The Federal Money Clause

The Congress shall have Power . . . To coin Money, regulate the Value thereof, and of foreign Coin. . . .

—Todd J. Zywicki

Introduction

The State Money Clause provides that the states cannot “coin Money; emit Bills of Credit; [or] make any Thing but gold and silver Coin a Tender in Payment of Debts. . . .”¹ (See Essay No. 79.) By contrast, Congress’s power to coin money is both exclusive and open-ended.

The Federal Money Clause authorizes Congress to “coin money” from precious metals such as gold and silver. Congress also can regulate the value of the coins struck domestically and set the value of foreign coins. However, the Constitution does not directly address whether the federal government can also issue paper money and declare it to be legal tender for payment of all public and private debts. During the Constitutional Convention, there was some debate over this question. After the Civil War, however, the Supreme Court invalidated and then upheld paper money as legal tender in a controversial pair of cases decided just one year apart.

History Before 1787

During the Revolutionary War, the state governments issued paper money. The Continental Congress issued Continental Dollars, also known as Continentals, that technically were redeemable in silver Spanish Milled Dollars but were repeatedly devalued and never redeemed. Counterfeiting of Continentals also occurred.

This widespread circulation of paper money spurred rampant inflation and loss of confidence by lenders and investors. In 1787, George Washington wrote that paper money will “ruin commerce—oppress the honest, and open a door to every species of fraud and injustice.”² Thomas Jefferson would later state that paper money was only “the ghost of money” and “not money itself.”³ Nevertheless, there was also populist support for the issuance of paper money as a way to devalue debts, especially by farmers, and deal with the chronic shortage of valuable metals, known as specie, in America.

The Articles of Confederation were ratified in 1781. Congress and the states had concurrent powers to “coin” specie money—that is, money backed by precious metals or “specie.”⁴ The Confederation Congress held the power to regulate the value of coins struck domestically but not to set the value of foreign coins, which circulated widely. As a result, the states could attach disparate valuations to circulating domestic and foreign coins.

The Constitutional Convention

The Federal Money Clause would give Congress three distinct powers: the power to “coin Money,” the power to “regulate the Value” of the money coined by the federal government, and the power to “regulate the Value” of the money coined by foreign governments. Throughout the Convention, these three powers were not particularly controversial. An early draft of this proposal appeared in a report from the Committee of Detail.⁵ In contrast to the Articles of Confederation, the Constitution granted the federal government the exclusive power to coin money. Relatedly, it also gave Congress the power to “provide for the Punishment of counterfeiting the Securities and current Coin of the United States.”

There was some controversy over a fourth power that did not make it into the Constitution: a federal power to issue bills of credit. A bill of credit was non-interest-bearing paper money issued on the good credit of the United States with no tangible backing in precious metal. The Committee of Detail’s report also granted Congress the power to “emit Bills on the Credit of the United States.”⁶

On August 16, Gouverneur Morris of Pennsylvania moved to strike out the power to issue paper money.⁷ He argued that “if the United States had credit such bills would be unnecessary,” and if the United States lacked credit, paper money would be “unjust and useless.”⁸ James Madison of Virginia suggested it would be “sufficient to prohibit making” the bills of credit “legal tender” rather than denying Congress the power to issue bills of credit completely.⁹ This distinction would permit the federal government to issue paper money to fund its operations in the event of national “emergencies” but not to declare those notes to be “legal tender” for purposes of requiring private parties to accept them in satisfaction of privately contracted debts. Nathaniel Gorham of Massachusetts advocated striking out the power “without inserting any prohibition.”¹⁰ Oliver Ellsworth of Connecticut thought this was “a favorable moment to shut and bar the door against paper money.”¹¹ John Langdon of New Hampshire said that he would “rather reject the whole plan than” emit bills of credit.¹² George Read of Delaware opined that if the power to “emit bills of credit” were not expressly “struck out,” the words “would be as alarming as the mark of the Beast in [the Book of] Revelation[].”¹³

By a vote of 9 to 2, the Convention voted to strike out the power of Congress to emit bills of credit.¹⁴ Only New Jersey and Maryland opposed the amendment. However, even though the Constitution did not expressly grant the federal government the power to issue paper money, it also did not expressly prohibit it. By contrast, the states were expressly barred from emitting bills of credit.

This provision was debated on August 16. George Mason of Virginia argued that this silence implied that Congress therefore could not issue paper money, and by implication could not declare it to be legal tender because the federal government “would not have the power unless it were expressed.”¹⁵ By contrast, Madison later noted that he acquiesced to Virginia’s vote to strike the clause. He “became satisfied that striking out the words would not disable the [government] from the use of public notes as far as they could be safe & proper,” such as by issuing interest-bearing Treasury Bonds to fund the government rather than bills of credit.¹⁶ This issue would not be settled by the Convention.

