A number of other states are also considering similar legislation – click here to view the Tenth Amendment Center’s Constitutional Tender Laws Tracking Page.

The article below is an excerpt of a longer essay written by Michael Rozeff for LewRockwell.com in 2008. It covers much of the long history of legal tender laws in the U.S.

Inherent Power and Legal Tender
by Michael Rozeff

Before there were Federal Reserve notes (our current paper money instrument), there were U.S. notes. These were issued by the U.S. Treasury, not the Federal Reserve, which is a central bank created by Congressional action.

Looking at a clear picture of a $20 U.S. note, we see at the top “Legal Tender for Twenty Dollars.” Legal tender means that the note must, by law, be accepted as payment for all debts, public charges, taxes, and dues.

The U.S. Treasury began issuing non-interest bearing notes in 1862 after Congress passed several Legal Tender Acts authorizing their issue. The notes came to be known as greenbacks. The law, which did not distinguish debts contracted before the law was passed from debts contracted thereafter, read as follows:

“Be it enacted …, That the Secretary of the Treasury is hereby authorized to issue on the credit of the United States, one hundred and fifty millions of dollars of United States notes, not bearing interest, payable to bearer, …, and such notes herein authorized shall be receivable in payment of all taxes, internal duties, excises, debts, and demands of every kind due to the United States,…, and shall also be lawful money and a legal tender in payment of all debts, public and private, within the United States,…”

The existing U.S. law is not far different:

“Section 5103 of title 31, United States Code

§ 5103. Legal tender

United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.”

Ex post facto law

The 1862 statute conflicted with the Constitution in several ways. In the first place, it was an ex post facto law. It was retrospective or retroactive. It impaired contracts made before the date of the law. Article I, Section 9, which applies to the federal government, says: “No bill of attainder or ex post facto Law shall be passed.” Article I, Section 10, which applies to the states, says: “No state shall…pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts,…”

In his article written in 1900 titled “Are Our Legal Tender Laws Ex Post Facto?”, Brainerd Taylor DeWitt examines the issue thoroughly. The evidence that the legal tender laws are retroactive and thus, in his view, unconstitutional is overwhelming. His own conclusion is this:

“Laws impairing the obligation of contracts being embraced in the prohibition of Article I, Section 9, under the terms “ex post facto law,” as explained by the Constitution itself, by The Federalist and by the usage of our English ancestors long previous to the formation of the Constitution, the conclusion is unavoidable that our legal-tender laws are ex post facto, and that Congress in enacting them violated an express provision of the Constitution.”

To Justice Strong, who wrote the majority opinion that upheld the legal tender laws, it did not matter if those laws impaired contracts and violated some provisions of the Constitution. There were more important fish to fry. He wrote:

“If, then, the legal tender acts were justly chargeable with impairing contract obligations, they would not, for that [79 U.S. 457, 551] reason, be forbidden, unless a different rule is to be applied to them from that which has hitherto prevailed in the construction of other powers granted by the fundamental law. But, as already intimated, the objection misapprehends the nature and extent of the contract obligation spoken of in the Constitution. As in a state of civil society property of a citizen or subject is ownership, subject to the lawful demands of the sovereign, so contracts must be understood as made in reference to the possible exercise of the rightful authority of the government, and no obligation of a contract can extend to the defeat of legitimate government authority.”

In unambiguous words, Strong asserts that government authority trumps the property of citizens (subjects) and the contracts they may make in civil society. He holds this view, as we shall soon see, because he believes that government itself is entitled to whatever powers it requires to perpetuate and preserve itself. In other words, we not only must have government, we must have the government we now have that was established by the Constitution, and that government has a right to preserve itself. We are subject to it. It is not subject to us.

In some cases, the Framers linked the impairment of contracts by ex post facto laws to the production of paper notes, known then as bills of credit. They knew that historically legal tender laws had the intent of making people accept a devalued currency in place of money instruments like gold and silver and augmenting the power and resources of the sovereign while diminishing the liberty of the sovereign’s subjects. Roger Sherman and Oliver Ellsworth, in recommending the Constitution to their state, wrote:

“The restraint on the legislatures of the several states, respecting emitting bills of credit, making anything but money [gold and silver] a tender in payment of debts, or impairing the obligation of contracts by ex post facto laws, was thought necessary as a security to commerce, in which the interest of foreigners as well as the citizens of different states may be affected.”

In Number 44 of The Federalist, Madison speaks strongly against bills of credit being issued by the states. The Federal Convention refused to grant Congress this power as well.

Emitting bills of credit, then the term for non-interest bearing paper notes to be used as currency, is not the same as making such bills into legal tender. The Supreme Court later held that the federal government could issue bills of credit.

Hepburn v. Griswold

The first test of the constitutionality of the legal tender law came in 1869. The Supreme Court found that the law was unconstitutional.

The Court said that (1) the Constitution contained no express provision to make any credit currency a legal tender in payment of debts, and (2) the legal tender laws were not justifiable under the “necessary and proper” clause:

“The making of notes or bills of credit a legal tender in payment of preexisting debts is not a means appropriate, plainly adapted, or really calculated to carry into effect any express power vested in Congress, is inconsistent with the spirit of the Constitution, and is prohibited by the Constitution.”

The Court pointed out another major conflict of legal tender laws with the Constitution. The Fifth Amendment declares that “no person shall be deprived of life, liberty, or property, without due process of law.” The legal tender laws by directly impairing the value of contracts deprived persons of property without due process of law.

Knox v Lee

Knox v. Lee

The Court reversed Hepburn v. Griswold in the following year in two cases: Knox v. Lee and Parker v. Davis. Such a reversal was unprecedented. The majority of 5-3 in Hepburn changed into a 5-4 decision favorable to legal tender laws with the Chief Justice dissenting. One of the original five had retired. The remaining four maintained their position. The minority of three became four when a vacant seat was filled, and it became the majority of five through a new appointee when the court was expanded from 8 to 9 seats in December, 1869.

Statements made by the majority in support of the legal tender laws are what interest us. They are of the utmost importance to us today, inasmuch as we hear them echoed on all sides as every government, Democrat and Republican, reaches for more power.

Justice Strong made several arguments. He began with this statement:

“If it be held by this court that Congress has no constitutional power, under any circumstances, or in any emergency, to make treasury notes a legal tender for the payment of all debts (a power confessedly possessed by every independent sovereignty other than the United States), the government is without those means of self-preservation which, all must admit, may, in certain contingencies, become indispensable, even if they were not when the acts of Congress now called in question were enacted.”

