"...great and ruinous mischief, which is expressly forbidden...."

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Created on Friday, 24 February 2012 05:00

Written by Ralph J. Benko

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"... and these changes, often great and sudden, expose individuals to immense loss, are the sources of ruinous speculations, and destroy all confidence between man and man. To cut up this mischief by the roots, a mischief which was felt through the United States, and which deeply affected the interest and prosperity of all; the people declared in their constitution, that no state should emit bills of credit."

What is a bill of credit? What did the constitution mean to forbid?

In its enlarged, and perhaps its literal sense, the term 'bill of credit' may comprehend any instrument by which a state engages to pay money at a future day; thus including a certificate given for money borrowed. But the language [29 U.S. 410, 432]   of the constitution itself, and the mischief to be prevented, which we know from the history of our country, equally limit the interpretation of the terms. The word 'emit,' is never employed in describing those contracts by which a state binds itself to pay money at a future day for services actually received, or for money borrowed for present use; nor are instruments executed for such purposes, in common language, denominated 'bills of credit.' To 'emit bills of credit,' conveys to the mind the idea of issuing paper intended to circulate through the community for its ordinary purposes, as money, which paper is redeemable at a future day. This is the sense in which the terms have been always understood.

At a very early period of our colonial history, the attempt to supply the want of the preci[ou]s metals by a paper medium was made to a considerable extent; and the bills emited for this purpose have been frequently denominated bills of credit. During the war of our revolution, we were driven to this expedient; and necessity compelled us to use it to a most fearful extent. The term has acquired an appropriate meaning; and 'bills of credit' signify a paper medium, intended to circulate between individuals, and between government and individuals, for the ordinary purposes of society. Such a medium has been always liable to considerable fluctuation. Its value is continually changing; and these changes, often great and sudden, expose individuals to immense loss, are the sources of ruinous speculations, and destroy all confidence between man and man. To cut up this mischief by the roots, a mischief which was felt through the United States, and which deeply affected the interest and prosperity of all; the people declared in their constitution, that no state should emit bills of credit. If the prohibition means any thing, if the words are not empty sounds, it must comprehend the emission of any paper medium, by a state government, for the purpose of common circulation.

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It seems impossible to doubt the intention of the legislature in passing this act, or to mistake the character of these certificates, or the office they were to perform. The denominations of the bills, from ten dollars to fifty cents, fitted them for the purpose of ordinary circulation; and their reception in payment of taxes, and debts to the government and to corporations, and of salaries and fees, would give them currency. They were to be put into circulation; that is, emitted, by the government. In addition to all these evidences of an intention to make these certificates the ordinary circulating medium of the country, the law speaks of them in this character; and directs the auditor and treasurer to withdraw annually one-tenth of them from circulation. Had they been termed 'bills of credit,' instead of 'certificates,' nothing would have been wanting to bring them within the prohibitory words of the constitution.

And can this make any real difference? Is the proposition to be maintained, that the constitution meant to prohibit names and not things? That a very important act, big with great and ruinous mischief, which is expressly forbidden by words most appropriate for its description; may be performed by the substitution of a name? That the constitution, in one of its most important provisions, may be openly evaded by giving a new name to an old thing? We cannot think so. We think the certificates emitted under the authority of this act, are as entirely bills of credit, as if they had been so denominated in the act itself.

But it is contended, that though these certificates should be [29 U.S. 410, 434] deemed bills of credit, according to the common acceptation of the term, they are not so in the sense of the constitution; because they are not made a legal tender.

The constitution itself furnishes no countenance to this distinction. The prohibition is general. It extends to all bills of credit, not to bills of a particular description. That tribunal must be bold indeed, which, without the aid of other explanatory words, could venture on this construction. It is the less admissible in this case, because the same clause of the constitution contains a substantive prohibition to the enactment of tender laws. The constitution, therefore, considers the emission of bills of credit, and the enactment of tender laws, as distinct operations, independent of each other, which may be separately performed. Both are forbidden. To sustain the one, because it is not also the other; to say that bills of credit may be emitted, if they be not made a tender in payment of debts; is, in effect, to expunge that distinct independent prohibition, and to read the clause as if it had been entirely omitted. We are not at liberty to do this.

