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Chapter I
Words Must Have Definite Meanings
Ideas can be conveyed correctly only when the words used to express ideas have definite meanings. When a teacher wishes to teach a subject he must use words that have a precise meaning and he must do everything he can to make sure that his students understand that meaning.
In textbooks and other reading matter on money and banking we find many words with vague meanings. This is why the subject of money and banking is spoken of as being complicated or difficult to understand. If people call something by a name other than what it is, that does not make it the thing it is called.
Let us explain by telling a story. A farmer asked his son, "Son, how many legs has a horse? "The son replied, "Four." "Correct,” said the father. Now if we call the horse's tail a leg, then how many legs will the horse have?” "Five," said the boy. "You're wrong,' said the father. "The horse still has only four legs. Just because we call the tail a leg does not make the tail a leg."
The student may wish to keep that story in mind when he is reading his textbooks on money and banking. He will probably find that many words, especially the word "money," are used ambiguously: "So I shall start out by giving my definition of the word money.
The word "money" has its origin from the word "mint." The Latin word for mint is moneta. The same word, "moneta," in Latin means a coin. Words such as [p. 6] monetary," and "monetize" are derived from the Latin word moneta."
Similarly, in Old English the word for mint was “mynet," which in addition to signifying the place where coins were produced, meant the coins themselves. As the English language changed, mynet became mynit, then mynyt, and finally mint. In Middle English the word was changed to moneye, and later it became “money."
Article I, Section 8 of the United States Constitution states, "The Congress shall have Power . . . to coin money . . ." The verb “to coin" means to make coins. So, when the writers of the Constitution used the word "money," the word "money" meant coins.
The phrase "to coin money" did not and does not mean to print or to issue United States notes. If the writers of the Constitution wanted Congress to have the power to issue United States notes in addition to the power to make coins, they would have stated that fact in the following words: The Congress shall have the power to coin money and to emit Bills (as it was written in the Articles of Confederation) or Bills of Credit (as they wrote it in Article I, Section 10, of the United States Constitution). Those were the terms the people used at that time to mean government-issued unredeemable notes, which were intended to be used as currency.
Thus, we conclude that the word "money" originally meant coins, especially the coins made by a government-owned mint. The word "money" included gold, silver, and base metal coins.
As time passed, gold and silver certificates and bank notes were issued and were redeemed with gold or silver coins. Because the paper certificates and notes were interchangeable with coins and served the same purpose as coins (money), people began to call them paper money, and in recent years, just money. But calling notes and certificates money did not make them money (coins).
If we would use the word "money" to mean coins, and only coins, no ambiguity would exist. [p. 7]
Just because items other than coins are used as media of exchange does not mean that we have to call those items money. If we were to pay for something with postage stamps we would not call the postage stamps money. Likewise, if other documents such as notes, checks or certificates are used as media of exchange we should not call them money. Each item should be called what it is. Collectively they may be called items that serve as media of exchange.
Bills of Exchange
The following documents are bills of exchange: checks, drafts, warrants, money orders, and perhaps other items. Bills of exchange are written orders from one party to another to pay a certain sum to a third party. They are issued by the owner of the sum to be paid. Therefore they are self limiting and their issuance places no one in debt. The issuer can never honestly issue more than the amount of funds he owns. Because they are self limiting their issuance will never cause an inflation of the media of exchange. The amount that may be issued never needs to be controlled by the government or by the Federal Reserve System. Note that Article I, Section 10 of the Constitution which says, “No State shall . . . emit Bills of Credit," does not say, No State shall emit Bills of Exchange.
Bills of Credit
A law dictionary defines a bill of credit as follows: "Paper issued by the authority of the state on the faith of the state, and designed to circulate as money." I would say that the meanings of the word "paper" and the phrase "on the faith of the state," and even the word "money" are ambiguous and therefore inappropriate in a definition.
That definition would be more meaningful if it read as follows: A bill of credit is a document, or a note, issued by government officials, such as the former United [p. 8] States notes, or by the authority of government officials, such as the former Federal Reserve notes, with a promise to pay coins or other currency which the issuer does not have, and designed to circulate as currency.
But in addition to written promises to pay currency that the issuer does not have, commercial banks extend bank credit (verbal promises to pay more cash than they have) that serves as written bills of credit.
When governmental bodies and banks issue promises to pay coins or other currency which they do not have, the amount of the promises (notes or bank credit) that they can issue is not self limiting. Perhaps that is why those who wish to control the money supply say that money will not manage itself. If we would use only honestly issued redeemable notes or certificates as media of exchange the money supply would manage itself because every item issued would be self limiting.
