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Constitutional Issues

As we consider proposed monetary reforms and the possibility of new complementary currencies, it is important to consider what the US Constitution has to say on the subject. Many critics of the Federal Reserve point out that the Congress has been given constitutional power to coin and regulate money but they have relegated this responsibility to a non-governmental institution which operates outside their control and so is not accountable to the people. This is a legitimate concern and deserves careful consideration.

The Constitution also places certain limitations on the states in regard to money. So are complementary currencies even legal under the Constitution? Or do we have to rely on the federal government for any money we might hope to use in the future? And if they have off-loaded this power to a government supported monopoly, are we then stuck with it forever?

Let us try to answer by examining the powers of the US Congress enumerated in article 1, section 8. Among other things, it says: “Congress shall have power … To coin Money, regulate the Value thereof, and of foreign Coin ...” So if Congress has the power to coin money, we need to ask first if this is an exclusive power. And does it apply only to coinage, or is it meant to apply to all forms of money?

First we should notice, it does use the term “coin money” which seems to apply specifically to regulating the gold and silver content of metallic coins. Do we have to apply this also to the issuance of paper money and/or the creation of credit money?

Furthermore, the language does not necessarily indicate that this power to coin money is exclusive to the Congress. For example, an adjacent and parallel clause empowers the Congress to establish post offices. However, no one would reasonably assert that this would exclude the private sector from establishing a competing business such as United Parcel Service or Federal Express.

The US Post Office exists as a government operated enterprise in the business of moving letters and parcels to and from various addresses around the world. Due to government subsidization, it does enjoy some degree of a monopoly. Yet privately operated businesses still compete head-to-head in exactly the same space, pricing their product as they choose, and independent of government dictates.

So although many of the powers enumerated in section 8 seem like they could, or even should be exclusive to the Congress, apparently not all are.

There is also other evidence to support the idea that Congress does not have an exclusive lock on the power to create money. As we have discussed, most money in our economy is not represented by a coin but rather exists as a debt or an obligation. Certainly there were also such debts and obligations existing in the founders’ day. Credit money is not a new invention. It has existed for as long as mankind has been doing accounting.

But this is not the kind of money the founders mentioned in section 8. Rather, they were talking specifically about the standard reference money of their day, gold and silver coins. Those forms of money are really commodities, packaged into standardized weights and measures, and then used to establish a measure for money.

While we still use certain coins in our modern commerce, this kind of money represents only a small part of the overall supply. There is nothing in the constitution saying that the Congress has the exclusive right to generate notes payable or other similar instruments of credit. To think so would be ridiculous—everyone clearly enjoys this right.

You remain free to establish credit with anyone you like, as long as they are willing to accept your promise. Modern money, including paper money as well as checkbook money and credit card money, all represent such promises.

To reiterate: this includes the short-term credit money you create when you use your VISA, Mastercard, or other credit card. The government has not found such money to be unconstitutional, even though it is created in the private market every day. If VISA can use private credit to create money measured in dollars, why can’t another private business use private credit to create money measured in CHIPs?

One further observation about Section 8: It is strange how the language almost sounds like the Congress is expected to regulate the value of foreign coin as well. This wouldn’t make any sense since the composition of foreign coin is sure to be controlled by the foreign government who creates it. Rather, it should be understood simply that the federal government is expected to manage the way the United States would interact with the other countries of the world. The Congress clearly has the power to impose such duties and import/export taxes to regulate how its official United States coinage would be valued in relationship to the coinage of foreign governments.

Article 1, section 10 contains limitations on state governments, relevant to the regulation of money. It says: “No state shall … coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts...” So it seems pretty clear: the Congress can coin money but the states can not.

But it is interesting, the states are also prohibited from emitting “Bills of Credit,” or borrowing. From this we see clearly, the founders were very aware of the concept of creating paper money, or debt. And they did not want the states involved in it.

It is also notable, they did not include this type of language in section 8 when discussing the powers of the Congress. This lends further support to the notion that section 8 was more about establishing standards for coinage than it was some kind of attempt to monopolize the creation of credit, or paper money.

The next important limitation on the states is, they may not pass a law establishing anything as “legal tender” unless that thing is a gold or silver coin. Remember, a legal tender law is one that says the government will not enforce your agreements with other people unless you agree to accept the type of payment they have declared as legal tender.

In a very real way, it forces you to use the kind of money the government wants because if you don’t, your contracts can not be relied upon. The Constitution does not seem to contain any explicit statement about Congress having the power to establish what is legal tender. It just tells us the states can establish nothing other than gold and silver coin as such.

So can the federal government force us to use Federal Reserve notes as money? Should it really have that power?

Probably not—particularly if you believe in the 10th amendment which tells us, the powers of the federal government are limited to those explicitly identified in the Constitution. All other powers are reserved to the states or the people.

So it would seem, in the case of money, the federal government was just supposed to create standards of measure for the value of coinage. It would be up to the states to decide if they wanted to make legal tender laws or not. They were just prohibited from specifying anything besides those gold and silver coins as such legal tender.

Clearly this leaves the door open for states to operate without legal tender laws at all if they want. It also implies that legal tender laws, if enacted, are expected to originate at the state level, and not at the federal level.

So can you operate with money that is not legal tender? Of course you can. Your VISA card is not legal tender and it is very well accepted.

If a buyer and seller both agree to use something else as a medium of exchange, they certainly should be able to do so. In a civil society that cares about choice, the laws should still support the enforcement of their contract even though payment may be measured in wheat, corn, or hours of labor.

We don’t need those things to be legal tender in order to use them as payment. We just need the state to refrain from declaring anything as legal tender and agree to enforce our contracts according to the way we have chosen to enter into them.

Ideally, a state would only establish laws dictating what form of payment you must make when you are engaging in a transaction with the state itself. In other words, this means when you are paying your taxes. But otherwise, governments should support individuals and companies exchanging value in any medium they might mutually choose.
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