The Federal Reserve, The Gold Standard, and The Constitution

Originally posted May 1, 2009 as part of a series of blogs by myself and fellow Conservative Constitutionalists

Well, I believe that honesty is the best policy, so let me begin by saying this: I thought this topic would be the first to be snatched up. In all honesty, this topic doesn’t even really excite me. Not as much as some anyway. I don’t think I’ve ever lost sleep over whether or not our money should have some sort of gold equivalency or that it is a private Federal Reserve Bank that is printing too much money, not the Congress. But I know that this issue is an important one and that it is one that we must debate and train ourselves to speak about and think about on a constitutional level.

Don’t get me wrong, I am more than happy to research this and to be the one to bring this issue out for debate. But considering the passionate arguments I have heard for and against the Federal Reserve Bank over the years, I thought for sure there would be someone more willing to tackle this. But there wasn’t, so here I am.

Woodrow Wilson, after signing the Federal Reserve Act, said this: “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”

Let’s examine what it was that made Wilson so upset at himself for signing. I now present: the Federal Reserve, the Gold Standard and the Constitution.

“To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

To provide for the punishment of counterfeiting the securities and current coin of the United States;” Enumerated Powers, Article I, Section 8

These are powers delegated to the legislative branch of the United States of America. If you want a history lesson on how this resulted in the Federal Reserve Bank, there are plenty of resources at your disposal. I would prefer to discuss the Federal Reserve Bank in its current state and constitutionality.

We will look at three main lines of criticism, followed by my thoughts, and will end with a brief note on the Gold Standard and an alternative.

THE FEDERAL RESERVE BANK IS UNCONSTITUTIONAL

Perhaps the biggest argument against the Federal Reserve Bank is that coining money and regulating the value thereof is a duty specifically delegated to the Congress. How can the Congress then take this duty and delegate it to someone else? This is a valid argument. After all, what else can Congress delegate of their specific duties? Could Congress delegate their duty of declaring war to Exxon-Mobile? I know some of you would argue that they already have. We won’t go there.

But that does bring up an interesting point. Congress has the duty to “raise and support Armies” and “maintain a Navy”, but does that mean that Congress must establish their own congressional oil company to keep our tanks and boats fueled? No. We see a reasonable use of delegation when it comes to the support and maintenance of our militaries. Besides, how many of us would want Robert Byrd designing GPS and unmanned aircraft technology for our military?

Would it be beyond the pale to have Congress delegate the printing and maintenance of their monies to a private bank or organization?

I would say no, but I draw the line at delegating the duties of assigning value to our money and fixing the standard weights and measures. This is the constitutional problem that I see inherent in the Federal Reserve System. By their delegated power to adjust interest rates and set monetary policy with little or no input from the legislative branch, they effectively have assumed those duties of assigning the value of our money and fixing the standard values to the paper and metal it is printed on. This duty must be returned to Congress and must be used as it was intended, not to modify economic circumstances to fit any sort of social agenda.

I would propose putting the decision making power over the Federal Reserve System and monetary policy back in the hands of Congress where it can be open, standardized, and self-regulated as is their duty.

INFLUENTIAL, UNACCOUNTABLE AND OPAGUE

This is certainly not a combination any would hope for in a system so powerful. Through Congress’ delegation of our monetary system to private banks and boards, we most likely do not even see the extent to which such policies are politically determined. Much of the study of economics especially as it relates to the Federal Reserve is funded and provided by the Federal Reserve. Let’s be honest, what Federal Agency can we count on to be honest enough to investigate and shut itself down? A good example would be the Treasury Department. If they had any honesty at all, they would recommend firing the secretary.

A recent research paper done for the Atlanta Federal Reserve Bank said this:
“In our previous research we have detected that New York City banking entities usually exert substantial influence on legislation, greater than their large proportion of United States’ banking resources.”

When you are a private company in possession of the US monetary system and monetary policy, there can be no doubt of the intense pressure and temptation to abuse that power. And these actions and decisions are made out from under the watchful eye of the Legislative branch whose duty it is to actually make these actions and decisions.

PROFITING ON OUR DIME

The final criticism I want to address is the criticism regarding the fact that private companies don’t work for free. This is true also of the Federal Reserve Bank. The Federal Reserve System doesn’t lend our money to financial institutions for free. The Fed charges interest on the monies they lend to financial institutions. Those institutions then lend our money to us at a higher rate and keep the difference. We take that lended money and use it to make purchases, which then converts the loans to capital for someone else.