The use of bills of credit and their equivalent, bank credit, as media of exchange since 1694 has taught us that both are very unsatisfactory media of exchange. At times their use has given us prosperity but it has also brought money panics, bank failures, inflation, deflation, booms and busts. The important thing that we should have learned from the use of unredeemable notes and unredeemable bank credit, however, is that it is necessary to increase continually the total debts of the country in order to have sufficient media of exchange. Without debts the notes and/or bank credit would not exist and without the notes and/or bank credit enough media of exchange would not exist.
The individual states have not issued any notes (bills of credit) since the Constitution was ratified in 1791. The United States government issued notes (bills of credit) only in 1862 and 1863. Various banks, however, have issued and loaned out notes which served as media of exchange from colonial times until about 1936. Since 1936 only the Federal Reserve banks have issued notes which serve as media of exchange. Between 1936 and 1965 the Federal Reserve notes were supposed to be redeemable in lawful money, but in practice they were [p. 9] only exchangeable for other currency. Since 1965 the Federal Reserve notes no longer contain the written promise "Redeemable in Lawful Money." In practice, they still are exchangeable for coins.
Because the commercial banks operate their demand deposit accounts on a fractional reserve basis, bank credit is loaned out to serve as media of exchange just as if it were bills of credit or bank notes. The effects are the same with one important exception. When the government issued bills of credit, no interest was charged. When banks issue bills of credit (notes) or its equivalent, bank credit, interest is always charged. (The fractional reserve system is explained in chapter XI.)
Gold and Silver Certificates
Gold and silver certificates were documents giving evidence that gold or silver was on deposit in the treasury of the United States and that it was payable to the bearer on demand. They were self limiting and no interest-bearing debt resulted from their issuance. They were a combination of a warehouse receipt and a certificate of legal tender.
Certificates of Credit
Certificates of credit (gift certificates) are documents usually issued by merchants which give evidence that the bearer has a claim for a certain number of dollars, worth of goods owned by the issuer. Only a relatively small amount of them are being used as media of exchange. They are self limiting and no interest-bearing debt is created when they are issued. Bona fide certificates of credit, issued in convenient denominations, could serve as a very practical medium of exchange.
Warehouse Receipts
A warehouse receipt is similar to a certificate of credit [p. 10] except that it gives evidence of a claim for a certain quantity of goods (pounds, tons, gallons, etc.) instead of dollars' worth of the items. They, too, are self limiting and no interest-bearing debt is incurred when they are issued. A warehouse receipt serves very well as a store of value and to some extent as a medium of exchange.
Let us keep in mind that in order to issue a bona fide warehouse receipt or a certificate of credit that is redeemable in gold, silver or other goods, somebody must be the keeper of the goods. Only the keeper of the goods can issue demand claims against the goods and he must be willing to give up the goods when the demand claims are presented to him. He cannot, therefore, issue demand claims for more goods than he possesses.
Tax Credit Certificates
Tax credit certificates are government-issued documents giving evidence that they will be received as payment for all fees, fines, dues and other charges due the government, and that they will be redeemed when they are presented as payment for the taxes levied at the time they were issued. They could be issued and used as payment for the needed government expenses. If they are issued in convenient denominations they would serve very well as media of exchange. They are self limiting and no interest-bearing debts are incurred when they are issued.
Paper Money
When a writer uses the term "paper money," the reader has no way of knowing what the writer means by the term. He may mean any of the many documents which might serve as media of exchange. He may mean gold or silver certificates, Federal Reserve notes, United States notes or other bank notes. All of these notes and certificates are paper documents. But there is a great difference between these documents, even though they may all serve as media of exchange, I suggest, to avoid [p. 11] confusion, that we call each document what it is and not use the term “paper money.”
Lawful Money
Once we accept the definition of the word "money" as coins, it is obvious that the term "lawful money" means lawfully made coins. It does not mean notes or certificates.
Formerly, when Federal Reserve notes were redeemable in lawful money, it meant that the notes were supposed to be redeemable in lawfully made coins. From 1914 to 1933 it meant lawfully made United States gold coins. Since 1934 Federal Reserve notes may be exchanged, but not redeemed, for lawfully made circulating United States coins. To redeem a note means to destroy the note. On page 50 in The Constitution of the United States: Its Sources and Its Application1. The Following quotations taken from Thomas James Norton's The Constitution of the United States: Its Sources and Its Application, are used by the permission and courtesy of The Committee for Constitutional Government, 71 West 23rd. Street, New York, New York 10010.)1 by Thomas J. Norton, we read
. . . the Act of Congress of February 25, 1862, as revised down to March 3, 1863, is still effective, declaring that "United States notes shall be lawful money, and a legal tender in payment of all debts, public and private, within the United States, except for duties on imports and interest on the public debts."
