Sec. 16 and be it further enacted, that all the gold and silver coin which shall have been struck at, and issued from the said mint shall be a lawful tender in all payments whatsoever.

Sec. 19 and be it further enacted, that if any of the gold and silver coins which shall be struck or coined at the said mint shall be debased . . . every such officer or person who shall commit any or either of said offenses, shall be guilty of felony and shall suffer death.

*********

In a system known as free coinage the Mint accepted precious metal bullion from anyone and replaced it with fabricated coin of equivalent worth, because the new U.S. Treasury, formed in 1789, lacked enough precious metal to issue all the coin the growing economy needed. U.S. money needs were met by private banks chartered to operate by state governments. Banks accepted deposits of gold and silver coin and made loans and payments in their own notes which were able to redeem the gold and silver coin. The banks had to keep the precious metal coin reserve on hand to meet redemptions. However, a few years earlier, in 1775, Scottish philosophy professor Adam Smith had published a book, The Wealth of Nations, which argued that the source of national power and wealth was not gold and silver but production of goods. Smith's book became the cornerstone of a new social science -­ Economics. His writings and those of his contemporaries, slowly turned Europe toward improving production and developing interdependent trade.

The goldsmiths (modern day bankers) had already seen the advantages of issuing paper in excess of gold coin on hand to be redeemed. In the early 1800s, America had many honest well­run banks, but others earned reputations more for fraud than integrity.

Wildcat banks got their name because they were located in regions so remote and hostile that wildcats, not note holders, came to their doors. Before state laws regulated banks, bankers knew they had to keep a certain amount of precious metal coins on hand to be redeemed upon request of note holders. To assure the public that reserves were available, vaults were often located where customers could view the precious metal coins.

But other bankers were not quite as truthful. They would sprinkle gold or silver coins on top of kegs of nails. In later years when state examiners checked reserves, some slick operators would ship coins from bank to bank minutes ahead of the examiner. The banks took in gold and silver deposits and made loans and payments in their own notes which, as mentioned earlier, could redeem gold or silver coin.

State bank notes worked well in local areas if people were sure the issuing bank was in good condition and its notes could redeem coin. Outside their local areas, notes were often accepted only at a discount (less than face value) because merchants did not know how honest and scrupulous the issuing bank was. If depositors feared a bank could not honor all of its outstanding notes, they rushed to draw out deposits and redeem gold and silver coin before the reserves disappeared.

Despite panics and failures, state­bank notes were widely used during much of the 1880s. By the early 1860s more than 10,000 separate issues of different sizes, colors, and designs were in circulation.

The Civil War produced changes that set the stage for today's money system. The federal government could not raise enough money to pay for the civil war through bond sales and taxes. As rapidly as the Treasury paid bills with gold and silver coin, the metal was hidden by the public as private property.

Congress issued paper money -- U.S. Notes -- that was not able to redeem gold or silver coin. Congress tried to make the notes acceptable by declaring them Legal Tender which meant they had to be accepted in payment of all private debts. The government also began chartering National Banks which were given paper currency they could issue as their own. State banks were stopped from issuing notes. The public was told that National Banks received currency in proportion to the amount of government bonds they purchased. No one stopped to think!

THE GOVERNMENT PRINTED THE BONDS AND THE CURRENCY. THE CURRENCY WAS GIVEN TO THE NATIONAL BANKS WITH WHICH TO BUY THE BONDS.

This particular piece of trickery was to make the public believe that the currency in circulation was backed by the government bonds held by the bank issuing them. Remember the currency was given to the National banks to issue as their own.

The real reason for the deceitful trickery was to divert gold away from public ownership. In public hands gold is independence; in the hands of any other authority - the public becomes interdependent on that authority.

Jay Cooke, a Philadelphia banker, was commissioned as a secret agent of the U.S. Treasury to accomplish this. The public was educated to look at government debt as a national blessing IF the public could cash-in on it. Government bonds THAT WERE PAYABLE IN GOLD could only be bought with paper currency (greenbacks). To get the greenbacks the public would deposit gold. The story was that if you held gold, the amount didn't increase over time. But if you deposited gold, got greenbacks, bought bonds, held bonds to maturity, you would then have more gold (the bond interest plus principal at maturity).

