Today we bring you Part IV of “A Brief Monetary History of the United States” from the Ron Paul Monetary Policy Anthology. The full series can be found at the following links:
Part I – Colonial Money and the Coinage Act of 1792
Part II – The Banks of the United States, McCulloch v. Maryland, and Private Coinage
Part III – Government Begins to Monopolize Currency
Part IV – The Legal Tender Cases and the “Crime of ’73”
Part V – The Rise of the Fed
Part VI – The Great Depression, Gold Confiscation, and the Gold Exchange Standard
Part VII – The Dollar Reigns Supreme: From Bretton Woods to Stagflation
Part VIII – The 1980s to the Great Recession and on to the Future
Legal Tender Cases
Supreme Court Justice William Strong, author of the majority opinion in Knox v. Lee.
The government understood the need to return to specie redemption, but was loath to let go of its issue of greenbacks. After all, greenbacks were an interest-free form of debt that circulated as money and could be used to pay off creditors, thus saving the government from having to use its valuable gold and silver. However, from the very inception of the Legal Tender Act, the constitutionality of legal tender paper currency had been called into question. That question was finally resolved after the decisions handed down in a series of Supreme Court cases known as the Legal Tender Cases.
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Inflation-racked Argentina is preparing to issue larger-denomination banknotes to alleviate critical shortages of cash in the country. What a difference between the Argentine government and most other Western governments, which seek to crack down on the use of cash.
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Presidential candidate Donald Trump last week claimed that the Federal Reserve was keeping interest rates low to help President Obama, since Obama didn’t want to leave office during a recession. Is there any truth to that? Well, maybe. Remember that Arthur Burns was once asked why, after helping Richard Nixon win re-election in 1972 by keeping interest rates low, he didn’t help Gerald Ford in 1976. The answer: Ford didn’t ask. So has Obama asked Janet Yellen to keep interest rates low so that he doesn’t leave office under a cloud?
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The US Treasury Department has warned the Chinese government that it will be paying attention to China’s new currency regime. Any further devaluations of the yuan will likely result in a strong denunciation from Washington. Meanwhile, the Federal Reserve continues to devalue the US dollar, but you won’t hear a peep from the Treasury about that. After all, do as we say, not as we do, right?
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“Battle of the Money Bags and the Strong Boxes” – Pieter van der Heyden, after Pieter Bruegel the Elder (After 1570)
China’s move to stabilize its economy by devaluing the yuan will bring a renewed intensity to the currency wars that have engulfed the world over the past several years. Ever since the financial crisis, central banks around the world have engaged in unprecedented monetary easing. As one central bank eases, its currency weakens in relation to other currencies, making the other currencies stronger. Countries with strong export sectors feel the pinch of a stronger currency as it makes their exports more expensive abroad, and so their central banks decide to engage in monetary easing. The result, as we see now, is a world in which the major central banks have engaged in competitive devaluation of their currencies, with perhaps even more devaluation on the horizon.
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On March 25, 1964, the Secretary of the Treasury announced that Silver Certificates would no longer be redeemable for silver dollars. By this time, the market price of silver had risen so high that the silver content of silver dollars was now worth more than one dollar. Silver dollars had not been minted since the 1930s and the Treasury had no desire to draw down its stocks of increasingly-valuable silver dollars by allowing arbitrageurs and coin collectors to redeem silver certificates for silver dollars. Silver certificates continued to be redeemable in silver bullion at the Treasury Department until June 24, 1968, after which time redemption of silver certificates for metal was abolished by Act of Congress. Silver certificates continue to be legal tender and can be exchanged for Federal Reserve Notes for anyone wishing to do so.
MarketWatch reported the other day on hedge funds profiting from the US Treasury’s sale of TARP assets. TARP, as you’ll recall, was the $700 billion bank bailout that Congress passed in early October of 2008. As Treasury seeks to rid itself of the TARP assets it still holds, it is auctioning them off to banks and investors.
The Treasury-created market has benefited a few savvy investors, while saddling taxpayers with a loss. Three private funds, which the report didn’t name, have won almost half the shares available at auction, often netting either a profit on paper or on the resale, according to the special inspector general for the Troubled Asset Relief Program.
It shouldn’t be shocking that the Treasury is losing money on its “investment.” First of all, anytime the government auctions off assets like this, the only entities that are even able to bid on them are those who already have lots of money, or who are able to arrange financing to make these purchases. Thus the possible pool of beneficiaries already is limited to the very richest and/or well-connected firms.
Secondly, the billions of dollars spent by Treasury to purchase these assets are billions of dollars that were sucked out of the private sector and thus couldn’t be put to good use by individuals. That money could have been loaned to small businesses to grow and create jobs, it could have been loaned to homebuyers to help them purchase a house, it could have been put to a whole host of productive uses.
Instead, it was siphoned off by the Treasury, used to purchase financial assets that sat around doing nothing for years, before being unloaded on the cheap to hedge funds who turned around and made scads of money at the taxpayers’ expense. If this example of Washington screwing taxpayers in order to profit Wall Street isn’t an example of what’s wrong with the political-financial system that exists in this country, I don’t know what else is.
Strong dollar policy? What strong dollar policy? Treasury Secretary Jacob Lew has been in the news recently talking about the “strong” US dollar. I guess I can’t put it past a government official to take credit for something for which he is not responsible, but this is just ridiculous. Take a look at the government’s own CPI figures above and you see just how much the cost of living has risen due to the dollar’s devalution. The only reason the dollar is considered “strong” is because Europe and Japan are in a cage match to see who can devalue their currency more. Yeah, if the ECB and BOJ are printing more money than the Fed, then the dollar will be relatively “strong” in comparison. But ask anyone in the US outside of the major political (DC) and financial (New York, San Francisco, Chicago, Charlotte) centers how far their dollars are going and I think you’ll find the same answer everywhere: “not much.”
I’m going to try to find video of Dr. Paul’s questions to Fed Chairman Bernanke and Treasury Secretary Paulson about the dollar. Ask the Fed about the strength or weakness of the dollar, and they’ll always say that that’s the Treasury’s responsibility. Ask the Treasury, and they’ll always say it’s the Fed’s responsibility. Funny how that works, at least when the dollar is weak. But when it’s “strong” because the Fed isn’t inflating as fast as other central banks, Treasury and the Fed will trip all over themselves trying to take credit for the dollar’s relative “strength.”
The US Treasury Department has issued a new rule that would request foreign governments, foreign central banks, and international monetary authorities to report to the federal government if they hold large positions in US Treasury securities. With nearly $13 trillion in debt held by the public, and almost half of that held by foreigners, it’s understandable that Treasury is getting nervous about foreign governments using their Treasury holdings as leverage. Of course, the solution to that is not to issue trillions of dollars of debt in the first place.
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The Gospel this morning for the 21st Sunday after Pentecost was the Parable of the Wicked Servant (Matthew 18:23-35). The moral of the story is to forgive others as we are ourselves forgiven:
For if that Royal master so readily forgave his servant his debt of ten thousand talents, should not his servants much more forgive lesser debts unto their fellows? (St. Jerome, from the homily on the Gospel read at Matins)
The hypocrisy of the wicked servant is one that is plainly obvious and that resonates with most people who hear it. Ever since the 2008 TARP bailout, every time I hear that Gospel passage I think of the behavior of the big Wall Street banks.
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