When we read that quotation we should remember that just because the Congress declared United States notes to be lawful money, the notes did not become lawful money, i.e., they did not become lawfully made coins. We also should keep in mind that the Constitution did not give Congress the power to emit bills of credit or to declare anything to be a legal tender. [p. 12]
Legal Tender
The term "legal tender" has a different meaning from the term "lawful money." Legal tender is a legal quality applied by a governmental body to any item of currency it so designates. Any item which the governmental body authorizes a debtor to tender (to offer) and requires a creditor to receive as payment for money obligations is called legal tender. But, in order for an item to really be legal tender, the governmental body must have the authority to make such a law.
For example, in 1933 Congress without the authority from the United States Constitution applied legal tender qualities to Federal Reserve notes, which formerly were not legal tender, and declared gold coins, which formerly were legal tender, to be illegal. Despite the fact that before 1933 Federal Reserve notes were not legal tender and not declared to be lawful money, they circulated as currency. However, they were receivable "for all taxes, customs and other public dues." That fact was written on each note.
Explanation
When a governmental body declares an item of currency to be legal tender, people naturally regard that currency as the best that can be devised. History has taught us that many unjust settlements of debts have been made with legal tender. Legal tender laws serve to legitimize an inflation of the currency. While legal tender laws are not needed, however, no injustice would result if Article 1, Section 10 of the Constitution were followed. The states then could declare government-issued gold and silver coins to be legal tender at the market value of their metal content at the time the coins were used as a payment.
In Article 1, Section 10 of the United States Constitution we read the following: "No State shall make any thing but gold and silver coin a tender in Payment of debts." That is the only provision in the Constitution [p. 13] wherein a governmental body is permitted to make any thing a legal tender.
We know that if the states declared gold and silver coins issued either by the United States government or by a foreign government to be legal tender, they could with honesty declare the coins to be legal tender only for an exchange value equal to the market value of their metal content at the time the coins were used as a payment. They could not declare them legal tender at the time they were minted or after they were used as a payment. The states were declaring foreign gold and silver coins legal tender at the time the Constitution was being written and that is what they did until 1857. Many Mexican silver coins, for example, circulated in the United States until 1857.
The writers of the Constitution knew that inflations of the currency occurred because the Continental Congress and the states had declared the Continental currency and state-issued bills of credit to be legal tender.
In 1923 the people in Germany experienced many unjust settlements of debts because the Reichbank's notes were declared to be legal tender.
Legal Tender Laws In the United States
Let us give some background information to show how changeable and unpredictable the legal tender laws have been in our own country because our government officials did not follow Article I, Section 10 of the Constitution. If the Constitution were followed, the legal tender laws would never change unless the Constitution itself were changed.
When our government officials do not follow Article I, Section 10 of the Constitution, the people who sign contracts for future payments to be made in legal tender cannot be sure of the exchange value of that future payment. It may or may not be a just payment. The members of Congress surely did not receive from the Constitution or from any other source the right to pass laws to legalize unjust settlement of debts. [p. 14]
The Coinage Act of 1792 made all United States gold and silver coins legal tender at their face value for payment in any amount. In 1857 all laws which made foreign coins legal tender in the United States were repealed.
From 1879 to 1933 silver coins in fifty-cent, twenty-five cent and ten-cent denominations were legal tender in one payment only for amounts up to ten dollars and five-cent and one-cent coins were legal tender in one payment only for amounts up to twenty-five cents. Silver dollar coins remained legal tender for payments in any amount from 1792 to the present time. Gold coins were legal tender for payments in any amount from 1792 to 1933. Since 1933 gold coins have not been legal tender.
United States notes were first issued on February 25, 1862. They were declared by Congress to be legal tender for all debts, public and private, at the time they were issued. After March 3, 1863, they were declared to be legal tender for all debts, public and private, except for payment of customs duties or payment of interest on the national debt.
On May 12, 1933, United States notes were made full legal tender for all payments, including customs duties and interest on the national debt.
On June 5, 1933, all United States coins except gold coins, and all other United States currency including, for the first time, Federal Reserve notes were declared to be legal tender for debts, public and private, for payments in any amount.
In 1935, however, the Supreme Court declared the June 5, 1933 Joint Resolution of Congress to be unconstitutional as applied to the payment of government bonds because it attempted to override the obligations agreed to in the bonds.
Let us give a little historical background information by again quoting from Thomas James Norton's book, The Constitution of the United States: Its Sources and Its Application.2. (Pages 48-49)2 [p. 15]
The Articles of Confederation forbade Congress to borrow or "emit bills" unless "nine States assent to the same." It was too often impossible to secure the support of that many. Hence this National power in our Constitution, which is entirely independent of State will.
