The Constitution and Paper Money; C. Carson

He is working at present on A Basic History of the United States to be published by Western Goals, Inc. ence to the practice in the same sec tion of the Constitution. It reads, "No State shall ... make any Thing but gold and silver Coin a Tender in Payment of Debts .... " Legal tender laws, in practice, are an essential expedient for making unredeemable paper circulate as money. Except for the one direct and one indirect ref erence to the origin and means for circulating paper money, the Con stitution is silent on the question. With such scant references, then, it might be supposed that the mak ers of the Constitution were only in cidentally concerned with the dan gers of paper money. That was hardly the case. It loomed large in the thinking of at least some of the men who were gathered at Philadelphia in 1787 at the Constitutional Con vention. There were two great· ob jects in the making of a new consti tution: one was to provide for a more 399 400 THE FREEMAN July energetic general government; the other was to restrain the state gov ernments. Moreover, the two objects had a common motive at many points, i.e., to provide a stronger general government which could re strain the states.

Measuresto Preventa Flood of UnbackedPaper Money One of the prime reasons for re straining the state governments was to prevent their flooding the country with unbacked paper money. James Madison, one of the leaders at the convention, declared, in an intro duction to his notes on the delibera tions there, that one of the defects they were assembled to remedy was that "In the internal administration of the States, a violation of contracts had become familiar, in the form of depreciated paper made a legal tender .... "2 Edmund Randolph, in the introductory remarks preceding the presentation of the Virginia Plan to the convention, declared that when the Articles of ~onfederation had been drawn "the havoc of paper money had not been foreseen."3 Indeed, as the convention held its sessions, or in the months preceding it, state legislatures were under pressure to issue paper money. Sev eral had already yielded, or taken the initiative, in iss~ing the un backed paper. The situation was out of control in Rhode Island, and had been for some time. Rhode Island refused to send delegates to the con vention, and the state's reputation was so bad that the delegates there were apparently satisfied to be spared the counsels of her citizens. Well af ter the convention had got under way, a motion was made to send a letter to New Hampshire, whose delegates were late, urging their at tendance. John Rutledge of South Carolina rose to oppose the motion, arguing that he "could see neither the necessity nor propriety of such a measure. They are not unapprized of the meeting, and can attend if they choose." And, to clinch his argu ment, he proposed that "Rhode Is land might as well be urged to ap point & send deputies."4 No one rose in defense of an undertaking of that character.

The ill repute of Rhode Island de rived mainly from that state's unre strained experiments with paper money. Rhode Island not only issued paper money freely but also used harsh methods to try to make it cir culate. The "legislature passed an act declaring that anyone refusing to take the money at face value would be fined £100 for a first offense and would have to pay a similar fine and lose his rights as a citizen for a sec ond."5When the act was challenged, a court declared that it was uncon stitutional. Whereupon, the legisla ture called the judges before it, in terrogated them, and dismissed several from office. The legislature 1983 THE CONSTITUTION AND PAPER MONEY 401 was determined to have its paper circulate. The combination of abundant pa per money and Draconian measures to enforce its acceptance brought trade virtually to a halt in Rhode Island. A major American constitu tional historian described the situa tion this way: The condition of the state during these days was deplorable indeed. The mer chants shut their shops and joined the crowd in the bar-rooms; men lounged in the streets or wandered aimlessly about.

. .. A French traveller who passed through Newport about this time gives a dismal picture of the place: idle men standing with folded arms at the corners of the streets; houses falling to ruins; miserable shops offering for sale nothing but a few coarse stuffs ... ; grass grow ing in the streets; ·windows stuffed with rags; everything announcing misery, the triumph of paper money, and the influ ence of bad government. The merchants had closed their stores rather than take payment in paper; farmers from neigh boring states did not care to bring their produce. . . . Some . . . sought to starve the tradesmen into a proper appreciation of the simple laws of finance by refusing to bring their produce to market. 6 But there was more behind the Founders' fears of paper money than contemporary doings in Rhode Is land or general pressures for mone tary inflation. The country as a whole had only recently suffered the sear ing aftermath of such an inflation.

