During the Senate discussions about the impending bailout of the banking system, Ron Paul questioned Bernanke’s authority to create money to purchase bad debt and take a gamble that they can get rid of it later. Bernanke’s response was that the Congress “is given the authority to coin money, and to regulate its value, and they delgated that to us [the Federal Reserve].” (in this video, at the 6:20 mark) Bernanke’s right, but he’s also very, very wrong. Here’s why.
It’s easy to come to the conclusion that Bernanke is telling the truth. After all, the Constitution does grant the Congress the authority to create money and regulate it. In fact, it says it like this: “the Congress shall have power… to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.” (you can find it in Article 1, Section 8 if you’re up for it) And Congress did in fact delegate authority to create money to the Federal Reserve. So how is Bernanke wrong?
It lies in the phrase “authority to coin money.” I mean, the world’s been printing money since the invention of paper in China. Even Ben Franklin printed money for the British government. So it’s not as though the concept hadn’t been introduced before they sat down to write the Constitution. So why use as weird a phrase as “coin money”?
The answer is across the Atlantic in France, in an economic crisis called the Mississippi Bubble. I won’t go into specifics here (this article at PBS does), but the gist of it is that the Banque Royal (France’s Federal Reserve) printed far more banknotes than they could cover and the entire financial system collapsed as a result. So, the folks who attended the Constitutional Congress in 1787 had an object lesson to draw from.
And draw they did, being very careful that a similar situation couldn’t happen in this country. The reason they wrote “coin money” into section eight of the constitution instead of “create money” was so the government could only create as much money as their resources could handle. Printing money is really easy. Coining money - well, that’s a whole other ballgame. First you have to get the stuff out of the ground, then you have to press the stuff into a mold, then you have to somehow distribute it (usually by buying something), and then you have to have accounting records for all of this.
By requiring the government to coin money, the constitution forces it to stay honest with the amount of money in circulation and where it’s being spent. They can’t just fire up the printing presses to pay off a debt - or to buy up bad debt in our present crisis - they have to somehow get the money from the population. The people have to agree to let the government have it.
Now, the part that Bernanke got right (well, sort of right) is that the Congress did delegate authority to regulate the US banking system to the Federal Reserve System. The problem is that the Federal Reserve prints money. And Congress doesn’t have the authority to print money, it only has the authority to coin money. So in passing the Federal Reserve Act, Congress delegated power that it didn’t have.
That’s sort of like me giving you the authority to declare war on Canada.
Bernanke either doesn’t understand the Constitution (making him an idiot), or just doesn’t care (making him a crook). Either way, it’s bad news for us.
As promised, here’s my plain as day advice: buy gold and silver coins. It’s the only stuff that’s actually money by definition, and it’s the only money that’s not going to have it’s worth destroyed by a seven-hundred-billion-dollar bailout.
September 29th, 2008 at 10:21 am
The US government has been printing money since 1862, so I think the case that Bernanke must be an idiot or a crook is somewhat weakened by the fact that you’d be sweeping in an awful lot of other (often evidently bright and honest) people as idiots or crooks–almost 150 years worth.
Before that we still had printed money, and although the government didn’t print it, banks chartered by the US government did–beginning in 1791, under the authority of a law passed by a government that included many of the same people who had written and ratified the constitution. (Admittedly, there were plenty of people who were doubtful about it even then.)
At some point I think it becomes silly to point to the text and say, “You know this thing we’ve been doing for 200 years? Despite what many people have decided many times, I think it says we can’t do it….”
October 6th, 2008 at 2:17 pm
@Phil
(sorry for the delayed response, out of town visiting family)
Wow, I’m actually surprised you bothered to drop by my site. You do make some good points, and yeah - maybe calling Bernanke a crook based solely on his response to Ron is… how do I put this lightly? Full of holes?
That said, I would like to point out that the paper currency that was issued during that time (by private banks and the government - maybe with the exception of the Civil War) was backed by gold or silver. In other words, a paper dollar was basically a receipt for coins or bullion in a vault somewhere.
However, all of that changed in 1971 when the dollar was divorced from gold. And it’s actually in that short time frame that we’ve seen most of the crazy decline in the dollar.
The point in Section 1, Article 8 still holds - as soon as you let government create currency out of thin air, the people loose their ability to control it and force honesty out of it.
Anyhoo… thanks for stopping by. I really do like reading WiseBread.com