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Gold versus Paper

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Federal Reserve Chairman Ben Benankeby Jacob G. Hornberger

In a recent lecture to an undergraduate class at George Washington University, Federal Reserve Chairman Ben Benanke, not surprisingly, blasted the gold standard and praised paper money and the nation’s central bank, the Federal Reserve. He said that it would be impractical to return to the gold standard and that the Federal Reserve is necessary to address economic crises.

Unfortunately, Bernanke’s pronouncements are nothing but standard statist monetary propaganda.

Contrary to popular misconception, the gold standard didn’t involve some sort of exchange rate between gold coins and paper money. Instead, the gold standard simply meant that gold coins and silver coins were the official money of the United States.

Thus, the gold standard didn’t involve some sort of exchange rate between paper dollars and gold coins because there were no paper money (with some periodic exceptions at the state level). I repeat for emphasis: the gold standard simply meant that the American people had chosen gold and silver coins, rather than paper money, as their official money.

From the inception of our nation, our American ancestors rejected paper money in favor of gold and silver coins. The Constitution expressly delegated to the federal government the power to coin money and regulate the value thereof. It’s obvious that the term “coin” refers to coins, not to the printing of money. After all, one does not coin paper money. One prints paper money. The Constitution did not delegate to the federal government the power to print paper money.

To make the matter even clearer, the Constitution expressly prohibited the states from making anything but gold and silver coins the official money for people to use in the states. Moreover, the Constitution expressly prohibited the states from printing paper money (i.e., from emitting bills of credit, a term that meant paper money).

The intent to have gold and silver coins as America’s official money, as expressed in the Constitution, was demonstrated soon after the federal government was called into existence. The Coinage Act of 1792 established the gold and silver coinage of the United States.

So, where did U.S. bills and notes come into play?

The Constitution also provided the federal government with the power to borrow money.

So, when the government borrowed money, what was it borrowing? It was borrowing gold and silver coins, which was the nation’s official money. That indebtedness was reflected by bills and notes promising to repay the debt in gold and silver coins.

So, to recap: the money is gold and silver coins. The government borrows gold and silver coins and promises to repay the money (gold and silver coins) to the creditor. That’s what bills and notes were all about — promises to pay money, and the money was gold and silver coins.

The problem was that as the U.S. government entered the era of the welfare-warfare state, federal officials wanted to spend lots more money than when the government was a small, limited-government republic. To do so, federal officials could raise taxes, but that usually makes people angry. They could increase borrowing, but they knew that ultimately the debts would have to be paid back (in gold and silver coins), which would, again, mean higher taxes.

To spend to their heart’s content, the statists needed a way to change the official money of the United States from gold and silver coins to irredeemable paper money. In that way, they could print bills and notes as much as they wanted without having to repay anything to anybody.

They got their chance during the Great Depression, which even Bernanke now acknowledges was caused by the Federal Reserve, which ironically had been brought into existence in 1913 supposedly to stabilize the monetary system. Don’t forget, after all, that U.S. officials for decades falsely told students and everyone else that the Great Depression was caused by the failure of America’s free enterprise system when, in fact, it had been caused by the Federal Reserve.

Seizing on that crisis, President Franklin Roosevelt ordered an abandonment of gold and silver coins as the official money of the United States. That’s right — the system that the people of the United States had established through the Constitution was abandoned and changed without even the semblance of a constitutional amendment.

Even worse, Roosevelt ordered the nationalization and confiscation of everyone’s privately held gold. What had been the official money of the American people for more than 100 years now became a federal felony to own. And make no mistake about it: In the land of the free and home of the brave, if FDR and his cronies caught any citizen with gold, they would prosecute him and do their best to send him to jail.

And then they made paper bills and notes the official money. Yes — the bills and notes that ostensibly promised to repay money (i.e., gold and silver coins) to people were now substituted as the new money, and they now promised to pay nothing.

Examine a dollar bill in your billfold. Notice at the top it says “Federal Reserve Note.” But a note is a promise to pay something, right? What is the Federal Reserve Note promising to pay? Nothing, absolutely nothing. It’s now nothing but a sad reminder of a bygone era, one in which the U.S. Constitution established a monetary system based on gold and silver coins, a system that was changed without any constitutional amendment.

As we have learned, the new paper money system enabled public officials to spend and borrow to their heart’s content for the welfare-warfare programs they were implementing throughout the 20th century and into the 21st century. All they had to do was continue printing the paper money to pay for it all, a process of continuous debasement of the money. It was a nice way to secretly and surreptitiously plunder and loot the citizenry, the same way that governments throughout history have done.

That’s what the Framers were trying to avoid with their constitutional monetary system. They had had experience with paper money. They knew what politicians do with paper money. That’s what the pre-Constitution Continental Currency was all about — the currency that produced the term “Not worth a Continental.”

Today, a bag of silver coins with a face value of $1,000 sells for around $20,000 in irredeemable paper money. It’s just a stark reminder of what the statists have done with their unconstitutional, immoral paper-money, Federal Reserve scheme.

Jacob Hornberger is founder and president of the Future of Freedom Foundation.


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