Federal Reserve Constitutional or Merely Legal?


The Federal Reserve is the Central Bank of the United States. It is in charge of printing money issuing bonds and setting interest rates for those bonds. Article 1, Section 8 of the Constitution says, “The Congress shall have Power … to coin Money, regulate the Value thereof.” The Federal Reserve is never mentioned. Has it always been this way? Does any other country do this? How did the Federal Reserve get its power over our currency and our economy? And the issue that so many are interested in today: is the Federal Reserve constitutional?

Has it always been this way?

At the dawn of the Republic our first Secretary of the Treasury Alexander Hamilton issued several reports which in many ways set the tone and pointed the way for the development of America in the economic sphere. His first report on the public credit recommended that the new central government not only honor the debts contracted under the original government as established under the Articles of Confederation but that it also assume the war debts of the States. This recommendation was followed by Congress and the Washington administration created what has evolved into a permanent national debt.

In 1790 Hamilton submitted his second report which asked Congress to charter the Bank of the United States. Several aspects of the bank Hamilton proposed will sound familiar and it can be seen that they provided the mold for the Federal Reserve. His plan was closely modeled after that used by Great Britain’s Bank of England. According to Hamilton’s vision the Bank of the United States would be a public/private hybrid. It would have an exclusive charter for twenty years. Its initial capitalization would be ten million dollars consisting of eight million from private investors and two million from the government. Congress would give the Bank the right to print paper money up to the ten million held in deposit. Most importantly the central government would declare that the notes issued by the Bank would be the only notes which would be accepted in payment for taxes. This would give the notes of the Bank of the United States credibility and value, which none of its state chartered competitors could match. This was Hamilton’s proposal. Now all he had to do was get it passed into law.

The report was introduced into Congress in 1790 and by February 1791 it passed both the House and the Senate and arrived on the desk of President Washington. This is when the battle of the Titans really began. Leading Anti-Federalists and strict constructionists such as James Madison, Thomas Jefferson, and Edmund Randolph, argued that the Constitution did not grant the government the power to incorporate a Bank. According to their line of reasoning It was not an enumerated power and therefore it was reserved to the States or the people. Those arguing for a strict interpretation of the newly minted Constitution, which Madison and Randolph had helped write, urged Washington in a written report not to sign the bill.

Ever the fulcrum between his philosophically divided advisors Washington presented Hamilton with the argument opposing his plan and asked him to present his argument in favor. Hamilton using his excellent reasoning and communication skills presented President Washington with the original argument for the implied powers granted to the central government by the Constitution. This report appealed to what is now known as the “Necessary and Proper” clause. He argued that the government was inherently empowered to do whatever was necessary to implement the laws required to use the enumerated powers. President Washington accepted Hamilton’s argument, signed the bill, and the first Bank of the United States was born.

Beginning on July 4, 1791 the first thing the new Bank did was inflate a financial bubble by offering the largest initial stock offering the nation had ever seen. Investors showed their confidence in Hamilton’s plan by quickly buying the options on the first issue of stock. Many of these initial investors were members of Congress. The initial price for the options was $25. This was soon bid up to over $300. It soon crashed to $150. Thus within days of its first action this original central bank inflated a bubble that soon burst. However, Secretary Hamilton setting the example for the central bankers to follow, stepped into the breach and averted a general financial panic by purchasing government securities with public funds thus stabilizing the markets and rewarding those who had initially speculated and “Too big to fail” was born.

The bank opened for business in December of 1791. All manner of people, landowners, manufacturers, merchants, politicians, and most important of all, the government of the United States lined up to deposit money and to obtain the new Bank script. Within months the Bank was the single largest economic enterprise in the nation.

Beginning a pattern that would be repeated over and over the bank which had been created to ensure a firm foundation for the American economy inflated another bubble and caused another crash.

First the Bank flooded the market with easy loans and a massive issue of paper dollars. This move added liquidity pushing the new securities market into a sharp rise. However, then the Bank reversed course and began calling in many loans. Investors and speculators were especially affected as they were forced to sell securities to pay the loans. When the largest of the speculators William Duer was forced to declare bankruptcy the markets collapsed. This in turn caused the financial markets to freeze up putting a stop to much of the nation’s credit and commerce. This is known as the Panic of 1792. The crash didn’t last long, because Secretary Hamilton once again stepped in and bought government securities with public funds injecting much needed capital into the economy.

Over its 20 year life the first Bank of the United States functioned as the central bank. It worked to regulate state banks, closing those that issued too much paper. It attempted to guide the entire economy through its monetary and interest policies. It coordinated all its branches up and down the east coast to project a united front in its economic policy by either tightening or loosening credit.

