Krowne (et al.) Testimony In Favor Of The Constitutional Tender Act (Georgia - HB 430)

The following is the 3/25/09 prepared testimony of Aaron Krowne on the Constitutional Tender Act (HB 430), currently in the Banking committee of the Georgia House. A briefer version of the following was delivered verbally. You can also view videos of this and testimony from other sound money activists here (Thanks to Jesse Bickel and Bill Greene for pulling this together, and Bill Greene especially for getting the ball rolling on this bill.)

HB 430 would require Georgia to obey its still-applicable Constitutional duty to accept only gold and silver as tender in payment of debts (i.e., all taxes). All states of the Union are still required to do so; however most have fallen afoul of the requirement implicitly as the United States has gradually abandoned sound money (Nixon deep-sixed it completely by unilaterally defaulting on the gold clause of Bretton-Woods in 1971). Read on below for more background and why this legislation is so important.

Update, March 26th: Rep. Bobby Franklin has posted a video synopsis of what happened, in particular looking at the Bank lobbyist opposition.

Aaron Krowne Testimony in Support of HB 430 - The Constitutional Tender Act

Thank you Congressmen for giving me the chance to speak in support of this important bill.

My name is Aaron Krowne. I am the co-founder and CEO of IEHI, Inc., a media company that publishes economic web sites with a primary focus on the financial crisis. While the term "financial crisis" now needs no introduction, when I started the first web site of our network at the end of 2006, to speak of anything other than the "sound fundamentals of the economy" was heresy. This was the case until well into the spring of 2008, and extended all the ways up to the president and the presidential candidates.

They were wrong, and now it is obvious we were ahead of the curve. Our first site was whimsically named the "Mortgage Lender Implode-o-Meter", and we now maintain "implode-o-meter" sites for many financial sectors, including banks. Each site was rolled out before it was widely accepted that there was a problem in the corresponding sector, as any troubles that had already manifested were believed to be "contained" -- if not intrinsically -- then by the rescue actions of the Fed and/or Treasury.

As a result, our sites have become very popular, sporting 50-100,000 visits on a typical week day. This has forced some acknowledgement by the "main stream" media, even when it would not accept our conclusions and prognostications. As such, we have been covered and cited by outlets such as the New York Times, the Economist, the Wall Street Journal, CNBC, Bloomberg, and countless others. I have also appeared from time to time on the Fox Business Network.

So how did we best most TV analysts, industry economists, Nobel Laureate academics, and political advisors in predicting there would be a crisis, and that it would spread, and that it would come to dominate (if not upend) the US and global economy?

The reason can be most succinctly expressed as "unsound money", which is what I am specifically here to talk about today.

Today in the United States today we have a de facto regime of "fiat money". This means that that our money is formally backed by nothing -- it consists merely of abstract promises. For US Treasury securities, the promises are to pay the principal plus interest, in the future, in US currency (dollars). For the currency itself, there is an implicit promise that the spending-power value of the notes will be kept roughly constant. Otherwise they would not be widely accepted. Yet, no one can actually be held accountable if this implicit promise is violated. Because of this lack of concrete value backing the money, it is more accurate to call it a "currency", as it lacks the critically-important store-of-value property of money.

This has not always -- or even usually -- been the case in history; even our own. Fiat money was permanently introduced in the United States only in 1913, when the Federal Reserve was created. Prior to this, other than briefly in times of war, US money was only in the form of gold and silver coin, or notes redeemable directly in US coin or other bullion. As far as durable value, under the Federal Reserve fiat regime, the dollar has lost more than 95% of its value. By contrast, from the founding of the republic until 1913, the dollar not only maintained but actually gained noticeably in value. So much for "promises" to maintain value. Instead, it appears the Federal Government has devalued the dollar at the maximum rate possible without threatening its own existence -- as of yet.

The founding fathers were very wary of this outcome. They had just experienced the disastrous Continental fiat money, which was inflated away to almost nothing amidst the expense of the Revolution. They also knew that distant despots could use fiat money to place into effective servitude the periphery and common citizens of a Nation, especially those who were politically the weakest. They did not want to create a new Federal Government that would assume this despotic role.

Because of this experience, and because they were learned men in general on the subject of political history, they made it explicit in the Constitution that "no State shall make any thing except Gold and Silver Coin a tender in payment of debts" (Article I, section 10). Nor could states coin their own money; the establishment of coinage standards being a responsibility explicitly assigned to the Federal Government (Article I, section 8). States could not "emit bills of credit" (Article I, section 10) -- a type of fiat money, and neither was this capability granted to the Federal government. Counterfeiting was expressly to be punished by the Congress (Article I, section 8).

So it is quite clear that the money of the United States must be only gold and silver.

Activists who would arbitrarily reshape the Constitution to suit their whims might protest that such a regime is "too restrictive" -- after all, how else could the Federal Government spend more than it takes in during times of emergency? But the Constitution does explicitly permit the United States to borrow (Article 1, Section 8), and states that the validity of its debt shall not be questioned (Amendment 14, Section 4.) So the founding fathers provided for this need.