In the Constitutional Convention the words "or emit bills," following the word "money" in the foregoing clause, were stricken out. Bills of credit or paper money had been the bane of the Confederation and the States. Madison raised the question whether it would not be enough to forbid that such bills be made a legal tender, that is, equivalent to gold or silver coin. He thought that would check the paper-money evil. Seventy-five years thereafter (February, 1862) the question stirred the country when Congress issued $150,000,000 of paper money known (because of the color) as "greenbacks," which were made "a legal tender in payment of all debts, public and private, within the United States. A woman who had before the passage of this Act become bound to pay a stated number of dollars in what was at that time the money of the United States tendered "greenbacks" (worth less than coin), which were refused. When the case reached the Supreme Court of the United States, Salmon P. Chase, who as Secretary of the Treasury in Lincoln's Cabinet had advocated the law, had been made Chief Justice. In an opinion written by him (upon fuller study, as he explained) the Act (and one of 1863) was held (1869) beyond the constitutional power of Congress, the chief ground being that the power of Congress could not be implied, and that the acts of Congress could not apply to debts contracted before their passage. Soon after the Greenback Case was decided, the Supreme Court was enlarged from seven judges to nine. In 1872 two similar cases were disposed of by the Court, one involving a debt contracted before the acts of Congress and one an obligation arising subsequently thereto. The Supreme Court overruled its [p. 16] decision in the first case and held that the war powers granted to Congress by the Constitution warranted the legislation.
Next the question came up whether Congress could issue legal tender paper in time of peace, as well as in time of war. In 1878 it passed such an act. The other cases had been rested by the Supreme Court on the war power of Congress. It was believed by many that the Supreme Court could go no further. But in the Last Legal Tender Case (1884) it held that, whether in peace or war, when the exigency is so great, owing to “unusual and pressing demands on the resources of the government, or of the inadequacy of the supply of gold and silver,” that it is expedient to resort to such means, the question of exigency is political and not judicial, and therefore to be determined, not by the courts, but by Congress. The Court said that "the power to make the notes of the Government a legal tender in payment of private debts" is "one of the powers belonging to sovereignty in other civilized nations."
In the preceding quotation it states that the Supreme Court decided that Congress had the power to declare the United States notes to be legal tender on the basis of exigency, expediency or sovereignty in other nations and not on any provision in the United States Constitution. We might ask the question, was that the intention of the writers of the Constitution?
In 1878, Congress authorized the issuance of silver certificates which were redeemable in silver dollars and later in silver bullion and declared them to be legal tender for all debts, public and private. After June 25, 1968, they were no longer redeemable and they no longer circulated as currency. They are still legal tender.
The Coinage Act of 1965 made the copper and nickel alloy fifty-cent, twenty-five cent and the ten-cent coins legal tender. It also made the United States notes "legal tender even after the phrases "at its face value" and "Will Pay To The Bearer On Demand" were removed from the notes. Likewise, the same Coinage Act of 1965 [p. 17] made the Federal Reserve notes legal tender at the time the phrases "and is redeemable in Lawful Money at the United States Treasury, or at any Federal Reserve Bank" and "Will pay to the bearer on demand" were removed from the notes.
Thus we see that when government officials ignore the Constitution they may declare any currency to be legal tender. The result is that when a contract is written requiring that a future payment be made in legal tender, the parties to the contract have no sure way of knowing with what type of currency the future payment will be made, whether or not that legal tender will be available, or whether or not that future payment will be a just or an unjust settlement of the debt.
A careful study will teach us that if the items used as media of exchange have exchange value in themselves, or are redeemable for items with exchange value, or may be redeemed when they are presented as a payment for taxes, there will be no need for them to be declared to be legal tender.
Most of us wish to follow the Constitution, but to do so in this case we must first determine what the writers of the Constitution meant by the provision in Article I, Section 10 that stated "No State shall make any Thing but gold and silver coin a tender in Payment of debts."
Why did they word that statement in the negative? Was it because The Articles of Confederation gave the Continental Congress the right to issue bills of credit (if nine states assented) and declare them to be legal tender? Was it because they remembered the inflations of the currency that took place when bills of credit were declared to be legal tender?
In considering the question of whether or not the Constitution should give Congress the power to issue bills of credit, James Madison suggested that it might be all right provided Congress were not given the power to declare the bills of credit to be legal tender. After due deliberation the Constitution was finally written and Congress was not given either the power to issue bills of credit or the power to make anything a legal tender. [p. 18]
The negative wording in Article I, Section 10 suggests that the writers of the Constitution were not inclined to permit the states to have the right to declare anything to be legal tender, but reluctantly allowed them to declare gold and silver coins to be legal tender because the states were already doing that with the foreign gold and silver coins.
