Constitution Lecture Extra: Coining Money and Legal Tender
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Constitution Lecture Extra: Coining Money and Legal Tender

October 16, 2019


I think it’s worthwhile occasionally to look
around at claims that are being made and to try and apply what we’ve learned so far in
this series to try to reach conclusions. This is a response to a video made by Dr.
Tom Woods called, “Is Ron Paul Wrong on Money and the Constitution?” He made this video
as a response to critics who claim that Ron Paul is wrong when he says that the Constitution
requires gold and silver money, not fiat money. I invite you to watch this video, and you
may wish to do so before playing the rest of this lecture. Dr. Woods does a good job
of responding to these critics, however, he misses what I believe is the most powerful
argument in support of Ron Paul and those who believe that the Constitution requires
a commmodity money standard based on gold and/or silver. First, let’s consider the arguments Dr. Woods
made. His first argument is that there would be a contradiction if the Federal government
made copper coins a legal tender, but the states could only use gold and silver. It’s
not his best argument, but okay. His next argument is better: nowhere in Article
I Section 8 is the Federal government given the power to create a legal tender. However,
there is a response to this that I’ve heard over the years, and that is that the power
to coin money includes the power to create a legal tender. It is that argument that I
will address later in this video. But before I do, let’s consider Dr. Woods’s
third argument: that the word “dollar” meant something specific when the Constitution was
ratified: specifically, a Spanish coin of a particular weight and purity of silver.
The Constitution uses the word “dollar” twice: once in Article I Section 9 where it imposes
a cap on the tax from the slave trade, and again in the 7th Amendment, where it guarantees
the right of trial by jury in suits where the value in controversy exceeds 20 dollars. Remember from Lecture 2 that the proper interpretation
of the Constitution is to use the meaning of the words as they were understood at the
time. This is what Woods is doing. However, as good an argument as this is, it does fall
a little flat, in that neither of these clauses directly deals with the government’s power
to coin money or to create legal tender. Although it should be said that Woods did an excellent
job showing that, by expressing this value as a standard for taxation and for lawsuits,
the Constitution was acknowledging the existing standard by which the country’s money was
to be set, as evidenced by the fact that this was standardized in the Coinage Act of 1792. But I really don’t think this is enough to
convince the naysayers. There is a much better argument that we can use, within a pure construction
of the Constitution’s original meaning, without having to leave the Constitution itself. As we discussed in Lecture 5, Article I Section
8 gives the Federal government the power to coin money, while Article I Section 10 prohibits
the states from coining money, and from making anything except gold and silver coin legal
tender. If the power is given anywhere to the Federal government to create a legal tender,
it’s in the power to coin money, according to those arguing that fiat money is Constitutional.
But we can use these two clauses to soundly refute that argument. Since Section 10 expressly prohibits the states
from coining money, then that power–and everything included with it–is prohibited to them while
Section 8 grants it to the Federal government. But later in that very same clause, the Constitution
says that states CAN extablish a legal tender, it just can’t be anything other than gold
and silver coin. So, according to the Constitution, the power to establish legal tender is a different
power from the power to coin money. And as it’s a different power, then under Section
8 Congress only has the power to coin money, not the power to establish a legal tender. It is a vital part of any legal system that
legal documents must at least be self-consistent, and this is especially true of the Constitution.
Saying that the power to coin money includes legal tender in one section, but doesn’t include
it just two sections later, violates this very important principle of justice. The Federal
government has no power whatsoever under the Constitution to establish a legal tender,
and the states can only establish gold and silver as legal tender, nothing else. To say that the meanings of words and phrases
in the Constitution are not even self-consistent is to open the door to any kind of wacky interpretation
you want, and justify any abrogation of our rights, any power the governemnt wants to
grab, and any tyranny they want to engage in. For that reason, this argument is important
not just for legal tender purposes, but for the purposes of protecting our rights, our
safety, and our very lives. Until next time, stay strong and be free.

