Congress Has One Week to Approve Spending… or Closures Begin

Mike Maharrey: Well, greetings everybody. This is Mike Maharrey. I am an analyst and reporter for Money Metals, and I'm here today with Dr. Vieira. He's an expert in constitutional law, has a JD from Harvard, and also a PhD in organic chemistry. He's the author of a number of books and has been involved in numerous policy areas, including Right to Work and Sound Money. Dr. Vieira, thank you so much for coming on the show.

Dr. Vieira: Well, thank you for having me.

Mike Maharrey: You are a smart man. Organic chemistry is the reason I am not a doctor. That was not my strong point, but luckily we don't have to talk about that. We're going to talk a little bit about money, and I'm sure that's of interest to pretty much everybody. And I want to start looking back at the founders and the framers vision. We look at the Constitution, we see that Congress has the power to coin money and regulate the value thereof and of foreign coin. And then we also have a prohibition against the states that they cannot make anything but gold and silver coin a tender in payment of debts. So if we take those two things together, what does constitutional money look like? What were they trying to get at with the system that they had in mind?

Dr. Vieira: They were trying to limit the governments, whether of the states or of the United States as a whole, to a species standard, gold and silver in the form of coinage. Or later on you find the Supreme Court looking at that system and saying, well, bullion is essentially the same as coinage if it's stamped with some kind of mark designating amount and purity by some kind of official organization. So you could have the United States Treasury doing that, which it still does in theory. Or the various state treasury is doing it. But coinage was supposed to be used for everyday transactions. And gold and silver were the two coins recognized by the Constitution.

One of the problems that seeped in very quickly was the difficulty of making change, as it were, small transactions, with the types of coins that were actually being minted by the Treasury because the states could not mint coins, no state shall coin money. So you had token coinage introduced into the system, and those were the coins not composed of gold and silver. We still have them today. In fact, most of our carnage is of that variety. Some kind of base metal copper was used initially for the cents, and then you had nickel coming in and so forth and so on. So that seeped into the system because of the physical difficulty of making very small silver and gold coins to deal with small transactions.

And then of course, the banks were another way of insinuating what I would call kind of an undercurrent, monetary undercurrent, because you could have and did have bank checks and very small denomination bank notes, and of course on a check you could write not only so many dollars, but also so many cents. So these were expedient at the time and it was very difficult to get around them because of the physical constraints.

Today, of course, we've gone in another direction. We can talk about that later. But the basic concept was that the governments were to be on a species standard, gold and silver. There were no limitations on private banks or other private institutions that might deal in monetary instruments. They were allowed to do essentially whatever they wanted within the limits of the laws of fraud. So the difficulty started right away that the government at the national level, later on at the state level, began to become, shall I say, incestuously involved with private banking.

You had the first and second banks of the United States, which some people think of as central banks. They really weren't. They were private institutions. They were designed in some way to have limiting powers over the state banks as a matter of practice, not as a matter of law really. And then you had various state banks, you can hear the thunder coming out here, we have a tremendous storm coming up, various state banks, some of them were quite closely connected with the state governments. The state governments might control the boards of directors, state governments might be the sole shareholders, whatever. So this incestuous relationship occurred and it resulted in the kind of swings, monetary swings from inflationary events to deflationary events. And eventually it led to more and more involvement of the national government in the banking system as a whole.

And also you had a pressure for the national government to generate what we recognize today as paper currencies. Now you notice Article 1, Section 10, Clause 3, Article 1, Section 10, Clause 1 of the Constitution says, no bank, no state shall admit bills of credit. And a bill of credit was the founder's terminology for paper currency of essentially all kinds, whether it was generated by a government or generated by a private institution. So no state shall do that. And that's where you ran into one of the first problems that the states were, to a large extent, running or deeply involved in state banks. And the banks were emitting bills of credit. And then you had the United States government involved with the first and second bank of the United States by chartering those banks. And those banks were issuing bills of credit, but there were no bills of credit being issued by the actual governments because Article 1, Section 10, Clause 1 says, no state shall make anything but gold steal the coin, a tender in payment of debts.

And the original... Are we still on? You can hear-

Mike Maharrey: Yes, I heard it.

