A Brief History of Money in America - Part II

A while back, I wrote about a pending academic research project I was embarking upon with Jeremiah Newhall, a good friend of the site. Below you will find a draft version of a chunk of a section of our paper on the history of money in the US., the second such chunk we are posting here. Part of the reason I am posting this is to solicit feedback, so please feel free to submit your thoughts in the comments section below. Additionally, please bear with us on the citations and the first-draft wordsmithing.

A compendium on the history of money in America from its birth until its great Civil War, by its very nature, includes the added benefit of serving as a very near proxy for a discussion of the nation’s overall history during that tumultuous period. There are references to the drafting of the Constitution and simultaneous discussions of the fundamental nature of what the nation should become. There are nods to the westward expansion of a burgeoning continental empire and tales of bank-busting. Discussing how America navigated to the dollar even includes discussion of some of the earliest instances of diplomacy and international affairs by a nation, first stumbling, than feeling its weight, on the global stage. In a relationship which has certainly continued since, the early history of money in America is so entwined with the early history of America itself that the two are, for all intents and purposes, inseparable.

As discussed above, the colonists made some initial forays into the issuance of paper money, an exercise which produced varied results. While it alleviated some of the problems created by a deficit of English pounds sterling available in the colonies, the fractured nature of issuance at the time, done on a colony-by-colony basis as it was, created some obvious problems. As one of the problems it created was the loss of profits by London-based (and therefore politically connected) merchants and traders, laws were established to curtail issuance.

Of course, once the colonies declared themselves free of Crown rule, new currency regimes had to be put into place to fill the void. In the vacuum of uncertainty that was post-revolution, pre-constitution America, the state-by state regimes that arose reflected the previously outlawed colony-by-colony regimes that they, albeit with some time lapse, ended up replacing.  While the Founders recognized that currency issues needed to be addressed under the original Articles of Confederation, the document, as it did in most matter of importance, provided that with respect to currency issuance, the states would have control.

The fundamental basis for this was that powers not “expressly” granted to Congress were reserved to the States. So the Congress did not have the power to declare bills of credit (paper money) to be legal tender. “Congress emitted bills of credit to a large amount; and did not, perhaps could not, make them a legal tender.”[1],[2] But some states did declare paper money to be legal tender. For example, Virginia declared its own paper money and Congress’s to be legal tender, even though paper “money” was (and is) actually nothing more than a promise to pay money.[3],[4]

The issues arising from this non-centralized system were multiple, particularly since the federal government had very little ability to tax, and had no rights under the Articles to create currency. This resulted in a weak central government with outstanding debts incurred to fund its war for independence but no practical means of paying them. This reality was of course compounded by the fact that state level sovereignty over matters of currency and taxation gave the states the ability to act in their own best interests at all times. As those interests alternately ranged from paying down war debts and providing revenues to the Congress based on the alliance of the day, or otherwise merely ignoring such obligations at their convenience, the Congress became as short on authority and reputation among some parties as it had seemingly always been on funds.

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[1] Craig v. Missouri, 29 U.S. 410, 435 (1830) (Marshall, C.J.)

[2] See below for a discussion of this important distinction

[3] See id. 

[4] So the money was (and is) both a promise to pay a dollar and a dollar.

[5] Interestingly, many of the arguments both in favor of, and against, paper currency will be familiar to those who weigh in on the government and its use of currency today. No less an authority than Benjamin Franklin felt that there were benefits to paper currency and that inflation served as an equal tax on all Americans which would help to fund war debts. Alternatively Founders such as James Madison felt that issuing paper money as a legal tender was a non-starter as it had no value but for its ability to be exchanged into silver and gold.

 

Jeremiah Newhall is a graduate of The George Washington University Law School and currently serves as a law clerk in Chicago. He can be reached via the miracle of email. Joshua Sturtevant is also a GW Law grad, and currently serves as an in-house legal fellow at a renewable energy financing and development firm.