Grassroots Commentary

Is the Federal Reserve Constitutional?

By Robert R. Owens · Oct. 3, 2011

The Federal Reserve is the central bank of the United States. It is in charge of printing money, issuing bonds and setting interest rates for those bonds. Article 1, Section 8 says, “The Congress shall have Power … to coin Money, regulate the Value thereof.” The Federal Reserve is never mentioned. Has it always been this way? Does any other country do this? How did the Federal Reserve get its power over our currency and our economy? And the issue so many are interested in today: is the Federal Reserve constitutional?

Has it always been this way?

At the dawn of the Republic our first Secretary of the Treasury Alexander Hamilton issued several reports which in many ways set the tone and pointed the way for the development of America in the economic sphere. His first report on the public credit recommended that the new central government not only honor the debts contracted under the original government as established under the Articles of Confederation but that it also assume the war debts of the States. This recommendation was followed by Congress and the Washington administration created what has evolved into a permanent national debt.

In 1790 Hamilton submitted his second report which asked Congress to charter the Bank of the United States. Several aspects of the bank Hamilton proposed will sound familiar and it can be seen that they provided the mold for the Federal Reserve. His plan was closely modeled after that used by Great Britain’s Bank of England. According to Hamilton’s vision the Bank of the United States would be a public/private hybrid. It would have an exclusive charter for twenty years. Its initial capitalization would be ten million dollars consisting of eight million from private investors and two million from the government. Congress would give the Bank the right to print paper money up to the ten million held in deposit. Most importantly the central government would declare that the notes issued by the Bank would be the only notes which would be accepted in payment for taxes. This would give the notes of the Bank of the United States credibility and value, which none of its state chartered competitors could match. This was Hamilton’s proposal. Now all he had to do was get it passed into law.

The report was introduced into Congress in 1790 and by February 1791 it passed both the House and the Senate and arrived on the desk of President Washington. This is when the battle of the Titans really began. Leading Anti-Federalists and strict constructionists such as James Madison, Thomas Jefferson, and Edmund Randolph, argued that the Constitution did not grant the government the power to incorporate a Bank. It was not an enumerated power and therefore it was reserved to the States or the people. Those arguing for a strict interpretation of the newly minted Constitution, which Madison and Randolph had helped write, urged Washington in a written report not to sign the bill.

 

Ever the fulcrum between his philosophically divided advisors Washington presented Hamilton with the argument opposing his plan and asked him to present his argument in favor. Hamilton using his excellent reasoning and communication skills presented President Washington with the original argument for the implied powers granted to the central government by the Constitution. This report appealed to what is now known as the “Necessary and Proper” clause. He argued that the government was inherently empowered to do whatever was necessary to implement the laws required to use the enumerated powers. President Washington accepted Hamilton's argument and signed the bill and the first Bank of the United States was born.

Beginning on July 4, 1791 the first thing the new Bank did was inflate a financial bubble by offering the largest initial stock offering the nation had ever seen. Investors showed their confidence in Hamilton’s plan by quickly buying the options on the first issue of stock. Many of these initial investors were members of Congress. The initial price for the options was $25. This was soon bid up to over $300. It soon crashed to $150. Thus within days of its first action this original central bank inflated a bubble that soon burst. However, Secretary Hamilton setting the example for the central bankers to follow stepped into the breach and averted a general financial panic by purchasing government securities with public funds thus stabilizing the markets and rewarding those who had initially speculated.

The bank opened for business in December of 1791. All manner of people, landowners, manufacturers, merchants, politicians, and most important of all, the government of the United States lined up to deposit money and to obtain the new Bank script. Within months the Bank was the single largest economic enterprise in the nation.

Beginning a pattern that would be repeated over and over the bank which had been created to ensure a firm foundation for the American economy inflated another bubble and caused another crash.