Dr. Vieira: Right over me. All right. And the original draft of the Constitution when they were working this out was based upon, in large measure, provisions from the Articles of Confederation. The Articles of Confederation gave Congress, the articles of Confederation Congress, the power to borrow money and emit bills. Those were recognized as two complimentary powers. You could borrow money from someone else or you could emit a bill, which essentially was a dead instrument that you were asking somebody else to use as a monetary instrument. When that provision came before the Constitutional convention, the words emit bills was struck out. And Article 1, Section 8, Clause 2 says that Congress shall have the power to borrow money on the credit of the United States, no power to emit bills. So one would think, well, that was the end of it.

You could never have bills of credit emitted by the government of the United States, and you couldn't have bills of credit emitted by the state governments. Therefore, there could be no bills of credit except private bank notes which people knew existed at that time. Well, what we've seen here is there were attempts at various times by members of Congress to promote the emission of bills of credit. They never got anywhere until the Civil War. And at that point, the Union Congress in '62 emitted the first treasury notes, irredeemable legal tender, treasury notes, classic example of a bill of credit. The Confederate government did it as well. So this wasn't a one-sided thing. They both did it because it was the exigencies of the war. They needed to raise money to pay for troops and supplies and whatever. And they couldn't do it sufficiently through taxation, either one of them.

So there was your first break in the species standard because now they were emitting treasury notes which were irredeemable. You couldn't take this note back to the treasury and demand a dollar's worth say of gold or silver. And that went on until 1875. There was a big debate after the Civil War, are we going to continue to emit these things or not? Are we going to not redeem these things or redeem them? And the compromise was that yes, they would be redeemed. So the Sound Money people won on that point, but no, they would not be removed from circulation. As they came into the treasury, the treasury could redeem them, but then the treasury could emit them again so they would continuously circulate. So this was one of these political compromises that really fouled up the system.

Now, simultaneously, you had banking acts during the Civil War, which created the national banks and the national bank currency. And what happened there was the banks would come to the treasury and they would deposit bonds that they had purchased. And to 90% of the value of those bonds, the treasury would allow them to emit national bank currency. Now, this of course, was limited by the amount of indebtedness of the country. And after the Civil War, not very many politicians wanted to increase the national debt. In fact, they were going in the opposite direction. So the banks-

Mike Maharrey: Feels ironic today.

Dr. Vieira: Yeah, we look at it now, we say, what a time that must have been. So the banks were limited in how far they could expand their currency because they had to actually get their hands on national debt [inaudible 00:10:29]. And it was a kind of a pyramid system. There were the local banks, the mid-level banks and the big banks, which were Chicago and New York. And the lower level banks deposited their deposits in the mid-level banks and the mid-level banks would deposit in the big city banks. And that's the kind of cartel structure. But there was no lender of last resort as we understand that now. So when the banks over expanded, as they tended to do, because they didn't need currency really to loan, they could simply loan out checkbook amounts that they were writing in their own books, and people would use these checkbooks amount, write checks on them, and they'd never actually see currency necessarily.

So there was an ability of the banks to expand. It was limited in terms of currency by the bonds they had deposited with the treasury, but not otherwise. So you had ups and downs in the banking system, these periods of inflationary exuberance when the banks were overextending their loans. And then when those loans proved not to be profitable, you have periods of contraction and what we would call recession or depression. So the banking group and the treasury people who aligned with them said, we need to have a system to solve this by creating a lender of last resort. We need to cartelize this system nationally. And that was the creation of the Federal Reserve system. They got together at Jekyll Island, some of the main bankers, and devised the plan. And it was passed in December of 1913, came into effect shortly thereafter, just in time, by the way, for the United States involvement in World War I.

Mike Maharrey: World War I. Mm-hmm.

Dr. Vieira: One of those interesting coincidences.

Mike Maharrey: Yeah, it's interesting as you look at the history, how often this monetary expansion coincides with wars.

Dr. Vieira: Right. As if someone had foreseen the necessity for this, because no one was selling the Federal Reserve system as a means for financing international warfare. It was being sold as a control mechanism that would stop depressions, control inflation, would give you what they call scientific management of currency. These were experts that had come, a lot of them from Europe, especially Germany, at the turn of the century. And this was an idea that was really of foreign provenance, if you will, but it was sold on that basis. We've now figured out a way scientifically to control the emission of bank notes and bank lending so that we can remove these two extremes in the system that we used to have. We won't have runaway inflation, we won't have these recurrent depressions. Fine.

