On 9 December 2009 Representative Ron Paul introduced H.R. 4248 the Free Competition in Currency Act of 2009.  This Act has the potential to impact the investment world more than any other legislation that has been enacted for decades.  The impact on the bond market, Treasury market, stock market and general economy would be tremendous and disruptive.

The aims of the Act are fairly simple to (1) repeal federal law which currently decrees unconstitutional forms of currency legal tender, (2) prohibit federal taxes on gold, silver, platinum, palladium or rhodium bullion, (3) prohibit States from assessing tax or fees on any currency or monetary instrument used in interstate or foreign commerce that has legal tender status under the United States Constitution, (4) repeal federal criminal code pertaining to gold, silver or other metal coins and nullify any previous convictions under those codes.

Like he has often been when attempting to restore the checks and balances of the Constitution on this issue with H.R. 4248 Dr. Ron Paul is the lone voice in the wilderness and has no co-sponsors.  To my knowledge the only legislation Dr. Ron Paul has introduced that has been approved and enacted is Public Law 99-185 and Public Law 99-61 which require under 31 United States Code 5,112 that ‘the Secretary shall mint and issue, in quantities sufficient to meet public demand, coins which’ contain .999 fine silver or fine gold.  When the public wants to buy gold or silver, lawful money, there should be enough!

H.R. 1207 – FEDERAL RESERVE TRANSPARENCY ACT OF 2009

On 26 February 2009 Representative Ron Paul of Texas introduced H.R. 1207 the Federal Reserve Transparency Act of 2009.  Most in the financial establishment chuckled, politicians ignored it and the general public was clueless as to its effect.  But because of rapid education of the public and the political pain they exerted on the politicians the bill now has 317 co-sponsors.

To fully understand the impact of the H.R. 4248 legislation it is important to take a short journey through American legal history.

CONSTITUTIONAL LEGAL TENDER

Under Article 1 Section 8 Clause 5 Congress is given the power to ‘Coin Money, regulate the Value thereof’.  Notice the Constitution does not say what money is only that it is something that is coined rather than printed.  The Tenth Amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”  The Constitution operates on the principle that if a power is not specifically delegated then it is prohibited.

In this case, the Federal Government is given no authority to make anything legal tender.  The Federal Reserve Act of 1913 was enacted by Congress creating the Federal Reserve and it would not be the first unconstitutional legislation.  They habitually violate their own laws.

Because Congress does not have the power to declare anything legal tender and because the Federal Reserve was created by Congress therefore it follows that the Federal Reserve cannot declare anything legal tender.  The individual States do retain the power to declare things legal tender but are restricted under Article 1 Section 10 Clause 1 from making any ‘Thing but gold and silver Coin a Tender in Payment of Debts’.   The creature cannot exceed the creator.

The Founding Fathers strongly supported the hard money system.  After all, they had just fought a Revolution after living through the tyranny of King George with the Stamp Act, Writs of Assistance, destruction from the the Continental hyperinflation and implosion of the economy.

Despite the constraints of the Constitution the monetary system of the United States has been perpetually in violation.  For example, the United States Dollar or Federal Reserve Note Dollar went poof multiple times last century including on 5 April 1933 when FDR decreed gold to be a dangerous weapon of mass financial destruction, deemed it a controlled substance and threatened any United States citizen with jail time for owning it,  on 4 June, 1963 and 24 June 1968 when silver certificate redemption was completely ceased and 15 August 1971 during the Nixon shock.

WHAT IS A DOLLAR?

Dr. Edwin Vieira, J.D., is the author of the preeminent legal treatise on monetary jurisprudence in American law Pieces Of Eight, holds four degrees from Harvard and practices law before the United States Supreme Court.  I highly recommend reading Dr. Vieira’s entire essay, What Is A Dollar?, which is quoted only in small part here:

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

Unfortunately, the present monetary statutes do not define the “dollar” in an intelligible fashion.

a. Federal Reserve Notes. Most people associate the noun “dollar” with the Federal Reserve Note (“FRN”) “dollar bill,” engraved with the portrait of President George Washington. This association is mistaken.

No statute defines – or ever has defined – the “one dollar” FRN as the ”dollar,” or even as a species of “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.”⁴ Thus, FRNs are not themselves “lawful money” – otherwise, they would not be “redeemable in lawful money.” And if FRNs are not even “lawful money,” it is inconceivable that they are somehow “dollars,” the very units in which all “United States money is expressed.”⁵

b. United States coins. The situation with coinage is more complex, but equally (if not more) confusing. The United States Code provides for three different types of coinage denominated in “dollars”: namely, base-metallic coinage, gold coinage, and silver coinage.

c. Currency of “equal purchasing power”. The UnitedStates Code provides no answer to this perplexing question. Indeed, it mandates that the 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.¹⁴

The term dollar is used in Article 1 Section 9 Clause 1 and the Seventh Amendment.  Neither the slave-trade faction nor the right to trial by jury would have accepted these provisions without a clear definition of what the dollar is.

