When the people, through the Constitutional Convention and the votes of the States, adopted Article I Section 8 of the Constitution, they gave Congress the power "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures". By its Currency Act Congress could define the country's money as specific weights and measures of particular metal and authorize the Mint to produce that currency in standard forms. Only Congress could do this. Section 10 of Article I removed from the States any power to "coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts". Only the Coins authorized by Congress would be legal tender.

Note what is omitted from Congress' limited powers and what is not prohibited to the States. The Congress is not given the power to create a central bank, like the Bank of England. The States are free to continue doing what they have been doing. They can authorize the formation of private banks and those banks can issue notes.

By establishing a gold currency standard and not putting it under the authority of a central bank, the Americans were, once again, violating the accepted rules of nations. They were explicitly prohibiting the establishment of any claims to aristocracy or state religion and rejecting the presumption of all governments that they had "sovereign" authority over property. Their idea of a mint coinage currency standard of precious metals was anything but simple. It was rejecting the notion that, like God, "the law" can be immutable and unchangeable. That, of course, was and is the plain meaning of the assertion that legal tender can be a "store of value". It cannot. Whether made of gold (or silver, nickel or copper or any other metal) or paper, money cannot avoid having its price fluctuate any more than anything else that is traded. What a gold standard can do is fix, with absolute certainty, what everyone, including the government itself, must recognize as the national unit of account.

And why was this necessary? Because, if you were going to embark upon the grand voyage towards the wealth of nations, you and foreigners had to be able to agree upon the terms of trade. That is why the Constitution was so specific about requiring Congress to "regulate the Value" of both U.S. and foreign Coin. Both Americans and foreigners had to share a common standard for their dealings with one another in money. Clearly, paper would not do. The colonists, the English and the French had all tried printing their currency. "The law" had done its best to make people accept paper as fully-valued money. But, whenever people were free to say "no", they did. But everyone would accept coin as a common unit of account. And, indeed, they did.

When Professor Cochrane writes: "The idea behind the gold standard is simple", he is ignoring all this history. I doubt he knows much of it. If he did, he could not write this about the 19th century: "If the value of gold rose relative to everything else (deflation), people gained an incentive to spend them, and thereby drive up the prices of everything else. If the value of gold fell (inflation), people needed more of it, so they spent less and drove down other prices. This crucial mechanism linked the price of gold to all other prices."

Nothing "linked" gold to all other prices. The common units of account for international trade - both gold and silver - were the prices. Whether people kept more or less money depended entirely on their expectations: (1) would their creditors pay? (2) would the harvest be "good" or "not so good" or "bad"? (3) would there be a war? (4) would lending at these rates be profitable?

All of the same questions that people now ask about finances were asked then.

There was only one difference: the government had to pay for its credit like everyone else. Now, governments have central banks that can literally make it profitable for governments to borrow money. Yet, at the same time, actual credit for people remains as rationed as ever. No bank anywhere is offering negative interest rates on credit cards.

In the 19th century this brave New World had yet to be invented. If governments wanted something and could not use force to steal it, they had to go to the market like everyone else. They could either offer money or make promises sufficiently sound that they could borrow money; but they had to follow the same rules.

No wonder reformers demanded that the United States have a central bank, like all the other countries. No wonder applying a gold standard to the country's money (and demanding that foreign countries do the same if they wanted us to accept their payments) now seems to every "educated" person a disastrously terrible idea. Professor Cochrane was not, but States were free to establish private banks and those banks could issue notes.

States could not themselves issue legal tender, but they could authorize the creation of banks Actually the idea behind the gold standard us anything but simple; it is so subtle that its defenders and critics alike cannot be bothered to learn its history or understand its function.


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