The Ratification Debates

In Federalist No. 44, Madison observed that under the Articles of Confederation, the state and federal governments held concurrent power to coin money. The Constitution, however, would take that power from the states in order to standardize the “forms and weights” of coins and reduce the duplicative costs of running mints. A standardized federal currency would also ease the cost and inconvenience of tax collection by the federal government. Madison criticized state issuance of paper money and highlighted the Constitution’s prohibition of states’ issuance of bills of credit and the further prohibition of their “power to make any thing but gold and silver a tender in payment of debts.” The essay is silent with respect to whether the federal government had the authority to issue bills of credit or pass legal tender laws.

Deliberator, an Anti-Federalist, expressed concern that the new Constitution would empower Congress to issue paper money, declare it legal tender, and then depreciate its value.¹⁷

Early Practice

On April 2, 1792, Congress passed the Mint Act, which established the U.S. coinage system and the dollar as the principal unit of currency.¹⁸ The first U.S. coins were struck in 1793 at the Philadelphia Mint.¹⁹ In February 1793, certain foreign coins were also designated legal tender at prescribed rates.²⁰ Congress chartered the First and Second Banks of the United States, which operated from 1791–1811 and from 1816–1836, respectively. But neither bank operated like a modern central bank in terms of issuing currency or serving as a lender of last resort.²¹

Before the Civil War, the federal government did not try to issue bills of credit. During the War of 1812, the Financial Panic of 1837, and the Mexican-American War of 1846, however, the government issued Treasury Notes.²² These notes generally bore interest and could be redeemed for payment of government obligations and taxes, but they were not legal tender.²³ Although generally issued in large denominations to fund government operations, some issuances were in sufficiently small denominations that they could circulate as a medium of payment and as cash reserves for banks. Their utility in paying taxes made them widely accepted on a voluntary basis, including as later issuances during the War of 1812.²⁴ Before the Civil War, most circulating currency was issued by more than 1,600 private banks.²⁵

Paper Money and Legal Tender

To fund the Civil War, Congress passed the Legal Tender Act of 1862.²⁶ Earlier issuances of paper money were used to finance government obligations. By contrast, Civil War “greenbacks” were designed to circulate as currency. These notes were declared legal tender, bore no interest, and were not redeemable in gold or silver. Following the end of the Civil War, greenbacks continued to circulate as currency but at a highly discounted value relative to gold. Meanwhile, many private banks continued to issue notes, typically convertible into gold at par or backed by Treasury Bonds.²⁷

To discourage continued circulation of private state banknotes, Congress imposed a ten percent tax on private notes issued by state banks.²⁸ Veazie Bank v. Fenno (1869) upheld the tax as a valid exercise of Congress’s power under the Necessary and Proper Clause.²⁹ The Supreme Court concluded that Congress had the “undisputed constitutional powers” to “provide a circulation of coin.”³⁰ Congress’s power to “provide a currency for the whole country” was “settled by the uniform practice of the government and by repeated decisions” and implied that Congress was authorized to emit bills of credit. The Court did not identify what those “repeated decisions” and “uniform practice[s]” were.

Veazie Bank, however, specifically left open the question of whether the federal government could also declare its paper money as legal tender. The Court would address this issue in two cases that were decided less than a year apart. First, Hepburn v. Griswold (1870) held that Congress did not have an implied power under the Necessary and Proper Clause to declare paper money as legal tender.³¹ Second, just one year later after a dramatic change in membership, The Legal Tender Cases (1871) overruled Hepburn and upheld the Legal Tender Act as a valid exercise of implied powers under the Necessary and Proper Clause.³²

The holding of the Legal Tender Cases was limited to the context of wartime, but thirteen years later, Juilliard v. Greenman (1884) upheld the validity of legal tender laws during peacetime.³³ The Court held that the federal government’s monetary power was inherent in its sovereignty; thus, it was not necessary for the Constitution to enumerate this power.³⁴ Justice Stephen Field’s blunt dissent declared that “[i]f there be anything in the history of the Constitution which can be established with moral certainty, it is that the framers intended to prohibit the issue of legal tender notes both by the general government and by the States; and thus prevent interference with the contracts of private parties.”³⁵