The history of paper money has been referred to, for the purpose of showing that its great mischief consists in being made a tender; and that therefore the general words of the constitution may be restrained to a particular intent.

Was it even true, that the evils of paper money resulted solely from the quality of its being made a tender, this court would not feel itself authorised to disregard the plain meaning of words, in search of a conjectural intent to which we are not conducted by the language of any part of the instrument. But we do not think that the history of our country proves either, that being made a tender in payment of debts, is an essential quality of bills of credit, or the only mischief resulting from them. It may, indeed, be the most pernicious; but that will not authorise a court to convert a general into a particular prohibition.

We learn from Hutchinson's History of Massachusetts, vol. 1, p. 402, that bills of credit were emitted for the first time in that colony in 1690. An army returning unexpectedly from an expedition against Canada, which had proved as disastrous as the plan was magnificent, found the government [29 U.S. 410, 435] totally unprepared to meet their claims. Bills of credit were resorted to, for relief from this embarrassment. They do not appear to have been made a tender; but they were not on that account the less bills of credit, nor were they absolutely harmless. The emission, however, not being considerable, and the bills being soon redeemed, the experiment would have been productive of not much mischief, had it not been followed by repeated emissions to a much larger amount. The subsequent history of Massachusetts abounds with proofs of the evils with which paper money is fraught, whether it be or be not a legal tender.

Paper money was also issued in other colonies, both in the north and south; and whether made a tender or not, was productive of evils in proportion to the quantity emitted. In the war which commenced in America in 1755, Virginia issued paper money at several successive sessions, under the appellation of treasury notes. This was made a tender. Emissions were afterwards made in 1769, in 1771, and in 1773. These were not made a tender; but they circulated together; were equally bills of credit; and were productive of the same effects. In 1775 a considerable emission was made for the purposes of the war. The bills were declared to be current, but were not made a tender. In 1776, an additional emission was made, and the bills were declared to be tender. The bills of 1775 and 1776 circulated together; were equally bills of credit; and were productive of the same consequences.

Congress emitted bills of credit to a large amount; and did not, perhaps could not, make them a legal tender. This power resided in the states. In May 1777, the legislature of Virginia passed an act for the first time making the bills of credit issued under the authority of congress a tender so far as to extinguish interest. It was not until March 1781 that Virginia passed an act making all the bills of credit which had been emitted by congress, and all which had been emitted by the state, a legal tender in payment of debts. Yet they were in every sense of the word bills of credit, previous to that time; and were productive of all the consequences of paper money.

The Rubin-Paulson Paradoxes: When Is it Too Much or Too Little

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Created on Wednesday, 08 February 2012 05:00

Written by Kathleen Packard

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Monetary policy, it would seem is full of paradoxes – at least as viewed by secretaries of the Treasury tried to both stimulate action and forestall panic. In an Uncertain World, describing the Mexican debt crisis of 1995, Bill Clinton’s second Treasury secretary,  Robert Rubin, described his problem: “I found myself trapped in a kind of Catch-22.  On the one hand, I needed to underscore the dangers in order to motivate reluctant legislators – and the public – to support our rescue package.  On the other hand, frank talk about what might happen could provoke the very reaction we most wanted to avoid. Explicitly raising our worse fears about global contagion could create a self-fulfilling prophecy.”

In his memoirs, Henry M. Paulson, Jr., George W. Bush’s third Treasury secretary, described a similar problem.  He wrote of a congressional testimony in 2008: “Going into the hearing, I knew I had to choose my words carefully.  We faced a real dilemma: To get Congress to act we needed to make dire predictions about what would happen to the economy if they didn’t give us the authorities we wanted.  But doing so could backfire. Frightened consumers might stop spending and start saving, which was the last thing we needed right then.  Investors could lose the final shred of the confidence that was keeping the markets from crashing.”

