Restoring the Dollar I

Dr. Edwin Vieira, Jr.

Major Problem: Ignorance

The major problem of monetary reform can be summed up in one word: ignorance. There are a lot of other words you can add to it: apathyÉ, fearÉ; but ignorance is the main one.

At some stage in the course of registering at a hotel, the person behind the counter gives me that little form and says, "How do you intend to pay for this?" In fact, it happened at this hotel when I came here; and I said, "Well, do you take Federal Reserve Notes?" About 95 percent of the time the answer I get is, "No. We take American Express, Visa, MasterCard." The other five percent (or 4.999 percent of the time -- there is one wise guy every now and then who knows the right answer) they say, "Well, IÕm not sure. Let me go check with the manager." When they come back they say, "No, we take only American Express, Visa or MasterCard." Then I take out a Federal Reserve note and show them where it is written at the top, "Federal Reserve Note;" and they smile a kind of embarrassed smile, and I smile, and it is all very funny; except it really isnÕt, is it? It's quite the opposite of being funny.

People don't even know the name of what they use as money, let alone what its source is, what its characteristics are, or what its problems are.

Invariably discussions of monetary reform come down to the question of whether the dollar should be somehow linked or backed by gold or silver or some other valuable commodity. There is a whole school of thought that brings that up in these discussions.

There is a fundamental and unexamined assumption in all this debate; but the fact is, the paper currency the Federal Reserve system generates, so-called Federal Reserve Notes, isn't as a matter of fact, or more importantly as a matter of law, a dollar at all.

Any student of American constitutional law history knows a Federal Reserve Note is not a dollar; it has never been declared by Congress to be a dollar, and it could never be an actual physical dollar, no matter what kind of statutes or regulations Congress or the Treasury Department might enact. It is easy enough to show, and impossible to refute, that a dollar is a specific silver coin containing 371.25 grains of fine silver. It has been so since the beginning of the American Republic.

The Constitution fixes the monetary unit of the United States as this dollar; and it empowers Congress to coin silver and gold coins, the values of which have to be regulated in relation to the dollar. And it very specifically prohibits the government from issuing what the Founding Fathers called "bills of credit," what we would call today paper currency that is redeemable in silver or gold. And the Constitution also outlaws any form of legal tender except silver and gold coins.

Thus, from the perspective of the Constitution and most American history, it is really senseless to talk about making the dollar redeemable or to talk about adopting a silver or a gold-backed dollar. And the very fact that so much debate on the Federal Reserve System focuses on this really senseless point demonstrates how totally ignorant most of the people are about the subject of American money.

Defining the dollar constitutionally is only the first step in explaining the real nature of the problem the Federal Reserve system poses. There are three other aspects to consider.

Nature of the Federal Reserve

First, False Character of the Fiat

The evolution of the Federal Reserve system exemplifies a typical historical devolution or corruption of monetary systems throughout the world for the last two centuries. This is a devolution from commodity money to fiduciary money to fiat money.

But first here are some definitions:

Commodity money is a medium of exchange, the units of which are fixed amounts of an actual commodity that has value other than as money alone. Historically, silver and gold coins of known standard weights and designs emerged as the preferred monies of the civilized world. Certainly that was the result at the end of the last century.

With commodity money, the actual commodity, the silver or the gold, is both the medium of exchange and the standard of value. The supply of commodity money is self-limited because of the costs of minting, refining, and coining the silver and gold. New supplies of commodity money will be coined only to the extent that coinage is economically profitable. The market will simply not produce more gold and silver coin than is necessary compared to all the other uses of that capital.

Fiduciary money is composed of some intrinsically valueless substance, typically paper, which the issuer promises to redeem on demand in commodity money. Private bank notes and government treasury notes served for fiduciary monies in general circulation prior to the 1930's in this country.

With fiduciary money, the promise to pay is the medium of day-to-day exchange. That is what people carry around in their pockets. But the actual money and the ultimate standard of value remains the promised medium of payment, the silver or gold coin.

The supply of fiduciary medium is also self-limited by the requirement of redemption. In a free market system, in which contracts are enforced, the supply of fiduciary money is issued only to the extent that the issuer is confident it can satisfy the demands for redemption. (The self-limiting aspect of fiduciary money has always failed whenever the government or a powerful private interest has been able to step in and license the issuers of the fiduciary money to suspend or to repudiate that promise to redeem.)

Finally, fiat money is composed of some intrinsically valueless substance which the issuer does not promise to redeem in a commodity or in a fiduciary money. Because fiat money has no legal connection to a commodity money, and, therefore, has no real economic cost in terms of production, the supply of fiat money is never self-limiting and is always largely a matter of public confidence in the economic or political stability of the issuer.

