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Former Senator Schmitt Challenges the 112th Congress to Take Control of Monetary Policy

The Founders gave Congress the constitutional power in Article I, Section 8, Clause 5, “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”. The intent of this Clause clearly lay in having a stable national currency, with a defined relationship to foreign currency, and tied to a standard weight and measure of silver or gold, the universally accepted media of coinage. Clause 6 of Section 8 further emphasizes the Founders’ intent to protect the value of the “Coin of the United States” by providing to the Congress the power to punish counterfeiting.

The Founders understood the basic principle that consumer demand and the supply of money determined the prices of goods and services. Growing economies require a stable value of national “coinage”, or money, and a quantity of money that grows in cognizance with growth in demand. Without monetary policy that met these criteria, an economy would be subject to either inflation or deflation if there were, respectively, a money supply excess or deficiency.

Other factors cause lags in the time correlation between money supply and prices, including overall economic demand and asset valuations, consumer use of discretionary funds to pay down debt rather than consume, and changes in the velocity of money (rate of money’s movement through the economy). Nonetheless, history and logic clearly show that if an increase in the money supply occurs in excess of the increase in the demand for goods and services, inflation results, lagging the money supply increase by a year or so depending on the rate of growth in demand.

As recently reminded by Seth Lipsky (Wall Street Journal, 11/17/10), the use of the word “dollar” at the time of the ratification of the Constitution and in the 1792 Coinage Act referred to a specific “weight and measure” of the Spanish Milled Dollar, namely, 371.25 grains (0.849oz) of silver. The standard value for silver relative to gold was set at 15:1 with the small level of copper alloyed with either silver or gold defined as well. In modern times, the previously practical tie between the value of silver and gold has weakened as the demand for silver has become partially tied to its more extensive use as an industrial metal.

Worth noting is that the penalty stated in the 1792 Coinage Act to be imposed on the officials of the United States Mint for fraud, embezzlement, or debasement of the currency was death. The Founders clearly anticipated that a tie of the American dollar to silver and gold would be their means of regulating the value of the dollar, as well as its value relative to “foreign Coin”, and were deadly serious about preserving that value.

Although gold generally has been a hedge against inflation, in the 1500s and 1600s rampant inflation swept Europe due to rapid increases in gold and silver supplies from new European production and then Spain’s production from the New World. That temporary inflationary effect receded as the industrial revolution raised the supply of consumer goods throughout Europe. Variations in gold supply increases (production about 2.5 metric tonnes per year) have been relatively minor in the last 150 years relative to the estimated current global historically mined inventory of ~180,000 tons (worth ~$5.76 trillion with a gold price of $1000 per ounce), with global official government reserves of about 36,000 tons (worth ~$1.15 trillion at $1000/oz).

A largely politicized Federal Reserve System now has created a critical emergency in monetary policy. Led by Chairman Ben Bernanke, the Federal Reserve plans to again violate the Founder’s intention of having a stable currency by further monetization of the still rising national debt through printing another $600 billion out of thin air, euphemistically called “quantitative easing” or QEII. The Fed’s monetary policies, created at the behest of the Obama Administration, have created the potential for rampant future inflation, once some semblance of sustained economic recovery appears. Whatever its domestic political intent, QEII also has seriously threatened the economic growth of our trading partners. One must wonder if the 1792 Coinage Act’s penalty for debasement of the currency still applies.

The recent disclosure by the Fed that large banks and businesses took advantage of $3.3 trillion in Fed loans beginning in December 2008 dwarfs QEII. What of substance stands behind such largess other than the Feds printing press or the taxpayer’s implicit guarantee of the loans? How did this loan policy remain secret for so long? Were the loans actually bribes to get banks and businesses to support the new Administration’s fiscal policies? Congress not only must take back its power over monetary policy but it must investigate this additional travesty in the exercise of dictatorial power.

In matters relative to Federal Reserve’s unconstitutional, 1978 congressional mandate (Humphrey-Hawkins) to promote the goal “of maximum employment”, the alleged rationale for QEII, the Congress has no direct constitutional power to regulate or legislate relative to employment or industrial policy, other than through tax and defense policy. In addition to its unconstitutionality, the bipolar mandate to both stabilize the dollar and destabilize the dollar and increase debt to further employment is inherently contradictory.

As currently legislated in matters relative to the value of the dollar, the Federal Reserve System acts outside the intent of the Founders and the words of the Constitution. Although Clause 18 of Article I, Section 8, provides Congress with the power to “Make all laws necessary and proper for carrying into execution…” the Coinage Clause, Congress has no constitutional power to totally abrogate its responsibility to “regulate the Value” of currency. In establishing the Federal Reserve System in 1913, and in subsequent Amendments to the founding Act, Congress made no provision for itself to independently regulate actions of the Federal Reserve that may adversely affect the value of United States currency or the value of that currency relative to foreign currency.

Creation of a One House Legislative Veto process [*] relative to perpetuation of any Federal Reserve decision related to monetary policy would provide constitutional cover if Congress wishes to re-authorize the Federal Reserve as an arm of its Coinage Clause power. The Legislative Veto should apply to any policy that stays in effect for more than one year and is deemed, by Resolution of either the House or Senate, to create sustained monetary inflation or deflation of more than one percent, annually.

