A Brief History of Money in America - Part III

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 third such chunk which 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.

As it became ever-clearer that the interests of the individual states were acting as an insurmountable hurdle in resolving the ongoing issues surrounding taxation and war-debts, Americans began to consider alternatives. As these issues were ultimately settled by the Constitutional Convention via the expanded power it granted to the Congress, it is not overstating the matter to claim that money was one of the strongest stimulants for both the creation of the longest-standing constitution in existence and centrally-strong federal government system which exists in America today. As might be expected, however, it was far from easy for the representatives of the Convention to determine how, exactly, currency should be handled. While it was clear that having 13 currencies was unsatisfactory, there was also discord regarding the Congress’s ability to print paper money.

The drafters disagreed about the wisdom of paper money (called “bills of credit” at the time because they are promises by government to pay coins upon redemption). Some drafters wanted to permit paper money, others to ban it. Still other drafters wanted to allow paper money as long as it was not legal tender.[5]An important set of distinctions between currency and legal tender (that is, recognized by law as valid payment for a legal obligation) is inherent in this line of reasoning.

Many of those who were against paper money as legal tender were perfectly content to see it used as a currency. While modern readers might not be able to tease out why one is not the same as the other, to those living in a metallurgic-centric world the distinction was critical.

Coinage served as an inherent source of value as it was made of a valuable commodity, typically silver or gold. It was, therefore, useful and widely accepted as a means of legal tender, or in other words, a currency which could be legally used to settle contracts and pay debts. Coins also, since the commodity they are comprised of can be weighed, serve as an efficient means of uniform foreign exchange. Paper money, by extension of this logic, is only worth some ink and the substrate which it is printed on[6]. By further extension, this makes paper currency difficult to utilize for purposes of foreign exchange. And, as foreign debts were one of the main reasons for creating a unified national currency, a lack of usefulness abroad certain detracted from any attractiveness paper currency might otherwise have had.

Unless, that is, there is an understanding that paper currency can be exchanged for something else - like gold or silver.[7]This would give it some inherent value, but it would still take something more to make it legal tender.[8]And even then, it would essentially be nothing more than a bearer bond, or a promise to pay coin money upon redemption by government. But the government can choose when and how to redeem it.

The Constitution, as it was ultimately ratified, reflected these issues and concerns. After considerable compromise, it was determined that Congress would be allowed to issue coinage, which had inherent value and would therefore be useful in paying the debts owed by the nation, but paper money was purposefully left out.

Despite, or perhaps because of, this lack of a unified national currency, local and regional banks rushed to fill the void.

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[6]Maybe even less if one posits that the ink, by merit of having been used, is no longer worth anything.

[7] Even then, of course, the foreign exchange problem remains.

[8]See our section on the Legal Tender cases below.

 

 

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.