Much of the War for Independence had been financed with paper money or, more precisely, bills of credi t. A Surge of Continentals Even before independence had been declared the Continental Con gress began to emit bills of credit. These bills carried nothing more than a vague promise that they would at some unspecified time in the future be redeemed, possibly by the states. In effect, they were fiat money, and were never redeemed. As more and more of this Continental currency was issued, 1776-1779, it depre ciated in value. This paper was joined by that of the states which were, if anything, freer with their issues than the Congress. In 1777, Congress re quested. that the states cease to print paper money, but the advice was ig nored. They did as Congress did, not what it said. At first, this surge of paper money brought on what appeared to be a glow of prosperity. As one historian described it, "the country was pros perous. . .. Paper money seemed to be the 'poor man's friend'; to it were ascribed the full employment and the high price of farm products that pre vailed during the first years of the war. By 1778, for example, the farmers of New Jersey were gener ally well off and rapidly getting out of debt, and farms were selling for twice the price they had brought during the period 1765-1775. Trade and commerce were likewise stimu402 THE FREEMAN July lated; despite the curtailment of for eign trade, businessmen had never been so prosperous."7 The pleasant glow did not last long, however. It was tarnished first, of course, by the fact that the price of goods people bought began to rise.

(People generally enjoy the experi ence of prices for their goods rising, but they take a contrary view of paying more for what they buy.) Then, as now, some blamed the rise in prices on merchant profiteering. As the money in circulation in creased and expectations of its being redeemed faded, a given amount of money bought less and less. This set the stage for speculative buying, holding on to the goods for a while, and making a large paper profit on them. There were sporadic efforts to control prices as well as widespread efforts to enforce acceptance of the paper money in payment for debts. These efforts, so far as they suc ceeded, succeeded in causing short ages of goods, creditors to run from debtors trying to pay them in the depreciated currency, and in the on set of suffering. Runaway Inflation By 1779, the inflation was near ing the runaway stage. "In August 1778, a Continental paper dollar was valued (in terms of gold and silver) at about twenty-five cents; by the end of 1779, it was worth a penny." "Our dollars pass for less this' afternoon than they did this morning," people began to say. 8 George Washington wrote in 1779 that "a wagon load of money will scarcely purchase a wagon load of provisions."9 It was widely recognized that the cause was the continuing and ever larger emissions of paper money. Congress resolved to issue no more in 1779, but it was all to no avaiL Runaway inflation was at hand. In 1781, Con gress no longer accepted its own pa per money in payment for debts, and the Continentals ceased to have any value at all.

A good portion of the dangers of paper money had been revealed, and reflective people were aware of what had happened. Josiah Quincy wrote George Washington "that there never was a paper pound, a paper dollar, or a paper promise of any kind, that ever yet obtained a general currency but by force or fraud, generally by both."lo A contemporary historian concluded that the "evils which re sulted from the legal tender of the depreciated bills of credit" extended much beyond the immediate assault upon property. "The iniquity of the laws," he said, "estranged the minds of many of the citizens from the hab its and love of justice .... Truth, honor, and justice were swept away by the overflowing deluge of legal iniquity .... "11 But the economic consequences of the inflation did not end with the demise of the Continental currency.

1983 THE CONSTITUTION AND PAPER MONEY 403 Instead, it was followed by a defla tion, which was the inevitable result of the decrease in the money supply. The deflation was not immediately so drastic as might be supposed. Gold and silver coins generally replaced paper money in 1781. Many of these had been out of circulation, in hid ing, so long as they were threatened by tender law requirements to ex change them on a par with the paper money. Once the threat was re moved, they circulated. The supply of those in hiding had been aug mented over the ye~rs by payments for goods by British troops. Large foreign loans, particularly from the, French, increased the supply of hard money in the United States in 1781 and 1782. A revived trade with the Spanish, French, and Dutch brought in coins from many lands as well. In addition, Robert Morris's Bank of North America provided paper money redeemable in precious met als in the early years of the decade.

