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As many of Advisor Perspective’s readers and contributors can testify, direct experience with the laws and regulations governing fiduciaries often leads to the conclusion that these rules were of, by and for the financial interests of the lawyers who made them. That legislation can be biased in favor of full employment for the legal profession is hardly surprising; after all, the large majority of elected officials throughout American history have been members of the Bar. Some writers have even suggested that the ultimate purpose of the law is to look out for the lawmakers. Congress was, in Mark Twain’s opinion, the only “distinctly native American criminal class”.
Yet, where the American political economy is concerned, far, far greater damage has been done not by crooked legislators but by the persistent efforts of thoroughly honest lawyers. In three centuries of growth and development before World War I, the former colonies of the Dutch, English, French and Spanish empires combined financial innovation and enterprise to create a world of faster, cheaper and more reliable commerce. What remains largely hidden under the last century of compulsory education is how much that economic development depended on the rule of law that was not made by lawyers.
The attorneys who attended the Constitutional Convention in Philadelphia in May 1787 had been educated in the common law, either in the colonies or at the Inns of Court in London. However, precisely because they were successful revolutionaries, the lawyer delegates were determined to produce, on ink and parchment, a complete blueprint of the formal specifications for their new republican government. (It helps to remember that, in 1787 as much as in 1775, to be a radical was to be “republican”. That is why Jefferson and his fellow Virginians organized themselves into a political party as Republicans.) The lawyers had already done this once before, with the Articles of Confederation; what brought everyone to Philadelphia was the near unanimous agreement that a redraft was needed.
During and immediately after the war, Congress had authorized and issued nearly half a billion dollars in legal tender: $207.8 million in currency and approximately $250 million federal certificates – the IOUs issued by the Continental Army when it requisitioned supplies (the exact figure is unknown). Contrary to the story that Alexander Hamilton’s national debt bailed out the states, the legislatures of the former colonies had already assumed more than half of the total war debts. They had voted to accept the federal certificates in payment of their own state taxes. They had done so because those certificates were the only official promises to pay that had any exchange value against coins. The continentals – the currency directly issued by Congress – had evaporated into nothing. Even the legal expediency of a mandated default had failed. Congress had passed a law authorizing a formal exchange of bills in the ratio of 40 old to 1 new; but the even new money had been discounted to nothing.
Commerce itself had not died. People were still ready, willing and able to deal in credit. They had simply abandoned all belief in the credit of the national government. As a government the Congress of the former colonies – they called themselves the Confederacy of Perpetual Union – they found themselves beyond legally bankrupt. In the judgment of the market, they had forfeited the right that the common law had given to every sovereign – the authority to issue currency.
The lawyers, being lawyers, had not lost confidence is their belief that legislatures could make laws into money. Alexander Hamilton’s plan was to establish a central bank like the Bank of England; James Madison and Edmund Randolph’s Virginia plan omitted all mention of any federal bank, but assumed Congress could, once again, print paper that would be legal tender. Whatever their disagreements on the details, they were united by a shared understanding that money was a thing created by the authority of the state. Debates would continue about who would have the final sovereign power, but there would be no doubt about ultimate authority of lawyers and legislatures. As Henry Clay would later remind Congress, money was and always would be whatever the lawmakers decided it was.
Yet, in little more than two hours on the afternoon of August 16, 1787, the lawyers’ shared assumptions about legislatures’ financial sovereignty was rudely and thoroughly discarded. In their place, the Convention adopted the amalgam of ideas that George Washington had on questions of national currency, banking and credit. Gouverneur Morris presented the text for the portions of Section 8 of Article I that dealt with the national legislature’s financial authority:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts ….
To borrow money on the credit of the United States; ….
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
The following month, the Convention would adopt, in Section 9 of Article I, the limits on the states’ legal financial authority: “No State shall … coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts”.
The lawyers at the Convention still had confidence in legislated money and the government’s sovereign rights of issue; but no one else did.
Colonists had only been able to survive the financial hardships of the Revolution by actively discounting all possible forms of credit and payment against the only kind of money that was not under the control of lawyers.
As the yardstick for measuring Continental currency, federal certificates, private and public bills of credit against one another, Americans had used the gold coins that the British and then the French armies brought with them and the scarce pieces of silver coinage exchanged with or stolen from the Spanish. Almost no one got their hands on more than a few coins, but nearly everyone in America had learned how to calibrate swaps of paper using specie as the unit of account.
In the late 18th century and the century that followed, foreign visitors and snobs of all nationalities would complain about the Americans’ “money madness.” “All they thought about was money,” was a familiar refrain. What, in fact, they were describing was not greed but the general ability of people to read and count. That was a completely remarkable combination of abilities in a world where only one in a 100 people could read letters or characters and Arabic numerals. For the elected representatives of such people, in that hot summer in Philadelphia, the question about a national currency was not “why limit legal tender for the states and the United States to foreign and domestic coins?” Given the nation’s history with legislated currency, only a lawyer could still consider such an inquiry a serious question.
