Federal Reserve and the Constitution

Part 2 of 1 in the series Paper Money

Congressman Ron Paul (R-Texas) wrote about the role of the Federal Reserve in relationship to the Constitution. After providing a brief U.S. history lesson of the debate over paper money, its attendant danger of inflation, and the role of a central bank in society, he wrote:

Federal Reserve global tentacles The lack of respect for the Constitution even in the nineteenth century set the stage for the Federal Reserve Act of 1913. Fear, misinformation, and ignorance allowed government to ram bad policies down the throat of the American people. This is not unlike giving the president authority to go to war and to bail out those least deserving help in an economic crisis. The rationalization that the state’s interest supersedes the interests and the rights of the people is embedded in the arguments as to why the American people had to go along with those who hate commodity money and love central banking.

The Fed was established as a result of the public and banking clamor for an elastic currency, and an elastic currency is nothing more than one that can be arbitrarily increased in volume at the discretion of the monetary managers. Sometimes they argue over who exactly will have the authority to do so, the central bank or Congress or private banks themselves. Increasing the supply of money and credit is the proper definition of inflation, meaning that when the demands were heard for an elastic currency, all they were looking for was a legal right to inflate the currency for the benefit of whatever special interests they were concerned for at the moment.

Noble intentions are always used to justify the inflation, but the real reasons are far more sinister. Those who get the control over the money are the beneficiaries, not the people as a whole.

Economist John Maynard Keynes, before he became the champion of inflation, wrote quite correctly of the grave danger of inflation. Like Greenspan, he changed his tune as the years moved on. Keynes stated in his book The Economic Consequences of the Peace:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.1

His Tract on Monetary Reform from 1923 is also clear:

A government can live for a long time . . . by print[ing] paper money. That is to say, it can by this means secure the command over real resources – resources just as real as those obtained by taxation. . . . A government can live by this means when it can live by no other. It is the form of taxation which the public finds hardest to evade and even the weakest government can enforce, when it can enforce nothing else.2

Marx’s Fifth Plank of the Communist Manifesto mandates a strong central bank monopoly. This was seen as necessary to maintain power over the entire economy and to protect against the encroachment of capitalism.

The Federal Reserve Act of 1913 established the Federal Reserve System to supervise the now fully elastic and easily debauched currency by the unconstitutional powers given to it. Not only would the Fed be able to create money out of thin air, banks were participating and benefiting in the process through fractional reserve banking.

Unfortunately but deliberately, a wall was built between the Federal Reserve and Congress. Congress created the system and could end it. Some say that the great evil is that it’s a private bank; therein lies the problem. If that were the only problem, all that would have to be done is to apply the laws against the Fed that apply to all other private corporations. I see the Fed as being much better off than just being private. It’s sanctioned by the government, protected by the government, and has the privilege of total secrecy.3

Proponents of Keynesian economics have long favored paper money – and either knowingly or unknowingly – favored an inflationary system which has led to disastrous consequences in this country.4 Even though the bill HR 1207 – Audit the Fed would provide much needed transparency into the Federal Reserve Board’s activities, especially its Open Market Committee meetings, it appears that the public is becoming more aware of what is at stake concerning control of the nation’s monetary system.

More on that later.


  1. John Maynard Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace, 1920), pp. 235-236.
  2. John Maynard Keynes, A Tract on Monetary Reform (London: Macmillan, 1923), Chapter II, Section I.
  3. Paul, Ron. Excerpt from “The Constitutional Case”. End the Fed. New York: Grand Central Publishing, 2009. 170-172.
  4. See Keynesian Economics and Savings.

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