Sound Money The Bedrock of Liberty
Written by Luis Miguel
On July 22, President Trump announced a deal with Democrats that will suspend the debt limit until the end of July 2021 — well after the 2020 election.
Each of the two major parties got something they wanted from the deal. A $50 billion hike in U.S. discretionary spending will go toward Democrats’ welfare programs and Republicans’ defense programs. Moreover, each side gets to save face with the public by avoiding a government shutdown, across-the-board spending cuts, and the messy job of dealing with a potential federal debt default as the government runs out of cash.
While the media focuses on the “victory for pragmatism” (though not for fiscal responsibility), no attention is given to why the U.S. debt has spiraled out of control in the first place.
In 1913, when America was nearly a century-and-a-half old and had seen numerous wars and crises, the national debt was $3 billion. Little more than 100 years later, the debt stands at $22 trillion.
What happened to cause this explosion of U.S. debt? It was the establishment of the Federal Reserve in 1913.
The Fed monetizes the debt, creating money out of thin air. This not only makes it easier for the government to spend outside its means but also hurts the economy by imposing a hidden tax in the form of inflation.
American money today is anything but sound. Our nation’s future does not bode well if we remain on the current course. A return to sound money is necessary not only to protect our economic interests but to safeguard liberty itself.
What Makes Money Sound?
“Sound money” is money that is not prone to sudden appreciation or deprecation. It is reliable and dependable, its value remaining steady in the long term.
At the foundation of sound money is the principle that money should not be artificially created, nor its value arbitrarily determined. Rather, it should be backed by a commodity of real value in the market, such as precious metals.
When people first began trading with one another, they initially did so through barter — exchanging goods in kind for other goods or services. But the impracticality of barter in a developed society is readily apparent. Societies rapidly began using money, experimenting with all manner of universally valued commodities as currency.
Cattle have served as money, for example. The problem with cattle, however, is that it is not divisible (if you divide it, you kill your money), and it must be fed.
In Colonial America, the people of Virginia, Maryland, and North Carolina used tobacco as currency. Among the many drawbacks of this system, however, was that tobacco would rot.
Salt has also been used as money. Unlike cattle, salt is easily divisible. And unlike tobacco, it can be stored without fears of rotting. But the drawback is that salt is easy to find — making it easy to inflate.
Because people needed a commodity that was durable, divisible, transportable, and scarce, gold and silver emerged as the preferred choices for money. Gold is scarce. It can be divided into bars and coins of different weights. Gold coins can be conveniently stored in a purse. And above all, gold will never spoil.
Gold and silver have stood the test of time and retained their desirability, making them ideal for use as a coin that resists drastic appreciation and depreciation.
Although gold and silver discoveries affect the metals’ prices in the short term, these shifts level out, making for long-term price stability.
That’s why, when the free market is allowed to operate without government interference, people naturally choose gold and silver for their money.
The Founding Fathers on Fiat Money
There are three types of money:
Commodity Money. Commodity money is what it sounds like, a real commodity with a market value that has been adopted as a medium of exchange. Gold and silver fall into this category.
Fiduciary Money. “Fiduciary” comes from the Latin word for “trust.” Thus, fiduciary money, such as the U.S. gold certificates used from 1863 to 1933, has no inherent value but can be exchanged for commodity money and thus has a value based on trust.
Fiat Money. “Fiat” in Latin refers to an edict or decree. Fiat money has no intrinsic value and cannot be exchanged for a commodity or fiduciary money. It becomes money by government mandate, just as the U.S. government has declared Federal Reserve notes “legal tender for all debts, public and private.”
The United States has used each of these three forms of money at some point in its history, but the Founding Fathers were vocal about where their preferences lay.
America’s Founders understood the advantages of gold and silver — as well as the dangers of fiat money.
In an 1813 letter, Thomas Jefferson wrote: “Specie [money in the form of coins] is the most perfect medium because it will preserve its own level; because having intrinsic and universal value, it can never die in our hands.”
He went on to warn that paper money has the potential of being abused by becoming unbacked fiat money.
“The trifling economy of paper, as a cheaper medium, or its convenience for transmission, weighs nothing in opposition to the advantages of the precious metals…. It is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted.”
James Madison maintained that any paper money must be backed by gold:
“The only adequate guarantee for the uniform and stable value of paper currency is its convertibility into specie — the least fluctuating and the only universal currency.”
George Washington, acknowledging that the Continental Congress and state governments issued paper money during the War for Independence, causing runaway inflation, wrote in a 1787 letter that the fledgling United States would be ill-advised to fall again into the same trap:
“If in the pursuit of the means we should, unfortunately, stumble again on unfunded paper money or any similar species of fraud, we shall assuredly give a fatal stab to our national credit in its infancy. Paper money will invariably operate in the body of politics as spirit liquors on the human body.”
Washington, Madison, Jefferson, and other early Americans were well-read in history. From the Roman Empire to the Byzantine Empire and the Spanish Habsburg Dynasty, currency devaluation and the debt it enabled have continually been the bane of civilizations.
The Founding Fathers also based their views on their own experiences in the War for Independence. During the war, both the Continental Congress and the states freely issued paper money.
These were, in effect, fiat currencies. The “Continentals” carried nothing more than a vague promise that they would be redeemed at an unspecified time in the future.
Although the surge of paper money initially brought prosperity and full employment and was favored by the poor, it soon led to vast inflation and shortages of goods as governments attempted to control rising prices. Creditors ran from debtors like the plague to avoid payment with the depreciated money.
Of the situation, Washington observed that “a wagon load of money will scarcely purchase a wagon load of provisions.”
All this is why the Framers specifically denied the power to emit paper money (called “bills of credit” in the Constitution) to the states by explicitly prohibiting it.
“No State shall … coin Money; emit Bills of Credit,” (Art. I, S. 10).