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The Root of Our Financial Problems

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(Originally published in July, 2008)

If you have been listening to Treasury Secretary Henry Paulson lately (although hopefully not believing what he says), you would think that the housing problem is the root of our financial crisis. He is either wrong or lying.

The root of the problem can be traced to one simple fact: Most Americans simply do not know what a dollar is. Or to put it another way, they do not know what is not a dollar.

If you want to check this basic fact out for yourself, you might experiment with people with whom you do business, such as cashiers in restaurants and grocery stores. Here is the way I do it. When it is time to pay the bill, I ask if they accept Federal Reserve Notes. I tell them that all I have to pay the bill with are Federal Reserve Notes. They will pause, think for a few seconds and then tell me that they only accept various charge cards, checks or cash. I ask them if they are sure, and they assure me that they are. I then suggest that they check with their manager. (If you like a large audience, you can do this on a Friday evening in a busy supermarket). When the manager arrives, I almost always insist that the clerk ask the manager the same question. The clerk often forgets what it was I said I could pay with. When the manager is finally asked the same question, he or she will almost always give me the same negative answer: We do not accept Federal Reserve Notes. I then pull out a folded $20 bill (or any other denomination) from my shirt pocket and ask them to read the words at the top of the bill. The words clearly read: Federal Reserve Note.

What experiments as this will reveal is that most Americans do not even know what they are using for money.

But this is not all that one should know about those pieces of paper people think are dollars. Each piece of paper claims to be a note at the top, and claims to be a certain number of dollars at the bottom. Obviously, a note for a thing cannot be the thing. If a person had a note for one banana, he would not try to eat the paper. He would want to exchange the piece of paper for the real thing.

It gets even worse. The “notes” are not even legal notes. To be a legal note, the instrument must have a promise to pay by the signer (the payer), a payee, a definite sum of money and a due date. Prior to 1964, the Federal Reserve Notes (one-dollar bills and other denominations) contained all these elements. For example, at the bottom of the note, (just above the amount), the note read:

WILL PAY TO THE BEARER ON DEMAND

This phrase contained the promise (Will Pay), the payee (the Bearer) and the due date (On Demand).

In the upper left hand portion of the bill, it also read: THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE, AND IS REDEEMABLE IN LAWFUL MONEY AT THE UNITED STATES TREASURY, OR AT ANY FEDERAL RESERVE BANK.

Today’s paper currency contains no promise to pay, no payee, and no due date. It also no longer states that it is redeemable in lawful money. The lawful money of the United States is gold and silver coin. (Real money by definition is metallic money with intrinsic value.) Prior to 1964, a person could take a one-dollar note to Federal Reserve Bank and receive one silver coin know as the silver dollar. Or he could take a ten-dollar note and receive ten silver dollars.

However, if you take a Federal Reserve Note to a Federal Reserve Bank for redemption today, all they will give you is more of the same kind of paper. According to 12 U.S.C. 411, the law still requires redemption in lawful money. But just because the words redeemable in lawful money were removed, the note for a dollar did not magically become the dollar, just like no change of wording could change the note for a banana into the banana. Congress has also never declared Federal Reserve Notes to be dollars.

But what is a dollar? We all use the term dollar whenever we discuss the price of things we buy or sell and when we discuss debts. Yet, few people can properly define the term. When trying to guess what a dollar is, some people suggest it is a unit of measure. But that is not a sufficient answer. A unit of measure is constant and certain. An inch measures a certain distance. A pound constantly measures a certain weight. A quart measures a certain volume. In response to the suggestion that a dollar is a unit of measure, I respond by asking, If a dollar is a unit of measure, what does it measure? To this question, they have no answer.

The law states that United States money is expressed in dollars:

31 U.S.C. 5101: Decimal system

United States money is expressed in dollars, dimes or tenths, cents or hundredths, and mills or thousandths. A dime is a tenth of a dollar, a cent is a hundredth of a dollar, and a mill is a thousandth of a dollar. ”hundredths,”

But who determines what a dollar is? Can Congress determine what a dollar is? No, they don’t have the authority to do so. What a dollar is today is what it was at the time the United States Constitution was written. The term dollar is used in the United States Constitution twice: once in Article 1, Sec. 9, cl. 1 and once in the Seventh Amendment. The United States Constitution is a document of limited powers. Congress doesn’t have the authority to redefine terms used in the document to suit its own desires.

“Congress cannot by any definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which alone it derives its power to legislate, and within whose limitations alone that power can be lawfully exercised.” Eisner v. Macomber, 252 U.S. 189 (1920)

The President of the United States means today what it meant then. It does not mean longest serving senator from Tennessee. Congress could define ‘Firearms’, ‘Gross Income’, or even ‘Federal Reserve Note’, but it doesn’t have the authority to define ‘Arms’, ‘income’, ‘dollars’, or even ‘excise’. Instead what the courts have done is use the general dictionaries.  I certainly found that to be true when the courts dealt with the matter of taxation.

The founding fathers would have not used the term ‘dollar’ if they didn’t know what a dollar was and what its fixed value was. The Spanish milled dollar was the standard coin used in trade and business transaction in the colonies. This coin contained a certain amount of pure silver, minus any wear and tear the coin might have had. The Constitution states that: Congress shall have the power ‘to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures’; Article 1, Sec. 8, cl. 5.

In Article 1, Sec. 10, cl. 1, it states that No State shall among other things, make anything but gold and silver coin a tender for payment of debt.

It would not be possible to build a house if a foot was not a set standard of measure just as it would be impossible to measure the weight of apples if a pound was 16 ounces one day and 12 ounces another day.

Since the dollar had been accepted as the official money unit of the United States, exact accuracy was needed in determining the value (the amount of pure silver) in a dollar (money unit). After some determinations, Congress defined the dollar as being 371.25 grains of silver. It then regulated the value of gold coins at 24.75 grains. This means you could exchange 15 grains of silver for every grain of gold. The Coinage Act of 1792 gave the new nation three gold coins (the Eagle or $10 gold piece, Half Eagle and Quarter Eagle); five silver coins (the Dollar, Half Dollar, Quarter, Dime (originally spelled Disme), Nickel (or half Disme); and two copper coins (the Cent and Half Cent). This is Constitutional money. Moreover, the Act provided all citizens access at the Mint to coin their gold, silver, and copper (free coinage) and established any debasement of the coinage as a capital offense! One complaint about gold and silver coin is that it is burdensome to carry around. It is entirely possible to use legal notes issued by a bank which are fully redeemable in lawful money.

Money based on gold and silver prevents arbitrary inflation and deflation. Today’s money is not based on gold and silver. It is simply fiat money. When you hear about the Federal Reserve increasing the money supply, that doesn’t mean that bankers are mining for gold and silver. They operate on fractional reserve banking. Think of it like creating money out of thin air. This is where the national debt comes from. It is also important to know that the Federal Reserve Banks “are not federal instrumentalities for purpose of the FTCA, but are independent, privately owned and locally controlled corporations.” Lewis v. United States, 680 F.2d 1239 (1982)

I remember when I was a kid, my grandfather said at one time he could have bought a car for $1,500, a house for $10,000 and feed a family of five on about $50 a month. I wondered why it seemed so cheap then. Only when I started to understand the money issue a few years ago that it all started to make sense. Alan Greenspan summed up the situation quite nicely: “Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.”

Written by chrisforliberty

June 28, 2010 at 6:39 pm

Posted in Banking/Money

One Response

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  1. This great site is indeed stuffed with important information. Outstanding!

    Ellis

    December 20, 2011 at 8:12 am


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