He stated that $1,000.00 in gold invested in five-twenties (bonds) would in five years be worth $2,000.00. Prudence and self interest, it was said, dictated that there should be no time lost in subscribing. THE PUBLIC FELL FOR IT: HOOK, LINE, AND SINKER.

The paper currency became Legal Tender by public compliance. The government could print bonds and currency as fast as the presses would go and the public forced its gold upon the authorities to get the bonds and the paper currency.

"Nothing could be more clearly expressed than this." As Mr. Justice Field observes, in his able dissenting opinion in the recent case of Juilliard vs. Greenman, "If there be anything in the history of the Constitution which can be established with moral certainty, it is that the framers of that instrument intended to prohibit the issue of Legal lender notes both by the general government and by the states, and this prevents interference with the contracts of private parties." Such has been the opinion of our ablest constitutional jurists, Marshall, Webster, Story, Curtis, and Nelson. There can be little doubt that, according to all sound principles of interpretation, the Legal Tender Act of 1862 was passed in flagrant violation of the Constitution."

The Critical Period of American History

by John Fiske 1888.

The greenback was then and for years afterwards one of the most hotly and ill­naturedly debated subjects in the financial policy of the United States.

One stop on the way to evil easily leads to others. Though Mr. Chase (Secretary of the Treasury) was a reluctant convert to the Legal Tender when the first law was passed on February 12, 1862, it was less than five months, on July 11, 1862, until a further emission of greenbacks, $150,000.00 was authorized, thus doubling their amount. The public went overboard for the bonds and the currency with which to buy them. Questions to Jay Cooke and his answers about the bonds will help to explain why the public was fooled into compliance.

Question: Do you take only Legal Tender notes?

Answer: Legal Tender Notes or checks upon Philadelphia or New York that will bring Legal Tenders, are what the Secretary allows me to receive.

Question: Do you sell the bonds at par?

Answer: The bonds are sold at par, the interest to commence the day you pay the money.

Question: What interest do you pay?

Answer: The bonds pay six percent interest in gold, three percent every six months, on the first day of May and November at the Mint in Philadelphia, or at any Sub­Treasury in New York or elsewhere.

Question: How does Secretary Chase get enough gold to pay this interest?

Answer: The duties on imports of all articles from abroad must be paid in gold, and this is the way Secretary Chase gets his gold. It is now being paid into the Treasury at the rate of Two Hundred Thousand Dollars each day, which is twice as much as he needs to pay the interest in gold.

Question: Will the face of the bonds be paid in gold when due?

Answer: Congress has provided that the bonds shall be paid in gold when due.

Question: Will I have to pay the same tax on them as I now pay on my Railroad, or other bonds?

Answers: No! You will not have to pay any taxes on these Bonds if your income from them does not exceed $600.00; and on all above $600.00 you will only have to pay one­half as much Income Tax as if your money was invested in Mortgages or other Securities.

Those who neglect these six percent Bonds, the interest and principal of which they will get in gold, may have occasion to regret it.

I am, very truly, your friend,

Jay Cooke,

Subscription Agent

At. Office of Jay Cooke & Co.,

No. 114 5. Third St., Philadelphia.

The public was told it was utter folly to hold gold with such a good investment available. The huge national debt being accumulated was considered by Secretary Chase to be "small compared with that of Great Britain or France, whilst our resources are vastly greater." Here was a reference to the economics of Adam Smith that the wealth of a nation was its potential for production of goods from resources. The currency was backed by the FUTURE PRODUCTIVITY of the public. The history of the world may be searched in vain for a parallel case of popular financial support for a Government accumulated national debt.

"Having once committed ourselves, and having a vast number of agents through the country, our government loan agency expending vast sums with the newspapers for advertisements, we felt that we had a right to claim their columns in which to set forth the merits of the new national banking system."

Jay Cooke.

