In a previous post, I explained that at this year’s National Lawyers Convention, in November, the Federalist Society’s Financial Services and E-Commerce Practice Group, of which I am a member, is sponsoring a panel discussion on Money and the Constitution. It is a broad topic, but a very important, foundational one. This is the second of two posts in which I present some key, basic points in preparation for that discussion. As with my initial post, these points will surely raise questions and comments, which is my hope.
In a modern-day economy, money, however defined, is a credit obligation of its issuer. Therefore, all forms of money, largely bank deposits, but also Federal Reserve notes and coins issued by the U.S. Treasury, are a portion of the nation's total credit supply.
The real impact of the federal government on money and credit is the authority Congress granted to the Federal Reserve to manipulate the price of credit, through its open-market operations. Since the Fed launched quantitative easing, the Fed has engaged in interest-rate manipulation across the entire yield curve
An interesting question is, does the Federal Reserve have the constitutional authority to engage in interest-rate manipulation given that Section 8 of the Constitution granted Congress the power to "regulate the Value" of money. Since U.S. currency effectively is issued against the credit of the United States, since all credit instruments can be exchanged for U.S. currency, and since the market value of all credit instruments (with possibly a few exceptions) is inverse to market interest rates, as manipulated by the Federal Reserve (a creation of Congress), arguably the Fed's interest-rate manipulations are constitutional. But even if constitutionally permissible, should Congress continue to grant the Fed the authority to manipulate interest rates or should Congress instead rely solely upon the financial markets to determine interest rates across the entire yield curve and therefore, directly or indirectly, the market value of all credit instruments, including U.S. currency?