Clearly, the Federal Reserve System no longer operates in the national interest. Congress should take the opportunity given it by the 2010 elections to assert its constitutional responsibility to stabilize the dollar and build the foundations for a vibrant, worldwide economic and trading environment. A monetary standard that combines the stabilizing power of gold with adjustments related to real wealth creation would go far in achieving this goal. The basis for a gold-wealth creation monetary standard should consider the following:

1. “Coinage”, hard or paper, evolved within human affairs to increase the efficiency of economic activity versus what would be possible in a barter or precious metal exchange economy. Setting the value of any form of money, however, has been increasingly important, particularly in the United States, as wealth creation accelerated after the industrial revolution and with the efficiencies of capitalism. Further, almost since the country’s founding, U.S. Administrations repeatedly have tried to manipulate the money supply to satisfy either political objectives or the necessities of national defense.

2. A pure, 100% gold standard or “specie” standard would tie the total value of paper and coin currency to the amount of gold reserves held by the Federal Reserve. A 100% gold standard clearly provides a barrier to inflation if the reserves or value of gold remain constant and the supply of goods and services does not decrease, drastically. On the other hand, a 100% standard creates a brake on economic growth unless gold reserves or their value grow at the same rate as the private sector’s potential for wealth creation. Unfortunately, such an inherent correlation does not exist.

3. An ideal modern coinage standard would be based on the market value of gold, adjusted by an index to a multiyear moving average of the rate of increase in true national wealth as measured by sales and investments rather than by the cost of creation of that wealth. The “cost” of goods or services created, but for which there is no demand, does not reflect the creation of new wealth.

4. Properly measured, an index of national wealth creation (INWEC) would inherently include the rate of increase in sales of domestically produced goods and services that contribute directly to the long-term growth of national wealth. A congressionally mandated basket of specific, domestically derived, INWEC for good and services should be limited to the following: commodities, manufactured goods, communications services, software, private education services, and research investments. Any regulatory attempt to change the composition of the final congressional INWEC basket should be subject to a One House Legislative Veto.

5. Other than funds invested in basic and applied research, direct and indirect federal expenditures should not be included in the index of national wealth creation. If they were, the potential for political manipulation of the value of the dollar would still exist.

A stabilizing gold-wealth creation monetary standard for the value of American currency would both prevent increases in inflation due to politically motivated additions to the money supply, as the Federal Reserve currently is attempting, and adjust the dollar’s value over multiyear periods to reflect realistic economic growth variables. The 112th Congress needs to get to work immediately on permanently stabilizing monetary policy and other items on its economic recovery agenda.

[*] The Founders clearly intended by Clause 18 of Article I, Section 8, that enactment of federal laws to be the responsibility of the Congress and not passed on to the Executive Branch through generalized regulatory authority. In order to return to the Founders’ intent, Congress should create a One House Legislative Veto process relative to any decision, order, or regulation promulgated by the Executive Branch. That process of regulation review and potential disapproval should begin with 20 percent or more of the members of either House petitioning to discharge an introduced Resolution of Disapproval from the relevant Committee or Committees and move its consideration to the floor of the initiating House. If the Resolution passes either House, the Congress can maintain constitutional control of this On House Legislative Veto process by a sequence of one House passage of a Resolution of Disapproval, followed by the other House’s opportunity to pass a Resolution of Disapproval of the first House’s action. This sequence avoids the constitutional requirement for the President to sign any joint action by the House and Senate (Article I, Section 7, Clause 3). Should an Agency or Department refuse to honor the Legislative Veto of a specific regulation, the Congress should use the Appropriations Bill to rescind funding for its enforcement.



A Constitutional Dollar

TAGS The FedLegal SystemU.S. HistoryGold StandardMoney and Banking


Are you aware that a Federal Reserve dollar bill is not a constitutional dollar? Perhaps you are, but if so, do you know what a constitutional dollar literally is? Is it gold? Is it silver? Is it both? What is actually meant by a metal standard? Can the United States or any country be on two standards at the same time? Can two metals circulate as coin if there is but one standard? Or does one metal have to drive the other out of circulation? How and why does Gresham's law work when a country uses metal coin for money? In what ways are certain statements of Gresham's law misleading?

Sooner or later, if and when the power of the Federal Reserve over money is revoked in a constitutional manner, and if and when constitutional coin comes back into use, these questions will need to be asked, answered, and understood. That is what this article does in a compact fashion.

In his meticulously researched two-volume work, Pieces of Eight, constitutional lawyer Edwin Vieira Jr. shows beyond any doubt that the constitutional dollar in the United States is an "historically determinate, fixed weight of fine silver." The Coinage Act of 1792 is but one source among many that makes this evident, reading,

"the money of account of the United States shall be expressed in dollars or units … of the value [mass or weight] of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure … silver.

The United States has a legal and constitutional silver standard, although we would not know it today, since the government has illegally and unconstitutionally removed silver as currency and replaced it with the Federal Reserve notes that we know as dollar bills. The term "dollar bills" obscures the actual and tangible meaning of "dollar" as a specific weight of silver.