Gold was steadily advancing in parity with paper as time passed and the government issued increasing amounts of paper money. The strong guiding hand of Mr. Cooke no longer dominated the stock exchange and the newspaper press. He embraced every opportunity to attack those who sought to profit by the traffic in gold.

"The city of New York, whilst containing . . . many noble and patriotic citizens and institutions, was undeniably the centre . . . filled with foreigners . . . and disloyal politicians, it became the centre of speculation in gold and every species of material and produce while could be turned into gold by trans­shipment abroad. This speculation and the rise in the price of specie were so persistent and continuous that even many good citizens thoughtlessly entered the trade and thus contributed to the depression of our bonds and currency . . . the editors I employed were instructed to make constant warfare upon this speculative disposition and to portray the want to patriotism of those engaged in it."

Jay Cooke.

"I had on several occasions pleaded with Mr. Chase to allow me to teach these rebels and greenback slanderers a lesson they would not forget and I told him I could do this, and at once bring gold down to a fairer level by the use of only a few millions of the of gold then in the New York sub­treasury, returning the specie at a large profit, if it were required at any time. From an investigation I had made I was sure that not more than $12,000,000.00 to $18,000,000.00 of greenbacks were then held by the New York banks, requiring the sale of not more than $6,000,000.00 or $7,000,000.00 of gold to absorb every dollar of them into the Treasury and to cause them to rise temporarily above bank credits.

One morning Mr. Chase arrived in New York at a time when I was also there. The gold men, hearing of his arrival, rushed the price of gold up . . . Although very nervous and doubtful about the policy of lessening his gold supply by a single dollar the crisis was so grave that he could see no other way than to give me authority to carry out my plans . . . Mr. Chase returned to Washington and I at once, that afternoon, met confidentially David Crawford of the firm of Clark, Dodge and Company, of which I had once been a member. I knew my friend David to be a man in whom I could fully rely to keep so vast a secret, even from his own partners, and that he had the discretion and wisdom to carry out my instructions to the very letter. We decided to begin sales of gold next morning, but sell no more on that day than could be the price down to 180, so as not to create suspicion regarding our plans, although he told the purchasers that he would require in payment greenbacks, or checks marked good, which would draw greenbacks."

"The first day we sold $2,700,000.00 and the next morning before anyone had yet reached Wall Street I carted the $2,700,000.00 from the Sub-Treasury to Clark, Dodge and Company's office and stored it away under their remotest and most secret counters; whence it was with as little show as possible delivered rather late in the day, checks and greenbacks being turned over to me in return. I took all these to Mr. Cisko, subtreasurer, requesting him to draw all the checks in greenbacks before three o'clock. In the meantime Mr. Crawford had disposed of over $2,500,000.00 more of gold and the price fell to 170.00. The same operation was repeated, the greenbacks being drawn from the banks, and the next morning when Mr. Crawford began selling, the price dropped so rapidly that by the time he had disposed of $1,250,000.00 a panic prevailed . . . worthless greenbacks rose to a premium . . . by this time the fact that the Sub­Treasury was selling gold and would sell $20,000,000.00 more if it were required to break up the conspiracy against the credit of the government, became noised about Wall Street and the result may be imagined."

"I saw at once that we had gone far enough, and that the power of the nation was uppermost . . . for some time thereafter it only required my visiting New York for the whole tribe of government haters to suspend their efforts."

Jay Cooke.

Later Mr. Chase was again forced to call upon Cooke to check the advance on gold. The sale of gold by the government had no permanent effect, however, on the gold market. Speculation continued to rage in New York and the price of gold again resumed its upward course. Chase tried another device, that of meeting the export demand for gold by selling exchange upon London at a rate below the prevailing market rate, but this also proved ineffective. In the meantime, another scheme had been brewing. It was based on the principle that, if the gold market could not be controlled, it should be destroyed.

The Act to prohibit certain sales of gold and foreign exchange was passed in June, 1864. It forbade trading in gold futures and all those practices which are special tools of operators on the market, and it also placed limitations on dealing in foreign exchange. Aimed at destroying a central market was the provision which forbade any transaction in gold at any other place than the ordinary place of business of either the seller or purchaser.