Elsewhere in On the Brink, Paulson wrote: “I was in a painful bind that I all too frequently found myself in as a public official.  Although it’s my nature to be forthright, it was important to convey a sense of resolution and confidence to calm the markets and to help Americans make sense of things.  Being direct and open with the media and general public can sometimes backfire.  You might actually cause the very thing you hoped to avoid.”

But there is another paradox, that Paulson discussed: the one requiring authorities to require funding big enough to reassure the markets but not so big as to panic them. “Before the Senate Banking Committee, Ben Bernanke and I stressed the need to strengthen the weak housing market.  I maintained the bigger and broader our powers, the less likely we would be to use them and the less it would cost the taxpayers.”

“If you want to make sure it’s used, make it small enough and it’ll be a self-fulfilling prophecy,’ I said.  Then I uttered the words that would come back to haunt me within a matter of months.  ‘If you’ve got a squirt gun in your pocket, you may have to take it out.  If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out.  By having something that is unspecified, it will increase confidence, and by increasing confidence it will greatly reduce the likelihood it will ever be used.”

Perhaps the paradoxes that Rubin and Paulson raised might be avoided if a monetary system with greater monetary discipline was in place around the world – requiring less judgment by monetary authorities struggling to guess what the right thing is to do.  Whether in Washington or Brussels, monetary authorities have tried to assemble a bazooka to deal with the world’s monetary and fiscal problems – only to discover they are holding a squirt gun.

A transparent money system – say, the gold standard – might reduce the dilemma of policy paradoxes.

Economic and Political Prospects for America and their Implications in the Florida Primary

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Created on Tuesday, 31 January 2012 05:00

Written by Kelly Hanlon

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In the ten days between the South Carolina primary won handily by yet another GOP presidential candidate and the next primary to be held on January 31 in the Sunshine State, economic and political winds were frenzied.

The IMF declared that there is a greater threat of a second, double-dip recession.  As reported by the Washington Post, the IMF said,

“In a sobering trio of reports on growth, public debt and financial stability, the agency described global trade and investment as waning and depicted the world as perhaps one shock away from a serious downturn. The epicenter of the economic turmoil remains the euro zone, where political leaders have not committed the money needed to prop up weakened governments and banks, thereby threatening to create a cycle of “self-perpetuating pessimism” that could undermine the recovery…”

Meanwhile, Forbes columnist Agustino Fontevecchia, reported on the first-ever, post-FOMC press conference during which, “…Fed Chairman Ben Bernanke recognized his zero-interest rate policy hurts savers.  Bernanke made it crystal clear that his intention is to make people spend, practically telling savers to get out there and invest.  The Chairman also said QE3 is still on the table, while he disregarded Republican criticism of the Fed as ‘political rhetoric.’”

As to political rhetoric, this week saw two more debates—the 18^th and 19^th—as the four remaining GOP presidential candidates tried to distinguish themselves from one another and from the incumbent president.  Gingrich and Paul—representing half of the Republican field—found a bit of common ground on the economy and monetary policy during the January 23^rd debate.  Gingrich even called for the establishment of a gold commission, naming Lew Lehrman and Jim Grant as co-chairs.

In an exclusive interview with Lou Dobbs following Mr. Gingrich’s call for a 21^st century gold commission, Mr. Lehrman pointed out the failures of the Federal Reserve System, including the inability of the Fed to maintain dollar stability over the long run.  Indeed, the average wage-earner has seen the value of his wages erode by 85% since 1971 when the last vestiges of a gold-backed dollar were eliminated unilaterally by President Nixon.