This statement contains justifications for the government power. Not one of them refers directly to the Constitution. A first technique of subverting the Constitution is simply to ignore its language and bring in other considerations. This technique is always in vogue.

Strong mentions extreme circumstances and emergencies in which Congress should have power to act, such power being constitutional, even if it be not present in that document. His idea is that practical necessity is the real ruler at times. He is saying that there is a tradeoff of constitutional constraints on power for another urgent need. This assumes that the Constitution is of second-order or third-order importance. Necessities hold sway.

A second technique of subverting the Constitution is thus to cry “Emergency!” This technique, which relegates the Constitution to secondary status, is also always in vogue. Any leader can easily find a dozen pressing needs, problems, disasters, exigencies, and necessities. He will then urge that they be dealt with no matter what the Constitution says. The Constitution, being the general document that it is, is denigrated as being unable to handle events that it could not have foreseen. Room must be made for stretching its words to fit the necessities of today. Under this philosophy one may well ask, why bother to have a constitution?

Obviously, if the Constitution is ignored in times of emergency or pressing need, then it is no longer the fundamental or supreme law of the land. Something else is, namely, practical need or pragmatism. They are assumed to be more important than the law. The problem with this approach is that it is lawless. Practical needs are not defined by law. They are defined by men, and that means there is no constitution acting as law. Once the Constitution has been ignored or twisted so as to conform to some supposed need, it is then easy to ignore it again and again. It cannot retain its former character as a constraint on government power. When pragmatic matters are primary, the role of the Constitution is that of providing a patina of legality that covers over the actual illegality.

Ignoring the Constitution’s limitations on government power in time of emergency or practical exigency not only assumes that the Constitution is of second-order importance, it also presumes that the government is the only means of possible action. It presumes that the government is the sole organization that can and must act and that it must be empowered to find the solution to the supposed emergency. But this is hardly ever so. In case after case, the government is the worst possible organization chosen to handle problems.

The question at issue in the legal tender case is whether or not the government has the power constitutionally to make everyone accept its paper money as legal tender. Justice Strong begs that question. He presumes that we as persons need the government to solve various problems and have put that government in place as the sole and only means to solve these questions. He presumes that we are incapable of organizing ourselves in any other ways to resolve particular problems. Having made that postulate, he easily deduces the implication that the legal tender power is necessary and proper for the government’s exercise of its other powers.

If one glorifies government to begin with, by placing it on a pedestal, by assuming that it and no other organizations and associations, it and no other means, can solve the common problems we as persons face, one then is ineluctably led to the conclusion that any powers that the government exercises that are needed to support its unique position in solving our problems must be necessary and proper to those exercises of power. If one assumes the uniqueness and singular importance of a government, one is led away from a government with limited powers. One is led to a government with unlimited powers. But since the Constitution established the national government as a unique government, it left itself open to expansive interpretations such as Justice Strong’s.

Strong’s second argument begins in the offhand remark that every other independent sovereignty had the power to make its note into legal tender. He views this as an indispensable means to the “self-preservation” of governments. This argument is false on several grounds, both theoretical and constitutional.

Mr. Justice Clifford, dissenting, demolished Strong’s argument. He pointed out that there was no implied power in the Constitution to make bills of credit into legal tender. Congress already had ample constitutional power to conduct war and preserve the government.

“Congress may appropriate all moneys in the treasury [79 U.S. 457, 630] to carry on the war, or Congress may coin money for that purpose, or borrow money to any amount for the same purpose, or Congress may lay and collect taxes, duties, imposts, and excises to replenish the treasury, or may dispose of the public lands or other property belonging to the United States, and may in fact, by the exercise of the express powers of the Constitution, command the whole wealth and substance of the people to sustain the public credit and prosecute the war to a successful termination.”

In another dissent, the Chief Justice gave an economic or theoretical argument. He laid out the basis for a “tax” foundation for U.S. notes to become currency:

“The real question is, was the making them a legal tender a necessary means to the execution of the power to borrow money? If the notes would circulate as well without as with this quality it is idle to urge the plea of such necessity. But the circulation of the notes was amply provided for by making them receivable for all national taxes, all dues to the government, and all loans. This was the provision relied upon for the purpose by the secretary when the bill was first prepared, and his reflections since have convinced him that it was sufficient.”

Governments do not disappear when they lack the legal tender power. The U.S. has fifty state governments that lack this power. Nor do paper monies issued by governments fail if they are not legal tender. A government can support its note issues as currency, without making them legal tender, by making them payable for the taxes that it assesses. Since the notes can be returned to the government to extinguish tax bills, they can circulate as a money instrument that has value.

Returning to Justice Strong, we find next an amazing argument:

“…the powers conferred upon Congress must be regarded as related to each other, and all means for a common end. Each is but part of a system, a constituent of one whole. No single power is the ultimate end for which the Constitution was adopted. It may, in a very proper sense, be treated as a means for the accomplishment of a subordinate object, but that object is itself a means designed for an ulterior purpose. Thus the power to levy and collect taxes, to coin money and regulate its value, to raise and support armies, or to provide for and maintain [79 U.S. 457, 533] a navy, are instruments for the paramount object, which was to establish a government, sovereign within its sphere, with capability of self-preservation, thereby forming a union more perfect than that which existed under the old Confederacy.”

Strong argues that the Congressional powers, as granted in the Constitution, and the Constitution itself are means to an overriding end: to establish a perpetual government. Government itself is the paramount end! It is true that the Constitution’s preamble says that we the people established the Constitution to form a more perfect union, but it does not say that union of the states is the premier end or even anything but a means to the other objects it lists: justice, domestic tranquility, the common defense, the general welfare, and the blessings of liberty. For us the people, having a union of states makes no sense in and of itself unless it is a means to these other ends.

He quotes approvingly from Justice Marshall:

“Said Chief Justice Marshall, in Cohens v. The Bank of Virginia, 86 ‘America has chosen to be, in many respects and to many purposes, a nation, and for all these purposes her government is complete; for all these objects it is supreme. It can then, in effecting these objects, legitimately control all individuals or governments within the American territory.’”

Some of our Justices seem to have had Hobbes at their elbows or for bedtime reading.

Strong holds that the government, by the necessary and proper clause, can do whatever it wants to that it is not prohibited from doing:

“That would appear, then, to be a most unreasonable construction of the Constitution which denies to the government created by it, the right to [79 U.S. 457, 534] employ freely every means, not prohibited, necessary for its preservation, and for the fulfilment of its acknowledged duties. Such a right, we hold, was given by the last clause of the eighth section of its first article.”

