A Brief History of Money in America - Part IV

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 an abridged section of the paper where we cover the history of money in the US. 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. As this is a draft, please bear with us on the poorly formatted citations (and/or lack thereof) and the first-draft wordsmithing.

After the ratification of the Constitution, there was still a lot of work to be done by the Founders to ensure that young America’s status on the world stage would be secure. Notable among issues was the fact that it continued to carry numerous debts as a result of the Revolutionary War with England which it was having trouble settle, making it susceptible to foreign aggression. One solution, advocated for most notably by Alexander Hamilton, was a central bank which could issue notes as well as serve the federal government’s interests. In a history of the bank, the Federal Reserve Bank of San Francisco has explained[1]:

     In 1791 the Bank of the United States received a charter to operate until 1811, followed by the Second Bank of the United States from 1816 to 1836. These two banks, chartered by Congress rather than a state, performed several central bank functions. Although privately owned, they were authorized to issue paper bank notes and serve as the fiscal agent of the government.

The constitutionality of these federally-chartered Banks was felt by proponents to be an extension of the power under the Constitution to borrow money and the Necessary and Proper clause. This view was upheld by the Supreme Court in M’Culloch v. Maryland. In general, the support for this reasoning was that the Constitution serves as a broad framework which includes implied powers for Congress inferred from other explicit powers. As Congress was granted the power to borrow money, the Court’s logic was that it was also able to act in ways which would facilitate this borrowing, here that is the issuance of paper money[2].

However, the Bank, despite being declared legal by the Supreme Court, wasn’t politically popular in some quarters. The San Francisco Federal Reserve Bank history noted above continues, “Both banks, however, were unpopular with those wanting easy credit--primarily the western, agrarian interests--and in 1832 Andrew Jackson vetoed the recharter of the Second Bank. Thus followed the "Free Banking Era"--a quarter century in which American banking was a hodgepodge of state-chartered banks with no federal regulation or uniformity in operating laws.”

After, or perhaps more appropriately because of, Andrew Jackson’s assertion that the federal government was unable to issue a unified national paper currency under the Constitution, local and regional banks rushed to fill the considerable void. State-chartered banks across the fledgling nation issued notes - essentially bearer bonds – which included a promise of redemption for US government-issued coinage at some fixed rate at the bank of issuance. While the Congress at first overlooked these issuances as the paper served merely as bearer bonds, it soon became apparent that there was an inherent structural flaw to this system. From the same San Francisco Reserve Bank history cited above:

     State Bank notes of various sizes, shapes, and designs were in circulation. Some of them were relatively safe and exchanged for par value and others were relatively worthless as speculators and counterfeiters flourished. By 1860, an estimated 8,000 different state banks were circulating "wildcat" or "broken" bank notes in denominations from ½ cent to $20,000.

[1] http://www.frbsf.org/publications/federalreserve/annual/1995/history.html  . Last accessed 10.20.12[2] Albeit not legal tender…

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.

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