From 1863 to 1935, National Bank Notes were issued by nationally chartered private banks and backed by gold or U.S. Treasury bonds.³⁶ During the Great Depression, Congress retired National Bank Notes as a form of currency and forced private parties to surrender gold coin and gold certificates for other currency not redeemable in gold.³⁷ This law abrogated preexisting gold clauses in private contracts. Norman v. Baltimore & Ohio Railroad Co. (1935) upheld this practice based on The Legal Tender Cases as valid exercises of implied powers under the Necessary and Proper Clause.³⁸

Open Questions

• Does the Federal Reserve Act grant the federal government the statutory authority to issue a digital currency and declare it legal tender? Under current precedent, Congress apparently would have the power to issue such tender (or anything else) under the Federal Money Clause.
• Professor Robert Natelson has argued that the original public meaning of the power to “coin Money” included the power to issue paper currency at the federal level and that “regulate the Value thereof” included the power to establish legal tender.³⁹ Would there be any opportunity for courts to reconsider this issue?

1. Art. I, § 10, cl. 1. ↩︎
2. Letter from George Washington to Jabez Bowen (Jan. 9, 1787), https://perma.cc/F5RX-6XVL. ↩︎
3. Letter from Thomas Jefferson to Edward Carrington (May 27, 1788), https://perma.cc/QQB2-UV63. ↩︎
4. Articles of Confederation, art. IX, §§ 4, 6. ↩︎
5. 2 Farrand’s 167. ↩︎
6. Id. at 168. ↩︎
7. Id. at 303. ↩︎
8. Id. at 308–09. ↩︎
9. Id. at 309. ↩︎
10. Id. ↩︎
11. Id. ↩︎
12. Id. at 310. ↩︎
13. Id. ↩︎
14. Id. ↩︎
15. Id. at 309. ↩︎
16. Id. at 310. ↩︎
17. Storing 3.13.5. ↩︎
18. Coinage Act of April 2, 1792, U.S. Mint, https://perma.cc/7ZPA-HXZV. ↩︎
19. The History of U.S. Circulating Coins, U.S. Mint, https://perma.cc/PB26-Y5G6. ↩︎
20. Legislation to Allow Foreign Coins as Legal Tender (Act of Feb. 9, 1793), U.S. Mint, https://perma.cc/8PWF-J7DZ. ↩︎
21. Andrew T. Hill, The Second Bank of the United States, Federal Reserve History (Dec. 5, 2015), https://perma.cc/2RVZ-8N5G. ↩︎
22. Natl. Credit Union Admin., History of United States Currency (Feb. 8, 2023), https://bit.ly/4keY7vF. ↩︎
23. Craig Elwell, Cong. Rsrch. Serv., R41887, Brief History of the Gold Standard in the United States (June 23, 2011), https://perma.cc/4PJC-NEVW. ↩︎
24. Donald H. Kagin, Monetary Aspects of the Treasury Notes of the War of 1812, 44 J. Econ. Hist. 69 (1984). ↩︎
25. Kevin Dowd, US Banking in the “Free Banking” Period, in The Experience of Free Banking 332 (Kevin Dowd ed., 2023); Howard Bodenhorn, Small-Denomination Banknotes in Antebellum America, 25 J. Money, Credit, & Banking 812 (1993). ↩︎
26. Act of Feb. 25, 1862, ch. 33, § 1, 12 Stat. 345 ↩︎
27. George A. Selgin & Lawrence H. White, Monetary Reform and the Redemption of National Bank Notes, 1863–1913, 68 Bus. Hist. Rev. 205 (1994). ↩︎
28. Act of Mar. 3, 1865, ch. 78, § 7, 13 Stat. 484. ↩︎
29. 75 U.S. (8 Wall.) 533 (1869). ↩︎
30. Id. at 548–49. ↩︎
31. 75 U.S. (8 Wall.) 603 (1870). ↩︎
32. Knox v. Lee, 79 U.S. (12 Wall.) 457 (1871); Charles Fairman, Mr. Justice Bradley’s Appointment to the Supreme Court and the Legal Tender Cases, 54 Harv. L. Rev. 977 (1941). ↩︎
33. 110 U.S. 421 (1884). ↩︎
34. Id. ↩︎
35. 110 U.S. at 451 (Field, J., dissenting). ↩︎
36. Bureau of Engraving and Printing, BEP History Fact Sheet, National Bank Notes (Apr. 2013), https://perma.cc/N8EG-M8Q3. ↩︎
37. Nortz v. United States, 249 U.S. 317 (1935). ↩︎
38. Norman v. Balt. & Ohio R.R., 294 U.S. 240 (1935). ↩︎
39. Robert G. Natelson, Paper Money and the Original Understanding of the Coinage Clause, 31 Harv. J.L. & Pub. Pol’y 1017 (2008). ↩︎