So it comes in 1913, and the first failure, of course, was in '21 and '22 after the war because there was a large expansion of currency to finance the war, and therefore you had the necessity for retraction. So you get a mini depression, I would call it in 21', '22. Well, 1913, 20 years later is 1933. 1933, you have the greatest banking collapse, and the beginning of the greatest depression in the United States and apparently the world, the receipt. Under the auspices of the Federal Reserve system that was supposed to stop this forever.

Roosevelt comes in, Franklin, first term, and the Democrat National Convention Party platform promised a sound currency at all hazards. Because of course, these problems began in 1929 with the collapse of the stock market. And then you had a cascading failure of the various banks, by the time you get to '33, it's chaos. So they were going to give us a sound currency at all hazards, which would've meant to me, I suppose, some kind of radical change in the Federal Reserve system to stop over expansion of lending. And it was interesting, the Federal Reserve system had a very large requirement of gold reserves for currency and for bank lending, extremely large, but it wasn't large enough.

Roosevelt comes in, what does he do? The first thing he does is bank holiday. And he goes on his first radio chat, fireside chat it was called, and this was a new departure, never been done before. Radio had come in, a lot of Americans had radio. This was the first time a president had ever gone on radio to explain what he was doing and why. He goes on radio and the first fireside chat was directed towards the problem of the bank holiday, which he had promoted. Banks were going to be closed, they didn't have to redeem currency. Why this was necessary.

And he told people, look, most of you don't understand the banking system. When you put your money in the bank, they don't put that money into a shoebox in the back room. They lend it to someone else. That's how they make their money. They're paying you a certain amount of interest and they're charging the borrowers a larger amount of interest. And that difference is where they make their profit. And so you can't expect banks to have your money that's supposedly on deposit ready for you to withdraw because they've lent it and they can't always get it back immediately in those loans. So that's why we have a bank holiday. That's why we're going to do some things to change the way the banks operate, so forth and so on.

Now, what did that tell, certainly me, I think, or anybody at the time, that the American people really didn't understand what the banks were doing, how they operate. Why else would the President of the United States have had to explain this? All right, so that was the first thing, and to me, it's proof that this whole system was so shrouded in what I would call accounting mysteries, the mystery of money, that the average American didn't know what was going on. He thought he put the money in the bank and it was there ready to take out. The President of the United States says, no, that's not the way it works.

So Roosevelt goes, and has the bank holiday, and then the next step was the gold seizure. We're going to remove the gold from circulation. People have to turn this into the banks, the banks have to turn it into the treasury, and you'll be paid the face value of your coinage. Well, that worked to a certain extent. There's a lot of that coinage that never was turned in. People can debate how much, but a lot of people were not, shall we say, confident in the system. So Roosevelt was causing people to turn in say a $20 gold coin, but not silver, only gold. They had a plan for turning in silver, but they never did it. Only gold. So you would turn in your $20 gold coin and you would receive $20 in paper currency or in the bank's $20 in deposit.

And Roosevelt meanwhile was scheming to raise the price of gold, change the value of gold, and he eventually, the Congress gave him the authority to do it 50%, to reduce the value of gold coins by 50%. They did it only from $20.67 to $35 an ounce. So he didn't use as much as he could have. And the idea here was they were going to raise prices. The depression had lowered prices. And so the whole scheme was, well, we need to raise prices. That's how we get out of a depression. We need artificially to raise prices, so we'll have the farmers kill their pigs and pour their milk into the gutter and we'll increase the price, so-called price, of gold from $20.67 an ounce to 35.

Now, we'll take various other measures, one of them being the National Industrial Recovery Act, which was, and I mentioned this because it's tied in a way to the Federal Reserve. National Industrial Recovery Act was a copy to a very large extent of Mussolini's fascist system.

Mike Maharrey: I did not know that.

Dr. Vieira: Well, when people talk about fascism, they usually talk about Hitler and they talk about Mussolini as a dictator and his involvement in World War II on the side of Hitler. But the fascist system was actually an economic slash economical political system. Because Mussolini had been in his youth, a radical socialist. And he thought that the problem was that you had the working class working against the entrepreneurial class, the so-called bourgeoisie, when they really should be cooperating. So he did have an economic insight. Those are two cooperative factors of production. They're not inherently antagonistic.

