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Article I, section 8 of the Constitution states that Congress “shall have the power…to coin money, regulate the value thereof, and of foreign coin.” Let’s look at the historical origin of this clause.
On Tuesday August 16, 1787 this part of the Constitution was discussed and unanimously adopted with very little debate or disagreement. None of the delegates voted against the words, as written. The only discussion came over whether Congress should have the added power to “emit bills on the credit of the United States,” i.e., to print money.
According to James Madison’s notes, Governeur Morris of Pennsylvania stated that “if the United States had credit, such bills would be unnecessary: if they had not, unjust and useless.” Oliver Ellsworth of Connecticut “thought this a favorable moment to shut and bar the door against paper money… Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good.” James Wilson of Pennsylvania agreed, “It will have a most salutary influence on the credit of the U. States to remove the possibility of paper money.”
John Mercer of Maryland “was a friend to paper money, though in the present state and temper of America, he should neither propose nor approve of such a measure. He was consequently opposed to a prohibition of it altogether.” James Randolph of Virginia said, “notwithstanding his antipathy to paper money, could not agree to strike out the words, as he could not foresee all the occasions which might arise.” James Mason of Virginia was “averse to tying the hands of the Legislature altogether.”
The last and fiercest words on the subject came from George Read of Delaware and John Langdon of New Hampshire. “Mr. Read thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelations.” “Mr. Langdon had rather reject the whole plan than retain the three words (and emit bills).”
On a motion made by Morris, the delegates voted, by state, 9-2 to strike out the words “emit bills on the credit.” Later that day the Convention proceeded to vote on the entire text of Article I Section 8. The vote in favor was unanimous.
Given this history, a modern reader has to ask how Congress was able to go beyond coining “money.” How has the “currency question” become a debate over which digital form should become cash? If emitting “bills of credit” is specifically not authorized as a power of Congress, how can the Constitution allow the Treasury to print Federal Reserve notes as currency?
The answer is that Congress, the Supreme Court and the president have all avoided Constitutional definitions of money. Under current law, Federal Reserve notes are not “money.” Neither are the pennies, nickels, dimes, quarters and collectibles produced by the U.S. Mint. They are “legal tender.” "United States coins and currency (including Federal Reserve notes and circulating notes of Federal Reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues."1
When the Constitution was written and adopted and Congress and President Washington approved the charter of the Bank of the United States, neither the Treasury nor the national bank had the power to issue legal tender. Everyone agreed that this was a good thing. “The extension of the prohibition to bills of credit must give pleasure to every citizen, in proportion to his love of justice and his knowledge of the true springs of public prosperity. The loss which America has sustained since the peace, from the pestilent effects of paper money….”2
Even as he supported the adoption of the Constitution, Virginia politics demanded that Madison, as a junior member of the House of Representatives in 1791, signal his virtue by opposing the chartering of the (first) Bank of the United States. Yet, 25 years later, as president, Madison and his Democrat-Republican party voted to charter a (second) bank to replace the first one. The Federalists, many of whom, as individuals, had promoted the first bank and lobbied for the extension of its charter, now voted as a party against a new national bank. They did not argue that a national bank was unconstitutional; no one on either side considered that to be a question. The Federalists simply said that a national bank was unnecessary; the country already had enough state-chartered banks.
And, indeed, it did. Banking had become big business in America. In 1791, there were two banks in the United States. By 1816 there were 205, all chartered by the individual states, and that total did not include the additional 52 branch offices. With the banks came their “money.” In 1811 there had been $28 million in bank notes outstanding in the country; five years later there were $68 million.
Why, then, would the Democrat-Republicans want and need another Bank of the United States? There was the little matter of the war. By year-end 1811 the federal debt had been reduced to $45 million. Five years later it was $127 million. As much as the country’s money supply had grown, its national debt had grown even faster. Even worse, the British amphibious assaults in Chesapeake Bay in August 1814 had caused the banks in Baltimore, Philadelphia and New York to suspend specie redemption of their notes. Two years later only the banks in New England continued to exchange coin for their notes, and they would not accept the drafts and notes of the banks in the rest of the country.
In voting for a new national bank, the Democrat-Republican Congress and the president hoped to repeat the magic trick they had seen Washington and Hamilton of pull off in 1791. The “bank” had helped manage a successful debt swap for the U.S. Treasury. Paper had been exchanged for paper and somehow gold had appeared. Neither Jefferson nor Madison understood exactly how this had happened, but Albert Gallatin, Alexander Dallas and William Crawford did. And this time “the bank” would be the equal of the Bank of England; its notes would be legal tender.
Towards the end of his life, decades after the convention, after he had twice been elected president, Madison made a further revision to his notes of the Constitutional Convention regarding the unanimous adoption of section 8. “This vote in the affirmative by Virga. was occasioned by the acquiescence of Mr. Madison who became satisfied that striking out the words would not disable the Govt. from the use of public notes as far as they could be safe and proper; and would only cut off the pretext for a paper currency, and particularly for making the bills a tender either for public or private debts.”
By distinguishing “public notes” from “paper currency” and legal tender bills of credit, Madison was able to square the currency question circle. He could, as a founder, continue to support gold and silver as “money” and oppose any issue of bills of credit by the Treasury; and, consistent with those principles, support expansion of the amount of the country’s circulating medium. There is no good reason to single out our fourth president as a particular hypocrite. He was simply doing what both the Federalist and Democrat-Republicans struggled to do: represent their voters’ own contradictory principles. From the very beginning the “American public” has wanted the country to have virtuous money and lots of it. (What else is a “strong” dollar that has a favorable rate of exchange for farm exports?) Creating a national bank was, for both parties, a way to allow Americans to have coin as money and be able to print it.
Stefan Jovanovich manages the portfolio for The NJT Company, Inc., a family office based in Nevada.
1 The Coinage Act of 1965, 31 U.S.C. 5103.
2 James Madison, Federalist 44.
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