Central Banking and the Constitution

[From the 2020 Supporters Summit, presented at the historic Jekyll Island Club Resort on Jekyll Island, Georgia, on October 9, 2020.]

At breakfast, I ran into Ed Griffin who wrote that wonderful book The Creature from Jekyll Island, the greatest book written about the monstrosity that was created 110 years ago and he said, “I heard you’re talking this afternoon. What are you going to talk about?” I said, well the title of my talk is the Constitution and Central Banking. He said, “Oh, you’re going to go for about thirty seconds,” because there’s nothing in the Constitution about central banking whatsoever. But there is, of course, a history that brought us to where we are now and my job, with deference to the great speakers who have appeared before me, is to try and tie a lot of this together by telling you about the history and telling you about how the Constitution has been tortured and twisted even as we speak in an effort to allow big government to control our lives. And then I have a little surprise for you at the end of my talk. Don’t let me forget the surprise. I’ve revealed it to one person, Professor Newman, I know he’s going to remind me to reveal the surprise.

So, when we were colonists and the king was looking for ingenious ways to raise money, one of those ingenious ways was the Stamp Act. This required that every adult in the colonies—not in Great Britain; it would have fomented a revolution there—but every adult in the colonies have in their possession, on every piece of paper in their home, every book, every pamphlet, every financial document, every letter, a stamp issued by the British government. So, you went to a British government—you think the post office is bad today—you went to a British government post office here in the colonies and purchased these stamps to put them on the papers in your home. Question: How did the King and the Parliament three thousand miles away know if you had the stamps on the papers in your house here? The answer, the Writs of Assistance Act. The Writs of Assistance Act permitted British agents—see if this sounds familiar—to go to a secret court in London and ask the secret court for a search warrant to search wherever they wished and seize whatever they found which was evidence of any lawbreaking by not having the stamps on your papers. So, it would not be uncommon for you to hear a knock on the door, and it was a British soldier very politely showing you the writ of assistance and telling you, We have the right to come in your household—ostensibly to look for the stamps. Of course, he might be looking for alcohol that you couldn’t prove you had paid tax on; he might be looking for furniture that you had imported from the island that you couldn’t prove you paid tax on. He might even be looking to expel you from the house so that he could take it over for himself and his buddies, which is why we have the Third Amendment written ten years later.

This all happened in 1765. The Stamp Act was so unpopular that Parliament eventually rescinded it, but before Parliament rescinded it, a group of students at the College of New Jersey, now called Princeton, did some quick math and concluded it cost the government more to enforce the Stamp Act than was generated by the sale of the stamps. Now that’s a headscratcher. We all know that George III was an idiot, but was he that stupid that he would enact that tax that cost more to enforce it than was generated and collected by it? Unless the purpose of the Stamp Act was not to collect money, but to remind the colonists that the king was still the king and he could enter their homes at his whim. One of the Princeton students who wrote the report was a 5’4” kid from Virginia by the name of James Madison, known then and throughout his life to his colleagues as Little Jimmy. I hope when I go to heaven I get to stand next to Little Jimmy, because I’ll look like Shaquille O’Neal by comparison.

We fought a revolution; we won the Revolution. Jefferson wrote that “We are endowed by our creator with certain inalienable rights.” Tom Woods explained them: they are life, liberty, and the pursuit of happiness, and they come from our humanity, they don’t come from the government. And because they are natural rights, the government can’t take them away, whether it’s by edict under the name of science, whether it’s by edict under the name of power, whether it’s by a majority of votes, whether it’s by the vote of everyone but one. These rights belong to us and they are ours to exercise as we see fit.