The gold act went into effect at once. The Gold room was closed. But the price of gold continued its upward flight. Foreign exchanges were thrown into a hopeless confusion. On July 2, 1864 the Act was repealed. Gold continued to rise.

On February 27, 1868 Senator Sherman made a long speech saying the Bonds should be redeemed with greenbacks. "I say," the Ohio Senator declared, "that equity and justice are amply satisfied if we redeem these bonds at the end of five years in the same kind of money of the same intrinsic value it bore at the time they were issued. This logic has captured the people. Even if erroneous, it is sweeping the country."

The Treasury department had been regulating the gold markets with purchases and sales in a way which was at first necessary, but which when continued indefinitely, could not be justified. After the secret sales were abolished, the Secretary of the Treasury manipulated the markets publicly and the government was relied upon to correct each slight disorder.

The government efforts to sustain this explosive and inflated paper system, had so far been marked by great ingenuity, resolution and success. Mr. Cooke's expertise with printer's ink, show­cards, posters, circulars, pamphlets, hand­bills and a variety of devices of the types to catch the eyes, impress the minds and draw the gold from the pockets of the public. All this was done on the most lavish scale with infinite psychological knowledge and it was a factor of very great importance in this gigantic fraud the mere mention of its name terrorized gold holders.

The existence of two standards of value, gold and paper, was rapidly leading the county to a most serious crisis which culminated on Friday, September 24, 1869. On this very day, Friday, September 24, 1869, however, the premium of gold had risen so high that, after consultation with the President, word was sent to New York as publicly as possible, ordering Treasury agents to sell $4,000,000.00 of gold and take in that amount on bonds. There was a panic instantly, gold falling from 162 to 133 in fifteen minutes.

Taking in the bonds they had to take in the currency also as the gold went out. The amount of bonds used as backing for the currency shrank, and the money quantity declined. Thus, the money quantity appeared inelastic incapable of expanding or contracting when necessary. This inelasticity led to money panics that wracked the nation until 1913, when the banking system was restructured.

This idea of the inelasticity of money was an extension of Adam Smith's new social science of Economics. Smith had advanced the idea of a Law of Supply and Demand. Although economists knew for centuries that changes in the amount of money and how quickly it was spent affected business, they did not discover how the relationship worked until this century.

In 1911, American mathematician and economist Irving Fisher mathematically proved that doubling a nation's money quantity would double prices. He believed economic booms and busts were maladies caused by too much or too little money. Fisher's combined use of statistics, mathematics and Smith's economics helped start a new approach to economics known as Econometrics.

Basically modern econometrics uses Adam Smith's Law of Supply and Demand, when supply of goods exceeds the demand (money), prices fall. When the demand exceeds supply prices rise.

The Federal Reserve System was created in 1913 to be responsible for making sure commercial banks do not create so much money that we have rising prices, nor so little that we suffer from falling production and unemployment. That job is not easy; indeed, no central bank has been entirely successful in maintaining the proper balance between too much and too little money.

One problem the Federal Reserve faces is balancing monetary policy with government spending and taxing actions fiscal policy. Another problem is that people cannot agree on just how much money is enough.

In the 1950s, another American economist, Milton Friedman, substantiated Fisher's theories and concluded that changes in the amount of money are a major influence on our economy's direction and the pace of production, employment and spending. A stable economy, he said, requires money quantity to increase steadily in proportion to our ability to produce.

Friedman's views, known as Monetarism, have vastly influenced how we think about money, and the way the Federal Reserve controls our money. Adam Smith . . . . . 1776 -- Economics, Irving Fisher . . . . . 1911 - Econometrics, Milton Friedman . . . . . 1950 - Monetarism.

All concepts are based upon the QUANTITY of money vs. PRODUCTIVITY. All are premised upon the PRODUCERS being INTERDEPENDENT upon a Money Creating Authority with power to acquire, hold, or redistribute the fruits of the public's labor arbitrarily.

The Federal Reserve System of privately owned commercial banks creates money, directs the policies of government and holds the destiny of the people under its control.

http://home.earthlink.net/~cadman777/monetary-reform.htm

Feb. 20, 2010