If the writers of the Constitution were hesitant in giving the states the right to declare only gold and silver coins to be legal tender, they surely did not intend to give Congress the right to declare anything other than gold and silver coins to be legal tender.
Given the power of the states to declare gold and silver coins to be legal tender at the market value of their metal content at the time they are used as payment and the hypothetical power of Congress to declare them to be legal tender at their face value, which is the market value of their metal content at the time Congress authorizes them to be minted (which Congress unwisely did in 1792), the probability of unequal legal tender values arises. Inequality and confusion could also occur if the states declared only gold and silver coins to be legal tender and the Congress declared copper and/or nickel coins and unredeemable notes to be legal tender. Valid contracts for future payments in legal tender might be difficult to write. It seems unlikely that the writers of the Constitution had such intentions.
While the United States Constitution does not give Congress the power to declare anything to be legal tender, Article I, Section 8, gives Congress the power to lay and collect taxes. With that power goes the right to declare which items will be received as payment for those taxes.
Valid contracts for future payments could be written so that they would be payable in the coins or certificates that the government would receive as payment for taxes, customs, and other public dues and redeem when they are presented as payment for certain specific taxes. They need not be declared to be legal tender. [p. 19]
To Coin
The verb "to coin" means to make coins. It does not mean to write or to print on paper notes or certificates. Documents such as United States notes, Federal Reserve notes and gold or silver certificates are written or printed on paper. They are not coined.
If the writers of the Constitution wanted the Congress to have power to print notes to circulate as currency they would have stated that fact with the following words: The Congress shall have the power to coin money and to emit Bills or Bills of credit.
To Issue: To Emit
To issue means to put out, to distribute or to place into circulation. It does not mean to coin or to print. Coins may be issued after they are made. Notes and certificates may be issued after they are printed or written.
When it is said that the Congress should issue all the money the people need, what is probably meant is that the Congress should issue all the media of exchange the people need. However, if Congress adheres to the Constitution it cannot just issue any type of coins or pieces of paper and declare them to be lawful money.
In addition to following the Constitution, the members of Congress must practice honesty in their actions. It is clearly dishonest, for example, for Congress to make a coin with six cents worth of metal and then pass a law declaring the coin to be worth one dollar as a payment for debts. It is honest, however, for the Congress to use that same coin as a one-dollar payment for its needed goods and services, levy a tax for the amount of the payment, and later receive and redeem that coin when it is presented as a payment for one dollar's worth of those taxes.
In Article I, Section 8, clause 1, Congress is given the power to impose and collect taxes. Here, too, the [p. 20] Congress must carry out its responsibility with honesty and in a manner that is the least burdensome to the taxpayers. The power to levy and collect taxes includes the power to decide when, how, and with what the taxes are to be paid. It would not be proper for Congress to require that taxes be paid with gold, if gold was not made available to the taxpayers for that purpose.
It is Article I, Section 8, clause 1 that gives Congress the power to lay and collect taxes and to issue Tax Credit Certificates as the medium the government uses to pay for its needed goods and services and the medium used by the public to pay taxes the government has levied.
Cash
The word "cash" is a technical term used by banks and other financial institutions to mean the dollar amount of any or all of the following items they have on hand: United States coins, United States notes, Federal Reserve notes, United States postal money orders, checks drawn on some banks, and government checks drawn on the treasury of the United States.
Currency
The word "currency" is derived from the word "current." The word "current" has two meanings: (1) belonging to the present time (2) moving, running, or flowing as a current of water. It is proper to use the word "currency" to mean those items currently used or circulating as media of exchange. So when United States notes, United States coins, and Federal Reserve notes are held by a bank or other financial institution, they are called cash. When the same items are held by the people in general, they are called currency. (Note: The word, “dollar” is not used as the name of any items called currency or cash.) [p. 21]
Backing of Currency
It is frequently stated that currency must be backed by gold or silver. It has also been said that our currency is backed by the faith of the people, or by the wealth of the whole country.
Let us ask what “backing of currency” actually means. When the word "backing" is applied to an item of currency, the only logical meaning it can have is that the item is redeemable for, and thus backed by something of value. If a token coin, a certificate, or a note is backed by gold or silver, it is redeemable in gold or silver. If a postage stamp is redeemable in postal service, it is backed by postal service. If a tax credit certificate is redeemable when it is presented as a payment for taxes, it is backed by the amount of the taxes it pays.
So it is meaningless to say that currency is backed by the faith of the people or by the wealth of the people. If each item of the currency is not redeemable for some specific item, it is not backed by or redeemable for anything. While our present currency is used as a medium of exchange, that is, to purchase items of value, it is none the less not backed by anything.