That is, at least, the theory of the Declaration of Independence; the rights that Jefferson calls inalienable we also refer to as natural. Most judges are too secular to use the word natural, so they’ll call those rights fundamental, but they basically mean rights that preexist the government. After we won the Revolution and we wrote the Constitution, Little Jimmy is the scrivener in Pennsylvania. He’s the one collecting the notes; he’s the one refining the language. We all know that that constitution would never have been adopted, but for the promise of the addition of a bill of rights. We also know that that constitution would not have been adopted but for a bribe. The bribe was an agreement by the new federal government to assume the debts of the state governments that they had incurred in the Revolutionary War. Now you can’t call it a bribe. When I call it a bribe—the government actually bribes people?—I get my fingers burned. That’s like saying abortion is murder, taxation is theft; you’re not supposed to say these things on television, but when you do say them, people’s ears perk up. Yeah, it was a bribe. New Jersey got its debts removed and the feds agreed to take over those debts in return for New Jersey ratifying the Constitution, yes, and the same was the case with the majority of the other states as well.

Madison is the most interesting character in all of this because of the various phases of his career. As a student at Princeton and during the Revolutionary era, he’s a radical along with Thomas Jefferson. When he’s crafting the declaration of the Constitution of the United States, he’s a big government person that’s using all kinds of artifices to craft this constitution which allows the federal government to sap the authority of the states and even to take away liberties from individuals. But then something happens to him. He’s a member of Congress; it’s time to write the Bill of Rights. He’s the chair of the committee of the House of Representatives to write the Bill of Rights, and he writes twelve amendments; only ten were adopted, the ten that we now know as the Bill of Rights. So, that iconic language, “Congress shall make no law abridging the freedom of speech,” is Madison’s. All of that beautiful language, your right to say what you want, to think what you say, to publish your thoughts, your rights, your worship or not to worship, your right to assemble or not to assemble, your right to keep and bear arms—which is not the right to shoot deer, it’s the right to shoot tyrants if they take over the government.

That quintessential American right, your right to be left alone—all of those rights are articulated by Madison in the Bill of Rights. The Bill of Rights, of course, is adopted in record time and the first ten amendments are part of the Constitution. And then it becomes time for the Federal government to pay off that debt that it assumed. And so, Alexander Hamilton, who was the secretary of the Treasury, persuades President George Washington and Vice President John Adams and all the big government Federalists who control the House of Representatives and the Senate to enact the First National Bank of the United States. And who do they look to as to whether there is authority in the Constitution to enact a bank? The guy that wrote the Constitution, the guy that just wrote the Bill of Rights, the congressman from Charlottesville, Virginia, little Jimmy Madison. But, this is a different Madison at this point. Madison knows there’s no authority in the Constitution for a central bank and Madison gives one of the greatest speeches in American history, known simply as the bank speech. Google it. It is a masterpiece of the following argument: the federal government has no authority but what was given to it in the Constitution. He doesn’t say this because he was too modest: I know because I wrote the Constitution. But the argument is clearly there. (By the way, if you do Google it, they didn’t have stenographers in those days, they had people writing as fast as they could, so some of the bank speech is literally what came out of Madison’s mouth, some of the bank speech is a summary by the persons taking notes of what they heard Madison say.

But by the time of the bank speech, the former radical, the then big government guy, now becomes a small government Anti-Federalist. They call themselves by the name that’s alien to our ears today, the Democratic Republicans, but this was Jefferson’s maximum individual liberty, maximum state rights, minimum federal government party. Madison has now left the Federalists and he’s back with them. Maybe some of this was personal, I don’t know, but clearly when he gave that bank speech, he exalts two of the ten amendments: the Ninth Amendment, which says, Just because we listed rights in the first eight, doesn’t mean that those are the only rights. There are other rights that human beings have, which the government shall not disparage. And the Tenth Amendment, which says, Those powers not delegated in this Constitution to the federal government are reserved to the states or to the people, respectively. Among those powers never delegated away and among the rights never articulated in the first eight, was the right of the states to create a bank. So, Madison’s argument is clear: there’s no authority under the Constitution for the federal government to create a bank. This argument will come back to haunt him. The bank, of course, passes. Professor Newman gave us a wonderful historical description. It was a disaster. It passes, and then it passes out of existence because it was such a disaster.