By the time it came for a renewal of the bank’s charter the Federalists were no longer in the seats of power and the newly ascendant Democratic Republicans, led by Thomas Jefferson, defeated its bid for another twenty years, and the first bank of the United States, America’s initial experiment with central banking, was over.

Does any other country do this?

Yes, many other countries have central banks. Today it is considered a hallmark of an advanced economy.

How did the Federal Reserve get its power over our currency and our economy?

There were subsequent attempts to re-establish central banking in the United Sates. There was a Second Bank of the United States chartered in 1816, but after being blamed for a series of bubbles and crashes its charter was not renewed and it ceased operations in 1836. In 1863 in the depths of the Civil War Congress passed the National Banking Act which chartered numerous Federal Banks. This law also taxed paper money issued by State banks but not paper money issued by the Federal Banks giving them a decided advantage.

In 1913 the Federal Reserve System was born. It established what is known as a decentralized central bank in that it has semi-autonomous branches. It was given the power to control the currency, issue bonds, and set interest rates for those bonds. It was established as a public/private concern and actually owned by stock holders. Who are these stock holders? They are private banks, and ownership of stock is required to participate in the system. The system was instituted to provide the foundation for a stable banking industry and an elastic currency that could be used to smooth the rough edges of the business cycle. Whether this latest experiment in American central banking has fulfilled its mission each citizen should judge for themselves.

Is the Federal Reserve constitutional or merely legal?

The first Bank of the United States was never challenged in court as to whether or not the government had the power to create a central bank. But the second Bank was. The Supreme Court in 1819 ruled in McCulloch v. Maryland that it was in fact constitutional due to the implied powers clause. Thus looking to precedent, and unless the Supreme Court reverses itself, the Federal Reserve is considered to be authorized within the confines of the broadly interpreted Constitution.

There was an important constitutional issue born with the creation of America’s first Central Bank. With the birth of the First Bank of the United States the acceptance and use of implied powers became the central government’s method to expand its powers beyond those expressly delegated in the Constitution. This in turn paved the way for our acceptance of things that are clearly unconstitutional just because they are legal.

The argument of Madison, Jefferson, and Randolph upholding a strict constructionist view would be codified and added to the Constitution in the same year the Bank was charted, and perhaps in response to it, in the 10th Amendment, but this did not end the appeal to implied powers as a means to the government’s ends. In theory this sounds good. In practice it has turned our limited government into an out of control leviathan crushing the free out of our free market and sucking the liberty out of the American experiment.

As my favorite American philosopher, Yogi Berra once said, “In theory there is no difference between theory and practice. In practice there is.”

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Comments

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  • Ethan Ellingson

    But Dr. Owens, what of the 'constructive' fraud perpetrated by the Fed in the issuing of bogus notes? The paper is masquerading as "legal tender" and is redeemable in nothing.

    In fact, please identify the substance, measured in dollars, referenced in the “notes” we use as if they were money, that government collects, spends or wastes; or that banks pretend to lend.

    http://www.youtube.com/watch?v=NZO9Io3PSmk

  • George Wentzel

    Neither, we need radical changes in our economic. Throw the bastards out of the door tarred and feathered revert back to the gold standard and let the market determine what sinks and what swims. Capitalism works every time. Survival of the fittest, that's God's plan and if you think you know more than him then lying to yourself and you are dangerous.

  • Libertarian58

    Lawyers have no concept of "morality" beyond "legal". That's why we have so many immoral "laws" in this country having been put in place by lawyers, and the Federal reserve act is just one shining example. Pure theft and corruption, including counterfeiting, and all perfectly "legal", just ask any lawyer. . .

  • ARMYOF69

    Time to shut that down. Bankers screwing us all the time in combination with obama's degrees.
    Who needs that?

  • http://www.facebook.com/davidzion.brugger David Zion Brugger

    After a few years of divinely guided study of 'What The world Calls Law and why it worked o more properly how it didn't work I came to a final consensus,
    So long as God's Children ar Paying Rent for The Rigt to Exist on The Earth Or Father gave us for Free,, we have yet to get something right.

  • http://www.facebook.com/davidzion.brugger David Zion Brugger

    As I see it,
    Legal verses Lawful
    Lawful= What Is Was and always will be Truth,,,
    Legal= The Lies of The Attorney Types.

