"All paper money eventually returns to its intrinsic value -- zero."
                                           Voltaire (1729)

"Permit me to issue and control the money of a nation,
and I care not who makes its laws."
                    Mayer Amschel Rothschild (1744-1812, attributed)

"Most unquestionably there is no legal tender, and there can be no legal tender,
in this country, under the authority of this Government or any other, but 
gold and silver, either the coinage of our own mints, or foreign coins,
at rates regulated by Congress. This is a constitutional principle,
perfectly plain, and of the very highest importance.
*****
The legal tender, therefore, the constitutional standard of value, is established,
and cannot be overthrown. To overthrow it, would shake the whole system."
                                               Daniel Webster (Senate Speech, 1836) 

"Money is gold, and nothing else."
                              J. P. Morgan (on the difference between money and
                                         and credit, testifying in Congress, 1912)

President Trump, in his inaugural address or soon after he takes office, has an extraordinary opportunity to seize control of the government and put the nation and the world on a proven path to a more prosperous and peaceful future by declaring (in substance):

The Federal Reserve and other major central banks have made such a hash of monetary policy over the past decade that the need for major reform is beyond dispute and their credibility as independent monetary stewards is in tatters. Almost a decade of near zero interest rates by itself proves their incompetence. They have now painted themselves into a corner from which the normalization of interest rates is practically impossible without crashing the world's debt markets and exploding national budget deficits. Their only road forward is more inflation and then hyperinflation, or "helicopter money" as they describe it.

Even the village dunce knows what the "intellectual yet idiot" class and Keynesians do not: that borrowing should not be free. By artificially suppressing the price of credit, i.e., borrowed currency, the central banks have corrupted the pricing mechanisms across all markets, essentially negating the ability of free markets to function efficiently anywhere. Almost as bad, they have supported the biggest banks at the expense of savers and pensioners everywhere. Indeed, fiat money has long been the means by which the wealthy classes swindle the poor and the financial interests cheat the producers of real goods.

Since President Nixon closed the gold window in 1971, thereby breaking the link between the dollar and gold and effectively putting the nation on unlimited paper money, the Supreme Court has declined to consider any constitutional challenge to the resulting monetary system. E.g., Petition for Certiorari, denied, 479 U.S. 1066 (1987). This silence flows from two facts: (1) there is no rational constitutional defense for the present monetary system in which the value of the dollar has no credible link to a weight of gold (or silver); and (2) the Court is unwilling to interpose its judgment on an issue of such paramount and far-reaching importance in the absence of support from either the Congress or the president. Ideally one might wish for a more a more courageous Court, but from a practical and political perspective, the Court's diffidence in this respect is not without merit. After all, the basic contours of nation's monetary system are left to Congress by the Constitution and to the president by historical practice.

At the outset of the New Deal, President Roosevelt closed the banks, prohibited most private ownership of gold, and devalued the dollar from $20.67 to $35.00 per ounce of fine gold. In so doing, he pushed to their limits the government's powers under the monetary provisions of the Constitution, achieving bare five-to-four majority support of the Justices in the Gold Clause Cases, 294 U.S. 240-381 (1935), the Court's last pronouncement on this subject. Accordingly, should President Trump, or any president, declare his intent to return the nation to constitutional money credibly defined with reference to a weight of gold (or silver), any rational Supreme Court having respect for the clear commands of the Constitution should be supportive.

What is more, such a reform would be in the best interests of all federal judges, who under the compensation clause (U.S. Const., Art. III, s. 1) shall "receive for their services, a Compensation, which shall not be diminished during their continuance in office." Long-term paper money inflation undermines this provision, which was intended to protect the independence of the judiciary by minimizing its dependence on the two political branches. Complaints by federal judges arising from loss of purchasing power of their fixed salaries during the inflationary 1970s eventually resulted in a working accommodation whereby Congress raises judicial salaries whenever it raises its own, but this arrangement -- ultimately resting on congressional discretion -- scarcely grants the constitutional independence originally intended.

The monetary provisions of the Constitution appear in Article I, ss. 8&10, granting legislative powers to Congress and imposing certain prohibitions on the States, but the purpose of these provisions relates directly to the Bill of Rights, particularly the Fifth Amendment prohibiting the taking of property without due process of law or payment of just compensation. As the great Austrian economist Ludwig von Mises explained (A Theory of Money and Credit, Ch. 21 (1952)):

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the nonobservance of old customs by kings. The postulate of sound money was first brought up as a response to the princely practice of debasing the coinage. It was later carefully elaborated and perfected in the age which--through the experience of the American continental currency, the paper money of the French Revolution and the British restriction period--had learned what a government can do to a nation's currency system.