Therefore, their support of these provisions inferentially establishes what a literal reading of them straightforwardly suggests: to wit, that the noun “dollar” refers, not to a mere name applicable to whatever Congress whimsically might decide thereafter to call a “dollar,” but instead to a particular coin so familiar in American experience as to be beyond political transmogrification. … Obviously, Jefferson’s free-market, scientific approach is a world apart from the arbitrary way in which Congress has set up the mutually incompatible and internally irrational sets of silver, gold, and base- metallic coins that exist today.

2) The Coinage Act of 1792. Little more than a year after Hamilton’s Report, Congress enacted its principles into law.

Section 9 of the Coinage Act of 1792 contained the monetary definitions for the United States monetary system and defined

DOLLARS or UNITS – each to be 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, or four hundred and sixteen grains of standard silver.

THE COINAGE ACT OF 1792

It is interesting to see the difference between how the Founding Fathers and the current politicians deal with those who engage in quantitative easing.  For example, on 21 November 2002 at the National Economists Club in Washington DC Federal Reserve Chairman Ben Bernanke said,

A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

Section 19 of the 1792 Coinage Act provided:

SEC. 19. And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.

As David Reilly of Bloomberg reported on 29 January 2010 in Secret Banking Cabal Emerges From AIG Shadows:

Later, when it became clear information would be disclosed, New York Fed legal group staffer James Bergin e-mailed colleagues saying: “I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals — too many counterparties, too many lawyers and advisors, too many people from AIG — to keep a determined Congress from the information.”

Think of the enormity of that statement. A staffer at a body with little public accountability and that exists to serve bankers is lamenting the inability to keep Congress in the dark. …

Now, I’m not saying Congress should be meddling in interest-rate decisions, or micro-managing bank regulation. Nor do I think we should all don tin-foil hats and start ranting about the Trilateral Commission.

Yet when unelected and unaccountable agencies pick banking winners while trying to end-run Congress, even as taxpayers are forced to lend, spend and guarantee about $8 trillion to prop up the financial system, our collective blood should boil.

Reuters reported on 8 December 2009 that the Chinese do not put up with this type of financial terrorism:

Yang Yanming was sentenced to death in late 2005 and took the secret of the whereabouts of 65 million yuan ($9.52 million) of the misappropriated funds to his grave, the Beijing Evening News said.

The report added that Yang was the first person working in China’s securities sector to be executed. …

Conscious that the growing gap between rich and poor could generate resentment, China is battling corruption and stock trading abuses. It has used the death penalty as a deterrent in serious cases.

It will be interesting to see if there is swing in the political attitude of the people towards the Federal Reserve engaging in quantitative easing.  As Dr. Ron Paul was the lone voice in the wilderness with calling for an audit of the Federal Reserve, is currently a lone voice about competing currencies and while he is joined by an increasingly shrill chorus condemning the bailouts he may yet become a lone voice in championing in introducing stiff legislation as a deterrent instead of rewarding the nefarious behavior with bailouts.  If legislation like the 1792 Coinage Act were to be passed then there would likely be a lot of rounding up to do.  Financial criminals, whether engaged in something large like unconstitutional legal tender or something small like a potential Monex fraud, should take heed.

CURRENCY CONTROLS

Many currency controls are in place which support the FRN$ by hindering its competitors such as gold, silver, platinum, palladium or rhodium.  H.R. 4248 intends to remove these barriers.  More may be implemented and holders of FRN$ may their usefulness and velocity frozen.

For example, there are ‘qualified intermediary’ rules the Infernal Revenue Service require foreign banks to follow even where legislation protects bank privacy.  The PATRIOT Act allows for ’sneak and peak’ warrants along with the ability to confiscate cash at will and in secret.

A particularly insidious but scarcely mentioned currency control was implemented by the United States Mint on 14 December 2006 which provided:

The United States Mint has implemented regulations to limit the exportation, melting, or treatment of one-cent (penny) and 5-cent (nickel) United States coins, to safeguard against a potential shortage of these coins in circulation. … Prevailing prices of copper, nickel and zinc have caused the production costs of pennies and nickels to significantly exceed their respective face values.

