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Hillsdale College Professor Paul Moreno at TheConservatives.com on "No Constitution for Deadbeats"
The Conservatives.com ^ | 11/12/09 | Dr. Paul Moreno

Posted on 11/12/2009 1:50:33 PM PST by hillsdale1

No Constitution for Deadbeats

By Dr. Paul Moreno | Nov 12, 2:00 PM

America's foreign creditors are uneasy, fearing that runaway government spending will spark inflation and reduce the value of their U.S. bonds. It has been quite common for governments to resort to inflation to relieve the debts of their own citizens and to reduce their own debts to foreigners. One of the principal goals of the American Constitution was to prevent such mischief.

The United States' poor credit in international financial markets was one of the main reasons that the Federalists called for a new constitution. That Constitution assured foreigners that regime change would not be used as an excuse for debt repudiation. Article VI states, "All debts contracted and engagements entered into, before the adoption of this Constitution, shall be as valid against the United States under this Constitution, as under the Confederation." Once the Constitution was ratified, Alexander Hamilton used the new powers of the federal government to restore America's credit.

Perhaps more important were the ways that the Constitution prevented state financial chicanery. Many states had responded to the economic distress of the post-Revolution period by enacting various kinds of debtor-relief legislation, especially by inflationary paper money laws. Madison referred to these laws in the Federalist Papers as the sort of "improper or wicked project" that the new Constitution would prevent. Accordingly, the Constitution (Article I, section 10) prevents the states from making "any thing but gold and silver coin a tender in payment of debts." States also cannot pass any law "impairing the obligation of contracts."

The Constitution also seemed to require a metallic currency, stating only that Congress had the power "to coin money." But the crisis of the Civil War led to calls for the issue of paper money not redeemable in gold or silver. The Treasury essentially monetized the war debt by printing about a half-billion paper dollars, known as "greenbacks." These contributed to a wartime inflation of about eighty percent (far better than the Confederate States' nine thousand percent rate). Treasury Secretary Salmon P. Chase, a hard-money man, was sick at heart to have to issue such "fiat money." When he became Chief Justice, his Supreme Court declared the greenback act unconstitutional. But two new appointees caused the Court to reverse itself a year later.

But the Republicans showed remarkable fiscal discipline after the war emergency had passed. Congress issued no new greenbacks, and by 1879 was able to redeem the wartime greenbacks in gold. Congress paid down the war debt, repealed wartime taxes (including the nation's first income tax), and regularly ran a budget surplus. After curtailing wartime inflation, the late nineteenth century was marked by price deflation. The only Democratic president in the late nineteenth century, Grover Cleveland, was equally firm, keeping the U.S. on the gold standard amidst the great depression of 1893, when Populists called for an inflationary "free silver" policy.

The Republican system held until the party split in the election of 1912. The Democrats then enacted the Federal Reserve Act. Among its many goals was to make credit more available to the South and West by way of a more "flexible" money supply--that is to say, a monetary system more influenced by Washington than by the private banking system (New York--more specifically, Wall Street). The Fed certainly made inflation more likely, and the twentieth century turned out to be more inflationary than the nineteenth was deflationary.

The dam finally broke with the Great Depression and the New Deal. President Roosevelt took the United States off the gold standard, confiscated all gold coin and bullion, and arbitrarily fixed the dollar price of gold (heretofore about twenty dollars an ounce) at $35 an ounce. The government cancelled all private contracts to pay in gold, and repudiated its own promises to pay in gold (as when it borrowed money to pay for the First World War). This 40% devaluation saved the Treasury about three billion dollars, and saved private debtors many more. The Supreme Court was not up to the task of keeping the government honest. It had already permitted the states to abrogate mortgage contracts despite the obligation-of-contracts clause. In a 5-4 decision, the Court allowed the federal government to refinance its own debts. "This is Nero at his worst," fumed Justice McReynolds in dissent.

Foreigners could still exchange their dollars for gold (at the devalued rate), and this kept the dollar as the global currency until 1971, when U.S. economic decline and global competition led President Nixon to let the dollar "float" in value against other currencies. Ever since then, we've been on our honor. World dollar-holders, as much as American citizens since 1933, have only the "full faith and credit" of the U.S. government to rely on. If they use our constitutional fidelity as a measure of our creditworthiness, it's no wonder they're increasingly nervous.

Dr. Moreno is Dean of Faculty and the William and Berniece Grewcock Chair in Constitutional History and Associate Professor of History at Hillsdale College in Hillsdale, Michigan.


TOPICS: Business/Economy; Constitution/Conservatism; Government; US: District of Columbia
KEYWORDS: gold; hillsdale; hillsdalecollege; monetarysystem

1 posted on 11/12/2009 1:50:33 PM PST by hillsdale1
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To: hillsdale1

This is a very good article. Thanks for posting it.

I would like my future children to go to Hillsdale, from all I’ve heard about it.


2 posted on 11/12/2009 1:58:09 PM PST by ConservativeMind (I love it every time a criminal dies at the hands of a victim.)
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To: ConservativeMind

Start saving now. It isn’t cheap.


3 posted on 11/12/2009 2:04:20 PM PST by Lurker (The avalanche has begun. The pebbles no longer have a vote.)
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To: hillsdale1

Thanks for posting. This is quite interesting.


4 posted on 11/12/2009 2:10:22 PM PST by Crolis ("Nemo me impune lacessit!" - "No one provokes me with impunity!")
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To: ConservativeMind
Excellent school. Also, an almost pristine campus, none of the usual collegiate defacing of this or that building or structure in the name of some cause or another.

Giving 2 lectures there next Wednesday in the Finance dep't and looking forward to it.

5 posted on 11/12/2009 2:34:16 PM PST by SAJ
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