Reflection on Monetary Freedoms Lost
Americans gathered together this week to celebrate the birth of our nation. The United States is still one of the freest countries on the face of the planet. Its citizens continue to enjoy rights that many other countries around the world have abrogated. Still, we cannot remain complacent in enjoying those freedoms and must remain vigilant lest we lose them. We have already lost significant monetary freedoms in this country, especially since the founding of the Federal Reserve System in 1913, and we risk losing much more in the future.
The Importance of Sound Money to the Founders
During the early days of the Republic, gold and silver served as money, mostly in the form of foreign gold or silver coins. It wasn’t until 1792 that Congress passed its first Coinage Act, establishing the US Mint and providing for a system of gold, silver, and copper coinage. Even with a national mint, however, Congress still provided for the circulation of foreign coins as money. Gold and silver coins from other countries could just as easily serve as money, as long as their gold or silver content could be trusted.
That is why Congress placed such an importance on sound money. A sound and stable currency is necessary to enable trade and investment. Once trust in money is lost, civilization begins to break down. If gold and silver coins couldn’t be trusted to contain their full gold and silver content, commerce would have come grinding to a halt until a better monetary unit could be found.
The Constitution allows the States to be able to declare only gold as silver as legal tender. This was born from the experience with paper money during the Revolution, an experiment that nearly cost the young Republic its independence. Congress was determined not to repeat that mistake and forbade the States from emitting bills of credit, i.e. paper money.
The Coinage Act of 1792 established a series of US coins that would circulate at face value when they were at their full weight, and at various percentages thereof once they began to be worn down. Highlighting just how important it was that coins could be trusted to have their full silver or gold content, Congress established penalties for debasing the coinage:
“And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent… every such officer or person who shall commit any or either of the said offenses shall be deemed guilty of a felony, and shall suffer death.”
That was serious business. Congress was so concerned with the debasement of the currency that they prescribed the death penalty for Mint officials who conspired to devalue the dollar. How far we have come since those days.
The Forgotten Importance of Sound Money
Subsequent Congresses and Presidential Administrations have over the years worn down those protections in order to devalue the dollar, making it easier for the government to borrow money and pay back its debts with less valuable dollars. The Federal Reserve even targets a 2% inflation rate, i.e. a 2% annual debasement of the currency, and no one bats an eye. Had that happened 225 years ago, Janet Yellen and her fellow Federal Reserve Board members wouldn’t have lived to see the negative consequences of their monetary policy folly.
The importance of sound money and a stable currency has been forgotten over the years. Monetary cranks who think that more money equals more wealth have gained the upper hand in the economics profession and among policymakers. Those of us who advocate for sound money are regularly denigrated as backwards-thinking gold bugs. Never mind the fact that the dollar has lost over 95 percent of its purchasing power since 1913, or the fact that an ounce of gold has maintained all of its purchasing power since then. The anti-gold, pro-paper dollar forces can’t be bothered to face the fact that gold is superior to paper.
Like all experiments with paper money, the current system of floating fiat currencies will eventually come crashing down. Central banks have so devalued fiat currencies worldwide that a backlash is all but certain. Quantitative easing policies enacted in the aftermath of the financial crisis are sowing the seeds for an economic bubble that, when it bursts, will dwarf the size of the 2008 financial crisis. Those who put their faith in paper money and the wizardry of Wall Street will suffer the consequences, while those who hold gold will be in good position to weather the crisis.