The Impactof Depression By the middle of the 1780s, how ever, the deflation was having its impact as a depression. Trade had reopened with Britain, and Ameri cans still showed a distinct prefer ence for British imports. That, plus the fact that the market for Ameri can exports in the British West In dies was still closed, resulted in a large imbalance in trade. Ameri cans made up the difference either by borrowing or shipping hard money to Britain. Prices fell to reflect the declining money supply. Those who had gone into debt to buy land at the inflated wartime prices were espe cially hard hit by the decline in the prices of their produce. Foreclosures were widespread in 1785-1786. This provided the setting for the de mands for paper money and other measures to relieve the pressure of the debts. Some people were clam oring for the hair of the dog that had bit them in the first place-mone tary inflation-and several state legislatures had accommodated them.

Though there is evidence that the worst of the depression was over by 1787, if not in the course of 1786,12 paper money issues and agitations for more were still ongoing when the Constitutional Convention met in Philadelphia. In any case, those who had absorbed the lessons of recent history were very much concerned to do something to restrain govern ments from issuing paper money and forcing it into circulation. There were those who met at Philadelphia, too, who took the long view of their task. They hoped to erect a system that would endure, and to do that they wished to guard against the kind of fiscal adventures that produced both unpleasant economic consequences and political turmoil. Paper money was reckoned to be one of these. The question of granting power to emit bills of credit came up for dis404 THE FREEMAN July cussion twice in the convention: The first time was on August 16, 1787.

(The convention had begun its delib erations on May 25, 1787, so it was moving fairly rapidly toward the conclusion when the question arose.) The question was whether or not the United States government should have power to emit bills of credit. Congress had such a power under the Articles of Confederation, and most of the powers held by Congress·un der the Articles were introduced in the convention to be extended to the new government. ConstitutionalConventionDebates Gouverneur Morris of Pennsyl vania "moved to strike out 'and emit bills on the credit of the United States'." That is, he proposed to re move the authority for the United States to issue such paper money. "If the United States had credit," Mor ris said, "such bills would be unnec essary: if they had not, unjust & useless." His motion was seconded by Pierce Butler of South Carolina. James Madison wondered if it would "not be sufficient to prohibit making them a tender? This will re move the temptation to emit .them with unjust views. And promissory notes in that shape may in some emergencies be best." (Madison's distinction between bills of credit that may be .freely circulated and those whose acceptance is forced by tender .laws should remind us that paper instruments serving in some fashion as money are not at the heart of the problem. After all, private bills of exchange had for several centu ries been used by tradesmen, and these sometimes changed hands much as money does. They are what we call negotiable instruments, and the variety of these is large. What Madison was getting at more di rectly, however, was that govern ments, if they are to borrow money from time to time, may issue notes, and these may be negotiable instru ments which may take on some· of the character of money in ex changes. But Madison's objection was overcome, as we shall see.) Gouverneur Morris then observed that "striking out the words will leave room still for notes of a respon sible minister which will do all the good without the mischief. The Monied interest will oppose the plan of Government, if paper emissions be not prohibited."

However, Morris had moved be yond his motion, which was for re moving the power, not specifying a prohibition, and· NathanielGorham of Massachusetts brought him back to the point. Gorham said he "was for striking out, without inserting any· prohibition. If the words stand they may suggest and lead to the measure." Not everyone who spoke, how ever, favored removing the power. George ·Mason of Virginia "had 1983 THE CONSTITUTION AND PAPER MONEY 405 doubts on the subject. Congress he thought would not have the power unless it were expressed. Though he had a mortal hatred to paper money, yet as he could not foresee all emer gences [sic], he was unwilling to tie the hands of the Legislature. He ob served that the late war could not have been carried on, had such a prohibition existed." Nathaniel Gorham tried to reas sure Mason and others who might have similar doubts by declaring that "The power so far as it will be nec essary or safe, is involved in that of borrowing."

