to establish fascism. If the objective of socialized medicine is to provide everyone, especially people who are really sick, with high quality, inexpensive medical care quickly, it has been a complete failure. Most do not even provided two of these three (quality, inexpensiveness, and quickness). Most are usually slow and expensive with variable quality.

The problem with healthcare in the United States comes not from a lack of governmental funding or oversight. It comes from too much governmental interference and a lack of competition. The government has sided with allopathic medicine and expends resources to suppress all its competition.

AMI asserts that its universal healthcare will not be inflationary (p. 12). How paying for universal healthcare with printing press money is not inflationary, it fails to explain satisfactorily. The best explanation that it has is its unsupported claim that all the money created by the government for healthcare and other infrastructure is not and cannot be inflationary by definition.

AMI offers two examples of successfully governmentally issued money of to support its position. These two examples are the Continental and greenback (p. 13).

AMI claims that the Continental’s loss of value came from British counterfeiting and not from the Continental Congress over issuance. Later AMI notes that money that is created and spent on warfare is inflationary (p. 13). Most Continentals were issued to pay for warfare. Which caused the inflation? Was it spending printing press money on warfare? Or, was it British counterfeiting?

AMI cites the greenback as a successfully governmentally created and issued paper money. True, it was much more successful than most fiat currencies. However, its success is contributed to features lacking in AMI’s money. First, the government limited the quantity of greenbacks and slowly reduced their quantity. AMI’s money expands indefinitely and without limits. Second, and most important, the people expected them to be redeemed at par (one greenback dollar for one gold dollar), and they were in 1879. Third, from 1879 to 1933, the government backed the outstanding greenbacks with gold. It held between about a third and a half of the outstanding value of greenbacks in gold. Because the people using the greenback knew that they could redeem them in gold anytime on demand, they did not rush to do so. AMI’s money is irredeemable.

When Roosevelt ended the gold standard in 1933 and greenbacks could no longer be redeemed in gold, their value declined. It declined as much as the value of federal reserve notes declined. If AMI’s theory were correct, greenbacks should have retained their value. A greenback dollar should have become worth more than the federal reserve dollar. Yet it did not. It maintained parity with the federal reserve dollar. This is strong evidence that AMI’s theory is wrong.

AMI’s system rests upon the integrity, honesty, and wisdom of a group of men not known to have these qualities. It relies on the incorruptibility of perhaps the easiest group of people in the world to corrupt. It entrusts vast amounts of power to Congressmen, Presidents, and cabinet officers. As a group, these politicians are notorious for their lack of probity. Most of them arrive at these high offices because the power brokers find them easy to control.

Fiat money reformers are rightly concerned about concentrating the power to control the supply of money and credit in the small group of people who run the central bank (Federal Reserve). They can see that the people who run the central bank will be tempted and will give into the temptation to use their power for selfish ends to the detriment of the country. Yet they seem not to recognize that political leaders and government bureaucrats suffer from the same temptations. History shows that political leaders are morally and ethically among the weakest of mortals. More often than not, their lust for power and fame injures the country. The problem of corruption exists even if some independent agency of "experts" is empowered to issue the currency. Whenever power becomes concentrated, the temptations of selfishness, self-interest, and corruption are usually too great to resist.

AMI places an enormous amount of trust in politicians, a group not known for its trustworthiness. It distrusts the people with the control of the monetary system. If it trusted the people, it would follow the example of the founding fathers and let the people create their money directly.

The founding fathers wisely did not trust giving political leaders, including themselves, the vast amount of power that AMI wants to give them. They left the creation of money directly in the hands of the people. With their control of the money, the people could better protect themselves from the government and the demagogues and despots, who always seek to control it.

Most of the founding fathers and supporters of the true gold and silver standard advocate using money based on the principles that God revealed. They advocate using the material, gold and silver, that He provided for money.

AMI like other adherents of fiat money advocates money based on the principles proclaimed by pagans, such as Aristotle. It advocates using manmade money. It wants money created and imposed by force instead of choice. It wants money that is independent of the people and is totally dependent on the whim of a ruling elite.

Walter E. Spahr remarks:

It should not be surprising that apparently all who would socialize our economy are opposed to the restoration of a redeemable currency in the United States. Either because they understand the relationship between an irredeemable currency and the processes of socialization or because they simply note that Socialist, Communist, and Fascist governments employ irredeemable currencies as a means of controlling and managing the people, advocates of government dictatorship seem invariably to defend irredeemable currencies with the utmost vigor. The evidence seems overwhelming that a defender of irredeemable currency is, wittingly or unwittingly, an advocate of socialism or of government dictatorship in some form.

So long as a government has the power over a people that is provided by an irredeemable currency, all efforts to stop a government disposed to lead a people into socialism tend to be, and probably will be futile. The people of the United States have observed all sorts of efforts, organized and individual, to bring pressure upon Congress to end its spending orgy and processes of socialization. It should be amply clear by this time that none of these efforts has succeeded. Moreover, there is no reason for supposing that any of them, except the restoration of redeemability, can succeed in arresting our march into socialism.[19]

Spahr describes the result of AMI’s proposal. Whether AMI’s real goal is socialism, it does not state in this article. Whatever its professed objective is, it gives the U.S. government absolute power over the people. Its proposal is pure statism.

In summary, AMI’s proposed monetary system has many flaws. A few follow.