And he tried to figure out a way to do this. It's called the fascist system. And he set up what were called [foreign language 00:19:47], corporations, but had a special meaning in Italian, where you would have the business interests and the labor unions working together within these corporations to try and hammer out exactly what the economic policies should be. And they actually had political influence within the Italian government. There was a body of corporations similar to a Congress, if you will, or a parliament. So it was an economic system that was trying, an economic and political system, that was trying to create social peace and social cooperation.

And one could look at what he did and say, well, maybe that really wasn't a sound way to do it. But that's what he was trying to do. In any event, Roosevelt sets up the National Industrial Recovery Act. Congress passes, they passed everything he wanted, and the National Industrial Recovery Act set up things called code authorities, which were the parallel to the Italian [foreign language 00:20:47]. And the code authorities were made up in each industry of the various participants, and the bigger you were, the more say you had in the code authority. So say in steel, the big steel companies had more authority than the small steel companies.

And there was a provision, which was the precursor of our later labor laws, section seven, which was theoretically supposed to have the labor people, labor unions in particular, have some say in this, but it really didn't go as far as what later happened. In any event, so here we had this thing, and it was really, if you put the two side by side, it was a mirror image of the Federal Reserve System. The Federal Reserve system was a banking cartel, and the National Recovery Act set up these cartels called code authorities for each of the different industries. But the Federal Reserve system was a separate thing because it had been created in 1913, not in 1933. But if you look at them together, you say, oh, these are both from the same parents. These are twins.

Mike Maharrey: Interesting.

Dr. Vieira: These are fraternal twins. Now the United States Supreme Court had a case called ALA Schechter Poultry Company versus United States. There was what was called a live poultry code in New York City. And the Schechter brothers ran a poultry business. They were Jewish poultry slaughterers.

Mike Maharrey: I remember this case, yeah.

Dr. Vieira: Okay. And they were selling chickens by the coop. That's what the code authority require. You were selling chickens by the coop. And what that meant was if I were a buyer and I came in and looked at a coop of chickens and said, "Well, I only want one of those, the other one looks a little sickly to me. I don't want that one. I just want this one here." You couldn't do that. That was against the poultry code. And in fact, it was a criminal violation to do that. That's how serious this was. So the Schechter brothers were in fact, violating the code and they were charged. And the case goes all the way to Supreme Court. And the government said, "Well, look, all we're doing here is we're giving these business interests, these code authorities, the ability to regulate prices and output and so forth. They're the people who know what's going on. They're the experts in their areas. And this will cause the end of the Depression. This is one of our methods for ending the Depression."

And the Supreme Court looked at them and said, "No, this is a delegation of governmental authority to private parties. This kind of arrangement is," and this is the exact term, "Unknown to our laws," unknown to our laws, nine to zero declared unconstitutional. Roosevelt came back a couple of years later, he tried to do the same thing in the coal industry, goes up to the Supreme Court again, Carter versus Carter Coal, most people don't know that case, but it was kind of a resurrection of the NIRA on the small scale of the coal industry. The Supreme Court declared that unconstitutional as well.

Now, the interesting thing is, if the National Industrial Recovery Act was unconstitutional for the chicken sellers, let's say, or steel or anything else, why wasn't the Federal Reserve Act also, or isn't it, unconstitutional? And the answer is, well, of course it's unconstitutional. But there was never a case that asked that question. The NIRA dealt with everything other than banking. The Federal Reserve had its own statute called the Federal Reserve Act. So that's really why we still have this thing today, because for some reason, and I think it's kind of behind the scenes, lawyers and the judges and so forth know we don't want to touch this thing.

But if you look at it, you say, no, that thing is obviously unconstitutional. If the NIRA was unconstitutional, Federal Reserve is. So here we come out of the Roosevelt administration with an irredeemable paper currency domestically, but still redeemable internationally. And the war, super beans, and huge amount of gold comes in the United States. The United States is the only country that isn't bombed into the Stone Age. Well, England wasn't quite bombed into the Stone Age, but they had a lot of bombing, wasn't seriously harmed. All of our industries are at peak production, et cetera, et cetera. So we are the dominant, as a practical matter, the dominant financial power in the world.