  • TheTexasCooke

    Two points and neither deal with the Fed as a bank:

    United States Constitution

    Article 1 - The Legislative Branch
    Section 8 - Powers of Congress

    "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;"
    and
    "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;"
    "To coin Money" is part of the "fix the Standards of Weights and Measure" in that Congress has the authority to say "this weight of [fill in metal here] of this purity [as certified by this coin] is worth one dollar. Very few of Congress' authorities may be conveyed to another AND THEY ARE INUMERATED.
    When the Fed prints paper money it ursurps Congress' authority to "coin money" and steals the value to back this new paper from EVERYBODY on this planet that owns a dollar. The Fed doesn't just tax citizens, it taxes citizens of countries all over the world and other world governments! Congress doesn't even have that authority! So why does the Fed and how can this possibly be Constitutional? And I don't care what the Supreme Court says because it is a creature of the Constitution not its arbitator....that's the State's job and the job of the People.

  • http://www.facebook.com/RobertAlexander.Salvage Robert Alexander

    Question is, what does GOD consider Money and why does man not return to that?

  • http://www.bibleversusconstitution.org/ Ted R. Weiland

    A more important question than whether it's constitutional is whether it's lawful:

    "Any legislation antithetical to Yahweh’s turns evil to good and good to evil (Isaiah 5:20). When man rejects Yahweh’s standard of morality, it is inevitable he will make legal what Yahweh has made unlawful (e.g., infanticide and sodomy [and the Federal Reserve System) and make illegal what Yahweh has made lawful (e.g., monotheistic Christianity outside the four walls of church buildings).

    "Yahweh is the only lawgiver because as Creator He’s the only one with the authority to determine what is good and evil. His morals as codified in His commandments, statutes, and judgments determine what is right and left. Anything left of His right(eousness) is left, liberal, and ungodly."

    for more, see "Left, Right, and Center: Who Decides?" Click on my name, then our website. Go to our blog and scroll down to title.

  • freedomringsforall

    I worked briefly for a subcommittee of the Congressional Oversight Committee on Banking.

    So, i am not an expert but i do know some about this matter.

    The above article is actually somewhat misleading.

    The current Federal Reserve is not the same as the previous National Banks.

    I do not think half the people like Ron Paul would have half the problem they do with the Federal Reserve if it was set up like the previous National Banks.

    The one main problem from which many of the problems with the current Federal Reserve system stem is that it is still wholly privately owned; at least to my knowledge.

    I haven't ever heard of any major sell-off of the Fed to the Government or any other interests lately.

    Here is what i think is the BIGGEST problem with the current Fed actions today; which is a result of a progressive step by step promulgation of Fed policy throughout the 100 year history of the Fed:

    I have heard a lot lately on the news and alternative media about the Fed propping up part of our debt now because other nations etc are slowing down their US debt instrument purchases.

    No matter whether the person likes or dislikes the process all I ever hear about is that
    basically we are buying our own debt.

    I do not understand how this could possibly be true.

    As I understand it the Fed is privately owned by banks.

    It is not actually a Government institution.

    Most people think it is but it is not.

    The official phrase for it is a Quasi-Governmental institution.

    It really is not even that because it is wholly owned by private banks.

    The only thing that seems true of the official line Quasi-Governmental is that the Fed Chairman and the top boards are kind of appointed by the Government and that they make and/or exercise official binding monetary policy for the Government.

    But really they are all bankers or cozy with the banking interests that own the
    Federal Reserve.

    So, there really is more private and not much Quasi-Government about it.

    The way i and many people see it is that they make and dictate monetary policy, that suits them best, to the American people with the official auspice and power of the United States Federal Government.

    So, if the Fed is propping up the U.S. debt then I do not see how it can be said that we are “buying our own debt”.

    We are handing off the U.S. debt to those private banks aren't we?

    And if that is true what price is the repayment to them by the U.S citizens going to be?

    What are the future consequences that might befall us as a result of it?

    I think the truth of this could be a stunning revelation to most of our citizens.

    Total dictatorial enslavement to the internationalist bankers that own the Federal Reserve under the structure of one world governance must be the answer because nobody has had the guts to tell us yet.

    Everyone must cry out:

    WHO OWNS THE FEDERAL RESERVE?

    WHAT IS THE PRICE WE MUST YIELD UP TO PAY BACK THIS MOUNTAIN OF DEBT?