Only registered users can comment.

  1. @shanedk Yes, the government would be able to do all the foreign entanglements and wars and everything else without the ability to print money. The Guns are not a product of money, but a product of industry. We have the guns, therefore we have the ability to make the guns. Money, specifically the ability to print money only makes it easier. It is feeding the beast that is our unconstitutional military that lead to fiat currency, not fiat currency creating the beast.

  2. As much as I would like to agree with this, the federal gov is not creating any fiat money, the federal reserve, a private/public bank issues the fiat currency. To further illustrate this, the federal gov has to pay interest on any money the fed creates to buy bonds. If the fed gov were issuing dollars, it wouldn't make any sense to pay interest to itself.

  3. @christo930 The Federal Reserve is part of the Federal government. Congress chartered it and appoints the board members and the Chairman.

    And the government pulls that kind of crap all the time. Just look at Social Security.

  4. How would the federal government have the power to regulate the value of coin if they did not have the power to create legal tender?

  5. What if there was a state that didn't consider gold or silver a viable tender, would it be OK for them to reject any "money" based on gold and/or silver? Just curious.

  6. @shanedk No it isn't. It is only quasi public since it has to turn over it's profits to the treasury. It is owned by it's member banks and is not subject to federal oversight. While the president and congress appoint the chairman, they can't simply remove him at will or install a new one at will.

  7. @christo930 It's not owned by them in any practical sense; it only is on paper because they were doing an end-run around the Constitution.

  8. Very eye-opening. I _almost_ wonder why constitutional studies aren't a bigger part of the public school system; they certainly weren't that important when I went through it.

  9. @Altimadark Actually, that got me wondering; why doesn't the government-run public school system put more focus on the constitution, the very document which is supposed to define that government?

  10. @Altimadark For the same reason the Catholic church doesn't want people to read the Bible: they want to be able to TELL you what it says instead of you thinking for yourself.

  11. I think it's a waste to use gold and silver on something as frivolous as money. Both of those metals are some of the best conductors on the periodic table, and very malleable, they would better serve for making electronic components or other practical purposes.

  12. Not sure how the constitution really applies to anything. Also why should gold and silver be legal tender over anything else?

  13. @sharperguy Our founders understood very well the importance of sound money and how ruinous fiat currency can be. They had just gone through it, after all.

  14. @wakeangel2001 I think silver has enough uses nowadays to make this a good point, but in the case of gold it's still primarily used as a monetary metal, and only incidentally as an industrial metal.

  15. @PanzerDivisionBOM While you do want some industrial use for your monetary metal, you don't want it to be TOO useful, because then your currency will be vulnerable to the economic conditions of that industry.

  16. @Desertphile And I agree 100%. That's why I base everything in these videos on logic and reasoning, and not any kind of assertive authority (because I ain't one).

  17. @wakeangel2001 Gold and silver are actually not particularly good conductors. They're used in electronic components usually as a means to prevent corrosion. There are plenty of substitutes for their use there.

  18. @Desertphile

    No one should accept everything ANYONE says. We weigh everything we hear and try to be objective. Shane knows what he's talking about even if he's not infallible.

  19. @aggrajag2813 I just looked it up: silver is the best conductor at 6.30×10^7σ at 20 °C, whereas copper is 5.96×10^7 and gold is 4.52×10^7. So copper is a better conductor than gold.

  20. @evensgrey It also made it easier to phase them out after the war and return to sound money, which was done.

    The Confederacy had no sound money, only fiat money. The Confederate government exchanged dollars for the Confederate money but didn't get the gold or silver backing them up. HUGE mistake!

  21. @PanzerDivisionBOM I will agree that I am not sure Congress ever had the authority to create the system in first place. While it isn't exactly a private bank, it isn't exactly a national state bank either, it's a quasi-public institution. I agree with Shane that it was created in this way to get around the constitution, but obviously it was effective.