Exchange Value of Currency
A bona fide item which is used as currency has the exchange value of its own intrinsic worth, such as a full bodied coin; or it has the exchange value of the item for which it is the evidence of a claim, such as a gold certificate or a certificate of credit. In the case where the item of currency is received as a payment for taxes, such as a tax credit certificate, it has the exchange value for the dollar amount of the tax payment for which it is accepted.
An item which government officials have declared to be legal tender, such as a Federal Reserve note, has the legal exchange value of its face value for the payment of public and private debts. [p. 22]
But when government officials declare an item which otherwise has no exchange value to be legal tender, it may sometimes create great injustice. As previously noted, that is what took place in Germany between 1921 and 1923, when the German government officials declared the Reichsbank's notes (the equivalent of our Federal Reserve notes) to be legal tender. If a life insurance policy of 1000 marks matured in Germany in 1923, the 1000 marks would not buy a ten cent loaf of bread. Whereas five years earlier the 1000 marks were worth $250 in United States currency.
We occasionally hear or read that currency is the evidence of a claim for any goods or services being offered for sale. If a currency is the evidence of a claim, it is a document. A bona fide document will have written on it the item for which it is the evidence of a claim. If it is a claim for silver, that fact will be stated on the document as it was written on our silver certificates. But even when we had silver certificates, those certificates gave evidence of a claim only for silver. They did not give evidence of a claim for meat or potatoes or anything else.
There are continuing efforts to establish a currency that will have the same exchange value five, ten, or twenty years in the future that it now has. These efforts are futile because they are not based on reality.
A gold certificate only promised the bearer a specific amount of gold, nothing else. It did not promise that the bearer could claim (buy) the same amount of goods or services at some future time as he could when he earned the gold certificate.
Sometimes United States coins and notes, as well as Federal Reserve notes, are called tokens. They are tokens only in the sense that they do not have exchange value in themselves. They are not bona fide tokens because they are not redeemable in anything. A bona fide token is redeemable for the item for which it is the evidence of a claim.
Before 1933, it was proper to call fractional coins, [p. 23] gold and silver certificates, United States notes, and even the Federal Reserve notes bona fide tokens because they were redeemable or exchangeable for gold.
Even though our currency is composed of non-bona fide tokens, it still has legal exchange value because our government officials have declared every item of it to be legal tender.
There is a difference between currency which is declared to be legal tender and is receivable as a payment for taxes and a bona fide tax credit certificate which is redeemable when it is used as a payment for taxes. The amount of redeemable tax credit certificates that can be issued is restricted to the amount of taxes levied. These certificates are self limiting and thus inflation of the currency cannot occur. A currency that is declared to be legal tender but is not redeemable in anything is not self limiting, so inflation can and does occur.
Currency as a Store of Value
Some textbooks teach that money (currency) serves as a store of value. Can an item which serves as a store of value simultaneously serve as currency?
The term "store of value" when applied to an item is intended to mean that the item will have approximately the same exchange value at some future time as it does at present.
In order for an item to serve as a store of exchange value it must have exchange value in itself or it must be the evidence of a claim for an item with exchange value. Full-bodied coins could serve as a store of value because they have exchange value in themselves. Bona fide certificates of credit also could serve as a store of value up to the date of their redemption because they are the evidence of demand claims for goods or services which have exchange value.
If one wanted, however, to have full-bodied coins or certificates of credit to serve as a store of value, one could not at the same time use them as media of exchange. [p. 24] Some people keep silver coins as a store of value, which means, of course, that the coins are not being used as a medium of exchange.
If a person deposits full-bodied coins in a savings account in a bank, he no longer owns the coins. He bought a savings account deposit with his coins, which now belong to the bank. When the person wishes to withdraw the coins, the bank will give him whatever currency is then being used. It will buy back that account deposit with the currency then in circulation. This happens because one must accept whatever currency the government has declared to be legal tender. If the government were to stop declaring any currency to be legal tender, one could make an agreement with the bank to have his deposits returned with the same type of items he deposited.
Gold and silver coins will serve as a store of value only if they are actually stored in a home vault, warehouse or a safety deposit box.
A coin or a bill which the government has declared to be legal tender may serve as currency but one cannot be sure that it will serve as a store of exchange value. It may not have exchange value in itself and it may not be the evidence of a claim for goods or services with exchange value. So, if we wish to have something as a store of value, we must possess an item with exchange value or we must possess a bona fide claim for an item with exchange value.
Dollars Are Not Currency
We should be aware of the difference between the meaning of the word "currency" and the meaning of the word "dollar." (An explanation of the meaning of the word "dollar" is given later in this chapter.) The word "currency" does not mean dollars. The exchange value of United States currency is expressed in the units called dollars. One does not have dollars in his pocket, but rather a number of dollars' worth of currency. When [p. 25] a person has fifty dollars' worth of coins or fifty dollars' worth of Federal Reserve notes, it is correct to say that he has fifty dollars' worth of currency.
