Like many critics of the money mischief taking place under the auspices of the United States government and Federal Reserve banking system, I have called Federal Reserve notes IOUs. I was wrong. They are not IOUs.
An IOU is a promise to pay. Federal Reserve notes promise nothing, although they were legitimate IOUs until November, 1963. That's when they were stripped of the printed promise to redeem in lawful money. All that remained was the printed statement that the note was legal tender for public and private debts. It was no longer a promise to pay anything. Researchers have never been able to discover where the order came from to remove the promise to redeem in lawful money that made the Federal Reserve and U.S. notes legitimate IOUs. .
After the promise to redeem was removed in 1963 the paper notes became IOU-nothings. Economist Walter Spahr called them that. New York banker John Exter called them that. We all should call them that if we wish to be accurate.
Although the paper notes are IOU-nothings, coins aren't. Dimes, quarter-dollars, half-dollars, and dollars prior to 1965 were made mostly from silver and were actual money, not promises. Even the base-metals coins of today are intrinsically more valuable than paper notes and they stand on different legal footing than paper currency. Banks may acquire paper IOU-nothings for the price of printing, but they are obliged to acquire coins from the Treasury Department at face value.
Not only did the Federal Reserve have to make its paper notes redeemable in lawful money until late 1963, so did the U.S. Treasury Department. U.S. notes or silver certificates did not pretend to be "money," either. Here is a five-dollar U.S. note from the 1950s stating that it was issued by the United States and was worth "Five Dollars payable to the bearer on demand." Obviously, if the certificate was an IOU for five silver dollars it could not simultaneously BE five dollars. All paper certificates and notes were IOUs. Money was metal coins. In fact, banker J.P. Morgan, who understood money better than most, said; "Gold is money. Nothing else."
J.P. would have laughed in our faces if we called bonds, T-bills, certificates, notes, and other paper promises "money." He knew how to play the paper games better than most, but he was never foolish enough to think that a gold-backed note was actually gold itself. Time and habit pulled the wool over people's eyes, however, and from 1933 until the present time printed IOUs became thought of as money itself.
If IOU-nothings aren't money what IS?
The U.S. Constitution established the dollar as a coin containing 371.25 grains of silver. (Gold came officially into the U.S. money system a bit later.) Franklin Roosevelt began the process of abandoning gold as money, and Richard Nixon hammered the final nail in gold's coffin in August, 1971. Silver coins remained in circulation through 1964 but soon vanished when Congress introduced nickel-clad copper coins in 1965. (Gresham's Law - - Bad money chased out the good money.)
A great many self-appointed monetary historians on the Internet indict the Federal Reserve System as a collection of gangsters aiming to destroy us all. That's hardly the case. The banks were given their legendary power to create debt-based currency by the U.S. Congress. It was Congress that gave up its Constitution-mandated authority to maintain a system of honest money. If there's fraud going on among financial institutions we're justified to pin the blame on Congress. Congress created the Federal Reserve and it can dismantle it. The Constitution says so.
What are we waiting for?
February 22nd, 2008
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