From Debt Note to Constitutional Coin: What Sound Money Is and Why It Is Needed


By Paul Dowling

“Under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth.”  – Alan Greenspan

How the Federal Reserve Works to Create Currency from Debt

The Federal Reserve creates more debt every time it issues currency.  Here is how the process works: The Fed orders the Treasury to print Federal Reserve Notes.  Then the Fed gives this currency to the US government in exchange for US Treasury Notes (marketable debt securities), which the Fed holds as collateral until such time (theoretically) as the currency is repaid with interest.  

These Federal Reserve Notes are, therefore, issued as debt that the American people must repay.  To pay off the interest, more currency must be created, which also comes with interest, creating a vicious cycle of ongoing debt, wherein no ultimate repayment will ever be possible. 

 So, every Federal Reserve Note is actually a Federal Debt Note that betokens the taxpayer’s unkeepable promise to repay with interest.

Not Worth a Continental: Bills of Credit Are Illegal Under the US Constitution

Article I, Section 10, of the US Constitution, describes the powers prohibited to the states.  There is a clause stipulating the kinds of money that states are barred from issuing that goes like this: “No State shall . . . coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts. . . .” 

This means that base metals are not to be used to coin money, and it also prohibits the states from issuing bills of credit – in other words, paper money that is not convertible to gold or silver – declaring further that only gold and silver coin (commodity money with intrinsic value) may be used to make, or back, the money supply. 

So, the Federal Reserve debt notes carried in Americans’ wallets today are actually un-Constitutional for use as money, since they cannot be exchanged for gold or silver. 

The Founders expressly prohibited the use of fiat currency as money, because the Founding Generation knew that the government, unless restrained by law from printing paper currency, would eventually yield to the temptation to hyperinflate the currency supply, thereby causing a damaging devaluation of the people’s everyday medium of exchange.

During the American Revolutionary War, the paper currency in use was called the “Continental.”  But, according to the Mises Institute, “the continental currency lost so much of its value that it became common to describe something as worthless by saying it was ‘not worth a Continental.’” 

It is the fate of all paper currency to be rendered worthless by the eventuality, over time, of hyperinflation.  This is why the Founding Generation’s representatives at the Continental Congress decided to prohibit the states from issuing anything but gold or silver coin. 

This is also the reason that the issuance of bills of credit is not among the Enumerated Powers granted to Congress. Indeed, while the Congress is empowered, in Article I, Section 8, of the Constitution “[t]o coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures,” it is not empowered to “print Money” by issuing paper bills of credit. 

Coining money based upon the commodity value of precious metals is far different from printing paper currency out of thin air, whose intrinsic worth is based only upon the “promise to pay.” 

It is, therefore, un-Constitutional for the Fed to issue fiat Federal Reserve Notes as money. If a power is not enumerated in the Constitution, the federal government and its agents – such as central bankers – are prohibited from exercising that power. 

Thus, while the states must be expressly prohibited a power, lest, under the Tenth Amendment, they may exercise that power, with the federal government it is enough simply to refrain from enumeration of the power, in order to prohibit its exercise.

No one objected to the Fed’s currency initially, since Federal Reserve Notes could be exchanged for their equal value in precious metal. 

But many Americans were startled by President Nixon’s severing, in 1971, of the final link between the Federal Reserve Note and the gold standard, thus converting the dollar into a fiat currency

Investopedia points out that “[s]ince fiat money is not linked to physical reserves, it risks becoming worthless, due to hyperinflation (e.g., if U.S. citizens lose faith in the U.S. dollar bill, this paper currency will no longer hold value).”

Congressional Borrowing

Also enumerated in Article I, Section 8, of the US Constitution is a clause that stipulates that Congress has the power “[t]o borrow money on the credit of the United States.”  But when the federal government borrows the very currency it uses for legal tender, issuing debt notes to its citizens for use as a medium of exchange, this is a massive perversion of Constitutional language that is being misused to justify the issuance of a corrupt, inflationary fiat currency whose value lessens with every passing day.

Debt Is What Serves as Money

What this means is that the entire US economy is based upon debt; in fact, if all loans were repaid, zeroing out all debt in the United States, the perverse side-effect would be that there would be no currency left in circulation. 

The public debt, therefore, for all practical purposes, can never completely be repaid under the Federal Reserve’s unprincipled financial system. This is the reason why financial liberty in America today means learning how to use debt as money, in order to accumulate and maintain one’s wealth. 

As entrepreneur and author Robert Kiyosaki puts it, “Debt is the new money. . . .  The rich work for good debt, investor debt.  The poor pile up bad debt, consumer debt. If you’re a small entrepreneur, understanding the different types of debt is critical.”

Judy Shelton: Trump’s Favorite Pick for the Fed

Today, there is a new sun rising over the US economy, and considering all that Trump the Miracle Worker has already accomplished economically in three short years as president, there is a new hope among Americans that the US finally has a chief executive who just might be up to the task of returning America to a sound-money footing

Presidential economic advisor Judy Shelton – whom President Trump wishes to name to the Federal Reserve Board – has publicly challenged the way the Fed has behaved since its inception. 

Shelton, a gold bug, desires the creation of a new gold standard for America in order to protect economic stability and make the dollar great again – a store of true value that will enable the people to be savers without becoming losers in the process, due to inflation’s robbing their savings of value over time. 

If Trump has his way, and Shelton (or some other proponent of the gold standard) ultimately wins confirmation to the Fed, a brand-new economic Golden Age will soon dawn in America.

Paul Dowling

Paul Dowling has written about the Constitution, as well as articles for American Thinker, Godfather Politics, and Eagle Rising; his blog is Conservative Notions.


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Francis W. Porretto
Francis W. Porretto
4 years ago

Nicely — and hopefully — stated. Trump himself is a “fan” of gold, though of a more esthetic bent, so we may have some impetus toward a renewed specie standard from that direction as well.

You may also find the essays posted here to be of interest.