In here lies an inherent problem. If institutions cease to lend, then our money has no vehicle for disbursement causing a retraction of dollars in our financial system and deflation/recession. This happened in the Great Depression of the 1930s and the Great Recession of now. Ironically, in 2002 Ben Bernanke spoke of Milton Freidman’s charge that the Fed made the Great Depression worse. He said:
“I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again”

On the other hand, when the economy is doing well and there are more stable borrowers, there are also more lenders willing to pay even a higher premium to meet those needs. The result, especially when the Fed chooses not to increase interest rates for political reasons, is high inflation.

But that is a rabbit trail for another time.

The profit in the Federal Reserve System has to go somewhere. Bernanke is not making .5% on every loan in the US. This money goes back to the banks who are compelled to be part of the Federal Reserve System through stock ownership. While this results in redistribution of a portion of the loan interest we pay to stronger banks who own a greater share in the Federal Reserve System, I don’t think this is a great cause for anger or uprising.

Were these funds not being redistributed to banks, they would be redistributed to Congress, giving them a backdoor to increasing revenues and manipulating monetary policy through a sort of Federal Reserve Funds Rate Tax. In our solutions to the constitutionality question of the Federal Reserve Bank, we must be wary of this backdoor option that would become available to our Congress.

THE GOLD STANDARD AND AN ALTERNATIVE

Perhaps the favorite alternative to this whole situation is to return to a system where our money is a note representing gold that is safely held for us by the Federal Government. Gold at one point was the standard for almost all currency in the developed world. The money issued was supposed to be easily converted to gold according to fixed standards. I certainly do not oppose fixing the value of our currency. I do have a couple concerns though:

1. Gold is a commodity. Gold itself does not have a fixed value. Because of this, it can hardly fix the value of a currency. England learned this lesson as they returned their currency to pre-war gold values after suspending the gold standard for World War I. You have probably heard the radio commercials for gold saying that “gold will never be worth zero”. That’s all well and good, but value is relative. GM stock isn’t worth zero right now either. And if you were paying attention a few years back, Real Estate was almost guaranteed to never go down in value. Certainly real estate will never be worth nothing.

2. Values from dollar to gold ratios are not necessarily fixed. As an example, let’s use apple pie. You can think of a stock split if that works better for you. Whether you cut an apple pie into 4 or 16 pieces, you still have one apple pie. What is the value of each of those pieces? It depends. If you have five people buying four pieces of pie, each of those pieces may have a higher value when divided by four than a single one of the 16 slices when sold to those same five people. In the same way, you can still manipulate the system by valuing currency based a half-ounce of gold when it used to be based on a whole ounce, even if you don’t change the actual ratio of dollars to ounces.

I propose the following:

The creation, valuation, distribution, and holding of our currency be returned to our legislative branch

Interest charged on disbursement to banks and lending institutions be fixed at the actual cost of our monetary system with a blind eye to our economic circumstances

Money be coded (perhaps bar-coded) in such a way that it is only created as it can be determined that it has been destroyed. This will fix the number of dollars in our system effectively creating a commodity more stable than gold.

Money creation be based on actual population size and reasonable determination of wear and tear on the materials with which our currency is
created.

http://www.law.cornell.edu/constit
ution/constitution.articlei.html
http://www.hou
se.gov/paul/congrec/congrec2002/cr091002b.htm
h
ttp://www.frbatlanta.org/invoke.cfm?objectid=A97A1
391-0FC5-6239-197BC2DD26215B17&method=display
h
ttp://www.federalreserve.gov/aboutthefed/section5.
htm
http://www.federalreserve.gov/BOARDDOCS/SPE
ECHES/2002/20021108/default.htm
http://www.lond
onexternal.ac.uk/current_students/programme_resour
ces/lse/lse_pdf/foundation_units/econ_hist/echist_
complete.pdf
http://books.google.com/books?id=H
SVakrh8TToC&pg=PA293#PPA294,M1

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1 Response to “The Federal Reserve, The Gold Standard, and The Constitution”


  1. 1 glume February 25, 2013 at 10:41 am

    I tend not to leave a leave a response,
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    and The Constitution | The Conservative Constitutionalist Movement.
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