  22. @evensgrey I agree that wars are expensive and that printing money helps. Wars are not fought with $, but guns and tanks. Guns and tanks are a factor of production not money. We could, and probably would, make the same amount of guns and tanks with out fiat currency.
    The government is like a drunk, and fiat currency is like an ABC store that delivers. The deliveries from the ABC store enable the drunk and make it easier, but by stopping deliveries will not stop the drunk from drinking.

  23. @sharperguy Traditionally gold and silver are used as legal tender because they're pretty scarce and have little application in other uses. You could also use something like platinum, I suppose, but you'd have a REALLY limited money supply. Really anything can be used as currency (some early colonies used tobacco, which worked pretty terribly, but it illustrates the point), but gold and silver work exceptionally well.

  24. @aggrajag2813 Yeah I get how they are good monies, I just don't see why it should be prescribed by any law. If it makes a good money people will use it.

  25. @Desertphile Do you have a problem with what Shanedk says in his videos? If so, why not make video responses. Frankly, off-hand remarks such as this seem a bit petty.

  26. @Virgil0211 ; Yes, I have only one problem with much of what Shandk says: a lot of it is silly, asinine pseudo-libertarian crap.

  27. @Desertphile That impression is also compounded a bit by the fact that you won't comment on the actual content of the video in any meaningful way, or even reply to Shanedk when he responds to your comments. That's the behavior of a high schooler, not a respected skeptic. Well, maybe Thunderf00t, but nobody's perfect. =P

  28. @shanedk Great explanation. Do you mind elaborating a bit on the difference between "coining" money and "making legal tender"? It's a little confusing to figure out how that would work and the difference between the two.

  29. @TrippingTheTube Coining money is taking a round piece of metal and stamping an image on it. Making legal tender is passing a law requiring people to use a certain money to pay off debts.

  30. @andrewhirsch Since only gold and silver could be used as legal tender, that's the only kind of money the Federal government could create.

  31. @andrewhirsch The Constitution is based on enumerated Federal powers. If it's not an enumerated power, the Feds can't do it. End of story.

  32. @andrewhirsch The difficulty isn't collecting taxes. The government could easily decree that X amount of a commodity should be payed by each person per year. People would then have to trade whatever currency they had for this commodity to pay the government. The difficulty would be in determining people's wealth – however this was never really possible, the existence of a standard currency only made it appear possible.

  33. @andrewhirsch "Only gold and silver can be used as legal tender BY THE STATES, but that does not directly implicate the US."

    The US IS NOT GIVEN THE POWER TO DO IT AT ALL! It's NOT THERE! It DOESN'T EXIST!

    Remember that the claim is that the US has the power to establish a legal tender because it's included in the power to coin money. As I DEFINITIVELY showed, IT ISN'T! And if it's not in the Constitution, the Federal government CAN'T DO IT!

    Why is this so difficult for some people to grasp?

  34. @andrewhirsch "This simplistic argument"

    It's NOT a "simplistic argument"–it's a FOUNDATIONAL PRINCIPLE OF THE DOCUMENT! Enumerated powers means that the Constitution MUST grant a power to the Federal government in order for the Feds to be able to do it.

    Section 10 shows QUITE CLEARLY that the clause YOU are using about gold and silver coin IS SEPARATE FROM the power to coin money. Your logic DOES NOT FOLLOW.

  35. @andrewhirsch They already do that in a manner of speaking. Except the taxing is in the form of money and the buying back is in the form of commodities payed for by the taxes.

  36. @andrewhirsch "Therefore, to coin money and to make gold and silver legal tender are two distinct powers, but that is not to say that to coin money and to make other things legal tender are distinct powers."

    That's a COMPLETE perversion of the clause! "…make no thing but gold and silver coin a tender" is a RESTRICTION. Meaning they HAVE the power to make a tender (DESPITE the prohibition on coining money), hence the NEED for that power to be restricted!