Mr. Justice Bradley, a member of the majority, explained at length why the government had the power to make its paper money a legal tender. He ended up saying that it is “one of those vital and essential powers inhering in every national sovereignty and necessary to its self-preservation.”

The notion of inherent powers, supported by Bradley, arises at the inception of the U.S.A. and carries forward to this day. Hamilton in The Federalist 23 made incredibly broad claims for government power:

“The authorities essential to the common defense are these: to raise armies; to build and equip fleets; to prescribe rules for the government of both; to direct their operations; to provide for their support. These powers ought to exist without limitation, because it is impossible to foresee or define the extent and variety of national exigencies, or the correspondent extent and variety of the means which may be necessary to satisfy them. The circumstances that endanger the safety of nations are infinite, and for this reason no constitutional shackles can wisely be imposed on the power to which the care of it is committed.”

Is it really the case that free people cannot defend themselves without giving up their liberty? Must they commit their lives and liberties to a central power and give that power carte blanche? If they do that, how can they control their controllers? Obviously, a government with no constitutional shackles concerning the war power is exceedingly dangerous and inimical to liberty. It seems that the U.S. has taken the Hamiltonian philosophy to heart. But should it have done so? The passage quoted seems to express an inordinate degree of paranoia and fear combined with an inordinate faith in government as the remedy for that fear. It is hardly wise for an entire country to follow out intemperate and extravagant rambling that has so little balance and restraint.

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.

Copyright © 2008 LewRockwell.com

The financial system our federal government created in 1913 and thereafter maintained has created nothing but iron chains around the hands, feet and necks of the states of America. Unfortunately, most Americans do not understand the unconstitutionality and dangers of this system (mostly because of a lot of brainwashing over the years). When politics begin to affect the wallet, however, many Americans all of a sudden become politically active and “righteously” indignant. This sadly reveals that principles of truth are not priority. But if a person even cares about America’s history, principles of freedom as accepted by our forefathers or the natural and revealed laws of God, he has to admit that one of the most fundamental elements of freedom is financial freedom. These fundamentals confirm the right of individuals to work in exchange for other items contracted for by the engaged parties, to reap all the benefits and rewards of his labor, skill and intellect without the unjust or unauthorized interference of anyone else, including government. Our Declaration of Independence categorizes this natural right as the “pursuit of happiness,” meaning property, which money certainly is.

Despite financial freedom being considered a natural right, our federal government has ignored this right and principle of freedom; and today, it controls virtually every aspect of money, starting with money’s very creation (i.e. printing) through the inaptly-named, Federal Reserve System (created in 1913 by Congress). But the idea of this system did not come from our forefathers. In fact, based upon the principles of individual freedom, self-government and limited government, our founders rejected the federal government’s power to print money by giving only this power to Congress in Article 1, Section 8: “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” Moreover, States agreed (by ratification of the U.S. Constitution) that they would only be limited as follows relevant to money and currency: “No State shall…make any Thing but gold and silver Coin a Tender in Payment of Debts.” Since 1913, the federal government has been perpetually acting unconstitutionally; and today, States are forced to violate the U.S. Constitution and accept fiat money as tender in payments of debts.

Even a shallow scan of America’s history reveals that our founders and ratifiers considered the constitution to be worth nothing more than fire starter if Congress had the power to print money and create a fiat monetary system. Consider of a few of our founders’ position on the money system we have had since 1913 (citing from, George Bancroft, History of the United States of America: From the Discovery of the Continent [to 1789], Volume 6, [New York: D. Appleton and Company, 1890], 301–303) (Emphasis added):

“[George] Mason of Virginia had a MORTAL HATRED TO PAPER MONEY.”

“[The ratification of the U.S. Constitution] is a favorable moment to shut and bar the door against paper money, which can in no case be necessary. THE POWER MAY DO HARM, NEVER GOOD. Give the government credit, and other resources will offer. “(Oliver Ellsworth)

“PAPER MONEY CAN NEVER SUCCEED WHILE ITS MISCHIEFS ARE REMEMBERED; and, as long as it can be resorted to, it will be a bar to other resources.” (James Wilson).

“Rather than give the power [to congress to emit bills] I WOULD REJECT THE WHOLE PLAN [of the Constitution].” (John Langdon)

“[Under the ratified version of the U.S. Constitution], THE PRETEXT FOR A PAPER CURRENCY, and particularly for making the bills a tender, either for public or private debts, WAS CUT OFF.” (James Madison)

“[Nathanial] Gorham favored STRIKING THE WORDS [in the Constitution, allowing Congress to “EMIT BILLS”] without a prohibition inserted in the document, feeling that if the words were to stand, this could lead to the issuance of paper money.”

“Pierce Butler remarked that paper money was a legal tender in no other country in Europe, and he wanted to DISARM THE GOVERNMENT OF SUCH POWER.”

“George Read stated that if the words [and emit bills] were not struck, IT WOULD BE AS ALARMING AS THE MARK OF THE BEAST IN REVELATION.”

“This is the interpretation of the [Article 1, Section 8] clause…History cannot name a man who has gained enduring honor by causing the issue of paper money.” Ibid., 303. Contradicting these sound lessons and mandates of human history, the U.S. Constitution and natural law (meaning, the value of commercial exchange should have actual value, not pretend value), the federal government has for nearly 100 years operated under a fiat financial system, printing money out of thin air, being backed by nothing of substance, increasing the federal debt, causing inflation, decreasing the value of our contracted-for work, diminishing our future investments, and jeopardizing the lives of millions (just to name a few). Do you think that a country is living in freedom when this takes place?!

The very implementation and structure of the Federal Reserve System is corrupt, considering the most basic principles of a free society, as it puts the power of the fiat money market into the control of a few unelected and uncontrolled people. The danger of this system was recognized immediately by financial experts after its implementation. Consider what Professor John Holdsworth observes in 1914: “It is obvious that a board clothed with such powers can exercise an enormous influence either for good or ill upon the new system. Success or failure…will depend largely upon their ability, wisdom, and tact.” John Thom Holdsworth, Money and Banking, 6th Edition, (New York: Appleton, 1914), 353. Is the definition of “oligarchy” coming to mind?

