The State Money Clause

No State shall . . . coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts. . . .

—Todd J. Zywicki

Introduction

During the Revolutionary War and the period of the Articles of Confederation, state governments engaged in rampant inflationary practices to fund the war effort. The states also depreciated the debts of borrowers, particularly farmers, that were owed to out-of-state creditors. This dynamic led to retaliation and interstate friction. In response, the State Money Clause significantly limits the power of states to issue money, providing in relevant part, “No State shall . . . coin money; emit Bills of Credit; [or] make any Thing but gold and silver Coin a Tender in Payment of Debts.”

History Before 1787

During the Colonial Era, Britain’s mercantilist policies resulted in a chronic shortage of precious metals and specie coins, and whatever coins were acquired tended to flow back to Britain in exchange for manufactured goods.¹ As a result, the colonies relied on coins imported from Europe, especially the Spanish dollar. America’s currency was eventually denominated in dollars rather than pounds.² But foreign coins had different values in different colonies.³ Depending on local circumstances, colonists also had to barter with such currencies as Indian wampum or such commodities as tobacco and beaver skins. Massachusetts and some other colonies also illegally coined money in violation of English law.⁴ The lack of coins forced some colonial governments to collect taxes in commodity currencies such as corn and wheat.⁵

Commodity money proved to be a cumbersome medium of exchange. As a result, starting in 1690, colonial governments also issued paper money.⁶ These bills of credit were a convenient medium of exchange for the payment of government debts and taxes, but they were not redeemable on demand in gold, silver, or other precious metal coins. And, unlike a government “note,” paper money generally did not bear interest. The result was inflation and conflicts when colonists attempted to pay their debts to English creditors with depreciated paper currency.⁷

Throughout the eighteenth century, this uncertainty and multiplicity of circulating currencies generated confusion and impeded inter-colony and international trade.⁸ Despite these inconveniences, however, paper money had great popular appeal, especially among farmers and other debtors who favored inflation.⁹

To stabilize the value of money, the British Parliament enacted a series of laws that regulated colonial paper money.¹⁰ The 1751 Currency Act provided that bills of credit could be used to pay public debts, such as taxes, but they were not deemed “legal tender,” which meant they could not be used to pay private debts such as payments to merchants and creditors. The 1764 Currency Act prohibited the use of bills of credit as legal tender for the payment of public and private debts. In 1773, in response to opposition by the colonies, Parliament repealed the prohibition and once again permitted bills of credit to serve as legal tender for public (but not private) debts. Soon thereafter, some colonies resumed issuing paper money.

During the Revolutionary War, all of the new states and the Continental Congress issued paper money to pay for military expenses.¹¹ These bills of credit, which could not be converted into gold or silver and did not bear interest, caused dramatic inflation.

The Articles of Confederation, ratified in 1781, granted the central government “the sole and exclusive right and power of regulating the alloy and value of coin struck by [Congress’s] own authority, or by that of the respective states.”¹² Congress also had the power to “coin money” and “emit bills” of credit.¹³ As a result, the central government and the states had a concurrent power to coin metal money and issue paper money.

In May 1786, the Rhode Island legislature succumbed to pressure by farmers to issue paper money to alleviate their debt burdens.¹⁴ When merchants and creditors refused to accept that currency as payment, the legislature passed the Forcing Act, which declared the bills of credit to be legal tender.¹⁵ The law levied a heavy fine on those who refused to accept it. And under the law, there was no right to trial by jury and no right to appeal. In 1786, the Rhode Island Supreme Court held in Trevett v. Weeden that the law violated the state constitution’s guarantee of a jury trial.¹⁶ In the state’s next legislative session, the state legislature removed four of the Justices and replaced them with new Justices more amenable to paper money. Still, many merchants fled the state to evade the excess paper money and harsh measures to force its acceptance. Commerce soon ground to a halt.

Rhode Island also mandated that out-of-state creditors must accept payment in the local currency.¹⁷ Merchants refused to accept the depreciated currency, even closing their shops. Farmers responded by refusing to sell their produce. This law led predictably to retaliatory currency laws in New Jersey, Pennsylvania, Delaware, New York, and other states.¹⁸ In August 1786, Shays’s Rebellion erupted in Massachusetts as creditors refused to receive payment in farm commodities and the state legislature refused to issue paper money after seeing the disastrous events in Rhode Island.¹⁹ In September 1786, the Paper Money Riot, also known as the Exeter Rebellion, broke out in New Hampshire when a group of armed farmers marched on Exeter to demand that the New Hampshire General Court immediately issue paper money.20 In all, only Connecticut and Delaware escaped the paper money conflagration.²⁰

In August 1786, James Madison wrote to Thomas Jefferson in the midst of this chaos. Madison explained that “at the head” of the problems plaguing the nation was “the general rage for paper money,” which was “producing the same warfare and retaliation among the States as were produced by the State regulations of commerce.”²¹ When the Constitutional Convention began in 1787, state issuance of paper money and state legal tender laws had led to a growing sense of crisis.²² Rhode Island’s determined support for its 1786 paper money act was a major factor in its boycott of the Constitutional Convention and extended refusal to ratify the Constitution.