    We are one step away from a total dictatorship

    The 2nd amendment

  • tom nogaro

    "It (the fed) was established as a public/private concern...."

    what do you mean by "concern"? it is wholly private: it was created by rich large bankers, to eliminate small competitor banks. it was given to bribed cronies in congress to sign into law on christmas eve, without time to study it. thus it came to be. it was thus given congressional license to guarantee its own income on our largesse, by way of our enslaved toil and bounty.

    over its history the fed has arbitrarily taken our money to bail out foreign nations and banks, and domestic banks and companies, all without public referendum, publicity, congressional debate, or audit. is this exercising a valid implied power? where is the express power for the federal government to take the people's money to bail out foreign corporations and sovereigns, or domestic corporations, contrary to our bankruptcy law and constitution. moreover, the constitution prohibits federal government intervention in private contracts, precisely what bailouts are intended to do, and in fact do.

    the fed earns income on each dollar it prints, which income is non-taxable, so each dollar printed is conflicted between our interest (a strong dollar) and the fed's bank owners'. yet there is no congressional outcry.

    one of the fed's 2 express mandates is to maintain the stability and value of our currency (dollar). yet, with all of this, and more, the fed has managed to debase our currency (dollar) 97% since its inception in 1913, so that if you had a dollar then, it would be worth 3 cents today. is that constitutional, or even self-consistent with its own charter?

    the federal coinage act of 1790 forbids anyone, under the risk of penalty of death for treason, to debase our currency. why? because our founders knew history's greatest empires fell by doing so. they knew currency debasement is theft, hidden taxation, sleuth inflation, and ultimate economic and political death. thus, its practice was worthy of death.

    you ask, "Is the Federal Reserve constitutional or merely legal?" it is neither, nor is it ethical or self-consistent with its own mandate. in short, it needs to be tossed.

    everyone here: read "the creature of jeckyl island" to confirm what i say here. your jaws will drop.

  • http://www.facebook.com/sheffield.swearingen.5 Sheffield Swearingen

    All these people that have run the Federal reserve come fromGoldman Sachs. And all are Jewish Men.

  • http://www.facebook.com/sheffield.swearingen.5 Sheffield Swearingen

    Woodro Wilson a progessive let this fed. res. exist.

  • A. Levy

    And if the Reserve were not Constitutional, would that really stop anyone today?

    • Steven

      NO, it wouldn't. That said, the question in the headline assumes a false premise. If it is unconstitutional, and I believe it is, it is also illegal. Anything that violates the SUPREME LAW OF THE LAND, cannot be legal.

    • http://www.facebook.com/davidzion.brugger David Zion Brugger

      Yes such things can be 'Legal' if you are a Legal Person rather than a Lawful Man,,, ect ect,,
      Isa 1:3 The ox knoweth his owner, and the ass his master's crib: but Israel doth not know, my people doth not consider.
      Isa 1:4 Ah sinful nation, a people laden with iniquity, a seed of evildoers, children that are corrupters: they have forsaken the LORD, they have provoked the Holy One of Israel unto anger, they are gone away backward.
      Isa 1:5 Why should ye be stricken any more? ye will revolt more and more: the whole head is sick, and the whole heart faint.
      Isa 1:6 From the sole of the foot even unto the head there is no soundness in it; but wounds, and bruises, and putrifying sores: they have not been closed, neither bound up, neither mollified with ointment.
      Isa 1:7 Your country is desolate, your cities are burned with fire: your land, strangers devour it in your presence, and it is desolate, as overthrown by strangers.

    • Steven

      Your bible referances would be irrelevant, even if your argument made sense. The DEFINITION of legal prevents anything that violates the SUPREME law of the land from being legal. If you insist on ingoring the definitions of words, commnunitcation is impossile, but you have a future as an atorney.

    • http://www.facebook.com/davidzion.brugger David Zion Brugger

      I have access to what is Called The Money Brief.
      If you want to avoid paying any judgement a judge might give, just fill this out, attach a copy of the judges Oath of Office and File it on the case and if you ever hear anything about that case again or the so called Debt, just ask the judge if there wasnt a money Brief filed on that Matter,, he will thumb through the papers and say that yes there does appear to be something like that there,, so ask im how it was responded to, he will say that it hasnt, so you say, well then the ball is in the plaintiffs court, just let me know when it is responded to.
      The Brief explains what Lawful Money is.
      At the end of the brief there is an Boiler plate Order and a boiler plate Alternate Order. The 1st says that since he judge is bound by Oath to never Demand anything from any one in anything but Lawful Money which is not available and he cant demand the impossible just forget the whole thing,,the alternate order say even though bound byOath that he still demands you pay in Beans Bullits or some other commodity besides lawful moneywhich of course he wont sign,, then there is a 3rd option to just ignore the whole Issue in which case you do the same and respond as above if needed........ Mor info on a Money Brief call [email protected] suggested retail 15yrs ago was $35