When it comes time for the Second National Bank, Madison is in the second half of his second term as president of the United States. He vetoes the Second National Bank of the United States, and then his buddies start to get to him and he changes his mind and he signs into law the Second National Bank of the United States—and by doing so contradicts everything he said in the bank speech, all the arguments that he made about how the federal government can only do what is delegated to it in the Constitution. And this is 1816; the bank comes into existence in 1817. In 1819, the State of Maryland decides to tax the bank. It taxes the Baltimore branch of the Bank of the United States and that tax is challenged in the Maryland state courts, and the State of Maryland prevails in the state courts, and then the federal government appeals it to the Supreme Court, and we have arguably the most consequential Supreme Court case in American history after Marbury v. Madison, which gives the court the right to engage in judicial review, to void what the Congress and the president have done when they exceed their authority under the Constitution. This case is called McCulloch v. Maryland.

McCulloch is the head cashier at the branch of the Second National Bank of the United States in Baltimore, and he is suing Maryland, asking the Supreme Court of the United States to invalidate the tax by invalidating the bank. So, the issue before the Supreme Court is, Does the Constitution of the United States authorize the Congress to establish a national bank? If you read the Bank Speech, Madison’s greatest artistry next to the Bill of Rights, it is clear that it doesn’t, but this is a different Madison and this is a different era, and by this point John Marshall—who, as Professor Newman pointed out, was an investor in the Second National Bank of the United States but sold the investment before ruling on the case—John Marshall writes again, one of the more consequential decisions he’s ever written. But this one—rather than restraining the government as judicial review did in Marbury v. Madison—this one unleashes the government.

So, where in the Constitution can the federal government establish a bank? Here is the government’s argument: well, the federal government can tax, the federal government can collect taxes, so the federal government needs a bank in which to put the taxes that it collects. Well, wait a minute, up to this point the federal government has put tax dollars that it collected into private and state-chartered banks. Why do they need their own bank? Ah, after the seventeen clauses in the Constitution giving seventeen specific, unique, discrete powers to the federal government is the Elastic Clause, also known as the Necessary and Proper Clause, which says, I summarize, I paraphrase, Congress shall have the power to do whatever is necessary and proper to put into action the foregoing authorities that we have given it. So, is the bank necessary and proper—not necessary or proper, necessary and proper—in order for the government to collect taxes and to store the tax dollars before it wastes them?

So, I’m going to take a little break from this. I’m going to come back to necessary and proper. Two theories of the origins of law: one is our humanity, natural rights; by the exercise of reason, we know right from wrong. The other is what’s known as positivism—whatever the lawgiver says the law is, as long as the lawgiver has written it down and it’s been ratified, that’s the law. So, positivism would say “necessary and proper” literally means necessary and proper. John Marshall comes up with an inverse positivism. Because the Constitution didn’t say absolutely necessary, the word necessary doesn’t mean necessary. It means needful or helpful. So, McCulloch v. Maryland says “necessary and proper” doesn’t mean necessary and proper because it didn’t say “absolutely necessary” and Little Jimmy could have put the word absolutely in there but he didn’t. So, by arguing from a word not present in the Constitution, Marshall upholds the constitutionality of the bank.

What about the Tenth Amendment? The bank speech dwells on the Tenth Amendment: the states never delegated away the authority to establish banks. We know that because the states have established their own banks. Ah, Marshall says, But the Tenth Amendment doesn’t say whatever is expressly delegated to the federal government. So, again, this inverse positivism. Two words that are not in the Constitution authorize him to expand the power of the federal government, and in doing so, he writes the following language, which is frequently quoted today, much to our dismay. “Let the end be legitimate. Let it be within the scope of the Constitution an all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consistent with the letter and spirit of the Constitution, are constitutional.” Basically meaning, If Congress wants to do something because it is helpful to the specific powers given to Congress, it can do so. This case, and Marshall’s language, has been cited thousands of times. Regrettably, it is still the law of the land; it is the lynchpin to allow the federal government to get away with the chicanery that it gets away with today.