What we have today is a system of bills of credit and nothing else. Apologists for this system argue that it has been established by law -- Namely, the Federal Reserve Act and other law and codes establishing the Fed's emissions as legal tender. But all of this law and code is, on the face of it, unconstitutional. Pointedly, while the Constitution establishes gold and silver-only money and provides for Federal borrowing, it does NOT permit that borrowing to become the foundation for the money itself. Yet today the Federal Reserve is little more than a machine to do exactly that: "monetize" Federal debt -- and even the debt of banks and non-bank private financial companies -- by creating money out of thin air with which to purchase it.

HB 430 simply provides for a return to the original Constitutional requirements, which still remain in place.

Critics will doubtless argue that things have "worked fine" since 1913 on a pure-fiat money basis, so why change now?

There are two main responses to that.

The first is that this regime of "pure fiat" is actually relatively recent. While it is true the Federal Reserve was established in 1913 and almost immediately began emitting paper money, gold and silver money were not immediately withdrawn. Gold and silver United States Notes circulated along side Federal Reserve Notes for decades after the founding of the Fed. It wasn't until 1933 that gold ownership was (unconstitutionally) outlawed for US citizens, and gold coins and Gold Certificates were withdrawn. However, silver and silver notes remained in circulation. In fact, until 1957, Silver Certificates continued to be issued. These notes were of the "exists on deposit at the Treasury" variety, an even stronger backing than being merely "redeemable" in a certain quantity of metal. Accordingly, when the Treasury's silver ran out, it stopped issuing the notes. As the price of silver rose, the notes disappeared from circulation.

However, even this was not the end of "real money" in the United States: US coin, all the way down to dimes, continued to be 90% silver until 1964. Silver certificates continued to be redeemable in silver all until 1968.

That, still, was not quite the end: throughout all of this, the US dollar continued to have an "international" gold backing -- it was redeemable in gold at a fixed rate under the post-WWII Bretton Woods agreement. The gold backing was maintained to instill global confidence in the US dollar amongst the nations of the world; indeed, Bretton Woods would never have gotten off the ground without it.

However, the United States had been expanding money supply so rapidly over the ensuing decades that it eventually became obvious to our foreign trading partners that there was not enough gold to cover the promises implicit in all the dollars that had been issued. The Treasury was accordingly drained of gold, until in 1971, president Richard Nixon unilaterally "closed the gold window" and stopped gold payments. This effectively ended the Bretton Woods system, and thrust the world into a "floating exchange" regime. It was only then that pure fiat money became the system of the United States, and became the rule rather than the exception worldwide.

It is clear from the above timeline what really happened: a sound backing for US money was not removed all at once, but was done so quite gradually, over almost sixty years. The public was thus duped. We were boiled slowly, and like the proverbial frog, did not hop out of our pot as it sat on the fire. Indeed, by the 1970s, most people did not even know what was being removed when the Bretton Woods gold backing was abrogated.

Thus, until 1971, one could argue on a legally-viable (though mootable) basis that state debts, payable in lawful money, also satisfied equivalently the gold and silver clause of the Constitution. In sum, the pure fiat regime can be seen as quite recent -- within living memory of most of our lawmakers today.

The second response to the claim that "our fiat system has been working fine" is that it simply has not been. Putting aside for a moment the issue of the gradual erosion in purchasing power of the dollar, a monetary system based on limitless expansion of credit has been a complete disaster. This is what my web sites are fundamentally about: without the discipline of a monetary connection to a fixed commodity like gold or silver, money becomes mere credit, and credit expands as fast as it can. This induces a bubble, to which very few protest because it is easier to participate in the bubble than to oppose it. For a while, many people make lots of money on leveraged speculation. Even politicians and bureaucrats cannot be trusted to exercise restraint; indeed, they thrive on, the increased tax revenues and public approval of the economic "boom". However, not being based on fundamentally-wise investment, it all comes to an end soon enough, resulting in extreme leveraged losses, bankruptcies, unemployment, a collapse in tax revenues, and expensive public bailouts. It is only then that the bubble activities are generally seen to have been a mis-allocation of vast quantities of human and financial capital.

Far from an "enlightened" regime of stability, there have been many such bubbles since the founding of the Fed and the institution of fiat money: the 1920s stock bubble and 1929 crash; the S&L bubble of the late 80s until 1990; the NASDAQ bubble of the late 1990s and crash in 2000; and finally (and likely terminally), the housing bubble of 2003-2007. There also have been other significant phases of instability and depression, such as the 1970s to early 80s stagflation (caused by excessive government expenditures and money printing), and the 1987 stock market crash (caused by the "portfolio insurance" scheme, itself a response to unhinged financial markets). In 1998 the financial system almost blew up when a hedge fund called Long Term Capital, which was levered by 100:1 or more, collapsed; inducing billions in losses for its creditors. Fed Chairman Alan Greenspan orchestrated the private bailout. However, instead of responding by returning to sound money, or at least emulating it with meaningful restrictions on leverage, the same imprudence was expanded to the entire banking system over the next decade, with the Fed's gleeful approval.

At the root of all of these problems is our "bills of credit" fiat money system, and concomitant unrestrained government spending and private speculation. Such a system, illegally, and to our proven detriment, remains the foundation of our monetary and banking system. Unfortunately, Federal authorities today are scrambling in vain to prop up this exhausted, unworkable system, at all of our expense.

HB 430 allows Georgia to lead the way for our country in upholding the rule of law and restoring monetary stability in the intended Constitutional fashion. It is only upon such a sound money basis that sustainable prosperity can once again take root in America.

Thank you.