First the Bank flooded the market with easy loans and a massive issue of paper dollars. This move added liquidity pushing the new securities market into a sharp rise. However, then the Bank reversed course and began calling in many loans. Investors and speculators were especially affected as they were forced to sell securities to pay the loans. When the largest of the speculators William Duer was forced to declare bankruptcy the markets collapsed. This in turn caused the financial markets to freeze up putting a stop to much of the nation’s credit and commerce. This is known as the Panic of 1792. The crash didn’t last long because Secretary Hamilton once again stepped in and bought government securities with public funds injecting much needed capital into the economy.

Over its 20 year life the first Bank of the United States functioned as the central bank. It worked to regulate state banks, closing those that issued too much paper. It attempted to guide the entire economy through its monetary and interest policies. It coordinated all its branches up and down the east coast to project a united front in its economic policy by either tightening or loosening credit.

By the time it came for a renewal of the bank’s charter the Federalists were no longer in the seats of power and the newly ascendant Democratic Republicans led by Thomas Jefferson defeated its bid for another twenty years, and the first bank of the United States, America’s experiment with central banking was over.

Does any other country do this? Yes, many other countries have central banks. Today it is a hallmark of an advanced economy.

How did the Federal Reserve get its power over our currency and our economy? There were subsequent attempts to establish central banking in the United Sates. There was a second Bank of the United States chartered in 1816, but after being blamed for a series of bubbles and crashes its charter was not renewed and it ceased operations in 1836. In 1863 in the depths of the Civil War Congress passed the National Banking Act which chartered numerous Federal Banks. This law also taxed paper money issued by State banks but not paper money issued by the Federal banks giving them a decided advantage.

In 1913 the Federal Reserve System was born. It established what is known as a decentralized central bank in that it has semi-autonomous branches. It was given the power to control the currency, issue bonds, and set interest rates for those bonds. It was established as a public/private concern and actually owned by stock holders. Who are these stock holders? They are private banks, and ownership of stock is required to participate in the system. The system was instituted to provide the foundation for a stable banking industry and an elastic currency that could be used to smooth the rough edges of the business cycle. Whether this latest experiment in American\central banking has fulfilled its mission each citizen should judge for themselves.

Is the Federal Reserve constitutional? The first Bank of the United States was never challenged in court as to whether or not the government had the power to create a central bank. But the second Bank was. The Supreme Court in 1819 ruled in McCulloch v. Maryland that it was in fact constitutional due to the implied powers clause. Thus looking to precedent, and unless the Supreme Court reverses itself, the Federal Reserve is considered to be authorized within the confines of the broadly interpreted Constitution.

There was an important constitutional issue born with the creation of America’s first central bank. With the birth of the first Bank the acceptance and use of implied powers became the central government’s method to expand its powers beyond those expressly delegated in The Constitution.

The argument of Madison, Jefferson, and Randolph upholding a strict constructionist view would be codified and added to the Constitution in the same year the Bank was charted, and perhaps in response to it, in the 10th Amendment, but this did not end the appeal to implied powers as a means to the government’s ends. In theory this sounds good. In practice it has turned our limited government into an out of control leviathan that is crushing the free out of our free market and sucking the liberty out of the American experiment.

As my favorite American philosopher once said, “In theory there is no difference between theory and practice. In practice there is.”

Dr. Owens teaches History, Political Science, and Religion for Southside Virginia Community College. He is the author of the History of the Future @ http://drrobertowens.com View the trailer for Dr. Owens' latest book @ http://www.youtube.com/watch?v=_ypkoS0gGn8 © 2011 Robert R. Owens drrobertowens@hotmail.com Follow Dr. Robert Owens on Facebook or Twitter @ Drrobertowens.