The United States has historically minted gold coins as well as silver coins, as the constitution instructed. It regulated their "value," the weight of gold they contained, in order to bring the meaning of a gold dollar into conformity with the silver standard coin, which contains 371.25 grains of pure silver. This too was constitutionally mandated. The government did the same for foreign coins up until 1857.

The United States never was or could be constitutionally on a dual standard or a gold standard. It circulated silver and gold coins as media of exchange by adjusting the content of the gold dollar to a silver-standard dollar. For example, the Coinage Act of 1792 authorizes "Eagles — each to be of the value of ten dollars or units [i.e., of ten silver dollars], and to contain two hundred and forty-seven grains, and four eighths of a grain of pure … gold." Since the dollar contained 371.25 grains of silver, this brought into legal equivalence 3712.5 grains of silver and 247.5 grains of gold. The ratio was 1:15.

In the Coinage Act of 1834, Congress adjusted the gold eagle: "Each eagle shall contain two-hundred and thirty-two grains of pure gold." This brought into legal equivalence 3712.5 grains of silver and 232 grains of gold. The ratio was 1:16. The reason for the change was that gold had appreciated in market value relative to silver.

Old coins could be brought in and reminted for free (after waiting 40 days.) If old coins were not reminted, they were to be accepted as payments "at the rate of ninety-four and eight-tenths of a cent per pennyweight." The weights of the earlier and later eagles were influenced by a change in the standard gold alloy. The rate of 94.8 cents per pennyweight took that change as well as the alteration in the pure gold content into account, so that payments made in either the old or the new coins became very nearly equivalent in terms of the amounts of pure gold being paid.

With this as an introduction, let us go on to an explanation of Gresham's law and the reason why Congress was constitutionally mandated to make such adjustments in the weight of gold in the gold-dollar coin.

Suppose that the dollar is defined as a unit that contains 371.25 grains of silver, and suppose that the unit is physically identified with a specific silver coin that contains that mass of silver. Since grains are unfamiliar units, let us use ounces. Let us note that There are 480 grains in one troy ounce. Hence, 371.25 grains weighs 0.7734375 oz. That is to say that if a silver-dollar standard is officially and constitutionally instituted, with each dollar having the mass of 371.25 grains of silver, this means that the dollar is defined as containing 0.7734375 troy ounces of silver.

In all nonfraudulent exchanges involving dollars, someone who pays or receives a dollar is supposed to pay or receive that mass (or loosely weight) of silver in coin or its equivalent in bullion (bars or ingots). The dollar sign, "$," in such a regime means 1 silver dollar of the official weight of 0.7734375 troy ounces of pure silver. The word "dollar" means the silver coin of that specific mass.

A standard is something that is unchanging. A yard always has 36 inches. A pound always has 16 ounces. A standard, constitutional dollar always has the same amount of the metal that is chosen as its definition, until the constitution is amended to alter the standard, or unless the constitution allows the legislature to alter the standard.

Economically, there can only be a single such standard dollar at a time. One cannot simultaneously have the dollar mean a certain amount of silver and another amount of gold. An economy cannot have two concurrent and different standards of the dollar. The reason for this is that, as will now be discussed, the relative prices of any two metals fluctuate over time.

The exchange rates of gold for silver vary over time due to the changing supplies and demands for these metals in markets. At one time, 1 oz of gold may exchange for 16 oz of silver, while at another time it may exchange for 25 oz of silver. These fluctuations go on unceasingly.

If an attempt is made to define a dollar by two standards simultaneously, it will fail. If a dollar is made to be 1 oz of gold and also 16 oz of silver, what is a dollar when those metals no longer exchange at that ratio? What is a dollar when they exchange at 1 oz of gold to 25 oz of silver? There is no answer. There is no answer because the dollar cannot simultaneously be two different weights of two different metals whose rates of exchange vary over time. One or the other of the two metals has to be chosen as a standard.

Fluctuations occur in the market even if the government sets an official rate of exchange between the two metals, which is what was done in the various coinage acts. The government can attempt to force a given exchange rate, but this will not alter the fact that the market exchange rate departs from the forced exchange rate. The result of a discrepancy between legal and market rates of exchange will be that one of the metals will disappear from circulation. That result comes under the heading of Gresham's law in operation.

There are two ways that the government can, without the direct use of force, keep both silver and gold circulating as money even if only one of them is the standard. One way is to regulate the value of the official gold dollar as time passes, which means to change the official rate of exchange between gold and silver in order to bring it into accord with the market rate of exchange. That is what the coinage acts did.

The other way is to avoid using a gold dollar altogether and produce gold coins that have a known weight but no designation as a dollar. The gold coin can "float" or have a changing price against the silver-standard dollar. This method was not used but it could and should be used in the future if and when the constitutional silver dollar is restored as the unit of account.

Let us examine in more detail how a money standard, such as the silver standard, works; and then let us examine Gresham's law.

Suppose that there is a single silver standard: that of a dollar containing 0.7734375 oz of silver. Suppose also that at some specific time, the price of a troy ounce of gold in terms of silver is $16 in the market. This means that 1 oz of gold exchanges in the market for 16 silver dollars, each dollar containing 0.7734375 oz of silver. That is, 1 oz of gold exchanges for 12.375 oz of silver.