We’re fighting the War between the States. Lincoln’s government is issuing greenbacks pursuant to a statute the Congress authorizes which allows them to pay the government’s bills in worthless, not gold- or silver-backed, but worthless greenbacks because people are accepting the greenbacks. This is challenged shortly after Lincoln’s death in a very famous case called Hepburn v. Griswold. A lot of these challenges are not somebody suing the federal government because they think the greenbacks are unconstitutional. It’s two private citizens suing each other because one wants to pay his debt to the other in greenbacks and the other says, The war is over, Lincoln’s dead, the legislation was temporary, I’m not going to accept the greenback. So, the litigation is over whether or not a debt, a legitimate, not denied debt under a contract, can be paid in greenbacks. And the Supreme Court says, No, Congress did not have the authority during the Civil War to issue greenbacks because the Constitution says only gold and silver is money in the United States, and there’s no central bank at this point in time.

And then there occurs something that everybody’s talking about today called court packing. So, Andrew Johnson is the president of the United States and the radical Republicans who control the Congress do not want him to be able to appoint new justices to the Supreme Court. So instead of expanding the Supreme Court, they shrink it. It goes from nine to six, meaning when somebody dies or leaves the court there’s no seat for him [Johnson] to replace somebody with. The Supreme Court goes down to six, Johnson is impeached, he survives the impeachment, he doesn’t run for reelection. Ulysses S. Grant is elected. What do the radical Republicans do? Increase the court back up to nine, and Ulysses S. Grant appoints three of his buddies to the Supreme Court. And then there’s a second challenge, again involving a private contract, this one called Knox v. Lee, and the same issue is before the court in 1871 that had been before it in 1869, except you have a different makeup on the court. And this time the court says, Greenbacks, greenbacks. The government can issue whatever it wants and these are lawful for debt.

This case, Knox v. Lee, and its companion cases are known to lawyers and judges as the Legal Tender Cases. They have been argued by scholars time and again, over whether the Legal Tender Cases were properly decided. Justice Scalia told me he did not think they were properly decided but believed that it would be cataclysmic if the Legal Tender Cases were to be overruled and greenbacks not backed by gold or silver were to become money. That is the last time this issue of the power of the federal government to issue paper money is resolved, and the challenges to the Federal Reserve never succeed. There have been a dozen efforts by various litigants to challenge the constitutionality of the Federal Reserve as we now understand it, and all of these challenges are swatted away by judges saying either, This is a political question and if you don’t like the Federal Reserve, go elect a Congress that will undo the Federal Reserve, or—this is judge-made law, this is what judges do when they don’t want to decide cases—You don’t have the standing to bring this litigation, meaning, Your injury is not unique to you and therefore under the Case or Controversy requirement of the Constitution, we’re not going to hear the case. So, the last time the courts examined the constitutionality of the Federal Reserve, it had to do with how people get on the Federal Reserve and is it constitutional for the president to appoint these people and for the Senate to confirm them. And the court said, We’re washing our hands of it.

Some years ago, Lew Rockwell asked me to give a talk entitled “Do We Still Have a Constitution?” At the time I gave the talk, I said barely. I’m not sure that we still have a Constitution now because of the ability of the government, the ability of courts, to twist and torment words, and we have this thing called precedent. Just because John Marshall in 1819 said that “necessary and proper” really means needful and helpful, should we be bound by that? For those of us who believe that the Constitution is an instrument of restraint, this is the contrary of that. For those who believe like the progressives and the Left today that the Constitution is an instrument that unleashes the federal government, they delight in this. The Madisonian view of the Constitution was, I take this from the bank speech, I don’t take this from his signing the legislation. (By the way, when you sign the legislation establishing the Second National Bank, he never repudiated the bank speech; he never repudiated his veto. He just signed it because the popular will was so strong. He also signed it because he wanted to help his fellow Virginian James Monroe get elected president of the United States and he didn’t want the issue of a Second National Bank to be a campaign issue in the presidential election of 1816.) But just because we have these precedents that permitted the big government people to get away with what they wanted 150 years ago, should we be bound by them today?

