Mises Daily Articles
Did the Framers Favor Hard Money?
The Old Republican leader John Randolph, the aristocratic liberal from Virginia, once famously remarked that the framers intended ours to be "a hard-money government." Is it true? Contrary to the efforts of academics and judges to obscure this issue, the framers' intentions in regard to money and banking were quite plain and are easily reconstructed.
On balance, the framers' views can be summarized as follows. On the one hand, they believed in fractional-reserve banking, generally following Adam Smith's currency and banking theories. On the other hand, they were resolutely opposed to government-issued paper money, fiat money, legal tender laws, inconvertible paper currency, and land banks. On the question of a national bank, they were divided, but they all believed in a hard dollar (defining the dollar as a certain weight of silver and/or gold). On a spectrum, their views would be closer to those of Murray Rothbard and Ron Paul than John Maynard Keynes and Alan Greenspan.
To understand the founders' views, one must grasp the meaning of two essential constitutional doctrines—delegation and enumeration. By ratifying the Constitution the states delegated a few defined powers to the federal government, every one of which was enumerated (i.e. written down) in the document. Except by amendment, the federal government has no other powers. The history of the period, the relevant documents, the records of the ratifying conventions, and the text of the Constitution offer overwhelming evidence that these doctrines merely state the prevailing understanding of the period.
If that were not enough, the Tenth Amendment codifies it. "The powers not delegated to the
What were "Bills of Credit"?
One must also grasp what the framers meant by "bills of credit." At the time, there was no confusion or uncertainty at all about their character or nature. They were government-issued irredeemable paper money made receivable for taxes—in other words, fiat money. Seven states had issued them just two years before, and the colonies had issued them over and over again throughout the century. They had done so to finance their wars with the French and the Indians, but they had also seized upon them as a means of reviving trade and solving the ever-recurring "shortages of money."
Sometimes the bills were made legal tender, other times not. Massachusetts was the first colony to print paper money in 1690 when it used them to pay the soldiers and discharge the debts incurred during an armed expedition against Quebec. A little later, the colonies created loan offices to lend such bills to citizens on the security of land or real estate. The borrowers were to pay interest, and the bills were made receivable for taxes. Finally, during the early eighteenth century, groups of merchants and others formed private "banks" to print currency and lend it out on interest. These "banks" had no capital, but the associates promised to accept the paper as lawful money. Some of them had legislative charters, others did not, and still others operated in violation of the law. It is significant that although these were privately issued notes, everyone considered them to be bills of credit too.
The British government did not look with favor upon these experiments with paper currency. In 1741, in order to suppress the private paper-money "banks," Parliament extended the Bubble Act to the colonies. In 1751, they forbade the New England colonies from issuing bills of credit except to pay for administration or meet an emergency, and they forbade them from making them legal tender under any circumstances. In 1764, Parliament extended the prohibition on legal tender paper money to all the colonies. During the War of Independence, both Congress and the states issued bills of credit to finance the war. The depreciating Continentals were bills of credit. In the postwar period, seven states issued bills of credit to pay debts, revive business, and relieve debtors.
Notes on Chart: Credit bills were paid to various public creditors (bond holders, ex-soldiers, public officials). Loan bills were lent to citizens on the security of land. Both were made receivable for taxes, and were to be retired after a designated period of time. Depreciation figures record the depreciation of the notes in relation to specie after one year of issuance.
The Relevant Financial Sections of the Constitution:
- Loans: "The Congress shall have power … to borrow money on the credit of the
- Coinage: "The Congress shall have power … to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures."
- Indebtedness: "All debts contracted and engagements entered into before the adoption of this Constitution shall be as valid against the
United Statesunder this Constitution as under the Confederation."
- Restrictions on the States: "No state shall coin money; emit bills of credit; make anything but gold and silver a tender in payment of debts."
As one can see, the federal government does not have the authority to print paper money, issue bills of credit, establish a legal tender, or impair contracts; and the states were explicitly forbidden from doing any of these things. Some have argued that the absence of a specific federal prohibition means that Congress can exercise these powers, but the records of the federal convention say otherwise.
A Federal Currency Power?
The committee of detail, which drew up the initial draft of the Constitution, explicitly gave the federal government the power "to emit bills on the credit of the United States." They presented their work to the full convention for consideration on 6 August 1787. The debate was soon joined. Although some delegates spoke in favor of granting the power (including James Madison), the majority were resolutely opposed.
Oliver Ellsworth of Connecticut remarked that since "the mischiefs of the various experiments which had been made were now fresh in the public mind, and had excited the disgust of all the respectable part of America, [it was] "a favorable moment to shut and bar the door against paper money. … The power may do harm, never good." George Read of Delaware warned that the power "if not struck out, would be as alarming as the mark of the beast in Revelation." John Langdon of New Hampshire said that he would "rather reject the whole plan than retain the three words 'and emit bills.'" The vote was then taken. Nine states voted for striking out the phrase "and emit bills on the credit of the
It should be stressed that not all the delegates who favored the power were friends of paper money. George Mason of Virginia confessed to a "mortal hatred to paper money" and Edmund Randolph, also of Virginia, admitted to feeling great "antipathy to paper money." However, with great naïveté, both thought the federal government should have the power for "emergencies."
The heroic Elbridge Gerry of Massachusetts was so alarmed by the prospect of the federal government having this power that he wanted an explicit prohibition, but the other delegates thought it unnecessary. Experience soon vindicated Gerry's apprehension and desire for additional safeguards.
During the second war with England, President Madison issued treasury notes to help finance the war. Because these notes were interest-bearing and redeemable in one year, they were not bills of credit, but they were just as inflationary. Murray Rothbard observed that the state banks used these notes as "high-powered money" or "reserves" upon which they could pyramid additional currency and credit; and William Graham Sumner noted, they "at once stimulated banking issues in the Middle States."