Now suppose that the government issues a gold coin. If an official gold coin is made that says it is a $16 gold coin, stamped literally 16 dollars, it will contain 1 troy ounce of gold, worth exactly $16, that is, worth 16 silver dollars. Suppose that the government goes one step further: it makes this exchange rate the official rate, such that in debt contracts one is permitted to pay either 16 silver dollars or 1 of these gold coins.

The official exchange rate is 1/16 oz of gold per silver dollar. The silver standard and accompanying law make silver a legal payment or legal tender in debt contracts, unless perhaps the private parties to the contract are allowed to specify otherwise. With gold's price officially fixed at 1 oz per 16 silver dollars, then gold at that price is also a legal tender in payment of debts. The government in this example is attempting to keep both gold and silver in circulation by making the official rate the same as the market rate.1

In the unlikely case that the market price of gold remains at $16 indefinitely, this gold coin provides a substitute or equivalent to the silver standard, even though there is but a single standard. If this market ratio prevails through time, staying at the official rate, there is no real difference between gold and silver for payment purposes. In this situation, one can think in terms of either a silver or a gold standard, even though there is really only a single standard. There is no significant difference.

However, this situation never actually occurs. Market prices do change. A single standard then becomes essential in an economic sense if the dollar is to retain a clear definition as a standard. The silver standard fixes the dollar at 371.25 grains of silver, no matter what happens to the market price of gold in terms of silver. If the relative prices of silver and gold change, that shows up in a change solely in the price of gold. This will make the "16 dollar" designation on the gold coin obsolete from a market point of view, but not from an official point of view.

This disparity will set in motion certain events that we now look into. These events are certain to occur because the discrepancy between the market and official rates will create a profit incentive.

Consider two examples in which the market prices deviate from the official exchange ratio. The first example occurs when gold rises in price relative to silver. Suppose that 1 oz of gold becomes able to buy 20 silver dollars in the market. The market exchange ratio becomes 0.05 oz of gold per silver dollar, while the official rate is still 0.0625 oz of gold per silver dollar. The gold piece becomes more valuable. An ounce of gold now exchanges for 15.46875 oz of silver, which is the amount of silver in 20 silver dollars. At the official rate, it exchanges for only 12.375 oz of silver.

Now we explore the profit opportunity that lies at the heart of Gresham's law: If someone owes 16 dollars and can pay in either silver or gold coins, which will they chose? Will it be silver or gold? Intuitively, one pays with the less expensive metal, which is silver. One holds gold off the market and instead uses silver for payments. The more expensive metal disappears from circulation as money or coin, although it will continue to be used for jewelry, teeth, and industrial applications.

The official contractual rate in debt contracts calls for either 16 silver dollars or 1 gold coin. But 1 gold coin now exchanges for 20 silver dollars in the market. If a person possesses 1 gold coin, he can buy 20 silver dollars in the market by ignoring the official rate of exchange. He can then pay the debt with 16 of these silver dollars and have 4 silver dollars left over. This is clearly preferable to paying out the entire gold coin to satisfy the debt, since he gets rid of the debt and still has 4 dollars left over. Hence, he will pay at the official rate in silver dollars, not in gold coins.

This situation contains a risk-free arbitrage (or profit) opportunity. Exploiting it drives gold out of circulation as money. For example, suppose a person starts by borrowing 1 gold coin. He then buys 20 silver dollars and keeps 4 of them. He then repays the loan of the gold coins with 16 silver dollars, since they are legal tender. He can repeat this operation again and again to augment his pile of free silver. This is a money machine — a risk-free arbitrage — in which one party gains and the other loses.

The lender of gold coins is obeying the law by honoring the official exchange rate, but he is losing on this deal since the 16 silver dollars that he is repaid cannot buy 1 gold coin in the market. He will stop lending gold coins. He will put an end to the money machine. This is why finance theories typically assume that assets are priced so as to preclude risk-free arbitrage opportunities.

Let us think of this in another way, which is in terms of exchange rates. An exchange rate when silver is the standard is expressed as a number of ounces of gold per silver dollar. When gold appreciates in price relative to silver, the exchange rate falls. That is, less gold is required to exchange for each silver dollar. In the example above, one can satisfy the debt at the official exchange rate of 0.0625 oz of gold per silver dollar, whereas the silver dollar fetches only 0.05 oz of gold in the market. Silver that is used to extinguish debt has a greater value than silver that is used to buy gold in the market as coin. Therefore, silver will be used for payments of debt and all other exchanges, not gold.

The result of gold having appreciated in price relative to silver and thus of the market rate of exchange of gold for silver having fallen below the official rate of exchange (0.05 oz of gold per silver dollar as opposed to 0.0625 oz of gold per silver dollar) is that gold will disappear from circulation as payments. This is an example of Gresham's law.

When two metals are legal tender at an official rate of exchange and one metal's market price increases, that metal (here gold) will disappear from circulation as money. Gresham's law is an application of the idea that money machines do not exist in equilibrium, that there is no free lunch, and that risk-free arbitrage opportunities do not exist in equilibrium.

There is another way of describing what happens when gold appreciates in price relative to silver, but the official rate is lower: One could say that the official exchange rate undervalues gold. The undervalued metal disappears from circulation.

