by Ron Paul
The sad part, when graft, corruption, and financial crisis results, is what gets blamed. Usually it’s the free market, and the problems become an excuse to further inflate and enlarge the government while undermining the free market, always serving the special interests. The lack of a moral compass in our entrepreneurial class and the vague understanding of economics have set the stage for the nationalization of the American free enterprise system. It’s at our doorstep.
With every passing year, especially since the 1930s, the market economy has shrunk and the government-managed and -subsidized economy has grown. Few care, because our credit has been good and the dollar was perceived as strong; our prosperity lingered as our deficits exploded.
Things have now changed. The loss of the moral principle that defends free markets and sound money has completely eroded the foundation of our economic system. The failure of the economy and the loss of the moral foundation have now set the stage for nationalization. Do the auto executives come to Washington to demand freedom—freedom to contract labor, freedom to retool when they please, freedom to choose the cars they build, freedom from central economic planners regulating their every move, freedom to make profit and keep it, freedom to fail? Do they demand a sound currency that would rectify the international trade imbalances?
No, they come to Washington to demand that innocent Americans bail them out and protect a system that deserves no protection. They never come to demand that the government protect contracts rather than insisting on the government rewriting them. They beg to be taken over, nationalized, partnered with, to obey a car czar and sacrifice every bit of self-respect that they might retain.
There’s a lot of blame to go around for bringing us to this point: the Fed, the Congress, the courts, the leeches. But the most abhorrent is the failure of the giants of industry to defend free markets. They are willing to be junior partners with government, believing they have sold out nothing and that better days lie ahead. They believe that they will once again be securely rich and enjoy the fruits of their labor and the benefits of freedom—if they can just get a bailout. Fascism is not on their mind. They rationalize that at times the markets fail and it’s legitimate to get a little help from government. They benignly call it a bridge loan to tide them over. But their selfish, narrow greed and distorted concept of the government-business relationship in a free society have set the stage for a sea change in American political structure.
On the House floor, I called it “nationalism without a whimper,” and the corporate business community is begging for it. As far as I’m concerned, the nationalization of industry, while retaining private ownership in name only, is just another word for fascism. Gross dishonesty exists today, and if that doesn’t include everyone, try denial by those who should know better.
Harry Truman, by using an executive order to take over the steel industry during the Korean War, was much more honest with his plans for nationalization. Fortunately, the courts reversed that course of action. Today, there is no principled opposition to the corporate bailouts and the Fed’s trillions of dollars of new credit and the takeover of insurance, mortgages, medical care, banks, and the auto industry. The arguments have only been over amounts, financial vehicles, and which political group gets to wield the economic power. If there is no moral argument against the economic takeover of America, there will be no resistance to the dictator who rules over our lives with an iron fist. I already see compulsory national service for all eighteen-year-olds as a program that Americans will be expected to embrace for patriotic reasons.
Over the years, I often wondered how the business leaders of Germany and Italy could have gone along with fascist dictators. Didn’t they know how it would end? I’m sure many hoped for the best, and making money in partnership with government was a philosophic position acceptable to both. Totally naive, they believed that they would maintain control over their own destiny.
Once the principle of the use of force by government to run the economy is endorsed, it is conceded that the government can run everyone’s life as well. It didn’t take long for fascism to evolve from the business partnership that gave us nationalization to uncontrollable militarism. The idea of a car czar alarms only a few.
Ever since the first business-government partnership of the nineteenth century, there has been a tendency for these anti-market institutions to spread. The seeds were sown a long time ago, as far back as the planning state of World War I, for fascism to thrive in America. They are quickly maturing into a dangerous political and economic crisis. If we are not vigilant, we will see fascism thrive while liberty is sacrificed.
Justice Louis Brandeis reminded us that crime is contagious, especially when the government commits it. When government breaks the law and defies the Constitution, it sets the standard that makes it much easier for society to do the same. When governments and politicians show contempt for the law, it’s a signal that everyone else can do it as well. The real irony is that when the individual lives within the Constitution and tries to hold government officials responsible, they become the law-breakers. If a situation like this is not rectified, it is destined to lead to violence. The wording on a plaque (which is really a bumper sticker) on my congressional desk reminds every visitor of the moral crisis we face: “Don’t Steal, the Government Hates Competition.”
CHAPTER 12
THE CONSTITUTIONAL CASE
The Constitutional Convention of 1787 was supposed to be limited in scope. The mandate from the states was to amend the Articles of Confederation. Need for free trade among the states and a sound national currency was high on the agenda. Although there was no admission, by some, the original goal was to discard the Articles of Confederation and write an entirely new constitution.
