by Rep. Ron Paul, MD

Ron Paul in the US House of Representatives, July 25, 2003

Mr. Speaker, I rise to introduce the Honest Money Act. The Honest Money Act repeals legal tender laws, a.k.a. forced tender laws, that compel American citizens to accept fiat (arbitrary) irredeemable paper-ticket or electronic money as their unit of account.

Absent legal tender laws, individuals acting through the markets, rather than government dictates, determine what is to be used as money. Historically, the free-market choice for money has been some combination of gold and silver, whenever they were available. As Dr. Edwin Vieira, the nation’s top expert on constitutional money, states: “A free market functions most efficiently and most fairly when the market determines the quality and the quantity of money that’s being used.”

While fiat money is widely accepted thanks to legal tender laws, it does not maintain its purchasing power. This works to the disadvantage of ordinary people who lose the purchasing power of their savings, pensions, annuities, and other promises of future payment. Most importantly, because of the subsidies our present monetary system provides to banks, which, as Federal Reserve Chairman Alan Greenspan has stated, “induces” the financial sector to increase leverage, the Federal Reserve can create additional money, in Mr. Greenspan’s words, “without limit.” For this reason, absent legal tender laws, many citizens would refuse to accept fiat irredeemable paper-ticket or electronic money.

Legal tender laws disadvantage ordinary citizens by forcing them to use money that is vulnerable to vast depreciation. As Stephen T. Byington wrote in the September 1895 issue of the American Federationist: “No legal tender law is ever needed to make men take good money; its only use is to make them take bad money. Kick it out!” Similarly, the American Federation of Labor asked: “If money is good and would be preferred by the people, then why are legal tender laws necessary? And, if money is not good and would not be preferred by the people, then why in a democracy should they be forced to use it?”

The American Federation of Labor understood how the erosion of the value of money cheated working people. Further, honest money, i.e., specie, was one of the three issues that encouraged ordinary people to organize into unions when the union movement began in the U.S. circa 1830.

While harming ordinary citizens, legal tender laws help expand the scope of government beyond that authorized under the Constitution. However, the primary beneficiaries of legal tender laws are financial institutions, especially banks, which have been improperly granted the special privilege of creating fiat irredeemable electronic money out of thin air through a process commonly called fractional reserve lending. According to the Federal Reserve, since 1950 these private companies (banks) have created almost $8 trillion out of nothing. This has been enormously advantageous to them.

The advantages given banks and other financial institutions by our fiat monetary system, which is built on a foundation of legal tender laws, allow them to realize revenues that would not be available to these institutions in a free market. This represents legalized plunder of ordinary people. Legal tender laws thus enable the redistribution of wealth from those who produce it, mostly ordinary working people, to those who create and move around our irredeemable paper-ticket electronic money which is, in essence, just scrip.

The drafters of the Constitution were well aware of how a government armed with legal tender powers could ravage the people’s liberty and prosperity. That is why the Constitution does not grant legal tender power to the federal government, and the states are empowered to make legal tender only out of gold and silver (see Article 1, Section 10). Instead, Congress was given the power to regulate money against a standard, i.e., the dollar. When Alexander Hamilton wrote the Coinage Act of 1792, he simply made into law the market-definition of a dollar as equaling the silver content of the Spanish milled dollar (371.25 grains of silver), which is the dollar referred to in the Constitution. This historical definition of the dollar has never been changed, and cannot be changed any more than the term “inch,” as a measure of length, can be changed. It is a gross misrepresentation to equate our irredeemable paper-ticket or electronic money to “dollars.”

However, during the 20th century, the legal tender power enabled politicians to fool the public into believing the dollar no longer meant a weight of gold or silver. Instead, the government told the people that the dollar now meant a piece of government-issued paper backed up by nothing except the promises of the government to maintain a stable value of currency. Of course, history shows that the word of the government (to protect the value of the dollar) is literally not worth the paper it is printed on.

Tragically, the Supreme Court has failed to protect the American people from unconstitutional legal tender laws. Salmon Chase, who served as Secretary of the Treasury in President Lincoln’s administration, when he was Chief Justice of the Supreme Court, dissenting in Knox vs. Lee, summed up the argument against legal tender laws in twelve words: “The legal tender quality [of money] is only valuable for the purposes of dishonesty.” [emphasis added.]

Another prescient Justice was Stephen Field, the only Justice to dissent in every legal tender case to come before the Court. Justice Field accurately described the dangers to our constitutional republic posed by legal tender laws: “The arguments in favor of the constitutionality of legal tender paper currency tend directly to break down the barriers which separate a government of limited powers from a government resting in the unrestrained will of Congress. Those limitations must be preserved, or our government will inevitably drift from the system established by our Fathers into a vast, centralized, and consolidated government.” A government with unrestrained powers is properly characterized as tyrannical.

Repeal of legal tender laws will help restore constitutional government and protect the people’s right to a medium of exchange chosen by the market, thereby protecting their current purchasing power as well as their pensions, savings, and other promises of future payment. Because honest money serves the needs of ordinary people, instead of fiat irredeemable paper-ticket electronic money that improperly transfers the wealth of society to a small specially privileged financial elite along with other special interests, I urge my colleagues to cosponsor the Honest Money Act.