This language is misleading and confusing, however. Is silver overvalued? It seems natural to conclude that silver is overvalued if gold is undervalued. However, silver is not overvalued. Silver cannot possibly be overvalued because it is the standard being used to define the dollar.

Despite the very great drawback introduced by the terms "undervalued" and "overvalued" in this context, they have been common in debates on bimetallism. These terms have contributed to confusion, erroneous analysis, and policy blunders with costly consequences, because they obscure the reality that one metal is always the standard. In the United States, that constitutional metal has always been silver.

One also hears Gresham's law stated as "bad money drives out good." This too is misleading, confusing, and erroneous. In the example of gold appreciating and disappearing, silver is by no means "bad money," nor is gold "good money." There is no good and bad money at all. Silver is the metal being used as the standard. It has not driven gold or good money out of circulation. The fixed exchange rate of gold set at too high a level compared to the going market rate has driven gold out of exchange.

For completeness, we consider the opposite case in which gold depreciates relative to the silver standard. Suppose that the market exchange rate rises from 0.0625 oz to 0.076923 oz of gold per silver dollar, which means that one ounce of gold now trades for 13 silver dollars. Suppose that a debt of $16 is to be paid. A person can pay in either silver or gold dollars. This again requires 1 gold coin at the official rate. The cost of that coin in the market is 13 silver dollars. If one had 16 silver dollars, one could use 13 of them to buy 1 gold dollar in order to pay off the debt. One would then have 3 silver dollars left over. Therefore, it's less expensive to pay the debt with gold.

Gresham's law again goes to work. Silver disappears from circulation. When two metals are legal tender at an official rate of exchange and one metal's market price depreciates in terms of the metal used as a standard (silver), that depreciated metal (gold) will circulate, and the other metal (silver) will disappear from circulation as a medium of exchange while maintaining its role as a medium of account.

In practice, a rather small depreciation of gold (1–3 percent) is enough to cause silver coins to disappear from circulation. Suppose we start with an official and market ratio of silver to gold at which there is the equivalent of 0.05 oz of gold in one silver dollar. This means that 1 silver dollar buys exactly $1 worth of gold at the official and market rate, and that 20 silver-dollar coins buy 1 gold coin that weighs 1 oz and is worth 20 times as much as the silver in one silver dollar.

Suppose now that the market price for gold declines such that 0.051 oz of gold buys 1 silver dollar. This is a 2-percent increase in the market exchange ratio. At the official exchange rate of 20 silver dollars per gold coin, the 0.051 oz of gold is worth 0.051 × 20 = $1.02 (i.e., 1.02 silver dollars.) If a person had to pay $1, it would be better to pay it in the less-expensive metal (here gold), at the official rate of 0.05 oz of gold per dollar. People will thus tend to use gold for exchanges and hold silver off the market.

If small changes drive one metal or the other out of circulation, the government has to adjust the official exchange rates frequently if both are to be kept in circulation. This is both costly and inconvenient. The solution to this is straightforward. Choose one metal as a standard and allow the price of the other metal to fluctuate freely or float in the market.

If silver is the standard, then gold coins can be minted with no dollar designation at all. They can be minted with the weight of pure gold shown. Then when they are used as payments or used as a basis for issuing e-credits or gold certificates, their weights can be used in conjunction with the changing price of gold to gauge appropriate payments and receipts.

Frequently Asked Questions

Q: What is a constitutional dollar literally (in the United States)?

A: It is a silver coin containing 371.25 grains (0.7734375 troy ounces) of pure silver.

Q: Is a gold standard constitutional?

A: No, not for the United States as the constitution is written. It should be noted, however, that individual states have a constitutional power to make specie (silver, gold, or both) legal tender.

Q: What is meant by a metal standard?

A: It means a monetary unit that contains a specific weight of metal.

Q: Can the United States or any country be on two metal standards at the same time?

A: No, this will be impracticable because of the continual changes in relative prices of any two metals.

Q: Can two metals circulate as coin if there is but one standard?

A: Yes. The metal that is not the standard can circulate as a coin of a given weight of that precious metal whose value at any given time is determined by reference to market prices. Such a coin need not carry any specific dollar designation. This obviates Gresham's law.

Q: Does one metal have to drive the other out of circulation?

A: No. As long as the metal that is not the standard is not legally made to exchange at a fixed ratio to the standard metal, both metals can circulate just as silver and gold both trade in today's markets. Gresham's law will not come into play.

Q: How and why does Gresham's law work when a country uses metal coin for money?

A: Gresham's law takes hold when the government fixes an exchange rate between two metals. When the market rate of exchange deviates from the fixed rate, arbitrage opportunities arise that make it profitable to use the less-expensive metal as means of payment at the official rate. Then the more-expensive metal disappears from circulation as a medium of exchange.

Q: What is an accurate rendition of Gresham's law?

A: When two metals are legal tender at an official rate of exchange and when one metal's market price appreciates in terms of the metal used as a standard, the appreciated metal will disappear from circulation as money and the metal used as a standard will circulate. Conversely, when two metals are legal tender at an official rate of exchange and one metal's market price depreciates in terms of the metal used as a standard, the depreciated metal will circulate; the metal used as a standard will disappear from circulation as a medium of exchange, although it is still the medium of account.

