by William Greene
Since its inception, the U.S. Federal Reserve’s monetary policies have led to a decline of over 95% in the purchasing power of the U.S. dollar. As a result, there have been several attempts to curtail or eliminate the Federal Reserve’s powers (for example, the efforts of Rep. Louis T. McFadden in the 1930s; the efforts of Rep. Wright Patman in the 1970s; the efforts of Rep. Henry Gonzalez in the 1990s; and the efforts of Rep. Ron Paul since the 1990s); however, none have proven successful to date, due mainly to the constraints of strong political opposition at the national level.
In contrast to these attempts at the national level, a paper I presented at the Mises Institute’s “Austrian Scholars Conference’ proposes an alternative approach to ending the Federal Reserve’s monopoly on money: the “Constitutional Tender Act,’ a bill template (first introduced by Georgia State Rep. Bobby Franklin) that can be introduced in every State legislature in the nation, returning each of them to adherence to the U.S. Constitution’s “legal tender’ provisions of Article I, Section 10.
Such a new tactic could achieve the desired goal of abolishing the Federal Reserve system by attacking it from the “bottom up’ – “pulling the rug out from under it,’ by working to make its functions irrelevant at the State and local level. Under this Act, the State would be required to only use gold and silver coins (or their equivalents, such as checks or electronic transfers) for payments of any debt owed by or to the State (e.g., taxes, fees, contract payments, etc.).
All contracts, tax bills, etc. would be required to be denominated in legal tender gold and silver U.S. coins, including Gold Eagles, Silver Eagles, and pre-1965 90% silver coins. All State-chartered banks, as well as any other bank that is a depository for State funds, would be required to offer accounts denominated in those types of gold and silver coins, and to keep such accounts segregated from other types of accounts such as Federal Reserve Notes.
Upon going into effect, the Constitutional Tender Act would introduce currency competition with Federal Reserve Notes, by outlawing their use in transactions with the State. Ordinary citizens of the State, being required to pay their State taxes in gold and silver coins, would find it necessary to open bank accounts in those denominations.
Businesses operating within the State, being required to pay their State sales taxes and license fees in gold and silver coins, would need to do the same; and in order to acquire such coins, they would begin to offer their goods and services in “dual currency’ denominations, where customers could choose to pay in Federal Reserve Notes (which would still be necessary to pay Federal fees and taxes) or gold and silver coins (including checks and debit cards based on bank accounts denominated in such coins). Customers, having found the need to open such accounts in order to deal with the State, would be able to engage in commerce using those accounts.
Over time, as residents of the State use both Federal Reserve Notes and silver and gold coins, the fact that the coins hold their value more than Federal Reserve Notes do will lead to a “reverse Gresham’s Law’ effect, where good money (gold and silver coins) will drive out bad money (Federal Reserve Notes). As this happens, a cascade of events can begin to occur, including the flow of real wealth toward the State’s treasury, an influx of banking business from outside of the State (as citizens residing in other States carry out their desire to bank with sound money), and an eventual outcry against the use of Federal Reserve Notes for any transactions.
At that point, the Federal Reserve system will have become unwanted and irrelevant, and can be easily abolished by the people’s elected Representatives in Washington, D.C.
I believe this “bottom up’ approach to ending the Fed would have a greater likelihood of success than a “top-down’ approach for a number of reasons. First, it is decentralized: rather than facing concerted political opposition at a single Federal level, it attacks the issue at the State level, where strategies and tactics can be adapted to the types and amount of political opposition they encounter.
Second, it is diffused: it can be attempted in any number of States, which can cause the opposition to spread its resources much more thinly than would be necessary at the Federal level. Finally, it is legally sound: it relies on the U.S. Constitution’s negative mandate in Article I, Section 10, that “No State shall… make any Thing but gold and silver Coin a Tender in Payment of Debts.’
Under this Act, not only would the use of FRNs by the State be made illegal; the use of legal tender U.S. gold and silver coins would be encouraged amongst the general population as well, along with any other currency that parties mutually consent to using.
This will have three immediate effects: the elimination of Federal Reserve Notes from State transactions; the requirement of individuals and businesses to cease using FRNs in their transactions with the State; and the introduction of competition in currencies amongst the general population. With all three effects working in tandem, the use of low-value pieces of paper issued by the Federal Reserve will become irrelevant, and an emaciated Federal Reserve system can be brought to a welcome, if inglorious, end.