Chapter 4, Legal Counterfeit
Let us imagine the formation of a political state calling itself Pretense. and declaring the national monetary unit to be the Pretensia ...
Everyone knows that it is a crime to counterfeit bills and coins and that governments, with the cooperation of banks, are constantly vigilant against those who practice this nefarious art. What is not generally known - even to the perpetrators - is that governments and banks unconsciously cooperate in legal counterfeiting.
It has been seen that, under the natural law of money issuance, governments cannot qualify as issuers, because they are not in the necessitous situation of personal enterprisers. They do not barter, and therefore have no need to escape from barter. They do not bid for money in the open market with goods or services. Their taxing power relieves them entirely from selling; they take merely by taxing. Hence, when they are admitted to the issue power, their issue cannot be a genuine promise to deliver value in trade. It must of necessity be counterfeit, regardless of any statutory laws intended to validate it.
This legal - illegal practice is innocently perpetrated, in the United States, not by the issuance of bills and coins, but through the loans made to the Government by commercial banks. As we have seen, to borrow money from an individual, private corporation, savings bank, building and loan association or any lender other than a commercial bank, means to reduce, by the sum borrowed, the monetary resources of the lender. Hence, no increase in the total money supply is produced. To "borrow" from a commercial bank, however, implies something quite different. When one borrows from such a source, no reduction in the capital funds of the bank ensues, nor is anyone's deposit reduced. The only effect is that the "borrower's" balance is increased by the amount of the "loan." The total money supply is increased the moment checks are drawn against this higher balance and accepted in trade.
All money is created through "borrowing" from commercial banks. When carried out by personal enterprisers, this practice is legitimate and essential. But when governments follow this practice, it becomes illegitimate and is infinitely more destructive that is counterfeiting by private individuals. The presence in the circulation of these counterfeit units reduces proportionately, by a blending process, the power of all units. No increase is produced in the money supply; the increase is solely in the number of units. From failure to discriminate between money issued through bank credit by personal enterprisers and by governments, has come an inflationary mixture of true and false money that threatens the social order.
Legal counterfeiting is by no means a modern invention, though it is practiced today on a much larger scale than ever before. Ever since the beginning of money, governments have found various ways of surreptitiously taxing their citizens and subjects through spurious money issues. With the advent of paper money, the opportunity was expanded and extensively utilized. Through the bank check, which is the latest evolutionary step in monetary instruments, has come the opportunity to practice legalized counterfeiting on the grandest scale and in the most subtle manner - indeed so subtle that even government officials are not conscious of it. This Open Sesame to weaken the money in circulation through dilution by counterfeit issues exists because of the popular belief that checks are not money. In fact, however, they are the primary form of money in use in the United States today. This becomes obvious when one stops to consider that currency, which most people consider to be the principal form of money, is usually obtained by cashing a check.
Lest readers gain the impression that legal counterfeiting and the introduction of various pieces of window dressing in our monetary legislation to justify it indicate malicious intent on the part of politicians, let it be clear that the practice arises from a universal misconception of the source and essence of money, a misconception which blinds legislators as well as the people they undertake to serve. Money cannot be governed by man - made laws; it operates solely by natural law. Under this natural law, governments cannot be vested, either by usurpation or by delegation, with the money issuing power. Efforts to legislate this power result in legal counterfeit as distinguished from illegal (the one is amoral, while the other is immoral.) It should also be understood that the practice of legal counterfeiting is indulged in all over the world, and to a greater degree abroad than at home. That is why the dollar is as yet the strongest monetary unit in the world.
History of American Legal Counterfeit
All of the thirteen American Colonies legalized the issuance of 'money' by government, and all thirteen units of account passed out into thin air through total inflation - the inevitable result when counterfeiting is carried to extremes. Following these Colonial experiments came that of the Continental Congress, from which sprang the continental, object of the reproachful phrase, "not worth a continental."
It is not surprising that, with these horrible examples of legalized counterfeit before them, the delegates to the Constitutional Convention resolved to withhold from the federal Government this perverting power. The question arose when Article 1, Section 8, Paragraph 5 was up for discussion. This provision, as adopted, reads:
Congress shall have the power to coin money, regulate the value thereof and of foreign coin, and fix the standard of weights and measures.