September 17 became the first nationally celebrated holiday for the United States. That day – Constitution Day – was when in 1787 when the delegates to the Convention ratified the text of what was, for most people then living, a document that celebrated the triumph of common sense over the logic of lawyering. Congress, the state legislatures and citizens (but not women and slaves) would have equal rights to make promises to pay, and none would have the sovereign authority to define what would be paid. In the casino of popular commerce everyone – the people, the states and the national government – would be free to save and spend and discount; and everyone, even lawyers in legislatures, would use the same units of account – the foreign and domestic coins that Congress specified as measurements in dollars.
Only gold and silver coins would be legal tender, throughout the entire country; and Congress’ sole power would be to decide what particular weights and measures of the metals would be coined as various denominations of the United States dollar and what foreign coins would be their equivalents. Congress and the states could offer as many IOUs as their lawyer legislators chose to sell. They could offer exchanges of debt instruments to creditors, as the Continental Congress had done. But no authority would be able to compel anyone to take government paper as a final payment. Only the people, through the tedious and cumbersome procedure of amending the Constitution by vote of Congress and the legislatures of the states, could grant Congress the right to do anything else with currency than “coin money.”
One can easily understand why law schools do not teach this part of the political history of the adoption of the American Constitution. It greatly deflates the importance of what the lawyers had to say then and calls into question the common law doctrine of legislative sovereignty on which the Federal Reserve Act stands. What is more surprising is how little attention the assertion of popular sovereignty over money has received from economists. To restore the money of the United States to what it was on June 21, 1788, Congress and the president only have to amend Section 5103 of Title 31, United States Code to remove the words, “including Federal Reserve notes and circulating notes of Federal Reserve banks and national banks”.
Yet, to do so would be immeasurably more shocking than the current explosions of Congress’ emergency spending and the Federal Reserve’s balance sheet. No academic economist believes that such a return to the Constitution’s monetary language is even possible; and all public figures of whatever education and politics agree that the Constitution’s enactment of specie as the country’s only legal money was a barbaric mistake that has to be erased from memory. Even the public figures who were once guilty of having kind thoughts about the gold standard have now taken pains to assure Congress that economics has “moved on.” As far as the economics profession is concerned, what the Constitution actually says is an error of economic thinking so horrible that it is the patriotic duty of every PhD (and the Supreme Court, Congress and the president) to pretend that Washington never had any ideas of finance at all.
The pretense is helped along by the fact that there is a direct record of what Washington did and no record at all of why he did it. All we know about the first president’s views on political economy comes entirely by inference from the words of the Constitution and the laws signed by him as president. In Washington’s own writings we have the standard homilies about thrift that are sprinkled through his correspondence with young people. Those exhortations in favor of financial virtue have no more direct connection to Washington’s monetary ideas than Poor Richard’s Almanac had to Benjamin Franklin’s. (Throughout his political life Franklin was a steadfast and passionate believer in Keynesian money printing.) As a source of insight into Washington’s own thoughts about money, banking and credit, James Madison’s notes of the Constitutional Convention are no help at all. In his role as chair of the Convention, Washington offered not a single substantive word on any subject.
What we can infer from the Constitution, the Legal Tender Act and the authorization of the first bank of the United States is that Washington had no faith at all in the gold standard. He rejected the English notion that bills of exchange were legal tender if they were issues of the central bank to whom the legislature had lent its sovereign authority. No paper, issued directly by Congress, a state legislature, or a bank, qualified as money. For this reason, questions of convertibility and redemption and reserves are almost entirely ignored in the official documents Washington signed. There is no specified reserve requirement for deposits for the first bnk of the United States. Its bank notes are not mandated to be convertible or redeemable into specie, since those notes, and all other paper promises, do not qualify as legal tender. Because the bank’s notes are accepted in payment of federal taxes, the bank is required to have paid-in capital in the form of gold and U.S. Treasury bonds; but that is because the bank, as the Treasury’s agent, is responsible for distributing the interest payments on the federal debt, which must be payable in money. There are no restrictions at all in the laws Washington signed that limit private and state-chartered banking and their issue of notes. “Free” banking is subject only to the limits of state laws.
For Washington, money was only the residual term in the economic equation. Like specific gravity of the Earth, one had to know its numerical value in order to do accurate calculations; but money itself no more caused the motions of exchange than Newton’s constant caused the motions of the planets. As the unit of account in which transactions were priced, money was the inescapable yardstick; but the exchanges that produced those prices were determined by people’s needs and abilities and resources. How those changed over time was the subject of political economy; and discounting was the mechanism by which all commerce operated.
The Coinage Clause confirms Washington’s view that all sovereign monopolies were fundamentally dangerous. Adam Smith’s idea that Parliament could somehow manage the United Kingdom’s commerce through the issue of money was inherently foolish. In controlling the supply of money, Parliament was giving its friends first place in line at the Bank of England’s discount window; the only commerce it was creating was added financial speculation in the discounting of money against itself.
Stefan Jovanovich manages the portfolio for The NJT Company, Inc., a family office based in Nevada.
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