Originally posted on Tuesday, December 17th, 2013
The Heritage Foundation’s Guide to the Constitution contains an analysis on the Constitution’s provisions relating to State Coinage written by David F. Forte, Professor of Law, Cleveland-Marshall College of Law:
The prohibition on the states to create any form of money signaled the shift of the power to make economic policy from the states to the federal government. In the late eighteenth century, money and trade were the prime mechanisms for regulating the economy, and the Constitution gave both exclusively to the new central government.
“Bills of Credit” was the generic name for various forms of paper money not backed by gold or silver (known as “specie”). Up until near the end of the Revolution, the states had managed, as they had when they were colonies, the issuance of paper money as a means of stimulating and cooling the economy, not unlike the practice of the modern Federal Reserve. After issuing a currency to increase investment, the colony or state would later call in, or “sink,” the currency by levying taxes payable in that particular issue. The colony would then issue a new currency (sometimes overlapping with the collection of the previous one) to begin (or maintain) the cycle again. Inevitably, currencies became depreciated, and the complexities of determining who owed how much in which currency to whom confounded transactions and the courts. See Deering v. Parker (1760).
During the latter half of the eighteenth century, Parliament laid increasing monetary regulations on the colonies until 1764, when, as part of its program of centralizing control in London, it put a complete ban on making bills of credit legal tender. During the Revolution, the states began issuing paper currencies again, having a somewhat better record in financing the war than Congress had. After 1783, however, specie dried up in a popular rush to purchase imported goods, and the states’ currency issues exacerbated the serious depression of 1784. In early 1787, Massachusetts, which had resisted currency issues, was faced with Shays’s Rebellion, whose partisans demanded new currency. In Philadelphia, the Framers were determined to put an end to the practice that they believed had contributed to so much economic and political dislocation. Rhode Island, a major issuer of paper money, refused to send delegates to the Constitutional Convention precisely because it feared monetary reform.
At the Convention, the delegates found a proposal to allow the states to issue bills of credit with the approval of Congress not stringent enough, and James Wilson and Roger Sherman successfully moved to insert the current language. In the ratifying conventions, the Anti-Federalists quickly saw what was afoot. The states could no longer debase the currency with new issues of paper tender. Luther Martin asserted that the states would no longer be able “to prevent the wealthy creditor and the monied man from totally destroying the poor though even industrious debtor.” After ratification, the full force of the constitutional changes soon came to fruition; Alexander Hamilton pushed through a program by which the federal government absorbed all previous federal and state debt, established a national bank, and levied new tariffs and internal taxes.
It is of particular interest to note the objection of Maryland delegate Luther Martin that the prohibition of paper money inure to “the wealthy creditor and the monied man from totally destroying the poor though even industrious debtor.” This sentiment anticipates contemporary apologists, like Prof. Paul Krugman, who argue on behalf of “easy money” in our era, “Quantitative Easing” as a boon to create employment.
Historical facts demonstrates that high quality money — with the gold standard proving, again and again, to be “the gold standard” of quality money repeatedly has proved beneficial to working people and the middle class. And “easy money” — fiduciary currency — to be a source of unemployment, recession, and general misery.
As two scholars from the Federal Reserve Bank of New York have observed “lessons learned often last only a lifetime and are easily forgotten.” The seductions of “easy money” — which promise prosperity and deliver austerity — continue to attract the gullible.
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