The creation of our Constitutional Republic was to place the power of securing individual natural rights under the constraints of a fixed constitution into the hands of many who would be affected by its abuse: that is, the people and their agents! The federal system was entirely a check and balance upon all powers in the federal government: checks by the people directly, checks by the other branches of federal government, checks by time itself and checks by the state governments. Yet, the Federal Reserve System literally removes one of the most fundamental natural rights (property) from the control, oversight and power of the people and of their closest representatives (Congress and the State governments). America’s monetary system is without a doubt despicable, unnatural, fraudulent and dangerous.

So, what is our federal government going to do about it? What have they done since 1913? Nothing! I believe we can say with certainty they will continue their legacy. Sure, we know Congressman Ron Paul (and maybe a few others) has attempted to make a difference in this area (See, H.R. 4683, The Free Competition in Currency Act of 2007). God bless him for his lone-wolf efforts. However, even with a Republican-controlled federal government from 2000 to 2008, nothing has been done to bring the Federal Reserve into accountability and responsibility, much less to termination–all this after nearly 100 years of this corrupt system being woven into the fabric of our states and even the entire world. We can say with assurance that putting our hope in the federal government to control the monster it has created is misplaced. It is disgusting how the federal government usurps the delegations and trusts of its power, violates the principles and limitations of the constitution, does nothing to reverse the usurpations and expressly revert these powers back to the states and the people. Still, every year, they expect that we vote for them and look to Washington D.C. for the answers to our problems. What a racket of tyranny! Yet, most take the bait. I would not trust them with taking caring for my dog.

There is, however, an alternative solution–one that our founders expected in cases of federal usurpations: the STATES. What has to be concluded here is that since the federal government does not possess the power to create this fiat system, it of course has acted unconstitutionally since 1913, depriving individuals, the people and the states of the powers they retained under the ninth and tenth amendments of the U.S. Constitution. Being sovereign, the states have the power to do what their constitutions give them power to do in this regard. As a result, the States must take courage to use of their inherent sovereignty: they must be energized by the force of truth, the fire of freedom and the passion of the people. The state governments must recognize this: we, who demand justice, demand that our states retake powers that rightly belong to us, terminate powers that have wrongly been usurped by tyrants, and create within our borders a free and independent system of finance and commerce.

The States must recognize and proclaim once again that,

“Paper money has no hold, and from its very nature can acquire no hold, on the conscience or affections of the people. It impairs all certainty of possession, and taxes none so heavily as the class who earn their scant possession by daily labor. It injures the husbandman by a twofold diminution of the exchangeable value of his harvest. It is the favorite of those who seek gain without willingness to toil; it is the deadly foe of industry. No powerful political party ever permanently rested for support on the theory that it is wise and right. No statesman has been thought well of by his kind in a succeeding generation for having been its promoter.” Bancroft, History of the United States of America, 304.

Freedom for a Change

Tim Baldwin is an attorney who received his Juris Doctor degree from Cumberland School of Law at Samford University in Birmingham, Alabama. He is a former felony prosecutor for the Florida State Attorney’s Office and now owns his own private law practice. He is author of a soon-to-be-published new book, entitled FREEDOM FOR A CHANGE. Tim is also one of America’s foremost defenders of State sovereignty. See his website.

Copyright (c) 2010 Timothy Baldwin

Statement at Hearing of the House Financial Services Committee, February 15, 2007

Transparency in monetary policy is a goal we should all support. I’ve often wondered why Congress so willingly has given up its prerogative over monetary policy. Astonishingly, Congress in essence has ceded total control over the value of our money to a secretive central bank.

Congress created the Federal Reserve, yet it had no constitutional authority to do so. We forget that those powers not explicitly granted to Congress by the Constitution are inherently denied to Congress – and thus the authority to establish a central bank never was given.

Of course Jefferson and Hamilton had that debate early on, a debate seemingly settled in 1913.

But transparency and oversight are something else, and they’re worth considering. Congress, although not by law, essentially has given up all its oversight responsibility over the Federal Reserve.

There are no true audits, and Congress knows nothing of the conversations, plans, and actions taken in concert with other central banks. We get less and less information regarding the money supply each year, especially now that M3 is no longer reported.

The role the Fed plays in the President’s secretive Working Group on Financial Markets goes unnoticed by members of Congress. The Federal Reserve shows no willingness to inform Congress voluntarily about how often the Working Group meets, what actions it takes that affect the financial markets, or why it takes those actions.

But these actions, directed by the Federal Reserve, alter the purchasing power of our money. And that purchasing power is always reduced. The dollar today is worth only four cents compared to the dollar in 1913, when the Federal Reserve started. This has profound consequences for our economy and our political stability. All paper currencies are vulnerable to collapse, and history is replete with examples of great suffering caused by such collapses, especially to a nation’s poor and middle class. This leads to political turmoil.

Even before a currency collapse occurs, the damage done by a fiat system is significant. Our monetary system insidiously transfers wealth from the poor and middle class to the privileged rich. Wages never keep up with the profits of Wall Street and the banks, thus sowing the seeds of class discontent. When economic trouble hits, free markets and free trade often are blamed, while the harmful effects of a fiat monetary system are ignored. We deceive ourselves that all is well with the economy, and ignore the fundamental flaws that are a source of growing discontent among those who have not shared in the abundance of recent years.

Few understand that our consumption and apparent wealth is dependent on a current account deficit of $800 billion per year. This deficit shows that much of our prosperity is based on borrowing rather than a true increase in production. Statistics show year after year that our productive manufacturing jobs continue to go overseas. This phenomenon is not seen as a consequence of the international fiat monetary system, where the United States government benefits as the issuer of the world’s reserve currency.

Government officials consistently claim that inflation is in check at barely 2%, but middle class Americans know that their purchasing power – especially when it comes to housing, energy, medical care, and school tuition – is shrinking much faster than 2% each year.

Even if prices were held in check, in spite of our monetary inflation, concentrating on CPI distracts from the real issue. We must address the important consequences of Fed manipulation of interest rates. When interest rates are artificially low, below market rates, insidious mal-investment and excessive indebtedness inevitably bring about the economic downturn that everyone dreads.

We look at GDP numbers to reassure ourselves that all is well, yet a growing number of Americans still do not enjoy the higher standard of living that monetary inflation brings to the privileged few. Those few have access to the newly created money first, before its value is diluted.

For example: Before the breakdown of the Bretton Woods system, CEO income was about 30 times the average worker’s pay. Today, it’s closer to 500 times. It’s hard to explain this simply by market forces and increases in productivity. One Wall Street firm last year gave out bonuses totaling $16.5 billion. There’s little evidence that this represents free market capitalism.