Later in the week, David Malpass connected the economic rhetoric of the week with the political maneuvering, consistent with Lehrman’s view that “Obfuscation on the dollar works fine for Wall Street, which reaps billions in profits from the Fed's unstable dollar policy.”  Malpass argued that, “Dollar weakness doesn't work at all for economic well-being. The corollary to the Fed's policy of manipulating interest rates downward at the expense of savers is declining median incomes.”  Malpass continued, “When the currency weakens, the prices of staples rise faster than wages, hurting all but the rich who buy protection.”

All the while, Mr. Obama in his annual State of the Union Address used political rhetoric artificially (and unnecessarily) dividing the nation between the haves and the have-nots—seating Warren Buffett’s secretary next to Mrs. Obama.  What Obama, the Fed, and other academic and policy elites have failed to understand, however, is that their cheap-money policies have widened—and continue to widen—the very economic inequality which they rail against.

At the conclusion of the week, New York Times best-selling author and Wall Street Journal columnist, Peggy Noonan described this political season as the “most volatile and tumultuous…of our lifetimes.”  She went on to say that “…it's left almost everyone…scratching their heads: what the heck is going on?  We are in uncharted territory.”  Noonan’s account of politics—“volatile,” “tumultuous,” and “unchartered territory”—could have just as easily been describing recent economic events.

One question remains, however, in the final hours before the Florida primary: what policy (or policies) will ease both our economic woes and the political unrest?

Lew Lehrman convincingly reasons that the gold standard is a major component in answering this very question.  In a recent interview, Lehrman argued

“that if we reestablish moral order in the monetary system and we make the dollar as good as gold—we fix its value and people come to depend upon it the way they depend upon a 36 inch yardstick being 36 inches today and tomorrow—we are going to restore not only confidence in our laws and in our money but we are going to restore confidence in our government.”

If ever there was a time for a president to restore the confidence of the American people in their government, it is now.

How the Recession of 1937-38 Shaped the Response to the Great Recession of 2007-09

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Created on Friday, 27 January 2012 05:00

Written by Kelly Hanlon

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Today’s policy makers—particularly Ben Bernanke and Barack Obama—are students of the economic and political history of the 1930s.

Federal Reserve Chairman Ben Bernanke authored a paper in 1983 on the cost of credit intermediation (i.e. cost of transferring funds from savers to borrowers) during the Great Depression. He found that recovery corresponded with the rehabilitation of the financial system. The increased cost of lending translated into the fewer loans which resulted in consumers reduce their demand for goods and services which in turn reduced aggregate demand.

Once the 2007-09 recession took hold, Mr. Bernanke was quick to take action so as not to repeat the policy mistakes of the 1930s. His 1983 argument foretold of the policies of the Fed under his leadership. At all costs, Mr. Bernanke sought to avoid credit markets seizing up. Many, many never before seen policies were implemented to provide liquidity to the markets. Of those, quantitative easing and interest rate policies are two of the most profound. However, economic woes have not ceased even after two rounds of quantitative easing—with a third under consideration—and with interest rates held at record lows for extended periods

All the while, President Obama has been working to enact the “New” New Deal with a series of entitlement programs, infrastructure projects, and an overhaul of the tax system. Treasury Secretary Geithner has been financing the President’s massive new expenditures with newly created dollars, while increasing the national deficit by more than $1 trillion annually.

Although the mechanisms and specific policies have changed slightly in the seventy five years between the two recessions, the outcome of our current recession remains to be seen. Writing in The Economist, Zanny Minton Beddoes compared 2012 with 1937. Beddoes writes, “There will be parallels with 1937, when a wrong-headed tightening of fiscal and monetary policy dragged down America’s economy and extended the pain of the Depression. The details are different, but in 2012, too, avoidable errors will ensure that the Great Stagnation lasts far longer than it needs to.”

As to the forecast for 2012? Beddoes predicts that 2012 will be the year of “self-induced stagflation” with “the most likely outcome [being] an economy not quite weak enough and a crisis not quite large enough to galvanize spineless politicians.”