5 - What’s causing the global credit crisis
This ambiguity left the door open for the Money Changers - just as they had planned. Of course, paper money was not itself the main problem. Fractional reserve lending was the greater problem, since it multiplied any inflation caused by excessive paper currency issuance by several times. But this was not understood by many, whereas the evils of excessive paper currency issuance were. In their belief that prohibiting paper currency was a good end, the framers were well advised. Prohibiting all paper currency would have severely limited the fractional reserve banking then practiced, since the use of checks was minimal and arguably would have been prohibited as well. But bank loans, created as book entries, were not addressed and so were not prohibited. As it happened, the federal and state governments were widely regarded as prohibited from paper money creation, whereas private banks were not - it being argued that this power, by not being specifically prohibited, was reserved for the people (including legal persons, such as incorporated banks). The contrary argument was that bank corporations were instruments or agencies of the states, which incorporated them and so were prohibited from “emitting bills of credit”, as were the states themselves. This argument was ignored by the bankers, who proceeded to issue paper banknotes based on fractional reserves, and it lost all force once the US Supreme Court ruled that even the federal government could charter a bank which could issue paper money. In the end, only the states were prohibited from issuing paper money, and neither private banks nor even municipalities were prohibited from issuing paper money (as happened in around 400 cities during the Great Depression). Another error not often understood concerns the authority given the federal government “to coin money” and “to regulate the value thereof.” Regulating the value of money (that is to say, its purchasing power or value relative to other things) has nothing to do with quality or content (e.g., so many grains of gold or copper, etc.), but has to do with its quantity - the supply of money. It is quantity that determines its value, and never has Congress legislated any total quantity of money in the United States. Legislating a total money supply (including currency, checks and all bank deposits) would, in fact, regulate the value 79
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