Both PositionsArgued On the other hand, John Francis Mercer of Maryland announced that he "was a friend to paper money, though.in the present state & tem per in America, he should neither propose nor approve of such a mea sure. He was consequently opposed to a prohibition of it altogether. It -will stamp suspicion on the Govern ment to deny it a discretion on this point. It was impolitic also to excite the opposition of all those who were friends to paper money. The people of property would be sure to be on the side of the plan [the Constitu tion], and it was impolitic to pur chase their further attachment with the loss of the opposite class of Citi zens." Oliver Elsworth of Connecticut pronounced himself of the opposite view. He "thought this a favorable moment to shut and bar the door against paper money. The mischiefs ofthe various experiments which had been made, were now fresh in the public mind and had excited the dis gust of all the respectable part of America. By withholding the power from the new Government more friends of influence would be gained to it than by almost any thing else.

Paper money can in no case be nec essary. Give the Government credit, and other resources will offer. The power [to emit bills of credit] may do harm, never good." Edmund Randolph of Virginia still had doubts, for he said that "not withstanding his antipathy to paper money, [he] could not agree to strike out the words, as he could not fore see all the occasions which might arise." James Wilson of Pennsylvania fa vored removing the power: "It will have a most salutary influence on the credit of the United States to re move the possibility of paper money. This expedient can never succeed whilst its mischiefs are remem bered, and as long as it can be re sorted to, it will be a bar to other resources. " Pierce Butler "remarked that pa per was a legal tender in no country in Europe. He was urgent for dis arming the Government of such a power." George Mason, however, "was still 406 THE FREEMAN July The Integrity of the Coinage ... the whole aim and intent of State intervention in the monetary sphere is simply to release individuals from the necessity of testing the weight and fineness of the gold they receive, a task which can only be under taken by experts and which involves very elaborate precautionary mea sures. The narrowness of the limits within which the weight and fineness of the coins is legally allowed to vary at the time of minting, and the establishment of a further limit to the permissible loss by wear of those in circulation, is a much better means of securing the integrity of the coinage than the use of scales and nitric acid on the part of all who have commer cial dealings. Again, the right of free coinage, one of the basic principles of modern monetary law, is a protection in the opposite direction against the emergence of a difference in value between the coined and uncoined metal. In large-scale international trade, where differences that are negli gible as far as single coins are concerned have a cumulative importance, coins are valued, not according to their number, but according to their weight; that is, they are treated not as coins but as pieces of metal.

LUDWIG VON MISES, The Theory of Money and Credit averse to tying the hands of the Leg islature altogether. If there was no example in Europe as just re marked, it might be observed on the other side, that there was none in which the Government was re strained on this head." His fellow delegates forebore to remind Mason that except for Britain there was hardly a government in Europe that was restrained on that or any other head by a written constitution. In any case, the last remarks were made by men vehemently opposed to the power. George Read of Delaware "thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelations." John Langdon of New Hampshire "had rather reject the whole plan [the Constitution] than retain the three words," by which he meant "and emit bills." Denying the Power to Emit Bills of Credit The vote was overwhelmingly in favor of removing the authority of the United States to emit bills of credit. The delegates voted by states, and 9 states voted in favor of the motion while only 2 opposed it. (New York delegates were not in atten dance, and Rhode Island, of course, 1983 THE CONSTITUTION AND PAPER MONEY 407 sent none.) It is a reasonable inference from the discussion that the delegates believed that by voting to strike out the words they had re moved the power from the govern ment to emit bills of credit. George Mason, who opposed the motion, ad mitted as much. Moreover, James Madison explained in a footnote that he voted for it when he "became sat isfied that striking out the words would not disable the Government from the use of public notes as far as they could be safe & proper; & would only cut off the pretext for a paper currency, and particularly for mak ing the bills a tender for public or private debts."13 The other discussion of paper money took place in connection with the powers to be denied to the states in the Constitution. The committee report had called for the states to be prohibited to emit bills of credit without the consent of the United States Congress. James Wilson and Roger Sherman, who was from Con necticut, "moved to insert after the words 'coin money' the words 'nor emit bills. of credit, nor make any thing but gold & silver coin.a tender in payment of debts' ," thus, as they said, "making these prohibitions ab solute, instead of making the mea sures allowable (as in the XIII arti cle) with the consent ofthe Legislature of the U.S."