In 2006 dollars, the minimum wage was $9.50 before the 1971 breakdown of Bretton Woods. Today that dollar is worth $5.15. Congress congratulates itself for raising the minimum wage by mandate, but in reality it has lowered the minimum wage by allowing the Fed to devalue the dollar. We must consider how the growing inequalities created by our monetary system will lead to social discord.

GDP purportedly is now growing at 3.5%, and everyone seems pleased. What we fail to understand is how much government entitlement spending contributes to the increase in the GDP. Rebuilding infrastructure destroyed by hurricanes, which simply gets us back to even, is considered part of GDP growth. Wall Street profits and salaries, pumped up by the Fed’s increase in money, also contribute to GDP statistical growth. Just buying military weapons that contribute nothing to the well being of our citizens, sending money down a rat hole, contributes to GDP growth! Simple price increases caused by Fed monetary inflation contribute to nominal GDP growth. None of these factors represent any kind of real increases in economic output. So we should not carelessly cite misleading GDP figures which don’t truly reflect what is happening in the economy. Bogus GDP figures explain in part why so many people are feeling squeezed despite our supposedly booming economy.

But since our fiat dollar system is not going away anytime soon, it would benefit Congress and the American people to bring more transparency to how and why Fed monetary policy functions.

For starters, the Federal Reserve should:

• Begin publishing the M3 statistics again. Let us see the numbers that most accurately reveal how much new money the Fed is pumping into the world economy.
• Tell us exactly what the President’s Working Group on Financial Markets does and why.
• Explain how interest rates are set. Conservatives profess to support free markets, without wage and price controls. Yet the most important price of all, the price of money as determined by interest rates, is set arbitrarily in secret by the Fed rather than by markets! Why is this policy written in stone? Why is there no congressional input at least?
• Change legal tender laws to allow constitutional legal tender (commodity money) to compete domestically with the dollar.

How can a policy of steadily debasing our currency be defended morally, knowing what harm it causes to those who still believe in saving money and assuming responsibility for themselves in their retirement years? Is it any wonder we are a nation of debtors rather than savers?

We need more transparency in how the Federal Reserve carries out monetary policy, and we need it soon.

Ron Paul is a Republican member of Congress from Texas. His “Audit the Fed” bill, HR1207, currently has over 290 co-sponsors in the House of Representatives.  He is the author of seven books, including “The Revolution: A Manifesto,” and his latest, “End the Fed.”

The United States Constitution does not mention paper money by that name. Nor does it refer to paper currency or fiat money in those words. There is only one direct reference to the origins of what we, and they, usually call paper money. It is in the limitations on the power of the states in Article I, Section 10. It reads, “No State shall . . . emit Bills of Credit . . . .” Paper that was intended to circulate as money but was not redeemable in gold and silver was technically described as bills of credit at that time. The description was (and is) apt. Such paper is a device for expanding the credit of the issuer. There is also an indirect reference to the practice in the same section of the Constitution. It reads, “No State shall . . . make any Thing but gold and silver Coin a Tender in Payment of Debts . . . .” Legal tender laws, in practice, are an essential expedient for making unredeemable paper circulate as money. Except for the one direct and one indirect reference to the origin and means for circulating paper money, the Constitution is silent on the question.

With such scant references, then, it might be supposed that the makers of the Constitution were only incidentally concerned with the dangers of paper money. That was hardly the case. It loomed large in the thinking of at least some of the men who were gathered at Philadelphia in 1787 at the Constitutional Convention. There were two great objects in the making of a new constitution: one was to provide for a more energetic general government; the other was to restrain the state governments. Moreover, the two objects had a common motive at many points, i.e., to provide a stronger general government which could restrain the states.

Measures to Prevent a Flood of Unbacked Paper Money

One of the prime reasons for restraining the state governments was to prevent their flooding the country with unbacked paper money. James Madison, one of the leaders at the convention, declared, in an introduction to his notes on the deliberations there, that one of the defects they were assembled to remedy was that “In the internal administration of the States, a violation of contracts had become familiar, in the form of depreciated paper made a legal tender . . .” Edmund Randolph, in the introductory remarks preceding the presentation of the Virginia Plan to the convention, declared that when the Articles of Confederation had been drawn “the havoc of paper-money had not been foreseen.”

Indeed, as the convention held its sessions, or in the months preceding it, state legislatures were under pressure to issue paper money. Several had already yielded, or taken the initiative, in issuing the unbacked paper. The situation was out of control in Rhode Island, and had been for some time. Rhode Island refused to send delegates to the convention, and the state’s reputation was so bad that the delegates there were apparently satisfied to be spared the counsels of her citizens. Well after the convention had got underway, a motion was made to send a letter to New Hampshire, whose delegates were late, urging their attendance. John Rutledge of South Carolina rose to oppose the motion, arguing that he “could see neither the necessity nor propriety of such a measure. They are not unapprized of the meeting, and can attend if they choose.” And, to clinch his argument, he proposed that “Rhode Island might as well be urged to appoint & send deputies.” No one rose in defense of an undertaking of that character.

The ill repute of Rhode Island derived mainly from that state’s unrestrained experiments with paper money. Rhode Island not only issued paper money freely but also used harsh methods to try to make it circulate. The “legislature passed an act declaring that anyone refusing to take the money at face value would be fined £100 for a first offense and would have to pay a similar fine and lose his rights as a citizen for a second.” When the act was challenged, a court declared that it was unconstitutional. Whereupon, the legislature called the judges before it, interrogated them, and dismissed several from office. The legislature was determined to have its paper circulate.

The combination of abundant paper money and Draconian measures to enforce its acceptance brought trade virtually to a halt in Rhode Island. A major American constitutional historian described the situation this way:

The condition of the state during these days was deplorable indeed. The merchants shut their shops and joined the crowd in the bar-rooms; men lounged in the streets or wandered aimlessly about . . . . A French traveller who passed through Newport about this time gives a dismal picture of the place: idle men standing with folded arms at the corners of the streets; houses falling to ruins; miserable shops offering for sale nothing but a few coarse stuffs . . . ; grass growing in the streets; windows stuffed with rags; everything announcing misery, the triumph of paper money, and the influence of bad government. The merchants had closed their stores rather than take payment in paper; farmers from neighboring states did not care to bring their produce . . . . Some . . . sought to starve the tradesmen into a proper appreciation of the simple laws of finance by refusing to bring their produce to market.