Dr. Ron Paul is a Republican member of Congress from Texas

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What is Opacity
Some believe the Federal Reserve System is shrouded in what its critics call excessive secrecy. Meetings of some components of the Fed are held behind closed doors, and the transcripts are released with a lag of five years.[38] Even expert policy analysts are unsure about the logic behind Fed decisions.[39] Critics argue that such opacity leads to greater market volatility, because the markets must guess, often with only limited information, about how the Fed is likely to change policy in the future. The jargon-laden fence-sitting opaque style of Fed communication, especially under the previous Fed Chairman Alan Greenspan, has often been called “Fed speak.”[39]

The Federal Reserve System has also been considered reserved in its relations with the media in an effort to maintain its carefully crafted image and resents any public information that runs contrary to this notion. Maria Bartiromo reported on CNBC that during a conversation at the White House Correspondents’ Dinner in April 2006, Federal Reserve Board Chairman Ben Bernanke stated investors had misinterpreted his recent congressional remarks as an indication the Fed was nearly done raising rates. This triggered a drop in stock prices just when the market was about to close.[40][41][42]

Some critics argue that the lag in the release of FOMC transcripts, and the limited and carefully worded minutes and statement lead to public unawareness of the issues of major concern to the Fed, and leave the public with an inadequate understanding of the logic and rationale behind the decisions.[citation needed] Some argue that this is a concerted attempt to keep Congress and the public at arm’s length[citation needed], and that the Fed did not help this public attitude with their prior actions (transcripts of meetings were not released until 1994). Before that time, the Fed refused to give transcripts out on requests, even under the Freedom of Information Act. When a judge ordered the transcripts released in the 1970s, the Fed said they had stopped taking transcripts at all.[citation needed] In 1993, Rep. Henry Gonzalez confirmed that the Fed did have tapes and transcripts of the meetings and could have complied with the FOIA requests, but had misrepresented the existence of the transcripts and chosen to ignore questions from Congress.[43] After the existence of the transcripts was revealed, the Fed agreed to release the transcripts on a five-year time lag. The time period has been extended, so that for example 1992’s transcripts were not released until 1998.[43]

Some critics believe the Fed exacerbated this idea when the Fed decided to stop publishing the M3 aggregate of financial data,[citation needed] which details the total amount of money in circulation at a time. The Fed said that economists did not need M3 when they had M2.[citation needed] However, a staff writer from the Connecticut Journal-Inquirer disagreed and saw no reason (according to his own views) to stop posting the numbers other than to keep the amount of America’s debt or a pending stock market crash or worsening economy hidden.[44]

Lastly, at the foundation of what is supposed to be an economy based on free markets where buyers and sellers agree on prices based on arms length transaction, the Fed establishes the price of money (the discount rate) in secret.[citation needed]

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Article I, Section 10 of the Constitution explicitly forbids the states from making anything but coins “tender in payment,” whereas there is no corresponding explicit prohibition against the federal government. The Tenth Amendment refers to powers that only the states can exercise, but the states also possess “concurrent powers” that may be exercised by either the states or the federal government, such as the power to repel invasions and arguably the power to treat coins as legal tender. After all, Article I, Section 8 of the Constitution gives Congress power to “regulate the value” of both U.S. and foreign coins.

Regarding paper money, Nathaniel Gorham explained at the Constititonal Convention that he “was for striking out” an explicit power of Congress to issue paper money, but Gorham was also against “inserting any prohibition.”[5] That is what ultimately happened at the Convention. Article I, Section 8 of the Constitution gives Congress power to “borrow money on the credit of the United States,” and therefore Gorham envisioned that “The power [to emit paper money], as far as it will be necessary or safe, is involved in that of borrowing.”[5] In other words, the power to emit paper money (e.g. bank notes) has been derived from the Necessary-and-proper clause in combination with the power to borrow money.

The federal government began issuing paper money long before the Legal Tender Act of 1862. In 1791, the First Bank of the United States began issuing paper bank notes.[6]

In 1798, Vice President Thomas Jefferson wrote that the federal government has no power “of making paper money or anything else a legal tender,” and he advocated a constitutional amendment to enforce this principle by denying the federal government the power to borrow.[7] Even if Jefferson’s suggested amendment had been successful, still (as mentioned above) Article I, Section 8 of the Constitution gives Congress the additional power to “regulate the value” of both U.S. and foreign coins — which implies a power to make coins into a legal tender, according to Justice Stephen Field dissenting in the Legal Tender Cases. Field believed that Congress had no power to make paper money a legal tender, but believed “the Constitution says that Congress shall have the power to make metallic coins a legal tender.”[1]

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a majority of the Convention, being wise beyond every event, and being willing to risk any political evil rather than admit the idea of a paper emission in any possible case, refused to trust this authority to a government to which they were lavishing the most unlimited powers of taxation, and to the mercy of which they were willing blindly to trust the liberty and property of the citizens of every state in the Union; and they erased that clause from the system.

Now, it is pretty obvious to me, that even a few hundred years ago they were fully aware that if we allowed the government to go to a system that was not measured by gold, it could mean the loss of liberty and property for every citizen of the union.

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Article I, Section 10, provides that “No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

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