 

Any announcement declaring an intent to return to constitutional money credibly linked to gold should make four additional points:

First, the exact details and mechanics of the new system can await further study and discussion. Neither the classical gold standard, nor the post-World War I gold exchange standard, nor the post-World War II Bretton Woods system, need necessarily be the model. Technology and modern communications may have opened the door to other effective and more practical alternatives. See, e.g., G. Gilder, The 21st Century Case for Gold (Am.Prin.Proj., 2015); J. Shelton, Fixing the Dollar Now (Kindle, 2013) and Money Meltdown (Free Press, 1994); L.E. Lehrman, Paper Money or the True Gold Standard (Lehrman Institute, 2012). The main point is simply that the defined gold weight of the dollar must be credible on a continuing basis, and even then, not immutable for all time.

In practical terms, President Trump would then have control of the monetary system in a way that no president has enjoyed since FDR. Of necessity, especially given the polarization of Congress, the White House would have to take principal responsibility for determining the operating details of the new system, to set in the first instance the new official or target gold price, and to choose when to recommend the whole package to Congress. The difference would be that whereas FDR was moving the monetary system away from constitutional principles, President Trump would be returning it to conformity with them.

Second, before attempting to set any gold value for the dollar, there must be an independent and publicly reported audit of the nation's gold reserves. Whether the officially reported approximately 260 million ounces (8130 tonnes) remains fully intact, or is subject to any claims beyond the gold certificates issued to the Federal Reserve by the Treasury, has been the subject of considerable speculation. Although officially valued at $42.22 per ounce, at a recent price of $1300/oz., this hoard is worth almost $340 billion. Virtually the entire amount is reflected in certificates on the Fed's balance sheet. Indeed, the gold stock at market is what keeps the Fed solvent.

If the gold reserves are what is claimed, they would presumably support a lower gold value for the dollar than if they are not. But if they are not, there will have to be an accounting as to why not. In this event, politicians from both sides of the aisle, past and present, are likely to share in the blame, or at least bear some culpability for the deception. And in this regard, being the total outsider that he is, President Trump will be insulated. Indeed, he can use any shortfall in the gold reserves as underscoring his criticisms of the political establishment.

Third, before attempting to set any gold value for the dollar, there must be a period of time for a fully free gold market to operate in anticipation of the event. Accordingly, both the Exchange Stabilization Fund and the Federal Reserve should be directed to refrain from any intervention in the gold market, whether directly or indirectly, through intermediaries or otherwise, and all government agencies responsible for market supervision should likewise be on alert to uncover and stamp out any schemes or manipulations targeting gold prices.

Fourth, those opposed to a gold-based monetary system, as a large majority of academic economists are almost certain to be, may suggest alternatives, but the burden must be on the proponents of any new unlimited fiat monetary system to secure a constitutional amendment authorizing whatever they propose. Should an amendment of this nature be forthcoming, the occasion might also provide the president an opportunity to push for amendments regarding term limits for members of Congress, possibly also for popular election of the president and/or a mandatory retirement age for supreme court justices, two other areas where the Constitution has failed to keep up with the times.

 

Moving to a gold-based constitutional monetary system would put the president in a commanding position to move forward in several key policy areas where he has expressed a desire for major change:

First, budget discipline. Prior to 1971, talk of a balanced budget amendment was nonexistent; more recently the idea has resurfaced regularly, driven by the exponential growth of federal deficits and debt. In short, when the dollar was defined as a fixed weight of gold, maintaining the credibility of the official gold price required budget discipline. Such will be the case again if the dollar is linked to gold; the tighter the link, the greater the discipline required. What is more, market judgment as to the ability of the political branches to maintain the required discipline will be reflected both in gold prices as the new system is being developed and in whatever official price is ultimately proposed to Congress. The president's leadership role in this whole process will by necessity be central.

In this connection, the principal purpose of the Federal Reserve, if it continues to exist at all, should be to support and maintain the gold value of the dollar, and its ability through mere balance sheet entries to circumvent the appropriation and borrowing powers entrusted to Congress should be eliminated. No longer should any bank be too big to fail, and any bank that takes customer deposits insured by the government should be restrained from any activities that place those deposits at undue risk.

Second, trade policy. Sensible and workable agreements on free trade require agreement on appropriate exchange rates. To liberalize trade restrictions while leaving the parties free to manipulate exchange rates is a bad deal, inviting abuse. As the nation transitions to a gold linked-dollar, the same should be required of its trading partners, particularly those with whom it has free trade agreements. Fixed exchange rates and settlement of trade balances in gold should be the ultimate goal in all the nation's trade agreements.

Third, foreign and defense policy. Budget discipline will require a total review of all military and related defense spending. Nothing would do more to curtail ill-advised and unnecessary wars and other military adventures, engagements and entanglements than to put them on a budget that over time must remain in balance. The basic principle should be: If it's worth fighting for, it's worth taxing for, either currently or to pay off related debt incurred at reasonable rates and without jeopardizing the gold value of the dollar. Here again, the White House will of necessity have to take the lead in setting priorities.