But there was more behind the Founders’ fears of paper money than contemporary doings in Rhode Island or general pressures for monetary inflation. The country as a whole had only recently suffered the searing aftermath of such an inflation. Much of the War for Independence had been financed with paper money or, more precisely, bills of credit.

A Surge of Continentals

Even before independence had been declared the Continental Congress began to emit bills of credit. These bills carried nothing more than a vague promise that they would at some unspecified time in the future be redeemed, possibly by the states. In effect, they were fiat money, and were never redeemed. As more and more of this Continental currency was issued, 1776-1779, it depreciated in value. This paper was joined by that of the states which were, if anything, freer with their issues than the Congress. In 1777, Congress requested that the states cease to print paper money, but the advice was ignored. They did as Congress did, not what it said.

At first, this surge of paper money brought on what appeared to be a glow of prosperity. As one historian described it, “the country was prosperous . . . . Paper money seemed to be the ‘poor man’s friend’; to it were ascribed the full employment and the high price of farm products that prevailed during the first years of the war. By 1778, for example, the farmers of New Jersey were generally well off and rapidly getting out of debt, and farms were selling for twice the price they had brought during the period 1765-1775. Trade and commerce were likewise stimulated; despite the curtailment of foreign trade, businessmen had never been so prosperous.”

The pleasant glow did not last long, however. It was tarnished first, of course, by the fact that the price of goods people bought began to rise. (People generally enjoy the experience of prices for their goods rising, but they take a contrary view of paying more for what they buy.) Then, as now, some blamed the rise in prices on merchant profiteering.

As the money in circulation increased and expectations of its being redeemed faded, a given amount of money bought less and less. This set the stage for speculative buying, holding on to the goods for a while, and making a large paper profit on them. There were sporadic efforts to control prices as well as widespread efforts to enforce acceptance of the paper money in payment for debts. These efforts, so far as they succeeded, succeeded in causing shortages of goods, creditors to run from debtors trying to pay them in the depreciated currency, and in the onset of suffering.

Runaway Inflation

By 1779, the inflation was nearing the runaway stage. “In August 1778, a Continental paper dollar was valued (in terms of gold and silver) at about twenty-five cents; by the end of 1779, it was worth a penny.” “Our dollars pass for less this afternoon than they did this morning,” people began to say. George Washington wrote in 1779 that “a wagon load of money will scarcely purchase a wagon load of provisions.” It was widely recognized that the cause was the continuing and ever larger emissions of paper money. Congress resolved to issue no more in 1779, but it was all to no avail. Runaway inflation was at hand. In 1781, Congress no longer accepted its own paper money in payment for debts, and the Continentals ceased to have any value at all.

A good portion of the dangers of paper money had been revealed, and reflective people were aware of what had happened. Josiah Quincy wrote George Washington “that there never was a paper pound, a paper dollar, or a paper promise of any kind, that ever yet obtained a general currency but by force or fraud, generally by both.” A contemporary historian concluded that the “evils which resulted from the legal tender of the depreciated bills of credit” extended much beyond the immediate assault upon property. “The iniquity of the laws,” he said, “estranged the minds of many of the citizens from the habits and love of justice . . . . Truth, honor, and justice were swept away by the overflowing deluge of legal iniquity . . . ”

But the economic consequences of the inflation did not end with the demise of the Continental currency. Instead, it was followed by a deflation, which was the inevitable result of the decrease in the money supply. The deflation was not immediately so drastic as might be supposed. Gold and silver coins generally replaced paper money in 1781. Many of these had been out of circulation, in hiding, so long as they were threatened by tender law requirements to exchange them on a par with the paper money. Once the threat was removed, they circulated. The supply of those in hiding had been augmented over the years by payments for goods by British troops. Large foreign loans, particularly from the. French, increased the supply of hard money in the United States in 1781 and 1782. A revived trade with the Spanish, French, and Dutch brought in coins from many lands as well. In addition, Robert Morris’s Bank of North America provided paper money redeemable in precious metals in the early years of the decade.

The Impact of Depression

By the middle of the 1780s, however, the deflation was having its impact as a depression. Trade had reopened with Britain, and Americans still showed a distinct preference for British imports. That, plus the fact that the market for American exports in the British West Indies was still closed, resulted in a large imbalance in trade. Americans made up the difference either by borrowing or shipping hard money to Britain. Prices fell to reflect the declining money supply. Those who had gone into debt to buy land at the inflated wartime prices were especially hard hit by the decline in the prices of their produce. Foreclosures were widespread in 1785-1786. This provided the setting for the demands for paper money and other measures to relieve the pressure of the debts. Some people were clamoring for the hair of the dog that had bit them in the first place—monetary inflation—and several state legislatures had accommodated them.

Though there is evidence that the worst of the depression was over by 1787, if not in the course of 1786, paper money issues and agitations for more were still ongoing when the Constitutional Convention met in Philadelphia. In any case, those who had absorbed the lessons of recent history were very much concerned to do something to restrain governments from issuing paper money and forcing it into circulation. There were those who met at Philadelphia, too, who took the long view of their task. They hoped to erect a system that would endure, and to do that they wished to guard against the kind of fiscal adventures that produced both unpleasant economic consequences and political turmoil. Paper money was reckoned to be one of these.

The question of granting power to emit bills of credit came up for discussion twice in the convention. The first time was on August 16, 1787. (The convention had begun its deliberations on May 25, 1787, so it was moving fairly rapidly toward the conclusion when the question arose.) The question was whether or not the United States government should have power to emit bills of credit. Congress had such a power under the Articles of Confederation, and most of the powers held by Congress under the Articles were introduced in the convention to be extended to the new government.

Constitutional Convention Debates

Gouverneur Morris of Pennsylvania “moved to strike out ‘and emit bills on the credit of the United States’.” That is, he proposed to remove the authority for the United States to issue such paper money. “If the United States had credit,” Morris said, “such bills would be unnecessary: if they had not, unjust & useless.” His motion was seconded by Pierce Butler of South Carolina.

James Madison wondered if it would “not be sufficient to prohibit making them a tender? This will remove the temptation to emit them with unjust views. And promissory notes in that shape may in some emergencies be best.” (Madison’s distinction between bills of credit that may be freely circulated and those whose acceptance is forced by tender laws should remind us that paper instruments serving in some fashion as money are not at the heart of the problem. After all, private bills of exchange had for several centuries been used by tradesmen, and these sometimes changed hands much as money does. They are what we call negotiable instruments, and the variety of these is large. What Madison was getting at more directly, however, was that governments, if they are to borrow money from time to time, may issue notes, and these may be negotiable instruments which may take on some of the character of money in exchanges. But Madison’s objection was overcome, as we shall see.)