9 Comments

enemaofthestatistquo said:

I don't want to steal any attention away from your excellent article, though I think this is a feasible solution to the US immediate financial and economic problems. Proposal of US Constitutional Amendment for Money and Tax Reform...........The sixteenth article of amendment to the Constitution of the United States is hereby repealed. The Congress shall make No Debt for this Union, or the several States, lest the monies be appropriated for the common defense being these exigencies; of natural disaster, insurrection, invasion, or of War, and these declared by two/thirds majority of Congress in joint session. The Congress shall make periodic budget appropriations for a term of not less than twelve months nor more than twenty four months. The Congress shall make no loan, or be the guarantor of any loan, to any person or entity. Money is, and Shall be the Common Currency of exchange for Commerce, Trade, and Law; the Common Denominator of the Commons Property; One of the fixed Standard of Weights and Measures, metes and bounds, of the produce and the Common Wealth of We The People of the United States of America, and All, Each, and None of the People Own the Money coined, issued, and circulated in our Name, our Full Faith and Credit. The Money, by denominations, possessed of each Person is equal; having the same consistent regulated value thereof. The Dollar is the Legal Tender Money of these United States, and only upon authority of Congress for Constitutional powers, the Treasury shall issue within the limitations and croteria proscribed herein; all denominations as appropriated expenditures and payments upon valid debts, and where applicable, the Treasury shall pay interest, not less than one percent upon any portion of the national debt. Each Person, and Citizen, or Inhabitant: Possesses Stewardship, as though their self shall Own, and for their Own exclusive purpose until Use; that Money obtained by neither force or fraud, which is upon their own Person, or is otherwise in their possession, or that is: any instrument of Certificate, Deed, Title, or Mortgage proof of property possession of these listed; either Is coin or currency, or Is chattel goods; or Is capital wealth, and/or Is Real property- in Land or Built, or Is account on deposit in their own Name at any bona fide Federal or State chartered financial institution. And no such Money shall be seized, lest due process shall have been adjudicated as proscribed by the fourth, sixth, seventh, thirteenth, and fourteenth articles of amendment to this Constitution, and no Person shall be deprived of life or liberty upon sole reason of accumulative debt. Each Person or Entity, within federal jurisdiction, is subject to the Transaction User Tax & Fee to be assessed upon each transaction using the Legal Tender money; to be used as federal revenue for Constitutional enumerated powers. Each of the several States; may assess and collect in like manner, a like Fee, not to exceed the federal collection of each like transaction, and to be used as State revenue for Constitutional powers. The Federal Fee total per Transaction of six percent, is assessed and collected – at three percent - from both the Buyer and the Seller Equally, at the time and place of any recorded Transaction being in excess of two dollars, or which makes addition to the chattel goods, capital wealth, or Real Property, of any Person or Entity, owned and proven by, and/or is, any instrument of Certificate, Deed, Title, or Mortgage. And upon any Transaction, which shall be final after periodic payment transfers with interest; the Fee will be assessed and collected only upon the amount of and at the time and place of each periodic transfer. Except, upon Transactions of Demand Accounts on deposit at any financial institution, and others exempted for Persons; being for Sustenance, Charity, Tithe, Care, and Pension; as defined by Law. The Federal government, and the several States, collecting in like manner an equal or lesser amount, of all Transactions; shall receive the User Fee portion of Five and one Half percent, or less. The Seller one Half percent, total one percent, as collection stipend, from both the Federal and State User Fees. The Federal and State governments, and the Seller; each, shall retain a Fee portion of one Half percent of such Money in Personal and Private Managed interest bearing escrow type Investments, whereof the Federal and State governments shall Not Use or Seize such accounts for any purpose. The Federal and State governments Fee portion Shall be set aside for present or later supplemental application to the Care and Pension of all Citizens: disabled, incompetent, and retired. The Seller stipend Fee portion Shall be set aside for present or later supplemental application to the Care and Pension of all employees: active and retired. The Federal government urges each Inhabitant to obtain like Private investments, and set aside for present or later supplemental application to the Care and Pension of: their self, their dependents, or heirs; wherein deposits, shall be free of any Fee or other Tax until Use after withdrawal upon disability, retirement, or incompetence. The Well-regulated Coining, issuance, and circulation of Money, the grant of credit upon reasonable rates and terms, and the ways and means to operate Federal powers; being necessary and proper in a Free State for Commerce, Trade, and Law; the Congress shall have sole un-delegated power, to regulate the standard Measure of interest by Class and Collateral, and the calendar Measure of Periodic Intervals of payment upon All borrowed money; and to assign expenditure appropriations of money from the Treasury for Constitutional powers, and to affix the Standard Weight of metal of the Coinage: precious, base, or alloy; and the Congress shall by annual April resolution -determine the whole quantity by denominations of legal tender money, coin and currency, to be issued by the Treasury, and regulate the consistent value thereof, and the same shall be first used as federal revenue and appropriated as expenditures for Constitutional powers and payments of valid debt. The quantity to be issued based: upon growth of population- calculated as necessary life subsistence for each new Inhabitant, the growth of economic productivity- calculated as additional gross domestic product, and the interest charged upon borrowed money within federal jurisdiction- calculated as the current annual quantitative money amount of collected interest. The Congress shall Not increase any Tax or Fee, either by amount, forms, percentile, quantity, or rates; Nor increase the Measures of Interest charged upon borrowed Money whether by Class, Collateral, or Periodic Interval; Nor Borrow money sufficient to exceed the total contemporary interest service upon the national debt in Time of Peace; Nor change the Standard Weights and Measures of the Coinage; lest any of these be passed by two thirds majority of the House of Representatives and of the Senate in separate sessions, and subsequent vote by state delegation of both Houses of Congress in Joint session, a three fifths majority of the state delegations required for passage, each delegation having One Vote; except no increase of Tax or Fee shall be for a Term longer than six years. The Congress shall make appropriations annually to be paid upon the national debt, sufficient money to pay the total contemporary interest service upon the national debt, and an amount equal to two percent of the same; and the Coining and Issuance of money Shall Not exceed this whole amount in Time of Peace. The President, annually; may propose and recommend to the House of Representatives for the deliberation of Congress, such rules and regulations, framed by the Departments, which _he shall deem necessary and proper to be made Law, and such expenditures from the Treasury as _he shall deem responsible and requisite to execute the Constitutional powers...I think the creation of a federal bank and the imposition of a progressive reported income tax is UNConstituional. The House of Representatives Shall start all money bills(ArtI,Sec7), that includes- as stated above- the determination of how much money will be issued as vital to the (balanced) Budget, & that money may be directly applied as payments to valid debts.