1. It is unconstitutional. The Constitution does not authorize the U.S. government to issue any kind of paper money—at least its writers were convinced that it did not.[20]

2. The dollar is left undefined. It is a vague abstraction. It has no substance or measure. Value can only be measured against tangible things that have value in and of themselves. An abstract value does not exist economically. (Although AMI would deny it, AMI’s dollar derives its value from the federal reserve dollar. The federal reserve dollar derives its value from its connection to gold in 1933 and 1971.) As far as AMI is concerned, the "dollar" is dependent on the whims of Congress and is whatever Congress arbitrarily proclaims it to be.

3. Contrary to its assertions, AMI’s monetary system will be highly inflationary.

4. AMI’s system relies heavily on men of good will who place the interest and welfare of the country above their own. It depends solely on the probity of politicians. It depends on the type of person who is seldom elected to Congress and the type of person who has not been elected President for more than a century.

5. Not only does AMI’s system depend on politicians of integrity, it also depends on competent politicians. Rare is a government that is wise, competent, and honest.

6. It will breed corruption. The whole system is designed of feed corruption.

7. AMI’s money is inelastic. It does not change to meet the economic demand for money. Political needs instead of economic needs determine the quantity of money. The quantity of its money cannot vary to meet the ever-changing demand of the people or business for money. AMI’s system is designed so that the quantity of money always grows even when the economic demand for money declines. Furthermore, AMI’s system like all fiat monetary systems has no way of really knowing the economic demand for money. The money mangers can only guess at that demand. Besides, real economic demand for money is always subordinated to the political and fiscal needs of the government under all fiat monetary systems including AMI’s.

8. Like other fiat money adherents, AMI mistakenly believes that the government is competent to manage the money supply. Never has history shown a well-managed fiat currency. Inconvertible paper monetary systems have always failed. Even the best ones fail in less than three generations. Many fail in less than a decade. There is no reason to believe that AMI’s system would last more than a decade.

9. Central planning has proven itself to be a failure. Yet AMI wants more central planning.

10. AMI seems to believe that if the government prints enough money, which is a liability of the government, it becomes an asset. It does believe that the government can create real wealth by creating and spending money for its broadly defined infrastructure.

Other articles posted at AMI’s website may answer some of the questions and resolves some of the issues raised in this paper. The purpose of this paper is not to evaluate all AMI’s material. It is limited to analyzing its August 18, 2008, version of "The American Monetary Act."

[Editor’s note: The original contains an appendix that described the real bills doctrine. To reduce the length of this article, the appendix has been omitted. A detailed description of the real bills doctrine is found in the author’s book Reconstruction of America’s and Banking System: A Return to Constitutional Money.]

ENDNOTES

1. Thomas Coley Allen, Reconstruction of America’s Monetary System and Banking System: A Return to Constitutional Money (Franklinton: TC Allen Co., 2009), pp. 72-81.

2. Edwin Vieira, Jr., "The Constitutional Imperative in Reform of the Monetary and Banking System of the United States,"1993, http://www.fame.org/HTM/ Vieira_Edwin_ The_ Constituion_ Imperative_in_the_ Reform_of_the_ Monetary_ EV-003.HTM, May 19, 2008.

3. Ibid.

4. Allen, pp. 72-81.

5. Henry Hazlitt, The ABC of Inflation (Lansing: Constitutional Alliance, Inc., 1964), p. 6.

6. This definition or one similar to it is used by most economists. Rothbard and his followers define inflation as any amount of money issued beyond the monetary metal. As AMI’s monetary system has no monetary metal, every piece of money issued would be inflationary.

7. Also see §2, ¶6 (p. 4) and §401 (pp. 9-10).

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

9. Joseph French Johnson, Money and Currency in Relation to Industry, Prices, and the Rate of Interest, revised ed. (Boston: Ginn and Company, 1905), p. 325.

10. Charles Adams, For Good and Evil: The Impact of Taxes on the Course of Civilization (New York: Madison Books, 1993), pp. 323-337.

11. The phrase "to promote the general welfare" is not in the Constitution. The Constitution reads, "The Congress shall have Power to lay and collect Taxes . . . to pay for the Debts and provide for the common Defense and general Welfare of the United States. . . ."

12. Frederick A. Bradford, Money and Banking, 4th ed. (New York: Longmans, Green and Co., 1938), p. 342. Lloyd B. Thomas, Money, Banking, and Economic Activity, 2nd ed. (Englewood: Prentice-Hall, Inc., 1982), p. 150.

13. Allen, pp. 17, 72, 84, 247-248.

14. Allen, pp. 30-35.

15. Hans F. Sennholz, Money and Freedom (Spring Mills: Libertarian Press, 1985), p. 26.

16. Johnny Silver Bear, "The Nature of Money and our Monetary System," Aug. 20, 2004, wysiwyg.//156/http://www.financialsense.com/editorials/ 2004/0820.html, Aug. 25, 2004.

17. Larry Parks, "Interchange between Professor Robert Mandell and Larry Parks re: the Legal Tender Issue," http://www.fame.org/HTM/ Mandell%20and%20Parks.htm, May 19, 2008.

18. At the terminal stage of hyperinflation, paper money reaches its intrinsic commodity value of its Btu content, and in that sense it may cease to be debt.

19. Garet Garrett, The People’s Pottage (Caldwell: The Caxton Printers, Ltd., 1953), p. 46.

20. Allen, pp. 74-75. George Bancroft, A Plea of the Constitution of the United States, Reprint (Boring: CPA Book Services, Inc.), pp. 40-43.

Copyright © 2009 by Thomas Coley Allen.

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