Gouverneur Morris then observed that “striking out the words will leave room still for notes of a responsible minister which will do all the good without the mischief. The Monied interest will oppose the plan of Government, if paper emissions be not prohibited.”

However, Morris had moved beyond his motion, which was for removing the power, not specifying a prohibition, and Nathaniel Gorham of Massachusetts brought him back to the point. Gorham said he “was for striking out, without inserting any prohibition. If the words stand they may suggest and lead to the measure.”

Not everyone who spoke, however, favored removing the power. George Mason of Virginia “had doubts on the subject. Congress he thought would not have the power unless it were expressed. Though he had a mortal hatred to paper money, yet as he could not foresee all emergences [sic], he was unwilling to tie the hands of the Legislature. He observed that the late war could not have been carried on, had such a prohibition existed.”

Nathaniel Gorham tried to reassure Mason and others who might have similar doubts by declaring that “The power so far as it will be necessary or safe, is involved in that of borrowing.”

Both Positions Argued

On the other hand, John Francis Mercer of Maryland announced that he “was a friend to paper money, though in the present state & temper in America, he should neither propose nor approve of such a measure. He was consequently opposed to a prohibition of it altogether. It will stamp suspicion on the Government to deny it a discretion on this point. It was impolitic also to excite the opposition of all those who were friends to paper money. The people of property would be sure to be on the side of the plan [the Constitution], and it was impolitic to purchase their further attachment with the loss of the opposite class of Citizens.”

Oliver Elsworth of Connecticut pronounced himself of the opposite view. He “thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By withholding the power from the new Government more friends of influence would be gained to it than by almost any thing else. Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power [to emit bills of credit] may do harm, never good.”

Edmund Randolph of Virginia still had doubts, for he said that “notwithstanding his antipathy to paper money, [he] could not agree to strike out the words, as he could not foresee all the occasions which might arise.”

James Wilson of Pennsylvania favored removing the power: “It will have a most salutary influence on the credit of the United States to remove the possibility of paper money. This expedient can never succeed whilst its mischiefs are remembered, and as long as it can be re sorted to, it will be a bar to other resources.”

Pierce Butler “remarked that paper was a legal tender in no country in Europe. He was urgent for disarming the Government of such a power.”

George Mason, however, “was still averse to tying the hands of the Legislature altogether. If there was no example in Europe as just remarked, it might be observed on the other side, that there was none in which the Government was restrained on this head.” His fellow delegates forebore to remind Mason that except for Britain there was hardly a government in Europe that was restrained on that or any other head by a written constitution.

In any case, the last remarks were made by men vehemently opposed to the power. George Read of Delaware “thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelations.” John Langdon of New Hampshire “had rather reject the whole plan [the Constitution] than retain the three words,” by which he meant “and emit bills.”

Denying the Power to Emit Bills of Credit

The vote was overwhelmingly in favor of removing the authority of the United States to emit bills of credit. The delegates voted by states, and 9 states voted in favor of the motion while only 2 opposed it. (New York delegates were not in attendance, and Rhode Island, of course, sent none.) It is a reasonable inference from the discussion that the delegates believed that by voting to strike out the words they had removed the power from the government to emit bills of credit. George Mason, who opposed the motion, admitted as much. Moreover, James Madison explained in a footnote that he voted for it when he “became satisfied that striking out the words would not disable the Government from the use of public notes as far as they could be safe & proper; & would only cut off the pretext for a paper currency, and particularly for making the bills a tender for public or private debts.”

The other discussion of paper money took place in connection with the powers to be denied to the states in the Constitution. The committee report had called for the states to be prohibited to emit bills of credit without the consent of the United States Congress. James Wilson and Roger Sherman, who was from Connecticut, “moved to insert after the words ‘coin money’ the words ‘nor emit bills of credit, nor make any thing but gold & silver coin a tender in payment of debts’,” thus, as they said, “making these prohibitions absolute, instead of making the measures allowable (as in the XIII article) with the consent of the Legislature of the U.S.”

Nathaniel Gorham “thought the purpose would be as well secured by the provision of article XIII which makes the consent of the General Legislature necessary, and that in that mode, no opposition would be excited; whereas an absolute prohibition of paper money would rouse the most desperate opposition from its partizans.”

To the contrary, Roger Sherman “thought this a favorable crisis for crushing paper money. If the consent of the Legislature could authorise emissions of it, the friends of paper money, would make every exertion to get into the Legislature in order to licence it.”

Eight states voted for the absolution prohibition against states issuing bills of credit. One voted against it, and the other state whose delegation was present was divided. The prohibition, as voted, became a part of the Constitution.

Paper Money Rejected

Three other points may be appropriate. The first has to do with any argument that there might be an implied power for the United States government to issue paper money since it is not specifically prohibited in the Constitution. Alexander Hamilton, the man credited with advancing the broad construction doctrine, maintained the opposite view in The Federalist. While he was making a case against the adding of a bill of rights, his argument was meant to have general validity. He declared that such prohibitions “are not only unnecessary in the proposed Constitution but would even be dangerous. They would contain various exceptions to powers which are not granted; and, on this very account, would afford a colorable pretext to claim more than were granted. For why declare that things shall not be done which there is no power to do.” In short, the government does not have all powers not prohibited but only those granted.

Second, this point was driven home by the 10th Amendment when a Bill of Rights was added to the Constitution. It reads, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The power to emit bills of credit or issue paper money was not delegated to the United States. More, it was specifically not delegated after deliberating upon whether to or not. The power was prohibited to the states. The logical conclusion is that such power as there may be to emit bills of credit was reserved to the people in their private capacities.

And third, not one word has been added to or subtracted from the Constitution since that time affecting the power of government to emit bills of credit or issue paper money.

Since the United States is once again in the toils of an ongoing monetary inflation, it is my hope thatthis summary review of the experience, words, and deeds of the Founders might shed light on some of the vexing questions surrounding it.

I’ve discussed just a few benefits of sound money in the last two weeks, and contrasted them to the perils of fiat currency.  Sound money keeps government spending in check, keeps trade fair and honest, which reduces the temptations, and many underlying causes, for governments to wage wars.  It also gives you the peace of mind of knowing that your savings will be able to sustain you in your retirement.