The Federalists wanted a more centralized and powerful government, complaining that Congress lacked power to regulate domestic affairs, and to collect taxes for national purposes. The anti-Federalists, such as Patrick Henry, worried of the danger of eroding liberty if a centralized government were approved.
Once the delegates were in Philadelphia, plans for changes other than interstate commerce and a national currency quickly emerged. Those who were concerned about the loss of liberty were given the Bill of Rights for additional protection against the encroachment of the federal government on the states.
If the original intent of the Constitution had been followed, we wouldn’t be where we are today. The protection against centralized government failed because of too many loopholes in the Constitution—but more so because, over the years, we’ve had too many people in and out of government demanding that government should guarantee security rather than liberty.
The authors of the Constitution were very much aware of the dangers of inflation and the need for commodity money. Destruction of the continental dollar was vivid in their minds. The journals of the Continental Congress noted that “paper currency… is multiplied beyond the rules of good policy. No truth being more evident, than that where the quantity of money… exceeds what is useful as a medium of commerce, its comparative value must be proportionately reduced.” Further, inflations “tend to the depravity of morals, and decay of public virtue, a precarious supply for the war, debasement of the public faith, injustice to individuals, and the destruction of the honor, safety, and independence of the United States.” 1
The Constitution is clear about no paper money. Only gold and silver were to be legal tender. Since the states caused themselves harm when they issued their own paper money, the states were prohibited as well from issuing paper currency under the Constitution. Article I, Section 10: “No state shall… make anything but gold and silver coin a tender in payment of debts.” So there you have it, plain and simple: paper money is unconstitutional, period.
The Constitution is silent on the issue of a central bank, but for anyone who cares about its intent, the Tenth Amendment is quite clear. If a power is not “delegated to the United States by the Constitution,” it doesn’t exist. There is no
mention whatsoever of a central bank being authorized. Even if a central bank were permissible, it could not legally repeal the legal tender mandate for gold and silver coins.
A central bank, theoretically, could exist with a gold standard, but a gold standard doesn’t need a central bank to manage it. Without this need, the motivation for having a central bank has to be questioned. It’s not difficult to come to the conclusion that the purpose of a central bank, when a gold standard exists, is to get rid of it.
During the convention, the issue of emitting bills of credit (i.e., convertible paper money) was fully debated and defeated. Neither the U.S. government nor the states would be permitted to issue paper money, and only gold and silver would be legal tender. Because of the runaway inflation of the continental dollar in the 1780s and the Founders’ disdain for paper, no paper money was officially issued by the U.S. government until the Civil War.
The prohibition of paper money was for convertible certificates. Even this was too great a temptation to be placed in the hands of government. Fiat money was such an outlandish idea that the Founders didn’t discuss it. What would they think of our creating trillions of dollars out of thin air and not even bothering to print the money? Today it’s all done by computers without the slightest hint of oversight by the Congress.
The argument over a central bank started early on; the Federalists supported it and the anti-Federalists opposed it. It was another instance of a Hamilton versus Jefferson argument. Hamilton won the argument early on, and the First Bank of the United States was established in 1791. It was left to expire in 1811, by Jefferson, who was a champion of hard money. The War of 1812, with its high debts and extravagant spending, caused financial problems and deficits bad enough that we again faced the choice between centralization and liquidation. The choice for politicians is an easy one: short-term fix over long-term health. Madison, in 1816, created the Second Bank of the United States. The constitutional argument over this bank in 1819 was of great significance. The seminal decision in favor of central banking, in McCulloch v. Maryland, not only was a major setback for sound money; the rationale by the Supreme Court for its decision did irreparable harm to the Constitution.
One side argued, as Jefferson did, that the Constitution gave no specific authority to Congress to establish a central bank. The other side, the majority in the case, amazingly claimed that Congress had all the powers it wanted except for those specifically denied by the Constitution. The whole idea of Article I, Section 8, and the Tenth Amendment was totally ignored. If they are correct in this interpretation, there would have been no purpose whatsoever in putting these provisions in the Constitution.
It was agreed that the “necessary and proper” clause of Article I, Section 8, permitted any law the current Congress thought “necessary and proper.” The fact that the “necessary and proper” clause was for exercising enumerated powers—only those powers explicitly granted by the Constitution and, in this case, those found in Article I, Section 8—was ignored.
This gross distortion and undermining of the Constitution by McCulloch v. Maryland has done great harm throughout our history and explains how we’ve ended up with the size of government we have today. It not only opened wide the doors for the Second Bank of the United States, it set the legal stage for the establishment of the Federal Reserve in 1913.
Thus, the Supreme Court established the principle of “implied powers,” a completely subjective notion. No longer would there be much chance of paying heed to Jefferson’s admonition: “Let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution.”