Historically, every major fiat money has self-destructed in what is commonly called hyperinflation, that is, extreme decreases in purchasing power that is caused either by unlimited increase in supply by the issuer or simply by loss of public confidence in the value of the money or in the economic or political fortunes of the issuer.

That is everything there is to know about the false character of money.

Second, Threat of Fraud

A piece of commodity money in silver or gold coin is itself payment because it contains a fixed weight of precious metal. But a unit of fiduciary money, say, of a bank note or a treasury note, is only an uncertain payment, because it depends on the ability and the willingness of the issuer to redeem it. There is always a temptation for the issuers to renege on the promise. Thus, fiduciary money always threatens to become fraudulent. The history of fiduciary money is the history of monetary fraud, both economic and political.

Third, Inherently Fraudulent

Fractional reserve banking is inherently fraudulent because it is impossible for the bank simultaneously to fulfill all its promises to redeem on demand. The bank's managers know that complete redemption on demand is impossible and that, therefore, the promises are false; and the bank's customers, by and large, are simply ignorant of how the fractional reserve banking system works.

In 1932 Franklin Roosevelt ran on the Democrat Party platform to preserve the value of the currency at all hazards. The first thing he did when he came to office in 1933 was to close the banks and cancel out receipts of gold. But he got away with that. Then he went on radio with the fireside chats. In the first fireside chat -- some of you may be old enough to have heard this one -- he explained to the American people why the banks had to be closed. He explained to them the fractional reserve banking system. He said, "The money isn't there. The banks cannot pay."

I submit to you that when the President of the United States has to come on nationwide radio and explain to the American people how the banking system in the country really works, the people have not been given full disclosure by their local bankers.

Politics and Money

There's no such thing as politically neutral or politically independent money. (That "neutrality" or "independence" is what has always been called "bird seed." It's put out for us pigeons to eat, but it's not true.)

Money as a medium for both storing and exchanging wealth, is a form of property, and mechanism for implementing contracts that transfer property from one person to another.

Even in a free-market economy, money has a necessarily political character since the degree to which the government protects the money system from private fraud and from public looting reflects the degree to which the government respects and protects private property and the right of contract.

So, the debate over whether the Federal Reserve System ought to be politically independent of Congress is completely misdirected.

The Constitution, being the ultimate political charter of the country, actually settled on one very specific political formula for money: a money of intrinsic value, the supply of which the political powers were unable to manipulate. It made our money independent of all electoral politics by fixing the monetary unit as the dollar, by outlawing bills of credit, and by allowing only silver and gold coin to operate as legal tender.

The creation of the Federal Reserve System in 1913 did not make Federal Reserve Notes politically independent or neutral, but changed the political character of the money system by empowering a small unelected clique of self-styled experts and private bankers to control the supply of Federal Reserve Notes, interest rates, and all the other monetary and banking phenomena -- to exercise the very influence over this countryÕs money and banking systems that the Constitution had originally disallowed.

Although control of the monetary and banking systems has serious political significance, the apologists of the Federal Reserve System have been extremely successful in the last seventy years or so in removing monetary and banking issues from the agendas of the political parties, candidates, and anybody else who is on the political platform or in the political arena.

There is no public political discussion about these issues anymore, yet it is of vital political importance. No top political movement now has a case for the immediate restoration of our constitutional money system.[This speech was made in 1991. The First National Convention of the USTP [now Constitution Party] was in 1992. Ed.]

It is of vital political importance that no top political movement commands that all paper currency of private banks be true fiduciary monies -- that is, redeemable in silver or gold.

It is of vital political importance that no top political movement attacks fraudulent fractional reserve banking.

It is of vital political importance that no top political movement denounces the incestuous relationship between the government and the banking industry through the Federal Reserve, the FDIC, or whatever other outside agencies will be coming along as this system explodes on them.

It is of vital political importance that no top political movement challenges the government's use of the monetary and banking system to regulate the economy and to impose pervasive police-state surveillance on individuals.

And it is of vital political significance that the general public is simply unable to devise any kind of strategy for dealing with the Federal Reserve System as a supposed agency of the government.

Even Congress is no big deal for the Federal Reserve. When the Federal Reserve testifies before Congress, it tells Congress what the policy is going to be -- not the other way around. Nobody has a handle on this agency.

A group that could completely excise all of these matters from political discourse in the United States without complaint by any significant part of the public must be very, very powerful. How the apologists for the Federal Reserve were successful in stifling political debate, the history books really do not explain very well.