Origin of the Specie Monopoly

Government's Money Monopoly, by Henry Mark Holzer, New York: Books in Focus, 1981, 227 pp., $19.95.

Henry Mark Holzer has compiled perhaps the most important reference book on money in recent years. Most of this book is not Holzer's own description but an exhaustive exploration by legal scholars of the legal history of the US government's monetary powers. What makes this book so significant is that Holzer shows the roots of that monopoly power and argues that we will never be rid of the pestilence until a constitutional amendment is adopted to abolish the power of the government "to coin money."

Holzer is pessimistic about the possibility of abolishing that power, but his discussion of it is informative and brilliant. At a recent business luncheon in Washington, the chief economist for Chase Manhattan bank observed, "There are two powers that governments will never surrender—the power to tax and the power to coin money." This is the conventional wisdom. The revisionist point of view is that some form of competition in currencies is inevitable as the world becomes a more and more integrated economic system. Regardless of the outcome, the information that Holzer has captured between the covers of Government's Money Monopoly represents an invaluable contribution.

When the American republic was founded, the Constitutional Convention seemed to establish a federal system without the prerogatives of sovereignty that the British monarchs had claimed. Yet, the new Constitution was not as tightly drafted as many had hoped. A few important words were left out of the document—a few places should have said, "Congress shall make no law respecting…"

The Federalists were a crafty bunch. One of the first bills in the hopper of the first Congress proposed to incorporate a bank—the first Bank of the United States. Asked by President Washington to give an opinion on the bill, Alexander Hamilton wrote a lengthy treatise justifying the "necessary and proper" powers of the new sovereign government. The bank act was passed, and Washington signed the bill.

In 1819, the famous Supreme Court case of M'Culloch v. Maryland was handed down, written by Federalist John Marshall. This opinion about the constitutionality of Maryland's taxation of the Bank of the United States reaffirmed the theory of sovereignty first advanced by Hamilton in 1791. As a result, the US Constitution was transformed from a charter granting limited powers to a central government into a document empowering the central government to do almost anything that was not explicitly forbidden.

The first chapters of Holzer's book should lay to rest once and for all the traditional conservative argument that the US Constitution is a "charter of liberty." Its weakness in the defense of property rights and economic values is blatant.

Under British law the sovereign powers of the king after the 16th century included the ability to debase the currency. Queen Elizabeth introduced a base coinage into Ireland during one of the many wars there to prevent the Irish from exporting specie to France in exchange for war matériel. Since the coins bore the royal stamp, however, some of them later were used in England to discharge a debt, and the courts upheld their use. This law case became a critical part of the decision in Knox v. Lee, the 1871 legal-tender case that upheld the power of Congress to issue greenbacks during the Civil War.

Other court cases and legal maneuverings continued to strengthen the government's money monopoly. In a fascinating, obscure case that came to the Supreme Court in 1910, Ling Su Fan v. United States, a citizen of the Philippines was convicted of attempting to export silver coin in violation of local law. The case was reviewed by the US Supreme Court and the law of the land was laid down for all time that if property is in the form of money, the government can attach "limitations which public policy may require." Out the window went the Fifth and Fourteenth Amendments, along with Article I, Section 9, which was supposed to prevent Congress from making laws that would impair contracts ex post facto.

The ultimate destruction of individual liberty as regards money, of course, came with FDR and the seizure of gold—and the fixation of Federal Reserve Accounting Unit Dollars as the monopoly money of the United States. Today the word dollar no longer has any meaning at all. If a borrower promises to repay some saver $1,000 in five years, there is no way at all to know or predict what the real purchasing power of $1,000 may be in 1987. The investor has to gamble—and to compensate himself for this speculation, he will perhaps ask that the sum of money be returned twofold. For a sum of $1,000 to double in five years, the interest rate would be calculated at 15 percent. Moreover, if the investor anticipated any risk at all that the borrower might default, he would ask for even more interest as compensation! Is it any wonder that high interest rates plague our capital markets?

Ludwig von Mises demonstrated in his book Socialism (1922) that a centrally planned economy cannot function efficiently because it would not have a capital market and so no judgments could be made about the relative efficiency of alternative investment projects. Today, the United States is discovering another version of that fundamental truth. Our continuing stagnation is no doubt due to the disintegration of our long-term capital markets, under the burden of shorter and shorter speculative planning horizons. The fog that every investor must attempt to pierce has become thicker than pea soup because the central bank of the United States—a creature of M'Culloch v. Maryland, Knox v. Lee, Ling Su Fan v. United States, and several other cases that Holzer has carefully documented in his book—plays an active role in making life tough all over.

Holzer shows us in careful detail the origins of the US monetary monopoly and how it was a perversion of the economic and legal principles of the Enlightenment upon which the United States was founded. The next question—the one that we must answer for ourselves, and in turn ask economists and statesmen—is, Why should the Federal Reserve System be a monopoly? Indeed, why should the government of the United States enforce any legal-tender monopoly at all?

The economic theory of money and credit that is taught in the United States—regardless of whether it is of the monetarist or Keynesian versions—derives exclusively from that of the British neoclassical school, where sovereign powers to coin money and establish central banks are considered self-evident. Is this a Fabian trick? Are the enemies of the free market getting the last laugh because nobody on our side is willing to raise the "politically unrealistic" question about abolishing government's money monopoly?

Joe Cobb studied economics at the University of Chicago and is executive director of the US Choice in Currency Commission.