  37. @sharperguy The Constitution is THE LAW. If someone robs a store, and a policeman arrests him for breaking the law, is it appeal to authority?

  38. @shanedk Technically yes, although a valid one. You're right – in some contexts it's relevant. I'm just plainly not that interested in it. It's like debating the intricacies of copyright law when really I just want it abolished.

  39. @sharperguy So the law is a fallacious appeal to authority when you don't like the implication, but a valid appeal to authority when you do.

  40. @johnrainrules No I was conceding his point but explaining my actual position. I'm also not taking this that seriously.

  41. @andrewhirsch This is only true to a degree. Congress was calling for Paul Volker's head on a platter when he raised the fed target rate to over 20%, but they were unable to stop him (he did have the support of Reagan though, the ONLY good thing Reagan did while in office). This was necessary to restore confidence in the USD and get inflation under control after the 60's and 70's inflation and led to high savings which financed the boom of the mid 80's.

  42. @christo930 And the same thing needs to have now–I seriously doubt as high as 20% (that was because inflation was 15% then), but interest rates DO need to go up. Who's going to invest when the interest rates are below the rate of inflation?

  43. @andrewhirsch "Some may argue that your logic is false, saying that A1.S10 means "the States may make gold and silver legal tender"."

    And that argument would be wrong. The Constitution does not grant powers to the states; it only restricts state powers. The only way to get there would be to grossly misquote the Constitution. "May make gold and silver legal tender" from a logical POV is VERY different from "make no thing other than gold and silver legal tender."

  44. @andrewhirsch Except that the only way you can do that is to misconstrue the clause in a way that cannot be defended logically.

  45. @MrPloppy1 Yes, having a legal tender doesn't mean that people can't voluntarily use something else if they want. But if you take someone to court to pay their debt to you, you get paid in the legal tender.

  46. @MrPloppy1 Legal tender is how legal debts are to be paid. Both then and today, you can specify whatever currency you want at the time of sale; but of a debt is owed, although both parties could agree on a different form of payment, if legal tender is offered but refused, the debt is invalidated.

  47. @shanedk I agree with you that we need higher interest rates and greater savings, but right now, the gov is doing everything they can to stifle savings and keep interest rates artificially low. Unfortunately, if the Fed defends the dollar and raises interest rates substantially, the banks we just bailed out will all be insolvent because they are loaded up with low interest bearing bonds (private and gov) as well as mortgages and those low interest bonds will collapse in price.

  48. @shanedk I think it will take the global economy down with it, that is, if the fed raises interest rates. If the dollar starts to collapse, if they keep printing money (though it has slowed down a great deal), it will collapse the dollar and by extension, the world's banking system.

  49. @christo930 But they do that by keeping interest rates low. Printing money increases the Supply of Loanable Funds, lowering interest rates. Raising interest rates would reverse that.

  50. @shanedk Raising interest rates would encourage savings and investment. If the printing press could create capital, all countries would be wealthy. All printing money does is distort the market and causes bubbles and inflation.

  51. @CoombesKidd "Not to mention the states originally made paper money was well, so article 1 section 10 made it illegal for the states to emit bills of credit."

    Yes, and this power was not given to the Federal government under Section 8, either.

    "however, this does imply, through the 9 and 10 amendments that the people can make privatley issued money through free banking and debt obligations."

    As well as section 10's prohibition of laws impairing the obligation of contracts.

  52. @shchpendrop "The problem with a gold standard is that it makes it too difficult for the government to finance its expenditure"

    That's a feature, not a bug.

    "and tax revenues tend to be low in times when high spending is necessary"

    BULLSHIT. EVERYONE needs to cut back in a recession, ESPECIALLY government!

  53. "BULLSHIT. EVERYONE needs to cut back in a recession, ESPECIALLY government!"

    Holy fail. If everyone cuts back, then how is anyone going to make money?

  54. Cutting back = more savings. More savings = more investment. More investment = more production, more jobs, and higher wages. THAT is how you recover. Paul Volker proved that in no uncertain terms. Pity no one ever listened.