Orders To Pay Currency
One person may order another person to pay currency to a third person. This is done by means of written orders called bills of exchange, checks, drafts, money orders and other written orders, or by direct verbal, telephone or telegraph orders.
Agreements To Pay Currency
When an agreement is made between a corporation and a bank for the bank to pay or transfer funds from the corporation's account to the accounts of others, such payments are made without using any actual items as checks or currency. Such a system of agreements and payments is called a moneyless, cashless, checkless money system.
If this system is done without incurring interest bearing debts, it is harmless. But if it is carried out through the use of the fractional reserve banking system, ever increasing interest-bearing debts will be the result.
Promises To Redeem—Warehouse Receipts—Certificates Of Credit
Our former gold and silver certificates were redeemable for gold and silver held by the government. Because the certificates were redeemable for a specific number of grains of the metal, they could be called warehouse receipts.
Bona fide warehouse receipts and certificates of credit are redeemable for goods held by the issuer. Therefore, when they are brought into circulation and used as media of exchange, they do not create interest bearing debts or inflation. [p. 26]
Promises To Pay Currency—Notes—Bills Of Credit—Bank Credit
A person, bank, corporation, or governmental body promises to pay currency to another person at a specified time or when certain conditions are fulfilled. The means by which this is usually done are varied: They may be promises called notes, the signing of written applications for credit and credit cards, a bank officer's verbal promise to pay out currency for the demand deposit accounts he accepts, and the magic words, "charge it," spoken by a buyer with a good credit.
When notes, bills of credit, and bank credit are used as purchasing media, interest bearing debts are always incurred and an inflation of the purchasing media may follow, because they are promises to pay currency which the issuer does not yet possess.
When a bank or a governmental body can issue promises to pay what they do not have, there is no limit to the amount that can be issued. These are the notes, bills of credit, and bank credit that have not served well as purchasing media.
Dollar—The Name of the Unit We Use To Express Exchange Value; The Name of Our Unit of Account
The word "dollar" at times was said to have meant a certain number of grains of silver or gold. The regular United States silver dollar coins have always contained 371.25 grains of pure silver.
When agreements were made that a payment was to be made in silver dollar coins, it was understood to mean that for each dollar payment due the creditor, he would receive a coin with 371.25 grains of silver. Sometimes the government or others would accept bullion in place of coins. It was agreed, in those cases, that 371.25 grains of silver bullion would be accepted as payment for each dollar due. So it was easy for government [p. 27] officials to declare that a dollar was 371.25 grains of silver. But declaring or calling 371.25 grains of silver a dollar did not make it the unit used to express exchange value. It only meant that 371.25 grains of silver was accepted as a payment for each dollar's debt.
As long as 371.25 grains of silver had a market value of one dollar, a debtor could give and a creditor would accept 371.25 grains of silver as a one-dollar payment.
However, between 1878 and 1964 the market value of 371.25 grains of silver was less than one dollar. For many of those years 371.25 grains of silver was worth about 50 cents. If during those years 371.25 grains of silver could be given to pay a one-dollar debt, a person could have bought 371.25 grains of silver for 50 cents and used it to payoff a one-dollar debt. Of course that did not happen because a creditor would not accept it as a full payment.
On the other hand, when the market value of 371.25 grains of silver is above one dollar, as it has been since 1965, a debtor will not offer it for a one-dollar payment.
The above facts show that 371.25 grains of silver will not always serve as a dollar payment. The word "dollar" (not 371.25 grains of silver) is the name of the unit used to express the exchange value of a payment as well as the exchange value of goods, services, and currency. Thus, the unit called the dollar is a common denominator unit used to express exchange value.
When the government issued silver certificates on which was written, “This certifies that there is on deposit in the treasury of the United States of America . . . dollars in silver payable to the bearer on demand," it was necessary for the government to declare the number of grains of silver that was on deposit for each dollar claimed by those certificates. Again it was easy to think that 371.25 grains of silver was a dollar.
When the word "dollar" is applied to a coin, the word is used as an adjective, not as a noun. It tells us that the coin is a one-dollar coin, not a half-dollar coin. When the word "dollar" is applied to a Federal Reserve note, it also is used as an adjective, not a noun. It tells us that [p. 28] the note is a one-dollar note, not a five or ten-dollar note.
So, if a coin collector will exchange his three one-dollar Federal Reserve notes for a one-dollar silver coin, he is not giving three dollars for one dollar; he is giving three (one-dollar Federal Reserve) notes for one (one-dollar) coin.