The Constitutional Convention

The Committee of Detail’s proposal provided that “No State, without the consent of the Legislature of the United States, shall emit bills of credit.”²³ Thus, states retained the power to issue paper money, but only when specifically authorized by Congress.

The Convention quickly moved to deny states even this conditional power of issuance. James Wilson of Pennsylvania and Roger Sherman of Connecticut proposed making the prohibition on state issuance of bills of credit “absolute” instead of “allowable” with the consent of Congress.²⁴ Under this proposal, states also could not coin money. Nathaniel Gorham of Massachusetts responded that making the prohibition absolute would prove politically controversial. He added that requiring Congress to assent to a state’s issuance of paper money would amount to an effective veto on reckless issuance of paper money but would not “excite[]” opposition or “rouse the most desperate opposition from” partisans of paper money.²⁵

Sherman replied that the current time provided “a favorable crisis for crushing paper money.”²⁶ He said that if Congress retained the power to issue paper money, supporters would apply lobbying pressure for Congress to permit it. After this brief discussion, the motion was carried eight to one, with Virginia voting in opposition and Maryland’s delegation divided. At least one Virginian, George Mason, expressed his “mortal hatred to paper money.”²⁷

Wilson and Sherman also proposed that states could make only “gold & silver coin a tender in payment of debts.”²⁸ This proposal was adopted unanimously with no discussion.²⁹ By 1787, gold and silver had emerged as the global standard to facilitate international trade.

Sherman would later explain in a letter to the governor of Connecticut that both the prohibition on issuing bills of credit and the prohibition on impairing the obligation of contracts were “thought necessary as a security to commerce, in which the interest of foreigners, as well as of the citizens of different states, may be affected.”³⁰

The Ratification Debates

In Federalist No. 44, Madison condemned the “pestilent effects of paper money” issued by state governments “on the industry and morals of the people, and on the character of republican government.” In addition, “[t]he subjects of foreign powers might suffer from the same cause, and hence the union be discredited.”³¹ At the South Carolina convention, Charles Pinckney similarly contended that paper money would undermine the trust of foreign merchants in the United States.³² He further argued that eliminating mischievous issuance of paper money in other states would guarantee South Carolinians a fair and just price for their commodities.

Anti-Federalists largely shared the Convention’s concerns regarding the dangers of paper money. Brutus supported the Constitution’s prohibitions on state emission of bills of credit, limits on legal tender, and the Contracts Clause: “These prohibitions give the most perfect security against those attacks upon property which I am sorry to say some of the states have but too wantonly made, by passing laws sanctioning fraud in the debtor against his creditor.”³³

Luther Martin provided a report to the Maryland state legislature about the Convention’s proceedings. He argued that because the Convention had stripped the federal government of the authority to emit bills of credit by other actions, the states should not also be deprived of that power. In his view, depriving both the federal and state governments of the power to emit bills of credit in times of crisis was unwise; once public and private credit had been restored, it might be valuable to retain that discretion in the future. Nevertheless, “the convention was so smitten with the paper money dread, that they insisted the prohibition should be absolute.”³⁴

Early Practice

During the early Republic, private banks issued banknotes that circulated widely as private currency. Unlike bills of credit, private banknotes were redeemable in gold or silver but were not designated as legal tender. Like bills of credit, private banknotes were negotiable and payable to the bearer.³⁵

Judicial Precedent

Two decisions from the 1830s interpreted the meaning of “bills of credit.” Craig v. Missouri (1830) involved state-issued certificates that could be used to pay state taxes. Chief Justice John Marshall, writing for the Court, defined the issuance of a bill of credit as “the emission of any paper medium, by a state government, for the purpose of common circulation.”³⁶ The state certificates were therefore void as “bills of credit.” Marshall observed that the Constitution’s prohibition on bills of credit was separate from limits on legal tender. In dissent, Justice Smith Thompson wrote that the certificates, which bore interest and were not intended predominantly as a circulating medium but as a loan instrument, should not be classified as bills of credit.