  55. Why the hell would businesses take out loans to expand their production and hire new people if no one is buying their products?

    "Paul Volker proved that in no uncertain terms."

    What? No he didn't, he proved that you can cut down inflation by raising the federal funds rate and bringing unemployment to 10.8%, I doubt anyone would argue with that. We only recovered once the fed started to lower rates again coupled with massive deficit spending by Reagan.

  56. The rates, WERE lower, and we DIDN'T recover. Volker realized that you don't get investment with negative real interest rates, so he increased interest rates significantly above inflation and the recovery happened within a year. THEN rates went down again.

  57. Dude you really need to stick to pwning creationists because you're terrible at economics and history. The fed raised interest rates to choke out inflation and there was a recession with unemployment soaring to over 10%. The recovery didn't happen until the fed started to lower interest rates again and Reagan also started doing massive deficit spending. Fed rates peaked in mid-late 1980 then started rapidly falling, GDP and employment both started rising almost immediately after.

  58. "The fed raised interest rates to choke out inflation and there was a recession with unemployment soaring to over 10%."

    That happened BEFORE Volker raised interest rates. He raised interest rates BECAUSE that had happened!

    "The recovery didn't happen until the fed started to lower interest rates again"

    Then how come the rates didn't actually go down until the recovery had begun? More time-travelling econometrics.

  59. "Fed rates peaked in mid-late 1980 then started rapidly falling"

    Umm, no. The funds rate peaked at 20% in June 1981, and the prime rate increased to 21.5 in 1981.

  60. You're right, I was off by one year. Fed funds rates were high for 80-81 but peaked in 81. Then they fell rapidly and unemployment followed. You can swap out where I said 80 for 81 and you're still totally wrong. For someone who calls people out for logical fallacies, you sure like to intentionally miss the point.

  61. "You can swap out where I said 80 for 81 and you're still totally wrong."

    No, because you claimed that it was LOWERING interest rates that spawned the recovery. The recession ended in November 1982, but interest rates didn't start falling until well into 1983.

  62. "The recession ended in November 1982"

    That's true but…..

    "interest rates didn't start falling until well into 1983."

    …….this is false. It was 19% in July of 81, then 15.08% in Nov, then 13.22% in Jan 82, then went back to almost 15% by April, then back down to 12.59% by July, and 9.71% by Nov of 82. (Source, St Louis Federal Reserve)

  63. "That happened BEFORE Volker raised interest rates. He raised interest rates BECAUSE that had happened!"

    That's not possible, unemployment hit 10.8% in december of 82, fed rates peaked in 81 and then fell.

    "Then how come the rates didn't actually go down until the recovery had begun? More time-travelling econometrics."

    You can deny the facts all you want, it doesn't make you right. Fed rates peaked in 81, then started to fall rapidly, unemployment peaked in late 82 then started to fall.

  64. I don't know what rate they're using, but it's neither the prime rate nor the funds rate. Are you sure that isn't the TARGET funds rate?

  65. It's the Effective funds rate from research (dot) stlouisfed (dot) org. Where are you getting your numbers?

  66. You mean the "funds effective rate." There's no such thing as the "effective funds rate."

    That's just a weighted average based on domestic securities. Look at the ACTUAL funds rate, taking ALL loans between banks into account. Also look at the prime rate.

  67. I'm confused. If the states have no right to establish a legal tender that is something other than Gold or Silver, then why is it significant that the Federal government doesn't have a right to establish legal tender? At the end of the day, even if that power is reserved to states( and not to the federal gov't), in what way is it imporatant if the states themselves do not have that liberty either? They can issue only gold or silver.
    It's really confusing.

  68. "why is it significant that the Federal government doesn't have a right to establish legal tender?"

    Because it's not a Federal power under the Constitution.