When the word "dollar" is correctly used as a noun, it is a descriptive term for a concept: The abstract unit we in the United States use to express our idea of the exchange value of one item in relation to the exchange value of one or more other items.
If we say a bushel of wheat is worth four dollars, we express our idea that a bushel of wheat can be exchanged for four dollars' worth of United States currency. If we then say that a bushel of oats is worth two dollars, we are expressing both the idea that a bushel of oats can be exchanged for two dollars' worth of U.S. currency, and that a bushel of wheat can be exchanged for two bushels of oats.
Because the abstract unit called "dollar" can be applied to all items with exchange value-property, goods, services, debts, taxes, expenditures, income, and United States currency-it is called a common denominator unit with which we express exchange value. It is the unit we use in accounting. It is called the unit of account.
When gold coins were used as currency, some agreements were made so that the debtor had to make his payments in dollars' worth of gold. The government also accepted gold at the mint for which it issued gold certificates. So it was necessary for the government to set a standard number of grains of gold for each dollar payment. That is why it was said that from 1792 to 1834 the dollar was 24.75 grains of pure gold; from 1834 to 1837 it was 23.20 grains; from 1837 to 1934 it was 23.22 grains; and from 1934 to 1971 it was 13.71 grains of gold for United States currency held outside of the United States.
Assertions by the government or anyone else that a [p. 29] certain number of grains of gold were a dollar did not make it so; grains of gold could not logically be referred to by the same term used for the unit expressing exchange value.
If the government declares that a dollar payment means a payment of whatever number of grains of gold or silver it may decide upon and if it can change that number of grains of gold or silver whenever it wants to (as it has done in the past), people who write contracts for future payments to be made in dollars will not know for certain the number of grains of gold or silver that the government might require for each future dollar payment. They will not know if the future payment will be a just payment.
When the government bought or sold (made exchanges of) gold at $1 for 13.71 grains (1/35 ounce), it meant the government had a fixed buying and selling price on the gold; and that is all it meant.
When the word "dollar" is used as the name of the unit with which we express the exchange value of a coin, the word "dollar" does not mean the coin; and it does not mean a certain number of grains of the metal in the coin. It is the name of the unit people in the United States adopted as a common denominator unit with which to express the exchange value of property, goods, services, debts, taxes, expenditures, income, and United States currency. It is our unit of account.
Check
A check is a written order to a bank to pay currency (coins or notes) to a specific payee or to the bearer on demand. Thus a check is not currency and it is not the actual payment.
When a person buys an item, let us say for $100, and gives the seller his check for $100 for the item, he does not pay for the item with the check. The seller accepts the check for the item but he has not yet been paid. The check is an order to the bank to pay $100 worth of currency to the seller. It is the bank that must pay the currency [p. 30] to the seller when the check is presented for payment.
If the check were the payment, the seller would be paid twice, once with the check and again with the currency. A check is like a doctor's prescription. The prescription is not the medicine. It is an order to the druggist to make or prepare the medicine. Likewise, a check is an order by the drawer of the check to the bank to give the payee a specific amount of currency.
A cashier's check is an order written by an authorized officer of a bank ordering his own bank to pay currency to a specific payee.
A bank draft is an order written by an authorized officer of a bank ordering another bank to pay currency to a specific payee.
Inflation
The word "inflation" used by itself often confuses people because there are different interpretations of its meaning. Similarly, the term “inflation of the currency” is not always clear. An inflation of the currency only means an increase of United States coins, United States notes, and Federal Reserve notes. The expression, "inflation of the purchasing media” (currency and bank credit), is the appropriate term to use in discussing inflation. Even in using that term, however, we must make it clear that we do not mean the normal and proper increase of the purchasing media in circulation which is at a rate not greater than the rate of increase of the amount of goods and services being offered for sale.
To maintain stable prices and normal production the amount of purchasing media in circulation must be increased or decreased at the same rate as the rate of increase or decrease of the goods and services being offered for sale.
We conclude, therefore, that when the word "inflation" or the term "inflation of the purchasing media" is used, it should mean the situation that exists when the purchasing media is placed in circulation at a faster or [p. 31] greater rate than the rate of increase of the goods and services being offered for sale. The effect of that situation will be an increase of the general price level.(*)
Full Bodied Coins
When the market value of the metal in a coin and the legal tender value of the coin are equal, the coin is called a full-bodied coin.
Token Coins
When the market value of the metal in a coin is less than the legal tender value of the coin, it is called a token coin.
Non-Circulating Coins
When the market value of the metal in a coin is greater than the legal tender value of the coin, the will no longer circulate as a medium of exchange. It will be kept as a store of value or exchanged at its higher market value.
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