It is difficult to overstate the task the Founding Fathers faced at the Constitutional Convention. One fundamental aspect of society at the forefront of the Founders minds was money—the economic medium of exchange. Prior to money, barter was the main vehicle of trade. For example, a carpenter who wanted some apples would have to locate an apple farmer who needed some woodwork for his home.
What counts as money varies depending on what commodities are valuable to that society. In colonial Virginia, bank-like warehouses stored tobacco and issued per-pound receipts that were in turn used as “money” in local markets. The receipts came to represent the amount of tobacco the individual had stored away. (This form of “deposit banking” can be traced all the way back to 8th century China!) Coin monies were also widely circulated—with some particular coins being used in trades around the globe.
Money was a well established concept by the time the Founders started crafting the Constitution in 1787. In 1784, Thomas Jefferson, who was generally skeptical of banking institutions, recognized the importance of money. He argued for a decimal-based coinage system for the United States in a pamphlet titled Notes on the Establishment of a Money Unit, and of Coinage in the United States. And indeed, the Constitution gave Congress the power to coin (create) and regulate the values and weights of foreign and domestic monies. The fifth clause of the Article I, Section 8 gives Congress this power as well as the power to prosecute counterfeiters.
Despite Congress’s new power, coin circulation and values was not immediately uniform throughout the colonies. Though Congress ordered the creation of the first mint in 1792, the Spanish Dollar (also known as a “piece of eight”) remained legal tender and widely circulated within the United States until 1857 when the Coinage Act officially ended the Spanish Dollar’s reign in America.
The Constitution gives clear instruction on the authority to mint coins, but is silent on the issuance of paper money. In England in the early 1600’s, wealthy people began leaving their gold in the hands of goldsmiths—people with the capacity to store large quantities of the precious metal. In return the goldsmith would issue a receipt which became “as good as gold.” This practice eventually found its way to the United States and the receipts began to be known as “bank notes.”
Since the Constitution granted no specific authority, private bank notes competed with government notes in the market. Inflationary practices existed on both sides as banks failed to resist the temptation to print notes that had no backing in deposits. But since no paper currency had the privilege of a legal mandate, the inflated notes of the poorly managed banks just stopped being circulated as people began to view them as worthless. Though no centralized force controlled paper money, stabilizing agents did emerge. The Suffolk Bank system is a great example how some private banks standardized the “value” of paper money.
The United States government began printing paper money early 1860s. The Union needed to finance the Civil War and began issuing “greenbacks” to pay its bills. With the Legal Tender Act, Congress authorized the Treasury to create this money and eventually created the official paper money printing agency (the Bureau of Engraving and Printing) in the late 1870s. Several Supreme Court cases challenged this action of Congress. In Hepburn v. Griswold (1869) the Court ruled paper money unconstitutional, but just a year later the Court overturned Hepburn in Knox v. Lee (1870) and Parker v. Davis (1870). The court reaffirmed the constitutionality of paper money several years later in Julliard v. Greenman (1884).
In 1913 Congress vested all power to produce paper notes in the Federal Reserve. Despite its name, the Federal Reserve is actually a private institution set apart from the government. Congress passed the Federal Reserve Act in hopes of stabilizing the somewhat tumultuous bank industry. Over time, the value of Federal Reserve notes has declined. Initially Federal Reserve notes were tied to gold, but that relationship was tenuously severed during the Great Depression and completely severed in 1971. Money underwent another transformation as technology advanced. Many transactions today are done in the digital realm, with bytes of information being the only things that change.
Since the Constitution does not specifically grant authority over paper money (let alone digital dollars), some people wonder if aspects of our monetary system are unconstitutional. One state-senator from South Carolina has even called on his state legislature to study whether the Palmetto State should create its own currency. Do you believe Congress should have issued an amendment concerning the issuing of paper money? Or does paper money fit into Congress’ enumerated power, including the Necessary and Proper Clause?