The clause as first presented included the words, "emit bills of credit." After debate, the delegates voted to strike out these words, and thus the Government was denied the power to issue currency. In those days currency was called bills of credit, and these were the only instruments of legal counterfeit, the checking system not yet having come into practice.
The clause, as enacted in the Constitution, authorized the Government to "coin money," but not to issue it. It meant that the Government was empowered to set up a mint to stamp out coins from metal brought to it by private owners. The coins minted were not Government property; they remained the property of the citizen from whose metal they had been coined. He was thereafter entitled to issue these coins into circulation bearing the Government's guarantee of weight and fineness. To "regulate the value thereof" meant to define what constituted a dollar and its fractions. It did not mean to regulate the power thereof, as this would involve price fixing, an impossible task.
(For authorities on the above report of the action of the constitutional Convention, consult Max Farrand, Records of the Constitution, Volume 2; E. H. Scott, Madison’s Journal of the Constitution; Charles Morris, Making the Constitution.)
For the first seventy years of the Republic, the intent of the framers of the Constitution was respected. During that time, no currency (bills of credit) was issued by the Government; business was conducted with private bank notes and with gold and silver coins minted by the Government for private owners of the metal. The Civil War emergency, however, induced Secretary of the Treasury Salmon P. Chase to recommend to Congress the issuance of United States notes, popularly called "greenbacks," and Congress obliged. This was the first legalized counterfeit issued by the United States Government, and it was frankly recognized as unconstitutional. It was justified on the ground of national emergency by Chase, although later, as Chief Justice of the Supreme Court, he condemned it in a majority report as unconstitutional. By a still later decision, however, with Chase this time in dissent, the Court sanctioned the practice and thus read into the Constitution what the founders had deliberately voted to keep out.
(See Hepburn vs. Griswold (1870) Wallace 603; Know vs. Lee (1871) Wallace 457)
The above quoted Article 1, Section 8, Paragraph 5 is the cause of popular misunderstanding. It is generally believed that this is the money enabling clause. However, except for the Civil War instance cited and some minor issues of silver certificates issued since, the great evil of legalized counterfeit has not sprung from this clause. The power comes from another clause that is never suspected because of its innocent wording. The enabling clause is Article 1, Section 8, Paragraph 2:
Congress shall have power to borrow money on the credit of the United States.
This paragraph opened the way for the modern method of counterfeiting that is far more insidious and dangerous than the "printing press" method that Paragraph 5 (the first quoted paragraph) undertook to exclude. That a government precluded from the issue power should, as an alternative, be permitted to borrow, seems quite logical and consistent, and no harm could come from the exercise of the borrowing power but for the double meaning of the word, "borrow."
The bank borrow-creating process is the modern form of "printing press money" which the framers of the Constitution endeavored to preclude. Under this modern method the Government has some bonds printed which it delivers to commercial banks, receiving therefor a deposit credit. Subsequently it writes checks against the credit thus established and "buys" what it wishes. The checks, in turn, are either cashed or deposited by the recipients, and in either case, they increase the dollar supply. Since all bank deposits are subject to conversion into currency, it may be seen that the public demand is the gauge of the amount of deposits that are converted into currency. In response to this demand, the banks call upon the Government to supply the needed currency, and thus, by a roundabout method, we reach the printing press again. If the Government resorted to the printing press directly to print and circulate bills, there would be a loud outcry against "greenbackism " and "printing press money." But by circumvention the unlawful issue of currency becomes lawful, and the legalized counterfeit permeates all bank deposits and currency, with the people quite unaware.
A strong case might be made against the Constitutionality of the Government's practice of "borrow-creating" on the ground that the Constitution makers could not have had this in mind when they wrote the word borrow into the Constitution. The practice of commercial bank borrow-creating had not come into use in their time. Their complete unconsciousness of this modern method is borne out by the debates in the Constitutional Convention. More fundamental, however, is the fact that neither constitution nor legislation can qualify a government to be a money issuer. As stated, money issuing power springs only from natural law, and this law disqualifies governments. Had the Constitution makers undertaken to invest Government with the money-issuing power, it would have had the same enabling power as if they had declared that it should have power to regulate the movement of the planets.