Monday, October 3, 2011 at 10:46 PM

GregInOregon said:

Good article, and I agree that it interprets the intent and content of the Constitution too broadly. At the time I'm sure they did not foresee the implications of their actions, but now we know what happens when man is left to his own devices without checks and balances in place. Sure, the argument can be made that whatever is "necessary and proper" could be made, and has been made for all manner of pretexts for creating more Fedgov bureaucracy. Washington never would have signed the bill in 1791 had he foreseen where it would lead.enemaofthestatusquo has made a good template for a Constitutional amendment. Could it ever be signed into law? We may have gone too far for it to ever see daylight.

Tuesday, October 4, 2011 at 4:26 PM

Abu Nudnik said:

Since the power to coin and regulate coinage is an enumerated power, the necessary and proper clause is necessary at least to establish some means by which to coin is it not? What is the alternative? It's propriety is open to argument.Regarding the preferential treatment given to federal over state banks during the Civil War, well, that's only natural isn't it?There are a whole bunch of assumptions that aren't proven here. That members of Congress bought shares in the Bank doesn't make them dirty: it just as well could make them patriots willing to risk their own money. Did they really get their lost money from the bailout or was the bank itself just kept from failing?I really would like to know how Congress is to coin money and regulate its value other than through the Fed or some other institution like it? Is it to change money in the legislatures on Capitol Hill instead?It's not that I disagree but your contexts are all out of place and tenuous connections everywhere. That the necessary and proper clause has been used to establish a bank and fine a citizen for not buying health insurance doesn't make it evil any more than a knife that can cut a tomato and throat is evil. The ability to make distinctions of value is what makes a culture great. I just don't get your argument.Your favorite philosopher is wrong by the way: there is a difference between theory and practice in both theory and practice.