Put more simply, when two metals are legal tender at a fixed, official rate of exchange, the metal that is less expensive at the market rate of exchange will tend to circulate for payments while the more expensive metal will tend to disappear as a medium of exchange.

  • 1.The law may also enable one to legally write contracts to protect against future changes in the market rate of exchange, but that is another matter. We want to see what occurs if the official rate of exchange of silver and gold deviates from the market rate as time passes.


A dollar is just a measure of gold and silver, it may be a coin but it has never been made into money. See
Thus, Congress did not create a “gold dollar,” or establish a “gold standard,” as the popular misconception holds. For example, the Encyclopedia Britannica erroneously reports that the “dollar . . . was defined in the Coinage Act of 1792 as either 24.75 gr. (troy) of fine gold or 371.25 gr. (troy) of fine silver.”29The Act did no such thing. It defined the “dollar” as a weight of silver, and “regulate[d] the Value”30of gold coins according to this standard unit and the market exchange-ratio between the two metals. Nowhere did the Act refer to a “gold dollar,” only to various gold coins of other names that it valued in “dollars.”

What Is a Dollar?

by Edwin Viera

his is a condensed version of the monograph “What Is a Dollar?,” distributed by the National Alliance for Constitutional Money. All rights to this condensed version are reserved by the National Alliance for Constitutional Money, Inc.

The question “What is a ‘dollar’?” seems trivial. Very few people, however, can correctly define a “dollar,” even though a correct definition is vital to their economic and political well-being.

1. Why is a correct definition of the term “dollar” important?

In America’s free-market economy, prices are expressed in units of money. Under present law, “United States money is expressed in dollars . . .”1Moreover, all “United States coins and currency (including Federal Reserve Notes . . . ) are legal tender for all debts, public charges, taxes and dues.”2Thus, defining the noun “dollar” is necessary in order to know what is the “money” of the United States and what constitutes “legal tender.”

2. Do the present monetary statutes intelligibly define the “dollar”?

The present monetary statutes do not define the “dollar” intelligibly.

a. Federal Reserve Notes. Most people mistake the Federal Reserve Note (FRN) “dollar bill” for a “dollar.” But no statute defines or ever defined the “one dollar” FRN as the “dollar” or even a “dollar.” Moreover, the United States Code provides that FRNs “shall be redeemed in lawful money on demand at the Treasury Department of the United States . . . or at any Federal Reserve bank.”3Thus, if FRNs are not themselves “lawful money,” they cannot be “dollars,” the units in which all “United States money is expressed.”

b. United States coins. The situation with coinage is equally confusing. The United States Code provides for base-metallic coinage, gold coinage, and silver coinage, all denominated in “dollars.” The base-metallic coinage includes “a dollar coin,” weighing “8.1 grams,” and composed of copper and nickel.4The gold coinage includes a “fifty dollar gold coin” that “weighs 33.931 grams, and contains one troy ounce of fine gold.”5Finally, the silver coinage consists of a coin that is inscribed “One Dollar,” weighs “31.103 grams,” and contains one ounce of “.999 fine silver.”6What is the rational relationship between this “dollar” of 31.103 grams of silver, a “fifty- dollar” coin containing 33.931 grams of gold alloy, and a “dollar” containing “8.1 grams” of base metals? Obviously, these are not the amounts of the metals that exchange against each other in the free market—that is, the different weights of different metals do not reflect equivalent purchasing powers. So, on what theory are each of these disparate weights, and purchasing powers, equally “dollars”?

c. Currency of “equal purchasing power.” The United States Code mandates that the latter question should not even be capable of being asked. For the Code commands that “the Secretary [of the Treasury] shall redeem gold certificates owned by the Federal reserve banks at times and in amounts the Secretary decides are necessary to maintain the equal purchasing power of each kind of United States currency.”7Obviously, the Secretary has defaulted on this obligation to keep all forms of “United States currency” at parity with one other—that is, to maintain a “dollar” of constant purchasing-power, whether it be composed of gold, silver, or base metals.

In sum, the monetary statutes do not define the noun “dollar” in a unique way. Instead, completely different things have the same name, things unequal to each other are treated as equivalent, and things that should have the same characteristics (i.e., “equal purchasing power[s]”) are quite different.

3. What does American history and the Constitution identify as the “dollar”?

History shows that the real “dollar” is a coin containing 371.25 grains (troy) of fine silver.

a. The “dollar” in the Constitution. Both Article I, Section 9, Clause 1 of the Constitution and the Seventh Amendment use the noun “dollar.” The Constitution does not define the “dollar,” though, because in the late 1700s everyone knew that the word meant the silver Spanish milled dollar.

b. Adoption of the “dollar” as the “Money-Unit” prior to ratification of the Constitution. The Founding Fathers did not need explicitly to adopt the “dollar” as the national unit of money or to define the “dollar” in the Constitution, because the Continental Congress had already done so.