    "even if that power is reserved to states( and not to the federal gov't), in what way is it imporatant if the states themselves do not have that liberty either?"

    They HAVE that power, they can only just use gold or silver coin to do that. And the founders knew very much the importance of sound money.

  69. "They HAVE that power, they can only just use gold or silver coin to do that"

    But that's my point.How is that giving them the liberty to set legal tender?It's like saying, you have the right to choose the topic of your research paper,but it has to be the topic that your professor gives you.It strikes me as being contradictory.

    Not that I'm against the Gold Standard, or sound money, mind you. I'm very much an Austrian. It's just taht the language of the constitution sometimes baffles me.

  70. "How is that giving them the liberty to set legal tender?"

    The Constitution doesn't enumerate state powers, like it does with Federal powers. The states have a power unless it's specifically restricted by the Constitution. The states have the power of legal tender because they've always had the power of legal tender; the Constitution restricted the states to just making gold or silver coin legal tender, not paper money or whatever.

  71. In that case, why does it matter if the gov't or the states set legal tender? In both cases it's true that only gold and silver can be considered legal tender. What difference does it make if the federal gov't or the states are responsible for it?
    Do you get where I'm coming from?

  72. "In that case, why does it matter if the gov't or the states set legal tender?"

    Separation of powers. The Feds coin the money, the states make it legal tender.

  73. Okay, makes sense.

    I do have another question. If we believe in free markets, and sound money, and we reject the notion that money should somehow be in control of one monopoly/central planner(the Federal Reserve), why is it okay for government to issue currency, and not leave it to the free market? Why aren't we outraged by the fact that the Constitution allows for such a provision to be in the hnads of government. Shouldn't the power to coin money be invested in individuals?

  74. It was. It gave the Federal government the power to coin money; it didn't give them the power to stop private individuals from doing the same thing. As long as the coin was genuinely gold or silver, and contained the proper amount, it wasn't counterfeit.

  75. Hmm, did not know that. I need to study this document in a serious in-depth fashion. I'm tired of being confused by its provisions.

  76. Yeah, except they blew it. They made the American dollar a smaller mass than the Spanish dollar, so all people had to do was take their dollars down to Florida and exchange them for Spanish dollars since Congress had fixed the exchange rate at 1:1. Capital flight, Gresham's Law, and all that.

  77. Americans were re-coining. They'd "buy" a Spanish dollar for an American dollar and melt down the silver. They then had more than one American dollar's worth of silver.

  78. If Zimbabwe has 100 trillion currency unit banknotes in circulation, then how much is the total amount of money of their currency in circulation right now? 

  79. Unfortunately most people don't know what money is or at least what it's supposed to be. You could make banknotes backed by ice cream and it is considered money. Granted your commodity isn't long lasting but it is tangible.

    Take crytocurrencies for example. While some may argue that they're not backed by anything, I haven't looked into every form of it yet, but there is one example that does have tangible worth beyond a medium of exchange.

    Ethereum is backed by the miners providing secure cloud based computing. While not strictly a commodity, more of a labor, cloud based computing will never be worthless in the right hands. Or at least that's what I understand it's backed by from watching a few videos explaining the difference between it and Bitcoin to say that it wasn't competing with Bitcoin.

  80. Money is not a "thing" – money things are monetary instruments which have three requirements: an issuer, a denominated value, and a guarantee to accept it in payment.
    The "legal tender" notice on a Federal Reserve Note (a dollar bill) says "all debts public and private." The public part is you can only discharge your liabilities to the government with the government's own monetary instruments, and you can only enforce through the legal means of the court system the settlement of private debts with the government's monetary instruments.

  81. You are so wrong and make no sense. The writers of the Constitution were well aware of the constant adjustments in the value of gold and silver and NEVER even hints that it's value of the current markets would remain constant. It never has in history known history of gold and silver standards for measure and these men were extremely aware of this fact. That's where the term "to regulate it's value" came from and not "to keep it's value at a constant level of today's prices".

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