Unfortunately, that’s the way the legal system works. All those beautiful words in the Declaration of Independence and the Bill of Rights, some of which I summarized for you, work in a law school classroom and can excite us in an environment like this. But unless we resist the forces of government that are sapping power liberty, whether it is our liberty to say to the government, I have the right to take chances and you can’t take that right away from me, or whether it’s our liberty to leave, or liberty to ignore the government, our right to travel, our right to say to the government You shall not pass this threshold. Whatever these rights are, they only work when we exercise them. We can talk about them all day. We can write about them well into the night, but unless courageous people exercise these rights, we are going to be stuck under the thumb of government, whether it’s a state government like New Jersey or Michigan or New York or whether it’s a federal government like we have today.

There’s an argument that I made holding up my iPhone during the Justice Kavanaugh hearings which evolved around his personal behavior in which I said, Here’s my problem with him: he thinks that the federal government and the state governments can get in here without a search warrant and he’s written that. And I encouraged Republicans on the Senate Judiciary Committee to ask him about that. Nobody asked him about it. He may be conservative politically on certain social issues, but not when it comes to the power of the government to intrude in our lives. I fear that with the court today. I once had the privilege to interrogate Justice Scalia before about twenty-five hundred people at the Brooklyn Academy of Music, and I was pounding him on the natural law, and he looked at me and he goes, “You’re a freak for the natural law. The fourth amendment only protects persons, houses, papers, and effects. That’s the language in the fourth amendment.”

I say, “Justice Scalia, this is an iPhone.”

“Yes, I know. I may be older than you, but I know what it is.”

“In the iPhone is a computer chip. Is the computer chip an effect?”

“I’d rather not answer; I think that case is coming before us. You tried to trap me and tried to trick me.”

Well, I mean, I knew the case was coming before them and I did try and trap and trick him, but I also wanted to make a point. The language that Madison used—persons, houses, papers, and effects—was intended to protect our right to privacy, what Madison called the right to be left alone.

So, where does all of this leave us today? We know that most of what we have heard about covid is utter nonsense, driven by those in power who want to use a crisis to control us. I have never heard a more articulate vision and version of that nonsense than my longtime bosom buddy Tom Woods just gave us earlier this afternoon. We know from reading Bob Hicks’s masterpiece Crisis and Leviathan that government always grows in crisis. We also know that there is nothing in the world more permanent than a temporary government program. And we know, we can laugh at the juxtaposition of words, but we know what the government will do. It will hang on to that power, keep it long, keep us under its thumb, get us accustomed to it. There is no concentration camp easier to manage than one where the inmates are familiar with its terrors, because they have allowed its terrors to be visited upon them in the name of democracy and electing people to terrorize them.

I expect that when I die, I will die in my bed peacefully surrounded by those who love me, faithful to first principles; but not everybody will have the luxury of dying that way. Some young people here may die in a government prison, faithful to first principles. Some young people here may die in a government town square, to the sound of the government’s trumpets blaring, but faithful to first principles. When the time comes, you will know what to do, because freedom lies in the human heart and no government, no army, no tyrant can take it away. But it must do more than lie there. We must exercise it. We must terrify the government, because, as Jefferson said, “When the people fear the government, there is tyranny. When the government fears the people, there is liberty.” Thank you and God bless you.

About twelve years ago [in 2016], an obscure law professor wrote a law review article arguing that the Federal Reserve, Social Security, Medicare, and paper money is unconstitutional. Her name: Amy Coney Barrett.