The American Colonies did not originally adopt the dollar from England, but from Spain. Under that country’s monetary reforms of 1497, the silver real became the Spanish money of account. A new coin consisting of eight reales also appeared. Known as pesos, duros, piezas de a ocho (“pieces of eight”), or Spanish dollars, the coins achieved predominance in the New World because of Spain’s then-important commercial and political position.8Indeed, by 1704, the “pieces of eight” had in fact become a unit of account of the Colonies, as Queen Anne’s Proclamation of 1704 recognized, when it decreed that all other current foreign silver coins “stand regulated, according to their weight and fineness, according and in proportion to the rate . . . limited and set for the pieces of eight of Sevil, Pillar, and Mexico” (forms of Spanish dollars).9

By the American War of Independence, the Spanish dollar had become the major monetary unit of the Colonies. Not surprisingly, the Continental Congress adopted the dollar as the nation’s standard of value. On May 22, 1776, a Congressional committee reported on “the value of the several species of gold and silver coins current in these colonies, and the proportions they ought to bear to Spanish milled dollars.” And on September 2 of that year, a further committee report undertook to “declar[e] the precise weight and fineness of the . . . Spanish milled dollar . . . now becoming the Money-Unit or common measure of other coins in these states.”10

Meanwhile, the Continental Congress worked on a new national monetary system. In his letter to Congress of January 15, 1782, Robert Morris, Superintendent of the Office of Finance, recommended that “our money standard ought to be affixed to silver.” Although Morris favored creating an entirely new standard coin, he recognized that, of “[t]he various coins which have circulated in America . . . . there is hardly any which can be considered as a general standard, unless it be Spanish dollars”.11

In a plan published on July 24, 1784, Thomas Jefferson concurred that “[t]he Spanish dollar seems to fulfill all . . . conditions” applicable to “fixing the unit of money.” “The unit, or dollar,” he wrote, “is a known coin . . . already adopted from south to north . . . Our public debt, our requisitions and their apportionments, have given it actual and long possession of the place of unit.”12

Yet Jefferson recognized the necessity of “say[ing] with precision what a dollar is. This coin as struck at different times, of different weight and fineness, is of different values.” So, Jefferson suggested, “we should examine the quantity of pure metal in each [type of dollar], and from them form an average for our unit. This is a work . . . which should be decided on actual and accurate experiments.”13

On July 6, 1785, Congress unanimously “Resolved, That the money unit of the United States be one dollar.”14On April 8, 1786, the Board of Treasury reported to Congress on the establishment of a mint:

Congress by their Act of the 6th July last resolved, that the Money Unit of the United States should be a Dollar, but did not determine what number of grains of Fine Silver should constitute the Dollar.

We have concluded that Congress by their Act aforesaid, intended the common Dollars that are Current in the United States, and we have made our calculations accordingly.

* * * * *

The Money Unit or Dollar will contain three hundred and seventy five grains and sixty four hundredths of a Grain of fine Silver. A Dollar containing this number of Grains of fine Silver, will be worth as much as the New Spanish Dollars.15

On August 8, 1787, Congress adopted this standard as “the money Unit of the United States.”16

Many of the same people who served in the Continental Congress participated in the Federal Convention that drafted the Constitution. And even those members of the Convention who had not served in the Continental Congress knew what that Congress had done. Therefore, when the Convention used the noun “dollar” in Article I, Section 9, Clause 1 of the Constitution, it was with the tacit understanding of the relevant history. The lesson here is clear: The constitutional “dollar” is a fixed weight of fine silver in the form of a coin.

c. Adoption of the “dollar” as the “Money-Unit” immediately after ratification of the Constitution. Upon ratification of the Constitution, Congress and the Executive began work on a national monetary system.

On 28 January 1791, Secretary of the Treasury Alexander Hamilton presented to Congress his Report on the Subject of a Mint. Hamilton posed two questions, “1st. What ought to be . . . of the money unit of the United States?,” and “2d. What [should be] the proportion between gold and silver, if coins of both metals are to be established?”17

On the first question, Hamilton referred to the resolutions of the Continental Congress and concluded that “usage and practice . . . indicate the dollar” as the money unit. As to “what precise quantity of fine silver” the dollar should contain, he surveyed the various dollar coins in circulation over the years, and recommended that “[t]he actual dollar in common circulation has . . . a much better claim to be regarded as the actual money unit.”18

Turning to “the proportion which ought to subsist between [gold and silver] in the coins,” Hamilton recommended the domestic market-ratio of “about as 1 to 15.” “There can hardly be a better rule in any country for the legal than the market proportion,” he explained, “if this can be supposed to have been produced by the free and steady course of commercial principles. The presumption in such a case is that each metal finds its true level, according to its intrinsic utility, in the general system of money operation.”19

Hamilton recommended the minting of two coins: a silver coin of 371-1/4 grains of fine silver (the dollar), and a gold coin of 24-3/4 grains of fine gold. “[N]othing better,” he wrote, “can be done . . . than to pursue the track marked out by the resolution [of the Continental Congress] of the 8th of August, 1786.”20

Congress then enacted the Coinage Act of 1792,21embodying the constitutional principles that Hamilton had re-affirmed in his Report. First, Congress followed American tradition by continuing the use of silver and gold as money.22Second, it reiterated the judgment of the Continental Congress and the Constitution that “the money of account of the United States shall be expressed in dollars or units.”23and defined the “DOLLARS OR UNITS” as “of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure . . . silver.”24Congress also created a new gold coin, the “EAGLE, . . . . each to be of the value of ten dollars or units”25(i.e., the weight of fine gold equivalent in the marketplace to 3,712.50 grains of fine silver). It fixed “the proportional value of gold to silver in all coins which shall by law be current as money within the United States” at “fifteen to one, according to quantity in weight, of pure gold or pure silver.”26It made “all the gold and silver coins . . . issued from the . . . mint . .. a lawful tender in all payments whatsoever, those of full weight according to the respective values [established in the Act], and those of less than full weight at values proportional to their respective weights.”27And it provided free coinage “for any person or persons,” and affixed the penalty of death for the crime of debasing the coinage.28