Nathaniel Gorham "thought the purpose would be as well secured by the provision of article XIII which makes the consent of the General Legislature necessary, and that in that mode, no opposition would be excited; whereas an absolute prohi bition of paper money would rouse the most desperate opposition from its partizans." To the contrary, Roger Sherman "thought this a favorable crisis for crushing paper money. If the con sent of the Legislature could author ise emissions of it, the friends of pa per money, would make every exertion to get into the Legislature in order to licence it."14 Eight states voted for the absolu tion prohibition against states issu ing bills of credit. One voted against it, and the other state whose dele gation was present was divided. The prohibition, as voted, became a part of the Constitution. Paper MoneyRejected Three other points may be appro priate. The first has to do with any argument that there might be an implied power for the United States government to issue paper money since it is not specifically prohibited in the Constitution. Alexander Hamilton, the man credited with advancing the broad construction doctrine, maintained the opposite view in The Federalist. While he was making a case against the adding of a bill of rights, his argument was meant to have general validity. He 408 THE FREEMAN declared that such prohibitions "are not only unnecessary in the pro posed Constitution but would even be dangerous. They would contain various exceptions to powers which are not granted; and, on this very account, would afford a colorable pretext to claim more than were granted. For why declare that things shall not be done which there is no power to dO."15 In short, the govern ment does not have all powers not prohibited but only those granted.

Second, this point was driven home by the 10th Amendment when a Bill of Rights was added to the Consti tution. It reads, "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." The power to emit bills of credit or issue paper money was not delegated to the United States. More, it was spe cifically not delegated after deliber ating upon whether to or not. The power was prohibited to the states. The logical conclusion is that such power as there may be to emit bills of credit was reserved to the people in their private capacities. And third, not one word has been added to or subtracted from the Con stitution since that time affecting the power of government to emit bills of credit or issue paper money. Since the United States is once again in the toils of an ongoing mon etary inflation, it is my hope that this summary review of the experi ence' words, and deeds of the Founders might shed light on some of the vexing questions surrounding il. I -FOOTNOTES1Actually, the phrase, "fiat money," did not come into use until the 1880s. It might have helped the Founders to specify. more precisely what they had in mind to prevent, but they had no such term.

2E. H. Scott, ed., Journal of the Federal Con vention Kept by James Madison (Chicago: Al bert, Scott and Co., 1893), p. 47. 3/bid., p. 60. 4Charles E. Tansill, ed., Formation ofthe Union of the American States (Washington: Govern ment Printing Office, 1927), p. 306. 5Merrill Jensen, The New Nation (New York: Vintage Books, 1950), p. 324. 6Andrew C. McLaughlin, The Confederation and the Constitution (New York: Collier Books, 1962), pp. 107-08. 7John C. Miller, Triumph of Freedom (Bos ton: Little, Brown and Co., 1948), p. 438. 8/bid., p. 462. 9Quoted in Albert S. Bolles, The Financial History of the United States, vol. I (New York: D. Appleton, 1896, 4th ed.), p. 132. lO/bid., p. 139. llQuoted in ibid., pp. 177-78. 12S ee Jensen, op. cit., pp. 247-48. 13All the discussion and quotations can be found in Tansill, op. cit., pp. 556-57. While there is no way to know if the record of the debates on this and other matters is complete, nothing has been omitted from Madison's notes.

14Ibid., pp. 627-38. The committee on style eventually reduced the number of articles in the Constitution to seven, so there is not now an Article XIII, of course. 15Alexander Hamilton, et. ai., The Federalist Papers (New Rochelle, N. Y.: Arlington House, n. d.), pp. 513-14.