In reality, the Constitution itself is incapable of achieving what we would like in limiting government power, no matter how well written. The morality of the people and the character and wisdom of our elected officials are the only things that count. Nevertheless, even with these limitations, we must do our best to “bind them down from mischief” with the rule of law lest the “chains” be used to bind down those of us who oppose the wicked use of government power.
The principle of implied powers, so clearly established in 1819, opened Pandora’s box and unleashed the steady erosion of our liberties. This has been especially true in the past century.
We lost twice on McCulloch v. Maryland and continue to suffer from both losses. This ruling set the stage for the Federal Reserve Act of 1913 and redefined the idea of “necessary and proper.” The Supreme Court has never been a friend of sound money and has rarely been a protector of the Constitution.
The Supreme Court supported making greenbacks legal tender during the Civil War period using the same arguments as Chief Justice John Marshall did in McCulloch v. Maryland. The courts have almost always defined legal tender as whatever Congress wanted—never adhering to the Constitution’s clear mandate that only gold and silver coin be used as legal tender and recognizing the prohibition against the “emitting of bills of credit.” I am doubtful the courts will ever be helpful to us in restoring constitutional money and ridding ourselves of the Federal Reserve System.
In the case of Hepburn v. Griswold in 1869, the Supreme Court ruled wisely and found the legal tender laws unconstitutional. “It has not been maintained in argument, nor indeed would anyone, however slightly conversant with constitutional law, think of maintaining that there is in the Constitution any express grant of legislative power to make any description of credit currency a legal tender in payment of debts,” the court ruled. “An act making mere promises to pay dollars a legal tender in payment of debts previously contracted, is not a means appropriate, plainly adapted, really calculated to carry into effect any express power vested in Congress, that such an act is inconsistent with the spirit of the Constitution, and that it is prohibited by the Constitution.”
But this ruling would not be allowed to stand, and one year later was reversed by another Supreme Court ruling in Knox v. Lee (1870), in which the majority wrote, with evident disregard for the actual Constitution, “It would be sad, indeed, if this great nation were now to be deprived of a power so necessary to enable it to protect its own existence.”
But here William Graham Sumner is exactly right: “The legal-tender decision did as great a wrong as the Dred Scott decision, and the latter instance shows us that it is not useless to discuss a constitutional question, even after the court decided it. It will not probably take a war to overthrow the principle of the legal-tender act, but it may take a national bankruptcy.” 2
The Supreme Court was every bit as destructive in dealing with the confiscation of gold in 1933 and in the support it gave for the cancelation of all gold contracts. The government and private issuers of gold bonds were not required to pay in gold. The idea of the government following contracts and enforcing contracts was buried, especially when it comes to money.
The lack of respect for the Constitution even in the nineteenth century set the stage for the Federal Reserve Act of 1913. Fear, misinformation, and ignorance allowed government to ram bad policies down the throats of the American people. This is not unlike giving the president authority to go to war and to bail out those least deserving help in an economic crisis. The rationalization that the state’s interest supersedes the interests and the rights of the people is embedded in the arguments as to why the American people had to go along with those who hate commodity money and love central banking.
The Fed was established as a result of the public and banking clamor for an elastic currency, and an elastic currency is nothing more than one that can be arbitrarily increased in volume at the discretion of the monetary managers. Sometimes they argue over who exactly will have the authority to do so, the central bank or Congress or private banks themselves. Increasing the supply of money and credit is the proper definition of inflation, meaning that when the demands were heard for an elastic currency, all they were looking for was a legal right to inflate the currency for the benefit of whatever special interests they were concerned for at the moment.
Noble intentions are always used to justify the inflation, but the real reasons are far more sinister. Those who get the control over the money are the beneficiaries, not the people as a whole.
Economist John Maynard Keynes, before he became the champion of inflation, wrote quite correctly of the grave danger of inflation. Like Greenspan, he changed his tune as the years moved on. Keynes stated in his book The Economic Consequences of the Peace: 3
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
His Tract on Monetary Reform from 1923 is also clear:
A government can live for a long time… by print[ing] paper money. That is to say, it can by this means secure the command over real resources—resources just as real as those obtained by taxation…. A government can live by this means when it can live by no other. It is the form of taxation which the public finds hardest to evade and even the weakest government can enforce, when it can enforce nothing else. 4
Marx’s Fifth Plank of the Communist Manifesto mandates a strong central bank monopoly. This was seen as necessary to maintain power over the entire economy and to protect against the encroachment of capitalism.
The Federal Reserve Act of 1913 established the Federal Reserve System to supervise the now fully elastic and easily debauched currency by the unconstitutional powers given to it. Not only would the Fed be able to create money out of thin air, banks were participating and benefiting in the process through fractional reserve banking.