The current monetary system of the United States is unconstitutional, through and through. The Constitution does not provide an in-depth explanation as to what monetary system the United States must use, but what it does say is unambiguously lucid. Article I, Section 8, clause 2 states: "The Congress shall have power... to borrow money on the credit of the United States... [clause 5:] to coin money, regulate the value thereof, and of foreign coin, and fix the standards of weights and measures... [and clause 6:] to provide for the punishment of counterfeiting the securities and current coin of the United States... " Furthermore, Article I, section 10, clause 1 declares: "No state shall... coin money; emit bills of credit; or make anything but gold and silver coin a tender in payment of debts... "
The writing of the Constitution in the summer of 1787 did not take place long enough after the end of the Revolutionary War for the Founding Fathers to forget the calamity of paper money printed and issued by the Continental Congress during the war. The paper notes known as "Continentals" eventually declined to zero percent of their original value because they could not be redeemed for either silver or gold. They were "greenbacks", and as such were the first of three major experiments with "greenbacks" that this nation has conducted. The Continental greenback failed so terribly that it gave rise to the saying "not worth a Continental."
Therefore, there was hostility towards paper money when the Constitutional Convention met in 1787. A delegate from Virginia by the name of George Mason declared that he had a "mortal hatred to paper money." Delegate Oliver Ellsworth from Connecticut believed the Convention to be "a favorable moment to shut and bar the door against paper money." James Wilson, a Pennsylvania delegate, argued: "It will have a more salutary influence on the credit of the United States to remove the possibility of paper money." South Carolina Delegate, Pierce Butler, made the point that paper was not legal tender in any country of Europe and that it ought not be made one in the United States. John Langdon of New Hampshire said that he would rather reject the whole Constitution than allow the federal government the power to issue paper money. When it came time for the final vote on the issue, nine states opposed granting the federal government power to issue paper money, and only two favored such a power.
The Founder's intentions were made obviously by using the word "coin" rather than the word "print," or the phrase "emit bills of credit." Thomas M. Cooley's Principles of Constitutional Law expounds upon this point: "To coin money is to stamp pieces of metal for use as a medium of exchange in commerce according to fixed standards of value."
Congress was granted the exclusive power to coin money while the states were prohibited from doing so. In addition, states were prohibited from making anything but gold and silver coin a tender in payment of debt, while the federal government was not granted the power of making anything legal tender.
In James Madison's explanation of the Constitutional provisions on money, Federalist No. 44, Madison referred to the "pestilent effects of paper money on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government." The intention of the Founders was to avoid the paper-based monetary system that has been used in the United States since Richard Nixon closed the gold window in 1971.
This intention was understood even throughout the 19th century. Daniel Webster wrote:
"If we understand, by currency, the legal money of the country, and that which constitutes a lawful tender for debts, and is the statute measure of value, then undoubtedly, nothing is included but gold and silver. Most unquestionably, there is no legal tender, and there can be no legal tender in this country under the authority of this government or any other, but gold and silver, either the coinage of our mints or foreign coins at rates regulated by Congress. This is a constitutional principle, perfectly plain and of the very highest importance. The states are expressly prohibited from making anything but gold and silver a tender in payment of debts, and although no such expressed prohibition is applied to Congress, yet as Congress has no power granted to it in this respect but to coin money and to regulate the value of foreign coins, it clearly has no power to substitute paper or anything else for coin as tender in payment of debts in a discharge of contracts... The legal tender, therefore, the constitutional standard of value, is established and cannot be overthrown. To overthrow it would shake the whole system."
In 1832, the Select Committee on Coins of the House of Representatives, in a report to Congress, concluded that "the losses and deprivation inflicted by experiments with paper currency, especially during the Revolution; the knowledge that similar attempts in other countries... were equally delusive, unsuccessful, and injurious; had likely produced the conviction that gold and silver alone could be relied upon as safe and effect money."
In 1844, the House Committee on Ways and Means concluded: "The framers of the Constitution intended to avoid the paper money system. Especially did they intend to prevent Government paper from circulating as money, as had been practiced during the Revolutionary War. The Mischiefs of the various expedients that had been made were fresh in the public mind, and were said to have disgusted the respectable part of America... the framers.. designed to prevent the adoption of the paper system under any pretext or for any purpose whatsoever; and if it had not been supposed that such an object was effectively secured, in all probability the rejection of the Constitution might have followed."
In 1884, in the case Julliard vs. Greenman, Justice Stephen Field wrote: " There have been times within the memory of all of us when the legal notes of the United States were not exchangeable for more than half their nominal value. The possibility of such depreciation will always attend paper money. This inborn infirmity, no mere legislative declaration can cure. If Congress has the power to make the notes legal tender and to pass as money or its equivalent, why should not a sufficient amount be issued to pay the bonds of the United States as they mature? Why pay interest on the millions of dollars of bonds now due when Congress can in one day make the money to pay the principal; and why should there be any restrain upon unlimited appropriations by the government for all imaginary schemes of public improvement if the printing press can furnish the money that is needed for them?"
It is noteworthy that this power of coining money is mentioned in the same sentence in the Constitution as the power to "fix the standards of weights and measures," because the framers regarded money as a weight of metal and a measure of value. Roger Sherman, delegate to the Constitutional Convention, wrote that "if what is used as a medium of exchange is fluctuating in its value, it is no better than unjust weights and measures... which are condemned by the Laws of God and man... "
Today's paper money system, issued by a coercive banking monopoly, has no basis the in the Constitution. It is precisely the sort of government institution that can forcibly exact financial support from the people without their consent. As such, it is a form of taxation without representation, and a denial of the hard fought and won principle of consent before payment of taxes. It is a form of embezzlement.
Surprisingly, the Supreme Court has never decided on any cases challenging the constitutionality of our current irredeemable paper money system; in fact such a case has not yet been adjudicated before the Court or at the federal appellate level.
The argument against a irredeemable paper money system is more than a Constitutional argument. It is also a moral argument. Furthermore, this system has led to a split in the field of Economics between Monetarists and the new school of Austrian Economics. This split lies mainly in the concept of inflation. Monetarists describe inflation as "the rise of prices over a period of time" whereas Austrian Economists describe inflation as "the unwise over-expansion of the supply of money and credit." It seems that the Austrian Economists have won this argument but the Federal Reserve continues to operate under the Monetarist definition of inflation. This leads to the lowering of interest rates once the bubbles (like the Dotcom bubble or the sub-prime mortgage crisis of 2008) of the boom-bust cycle burst. This leads to further expansion of credit in the system and the creation of a new bubble and thus the perpetuity and increased severity of the boom-bust cycle. This inflationary monetary policy facilitates the transfer of wealth from the poor to the very wealthy and politicians and the consolidation of wealth in the hands of a few.