Even worse, at the end of the war, Congress authorized the printing of noninterest bearing treasury notes of small denomination (as low as $3.00). These were bills of credit in all but name (i.e. government paper currency).
The historian of early American banking, Bray Hammond, leaves no doubt as to the conclusion that any honest historian or constitutional scholar should draw:
Was it intended that though the states might not issue paper money, establish other legal tender, and impair contracts, the federal government might do so? The question is not to be answered by the Supreme Court's subsequent decision that the federal government does have the power nor by the fact that the federal government has exercised the power. The question is historical and is not answered by jurisprudence or by subsequent practice. Was the power intended? The answer … seems clear enough: it is no.
There is an additional question of great importance. Were state bank notes bills of credit, thus falling under the prohibition of the Constitution? The framers thought not, but their knowledge of such notes was based on the experience of only three commercial banks, all of which were specie-paying: the Bank of North America (c. 1781), the Massachusetts Bank (c. 1784), and the Bank of New York (c. 1784). They clearly did not foresee the multiplication of banks after 1800, the gradual substitution of state bank paper for gold and silver coin as the exclusive circulating medium of the country, and the tricks and threats employed by bankers to escape paying their notes and deposits in hard money.
The question of the constitutionality of bank paper actually came before the Supreme Court in the case of Briscoe vs. Bank of Kentucky (1837). The court ruled by a vote of 6 to 1 that such notes were not bills of credit. They were wrong. In an eloquent and learned dissent, Justice Joseph Story (Mass.) pointed out that state bank notes possessed all the characteristics of the colonial bills of credit.
Although they were not issued by the state government itself, they were issued by state-chartered banks, and it was an established legal principle that what the principal cannot do, its agent cannot do. The convertibility of the notes was mostly nominal, not real. They were accepted for taxes and bonds. The historian Sumner added that they had the effect of driving specie from circulation, creating a currency of inconvertible and depreciated paper, and fueling a business cycle of boom and bust. In short, they had reproduced all the evils of the colonial bills of credit.
Sumner condemned the Court's decision in the strongest terms. "In Briscoe's case the court … made the prohibition of bills of credit nugatory. … Wild-cat banking was granted standing ground under the Constitution, and the boast that the Constitutional Convention had closed and barred the door against the paper money with which the colonies had been cursed was without foundation." He goes on to point out that these "private" paper-money banks (so beloved by contemporary 'free bankers') "went on their course and carried those States [which authorized it] down to bankruptcy and repudiation." What was worse, fractional-reserve banking "miseducated the people of those States until they thought irredeemable government issues an unhoped-for blessing."
Here was a case where a branch of the federal government had the power to do the right thing but did not do it. To have denied the legal standing of fiduciary media would have been to deprive the state governments of their chief means of funding the construction of public works, and the federal government of its chief source of borrowed funds for war. The
A Federal Banking Power?
Does the Federal Government have the power to charter a mixed public/private bank, establish a central bank, or regulate the currency supply? The question was raised only three years after the ratification of the Constitution when Secretary of the Treasury Alexander Hamilton proposed the chartering of a national bank (mixed private/public ownership) with the power to discount notes, issue currency, lend money to the government, and hold and disburse government funds.
Hamilton argued that although the federal government did not have an express warrant to establish such a bank the power was implied because a national bank would help the federal government borrow money, service the debt, keep the revenue, and pay its creditors. His rule of interpretation: "If the end be clearly comprehended within any of the specified powers, and if the measure have an obvious relation to that end, and is not forbidden …, it may safely be deemed to come within the compass of the national authority." This was ingenious, but it was also subversive.
When Secretary of State Thomas Jefferson heard of the bank plan, he was greatly alarmed. He saw immediately that the doctrine, if once accepted, would break down the guards on federal power provided by the Constitution. He wrote, "To take a single step beyond the boundaries thus specially drawn around the powers of Congress is to take possession of a boundless field of power, no longer susceptible of definition." He then drove a stake through Hamilton's argument by citing the records of the federal convention. "It is known that the very power [to charter a bank] now proposed as a means was rejected as an end by the Convention which formed the Constitution. A proposition was made to them to authorize Congress to open canals, and an amendatory one to empower them to incorporate. But the whole was rejected, and one of the reasons for rejection urged in debate was, that then they would have a power to erect a bank."
In other words, not only did the framers not intend the power, they thought it was forbidden. Alas, a Federalist-controlled, mercantilist-minded Congress passed Hamilton's charter, and President Washington signed it into law in early 1791. It is worth noting that the charter forbade the bank from issuing bank notes less then ten dollars ($200 in today's money). Even the Federalists intended the circulating currency of the country to be composed of gold and silver coin.
During the 1815 debate over chartering a second national bank (the charter for the first Bank expired in 1811 and was not renewed by the Republican Congress), supporters raised an additional argument. A national bank was an indispensable means for regulating the currency supply. Opponents responded by arguing that the federal government had no power to regulate the currency. The political economist Condy Raguet pointed out with great force, "Congress has no more authority under it to regulate the currency, excepting that portion of it which consists of coin, than it has to regulate the emission of promissory notes by individuals." The federal compact never "placed the national currency under the regulation of Congress." He was right. Congress has the authority to regulate only the value (i.e. determine the weight and fineness) of gold and silver coin not that of various kinds of paper currencies.
Two centuries later, our money supply is composed entirely of government-issued fiat currency and bank deposits redeemable in the same currency. The money supply and the banking system are largely controlled by means of federal laws and the existence of a powerful central bank. None of which are authorized by the Constitution. It is yet more evidence that our government is no more constitutional than it is democratic or liberal.