In the second case, Briscoe v. Bank of Commonwealth of Kentucky (1837), a state-established bank issued a banknote. The Court held that this banknote was not a “bill of credit” because it was not “a paper issued by the sovereign power containing a pledge of its faith and designed to circulate as money.”³⁷ Moreover, the banknote was not legal tender. Issuance of the banknote was a valid exercise of the legislature’s power to incorporate entities to carry out socially valuable enterprises.

The Virginia Coupon Cases (1895) ruled that negotiable, state-issued coupon bonds that could be used to pay taxes did not constitute “bills of credit” because they were not issued with the intent to circulate as money between individuals and between the government and individuals.³⁸ Relying on Craig and Briscoe, the Court stressed that the purpose of the Constitution’s limit was not to prohibit any effort by states to issue debt. Rather, the purpose of the clause was to prohibit the issuance of paper money backed by state credit “which had been so abused to the detriment of both private and public interests” during the War of Independence.³⁹

Open Questions

• Several states recognize gold and silver coins as legal tender, and many others have considered similar legislation. Are these laws constitutional?
• Bitcoin and other cryptocurrencies plainly are not “gold and silver coin.” Can a state designate these forms of currency as legal tender?

1. Owen F. Humpage, Paper Money and Inflation in Colonial America, Federal Reserve Bank of Cleveland Economic Commentary No. 2015-06 (May 13, 2015). ↩︎
2. Federal Reserve Bank of Philadelphia, Money in Colonial Times, https://perma.cc/9A9X-SB2X. ↩︎
3. Louis Jordan, Colonial Currency: The Comparative Value of Money Between Britain and the Colonies, https://perma.cc/WW4D-2CB4. ↩︎
4. Claire Priest, Currency Policies and Legal Development in Colonial New England, 110 Yale L.J. 1303 (2001). ↩︎
5. Alvin Rabushka, The Colonial Roots of American Taxation, 1607–1700 (Aug. 1, 2002), https://perma.cc/7AHC-LLPP. ↩︎
6. Priest, supra at 1311. ↩︎
7. Id. at 1383–84. ↩︎
8. Deering v. Parker, 4 Dall. App. xxiii (Privy Council 1760). ↩︎
9. Robert G. Natelson, Paper Money and the Original Understanding of the Coinage Clause, 31 Harv. J. L. & Pub. Pol’y 1017, 1040 (2008). ↩︎
10. Joseph Ernst, Money and Politics in America, 1755–1775: A Study in the Currency Act of 1764 and the Political Economy of Revolution (1973). ↩︎
11. Ben Baack, America’s First Monetary Policy: Inflation and Seigniorage During the Revolutionary War, 15 Financial Hist. Rev. 107 (2008). ↩︎
12. Articles of Confederation, art. IX, § 1. ↩︎
13. Id. ↩︎
14. Murray N. Rothbard, 5 Conceived in Liberty: The New Republic, 1784–1791, at 76 (2019). ↩︎
15. Id. ↩︎
16. Patrick T. Conley, The Story Behind Rhode Island’s Most Important Legal Case: Trevett v. Weeden in 1786 (Jan. 26, 2019) (adapted from address given May 3, 1976), https://perma.cc/MK3M-3Q2C. ↩︎
17. Natelson, supra at 1051. ↩︎
18. Id. ↩︎
19. Michael J. Klarman, The Framers’ Coup: The Making of the United States Constitution 73–125 (2016). ↩︎
20. John Fiske, The Paper Money Craze of 1786 and the Shays Rebellion, The Atlantic 376, 378 (Sept. 1886). ↩︎
21. Letter from James Madison to Thomas Jefferson (Aug. 12, 1786), https://perma.cc/PMZ4-9ERG. ↩︎
22. Edward Stanwood, A Glimpse at 1786, The Atlantic 777, 780 (June 18860. ↩︎
23. 2 Farrand’s 187. ↩︎
24. Id. at 439. ↩︎
25. Id. ↩︎
26. Id. ↩︎
27. 2 Farrand’s 309. ↩︎
28. Id. at 439. ↩︎
29. Id. ↩︎
30. 3 Farrand’s 99. ↩︎
31. Federalist No. 44 (Madison). ↩︎
32. 4 Elliot’s 333–36. ↩︎
33. Storing 2.9.182. ↩︎
34. 3 Farrand’s 214. ↩︎
35. Ali Khan, The Evolution of Money: A Story of Constitutional Nullification, 67 U. Cincinnati L. Rev. 393, 412–13 (1999). ↩︎
36. 29 U.S. 410 (1830). ↩︎
37. 36 U.S. 257 (1837). ↩︎
38. Poindexter v. Greenhow, 114 U.S. 270 (1885). ↩︎
39. Id. at 284. ↩︎