So if sound money is such a good thing, what is stopping people from simply trading with each other in gold and silver?  Why are you still being paid in fiat dollars, and why can’t you pay for gas in gold?  The answer is that the government has enacted policies that provide considerable stumbling blocks to such transactions.

One of the main stumbling blocks is Federal legal tender laws, which state that government-controlled fiat currency MUST be accepted for many kinds of monetary transactions.  In light of this, Gresham’s Law takes effect.  Gresham’s Law states that bad money drives out good money.  Meaning, if someone is forced to accept your bad money, it is to your advantage to pass it off, like a hot potato, in exchange for something of value.

Any good money you have, you will hoard.  Eventually, real money is driven out of circulation and under people’s mattresses, so to speak.  In the absence of legal tender laws, people are free to accept the medium of exchange of their choice, and are likely to insist on payment in something of real value.

Related to legal tender laws, contracts in gold are not enforced.  Meaning if two parties agree to exchange goods or services for gold, and end up in a dispute, the courts will simply settle the dispute in Federal Reserve notes. Governments should do very little, in my estimation, but it should enforce contracts and property rights through the courts.  But in this instance it shirks this basic duty, when it comes to gold, as one way to keep control of our economy and the medium of exchange.

One is also expected to pay sales tax on the purchase of gold.  This is as ludicrous as if you paid sales tax at the bank when you converted dollars into quarters!  The IRS also expects you to pay capital gains tax on gold, which is so backwards, since gains on gold really represent decline in the value of the dollar!

Legal tender laws should be repealed at the Federal level.  Congress has the Constitutional duty to protect the integrity of our money.  However, since it has passed this duty off, and the Federal Reserve has only debased our currency, Congress should no longer force Americans to do business in dollars if they would prefer to transact in gold, or silver, or cigarettes or seashells, for that matter.

Free people should be free to associate and do business in ways that benefit them.  Instead they are forced to use the unstable dollar to their own detriment, and the benefit the government.

Ron Paul is a republican member of Congress from Texas.

Last week I discussed how sound money contributes to peaceful relationships around the world.  It is not gold, in and of itself that excites me, but the many benefits of sound money.  Another benefit is financial security.

Can sound money give you financial security?  There is something very comforting in knowing that what you earn today will retain its purchasing power in the years to come.  Indeed, the same silver dime that bought a loaf of bread in the 1960′s can still buy a loaf of bread with its precious metal content – which is worth about $1.00 today. 

An ounce of gold has always been about evenly exchangeable for a finely tailored men’s suit, which these days is roughly $800.  And in these days of fluctuating gas prices, when priced in gold, oil has been stable.  Meanwhile, since the creation of the Federal Reserve, the fiat dollar has lost 94?f its purchasing power.  The erosion of purchasing power rapidly accelerated when it was completely uncoupled from gold in 1971.

This sort of fluctuation in the medium of exchange creates a lot of uncertainty in the marketplace and necessitates that you either take extraordinary defensive maneuvers, or face financial ruin.  Trusting in government for financial security in retirement is not a safe option.  Indeed, a recent study by the Consumer Bankruptcy Project shows that bankruptcies among those 75 and older has more than quadrupled since 1991.

This represents wealth and savings that have been eroded by inflation, and trust in entitlement promises that were more fantasy than reality.  Even with the pittance that social security pays to seniors, it is bankrupt and bringing the economy to its knees.  It is no wonder that many in the younger generations want no part of it, and they should not be forced into a failed system.

On the other hand, holding physical gold can defend against aggressive government monetary policies that threaten to inflate away the value of your life savings.  During the hyperinflation in post WWI Germany, what used to be a comfortable nest egg was suddenly the value of a postage stamp.

If one held just a portion of their savings in precious metals, the crisis was greatly softened.   Gold will never be worth nothing, even if the exact price fluctuates.  There is a famous photograph, however, of a German woman during this time period burning piles of tightly bound banknotes to keep warm.

Imagine if the money you earned had honest, stable value, or even appreciated like an investment!  No such special measures, like converting dollars to gold, would be required to ensure that your savings would sustain you in your golden years.

That is the way it could be and is supposed to be.  However, the government’s thirst for power will not be easily, or cheaply, quenched.  Fiat currency is one tool governments have to extract wealth quietly from the working class.  It is time for the people to wake up to this ruse and look to the Constitution to restore sound currency.

Ron Paul is a republican member of Congress from Texas.

Many who agree with me on a lot of other issues, do not understand my enthusiasm for gold and sound money or why I spend so much time studying and talking about monetary policy.  It’s true that I talk about money differently than most, but the fact is sound money offers many benefits.

For example – peace.

Can sound money really bring about peace?  Actually, it plays a big part in peaceful international relationships.  Money based on commodities, rather than paper, is not subject to government manipulation, and is a key component to free and honest trade.

History shows that if countries engage in trade with each other, their governments tend to find ways to get along for the same reason you do not kill your customers at your place of business, even if they occasionally annoy you.  If someone outright cheats you, however, you may engage in “war” by taking them to court, for example, and the relationship will sour.  Governments and central banks with unfettered power to manipulate currency also have the ability to cheat their creditors.

One way they do this is to simply create enough currency to pay off debts.  This devalues the currency and “cheats” the recipient out of what they are owed.  It would not be fair if you watered down your product the way our government waters down its currency, so it is not hard to understand, in these simplified terms, why loose monetary policy contributes so much to ill will and war around the world.

Sound money, on the other hand, simply is what it is.  Removing governmental power to manipulate money, removes the temptation for government to spend, print and cheat.  Sound money ensures that our government’s spending priorities would be brought into sharp focus and reduced to only what we can afford.

Sound money also limits the ability to wage wars of aggression.  Imagine how much more careful Washington would have to be about starting a war if they did not have this financial sleight of hand at their disposal!

Fiat currency allows government do expensive things they should not be doing while paying the bills with cheap money.  The Federal Reserve has lately been auctioning off large amounts of treasury bills as a way to finance the wars in Iraq and Afghanistan, and our crushing entitlement burden.

The resulting devaluation of the dollar is quickly eroding our image as a good trading partner in the world.  As a consequence, there is therefore more talk of economic isolation and war.

This vicious cycle of spending, fighting and inflating is not what Americans want.  It is what the government wants, and it has had to deceive the citizens into allowing and supporting it.

Sound money curbs the government’s ability to engage in these shenanigans and reduces the wars we fight to only truly defensive ones, for which Americans are more than willing to stand and fight.  So in these ways, sound money is very conducive to peace.

Ron Paul is a republican member of Congress from Texas.