Tuesday, October 4, 2011 at 4:46 PM

A.R. Nash said:

The Fed can makes things better to a degree or worse to a large degree (refer to Alan Greenspan's too low interest rates for too long financial bubble) but the biggest problem isn't the Fed, it's the profligate spending of the Congress, always out to curry favor, secure more votes, campaign contributions, private sector jobs for their own or themselves, bribes, and exclusive junkets. All by spending, spending, spending money that isn't theirs, and isn't even the government's, but is "investor's", (borrowed). With "friends" like Congress, who needs enemies. We're screwed if there isn't a new slate of leadership in 2012, leadership that will do the things we've never seen a Congress do, -except in the opposite direction.

Wednesday, October 5, 2011 at 1:30 AM

Howard Last in Wyoming said:

Where is Andrew Jackson when we need him? If you don't understand this you need to brush up on your American History. HINT - Second Bank of the United States.

Wednesday, October 5, 2011 at 12:12 PM

Michael Lynch said:

The Federal Reserve System ENABLES the Congress to go on spending more than the government takes in. The ability to Print or "coin" unlimited amounts of "fiat" currency is the key that unlocks this Pandora's Box. Congress and the rest of the Federal Government are unwilling to curb out of control spending. THAT is the problem. Without profligate spending, the argument over the Constitutionality of the Federal Reserve would be an almost moot point. Without the Fed, Congress would simply find some other mechanism to facilitate their addiction!

Thursday, October 6, 2011 at 4:20 PM

Abu Nudnik said:

"Where is Andrew Jackson when we need him?"He's dead. Maybe you could get off your high horse and explain it. I don't understand and I'm not embarrassed to say so. There are things I do and things I don't. I understand the Theory of Relativity but not the argument against the Fed, what would replace it, how the Congress would coin and regulate the value of money without it. How, exactly, would it be done.I agree that overspending is the culprit. The bribing of the electorate is the problem. Power hungry politicians hold on that way.It the Paulites want to be elected they really DO have to explain it so it can be understood. It's not enough to call people fools and tell them to research this and that and give them snooty hints.People will not vote for Obama for calling them stupid. They won't vote for Paulites for the same reason.And gold. How much shrinkage would there be? What would be its effects?I think a lot of posters here think they know everything and if anyone just asks a question it's assumed there's an agenda and they're the enemy. It's so immature. I really would like to understand. If you're too big to explain it, well, that's not all that big. But maybe it's something you just believe in but don't understand yourself?

Thursday, October 6, 2011 at 5:27 PM

enemaofthestatistquo said:

@Abu--- The Fed is a redundancy which enriches a select few, it is privately owned & operated: You, I ,PatriotPost, Dr. Owens, Mr. Last, GreginOR, etc. NOT A ONE of US own any stock in this Central Bank. The Treasury via the US Printing Office may print our currency, the US Mint may coin our coinage, Why do we need this behemoth? The Congress is enumerated the power to coin our money and regulate its value, they have UNConstitutionally delegated this authority to private interest. The Congress may regulate the value of our Money by regulating the interest rates as the Fed now does, & by annually authorizing issuance by the Treasury of coin & currency based upon objective criteria, & using that same issuance to pay a portion of valid US debt.

Friday, October 7, 2011 at 3:27 PM

enemaofthestatistquo said:

The Congress, by utilizing the US Printing Office & the USMint to print & coin our money, does not even have to back our money w/precious metals- only our Full Faith & Credit is necessary thus avoiding the stigma of the Fed monetizing the debt, or lets call it what it is- making debt to the Fed by Fraud- from nothing for no goods produced or services rendered which are best & should be done by the Congress thru the Treasury. The 1st circulation of the money would be for the payment of federal accounts payables & this Legal Tender would be accepted as payments for all taxes fed,state,&local.

Sunday, October 9, 2011 at 12:16 AM