Thus, Congress did not create a “gold dollar,” or establish a “gold standard,” as the popular misconception holds. For example, the Encyclopedia Britannica erroneously reports that the “dollar . . . was defined in the Coinage Act of 1792 as either 24.75 gr. (troy) of fine gold or 371.25 gr. (troy) of fine silver.”29The Act did no such thing. It defined the “dollar” as a weight of silver, and “regulate[d] the Value”30of gold coins according to this standard unit and the market exchange-ratio between the two metals. Nowhere did the Act refer to a “gold dollar,” only to various gold coins of other names that it valued in “dollars.”31

4. Where are we now?

This history demonstrates that official Washington, D.C., has no conception of what a “dollar” really is. The reason for this self-imposed ignorance is obvious. By reducing the “dollar” to a political abstraction, the government has empowered itself to engage in limitless debasement (depreciation in purchasing power) of our money. A “dollar” that must perforce of the Constitution contain 371.25 grains of fine silver cannot be reduced in value below the market exchange value of silver. A pseudo-“dollar” that contains no fixed amount of any particular substance per “dollar,” on the other hand, can be reduced in value infinitely.

Because debasement of money amounts to a hidden tax, Congress’ silent refusal torecognize the constitutional “dollar” amounts to the usurpation of an unlimited power to tax through manipulation of the monetary system. Thus, modern money has become a means for the total confiscation of private property by the government.

One need not be overly pessimistic to predict that misuse by politicians of the fictional, constantly depreciating pseudo”dollar” to expropriate unsuspecting citizens will continue until an economic crisis finally shocks an increasingly impoverished American people out of its slumber, and forces the people to ask the simple question: “What is a ‘dollar’?” At that time, the answer will be no different from what it is today, and has been since 1704. []

  1. 1.   31 U.S.C. § 5101 (emphasis supplied). See Act of 2 April 1792, ch. 16, § 9, 1 Stat. 246, 248.
  2. 2.   31 U.S.C. § 5103.
  3. 3.   12 U.S.C. § 411 (emphasis supplied).
  4. 4.   31 U.S.C. § 5!12(a), 51120o).
  5. 5.   31 U.S.C. § 5112(a)(7).
  6. 6.   31 U.S.C. § 5112(e).
  7. 7.   31 U.S.C. § 5119(a) (emphasis supplied).
  8. 8.   See Sumner, “The Spanish Dollar and the Colonial Shilling,” 3 Amer. Hist. Rev. 607 (1898).
  9. 9.   See An Act for ascertaining the rates of foreign coins in her Majesty’s plantations in America, 1707, 6 Anne, oh. 30. § I.
  10. 10.   4 Journals of the Continental Congress, 1777-1789 (W. Ford, ed., 1905), at 381-82; 5 id. at 725.
  11. 11.   Propositions respecting the Coinage of Gold, Silver, and Copper (printed folio pamphlet presented to the Continental Congress 13 May 1785), at 4, 5.
  12. 12.   “NOTES on the Establishment of a MONEY MINT, and of a COINAGE for the United States,” The Providence Gazette and Country Journal, Vol. XXI, NO. 1073 (24 July 1784), in Propositions, note 11, at 9, 10.
  13. 13.   Id. at 11.
  14. 14.   29 Journals of the Continental Congress at 499-500.
  15. 15.   30 Id. at 162—63. After ratification of the Constitution, Congress made a more accurate determination of the value of the dollar, setting it at 371-1/4 grains of fine silver (as described below).
  16. 16.   31 Journals of the Continental Congress at 503.
  17. 17.   2 The Debates and Proceedings in the Congress of the United States ($. Gales compil. 1834), Appendix, at 2059, 2060, 2061.
  18. 18.   Id. at 2061-63.
  19. 19.   Id. at 2066, 2068, 2069.
  20. 20.   Id. at 2O82.
  21. 21.   Act of 2 April 1792, ch. 16, 1 Stat. 246.
  22. 22.   § 9, 1 Stat. at 248.
  23. 23.   § 20, 1 Slat. at 250.
  24. 24.   § 9, 1 Slat. at 248.
  25. 25.   § 9, I Slat. at 248.
  26. 26.   § 11, 1 Slat. at 248-49.
  27. 27.   § 16, I Slat. at 250.
  28. 28.   § § 14-15, 1 Star. at 249-50; § 19, 1 Star. at 250.
  29. 29.   Vol. 7, “Dollar” (1963 ed.) at 558.
  30. 30.   See U.S. Cost. art. I, § 8, el. 5.
  31. 31.   For the correct interpretation of the Act, See, e.g., A. Hepburn, History of Coinage and Currency in the United States and the Perennial Contest for Sound Money (1903), at 22.