And out of that comes the Bretton Woods agreement, which essentially makes the quote unquote dollar. And I use the dollar with quotation marks because a constitutional dollar, if you go through all the history and the terms of the Constitution, is a silver coin containing 371 and a quarter grains of silver. This thing we call a dollar is a paper currency. And this is where it gets really confusing. There is gold and silver coin is being produced by the treasury denominated in dollars. There are coins of various denominations which are made of base metals. They're denominated in dollars. There are Federal Reserve notes that are denominated in dollars. There might be some national currency still floating around, because the national banks are part of the Federal Reserve system, that's denominated in dollars.

Extremely confusing because the dollar became, from the Roosevelt era on, this label that really had no specific meaning unless you have someone such as myself that could go back and say, well, I know exactly what a dollar is. And these things are not really dollars. These are artificial constructs that are being labeled dollars. Another reason. So anyway, we get to the Bretton Woods Agreement post World War II, and that has gold as the anchor or the unit or whatever. And we still have that. 42 and two ninths dollars per ounce is still the statutory standard by which the Secretary of the Treasury of the United States is required to maintain the equal purchasing powers of all forms of the United States currency. Most people don't know this.

The Secretary of the Treasury is required by law to maintain the equal purchasing power of all forms of the United States currency at a rate of 42 and two ninths dollars per ounce of gold. Well, what is the price of gold in Federal Reserve notes today? Is it 42 and two ninths dollars per ounce? No, it's-

Mike Maharrey: A little north of that.

Dr. Vieira: Yeah, it's a couple of thousand and change. And if you look at the coinage that is created by the treasury of base metals, Susan B. Anthony dollars, the state quarters, whatever, well, those things are certainly not exchangeable at 42 and two ninths dollars for an ounce of gold. Now, if you look at the gold coinage, the American Eagles, what's the big coin? It's a $50 gold coin. That's close. 50 is at least close to 42 and two ninths, right on the face of that coin says $50 coin. When you go to the others, well, they're all in synchronization with that $50 gold coin. If you go to the liberty silver dollars, well, they're not, what's the exchange ratio between silver and gold?

I think those coins, what are they, $20 an ounce, whatever it is. It's completely out of synchronization. So we have what I would call a multiply schizophrenic form of money in this country. The schizophrenic person is the one who has two realities he's facing, two or more realities. Well, we have two or more realities in money. We have the gold coinage, which seems to come close to the statutory standard. We have the base metallic coinage, which is completely divorced from the statutory standard. We have the Federal Reserve note.

And what can you do with the Federal Reserve note? Well, it is legal tender, and you can redeem it for what's called lawful money. That's what the statute says. Redeem lawful money at the Federal Reserve Bank or at the Treasury. Well, when you go to the Treasury, go to the Federal Reserve Bank, they'll redeem it for junk coinage. They're not going to give you gold. If you go to the Treasury, there's a statute that says the treasury cannot give you gold or silver. They're precluded from doing that. So the Federal Reserve note, other than the ability to redeem for junk coinage, is basically an irredeemable coin in the sense of the Constitution. It's not redeemable for the constitutional monies, which are gold and silver. So that's where we are now. And the limitation on this system is solely, ultimately, the willingness of the US Congress to engage in deficit spending.

They can go millions, billions, trillions. What are you after trillions? What's the next number?

Mike Maharrey: I don't even know what that is. We might find out.

Dr. Vieira: I think it's quadrillion, four, quad, right? I think it's quadrillion. Well, we may be finding that out shortly. We're already 37 trillion. So you look at the monetary system now and you say, well, this is, I don't know, from a rational constitutional point of view, it's a manifestation of insanity. They're generating paper currency, bills of credit, which neither the national government or the states have the constitutional power to emit. They're generating coinage. Congress has the power to coin money, but it's supposed to be gold and silver, primarily silver is the unit tied to gold coinage. And the states, and we know this, the states are specifically told they can't emit bills of credit and they can't coin money, but they have to make gold and silver coin a tender in payment of debts.

Mike Maharrey: Right.

Dr. Vieira: So where are we? It's madness. How will it be corrected is the problem.

Mike Maharrey: Right. And that was my next question. And for the answer to that question, you're going to want to tune into next week's market wrap podcast.