“We are taking this action because the Nation needs its coinage for commerce,” said Director Ed Moy. “We don’t want to see our pennies and nickels melted down so a few individuals can take advantage of the American taxpayer. Replacing these coins would be an enormous cost to taxpayers.”

Specifically, the new regulations prohibit, with certain exceptions, the melting or treatment of all one-cent and 5-cent coins. The regulations also prohibit the unlicensed exportation of these coins, except that travelers may take up to $5 in these coins out of the country, and individuals may ship up to $100 in these coins out of the country in any one shipment for legitimate coinage and numismatic purposes. In all essential respects, these regulations are patterned after the Department of the Treasury’s regulations prohibiting the exportation, melting, or treatment of silver coins between 1967 and 1969, and the regulations prohibiting the exportation, melting, or treatment of one-cent coins between 1974 and 1978.

The new regulations authorize a fine of not more than $10,000, or imprisonment of not more than five years, or both, against a person who knowingly violates the regulations. In addition, by law, any coins exported, melted, or treated in violation of the regulation shall be forfeited to the United States Government.

Better be careful with the amount of pocket change you take across the border into Mexico to buy gum.  You may find yourself unjustly criminally liable and headed to jail!

ECONOMIC IMPLICATIONS

The Federal Reserve Note is a bill of credit, a debt instrument.  As Murray Rothbard observed on page 18 of his 1963 America’s Great Depression, “It is true that credit contraction may overcompensate, and, while contraction proceeds, it may cause interest rates to be higher than free-market levels, and investment lower than in the free market.  But since contraction causes no positive malinvestments, it will not lead to any painful period of depression and adjustment.”

Mr. Rothbard continues the observation that government policy can hobble the adjustment process by: “(1) Prevent or delay liquidation, (2) Inflate further, (3) Keep wage rates up, (4) Keep prices up, (5) Stimulate consumption and discourage saving and (6) Subsidize unemployment.”

H.R. 4248 would hasten the liquidation of the FRN$ credit instruments and hobble the government and central bank’s ability to inflate further.  Because the monetary metals are safe stores of value it would encourage savings.  The cascading effect this would have on wage rates, prices and the inability to subsidize unemployment would allow the country to recover from this greater depression much quicker.

UNAVOIDABLE COLLAPSE

The current unconstitutional monetary system will collapse.  It is not a matter of if but when.  Tremendous resources are being mashelled in an attempt to stop the collapse but it is about as effectual as a lone man putting forth his arm to stop the might Amazon from flowing or some costumed King named Cnut decreeing that the tide should not rise.  Economic law will takes it course.

As Ludwig von Mises predicted decades ago in chapter 20 of Human Action, ‘The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. … But then finally the masses wake up. … A breakdown occurs. The crack-up boom appears.’

The fiat currency system with the Federal Reserve Note dollar as the world reserve currency is in the process of and will eventually completely breakdown and fail.  There is no easy solution.  The more capital is misallocated through bailouts the more painful the liquidation and correction will be.

Dr. Ron Paul’s legislative prescription to the monetary ailments is like taking a drug addict off drugs; the simplest, most ethical and most likely solution to put America back in a position to generate freedom, peace and prosperity.  To ignore H.R. 4248 and continue with the current monetary system is like giving an alcoholic a stolen bottle of whisky to cure his headache; while it may mask the pain in the short term it causes more damage, is immoral to steal the whisky and will lead to a worse headache later.

CONCLUSION

With unlimited greed, insatiable and imprudent desires in Wall Street and Washington it must be that the whole operation must combine and climax in an unsustainable debt bubble that either implodes in a depression or erupts in hyperinflation.  But in the grand design, gold and silver’s primary role are not as economic tools, insurance against depression or hyperinflation, but guarantors of liberty when actually used in ordinary daily transactions.

Gold, silver and the other precious metals protect against confiscation through inflation which is a form of taxation without representation or due process of law.  These shiny metals are not mere barbaric commodities but essential checks and balances in the American political machinery.

Thus, the fight over of competing currencies is about more than just wealth.  It is a fight with only two destinies:  freedom of choice or coercion.  To realize the first and vanish the second will not have too high a price because without it you will have paid the ultimate anyway without a return.

Dr. Ron Paul’s H.R. 4248 the Free Competition in Currency Act of 2009 would return America to a Constitutional monetary system, lay the foundation for freedom, peace and prosperity and clear up the unintelligible federal law in these regards.  For these reasons I endorse this legislation.

Disclosures: Long physical gold and silver with no interest in the problematic SLV or GLD ETFs or the platinum ETFs.