Fourth, international monetary policy. Dissatisfaction with the dollar as the world's principal reserve currency has increased, driven not only by the "exorbitant privilege" of which de Gaulle complained, but also by sanctions imposed for political purposes by the United States through its banking system. Both China and Russia have substantially increased their gold reserves in recent years, and indications are that the Chinese intend at some point to link the yuan to gold and to challenge the dollar's dominant international position.

For the present, however, the American economy is still the world's largest and its dollar continues to sit atop an ever more shaky pyramid of fiat currencies. How much longer this tenuous situation can continue to exist is uncertain, but as long as it does, the United States remains in a far stronger position to influence reforms in the international monetary system than it will be after any serious future dollar crisis, virtually assured if the nation remains on its current monetary and financial course.

Indeed, under present conditions, a restored constitutional dollar credibly linked to gold would almost automatically become the world's new and more permanent standard of value, though that might be a position it would have to share with any other currency having an equally credible gold linkage. Nothing would prevent China, Russia, or any other nation from following America's lead, but by leading rather than reacting to some future Chinese move in the same direction, the United States would have in the first instance more control over the details and design of the linkage mechanism and determination of the new or starting gold parity.

What is more, returning the international monetary system to reasonably fixed exchange rates linked to gold might also give the European Union an opportunity to address the ever more obvious problems of its single currency. Restored national currencies at fixed exchange rates subject to occasional adjustment would allow considerably more leeway for dealing with the varying budgetary and economic constraints of the member countries while preserving most of the political and economic benefits of a single currency.

 

The errors of the past several administrations have handed the new president an almost impossible challenge, exacerbated by the fact that many of those responsible for these mistaken policies remain not only in government service but also beholden to the same special interests that have supported them in the past. By putting the nation swiftly and firmly on course to restore constitutional money and making that reform the foundation of his administration's policies, President Trump would secure two further advantages.

First, opponents of measures deemed necessary to carry out this reform will be boxed in by the monetary requirements of the Constitution itself, provisions that have fallen out of law school curriculums but still resonate with the public. Indeed, once the move to constitutional monetary reform is launched, and particularly if the linkage to gold is communicated effectively to the people as a constitutional command for their protection, the process should develop a self-sustaining momentum hard to turn around.

Second, some have suggested that the establishment abandoned Secretary Clinton in order to set up Mr. Trump to take the blame for the economic depression and social upheaval that they believe is now the unavoidable result of decades of monetary mischief and mistaken policies, not to mention corruption and greed at the highest levels of government and private business. Rather than reprise the role of President Hoover, President Trump should get in front of this inevitable crisis by publicly identifying its true source and proceeding at once to begin the necessary monetary reforms.

Of course effecting a return to constitutional money will not be easy or painless, but much of the burden will fall on those who have benefited the most under the current paper regime. In historical context, the cause of the pain is not the cure but the addiction that made it necessary. The body politic can no more survive ever larger injections of fiat money than the human body can of drugs or alcohol. In both cases, effective treatment is no walk in the park. But the alternative -- no treatment and continued addiction -- is the path to disaster.

The "continental" dollar of the American Revolution, the assignats of the French Revolution, the post-World War I German hyperinflation, more recently Mugabe's Zimbabwe, and now Maduro's Venezuela, are among the better known examples. Arguing in support of the monetary provisions of the Constitution, James Madison reflected on the continental dollar (The Federalist Papers (Madison), No. 44):

The loss which America has sustained since the peace, from the pestilent effects of paper money on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government, constitutes an enormous debt against the States chargeable with this unadvised measure,which must long remain unsatisfied; or rather an accumulation of guilt, which can be expiated no otherwise than by a voluntary sacrifice on the altar of justice, of the power which has been the instrument of it.

President Trump has demonstrated courage, independence, toughness and patriotism in pulling off the political upset of the century. Able largely to self-fund a campaign costing half those of his opponents, he has managed to escape the grip of the special interests that in recent years have dominated American politics. As a father and a friend, he has long cautioned against addiction to alcohol or drugs. As a businessman and real estate developer, he has managed from conception to completion major building projects around the world. And as an entertainer and showman, he has reached the people.

Not since FDR has a new president entered office with the international monetary system in such disarray and the American heartland facing such disheartening economic conditions. But President Trump has at hand a unique opportunity: the last best chance to do what President Reagan could not: restore constitutional money and save the American republic from the very monetary disorder that gave it birth. By expiating President Nixon's greatest constitutional sin, the United States can then lead the nations of the world to the peace and prosperity made possible by the end of the Cold War.

 

Thanksgiving 2016