Simone Lawson
The use of paper currency has been a contentious issue in the United States, with debates surrounding its constitutionality. The Constitution does not explicitly mention paper money, but it does refer to “bills of credit”, which were a form of paper money issued by states before the Constitution was adopted. The Constitution prohibits states from issuing bills of credit and only permits gold and silver coins to be used as legal tender. However, it does not explicitly prohibit the federal government from issuing paper currency, and Congress has done so since 1812. The interpretation of the Constitution's coinage clause, which grants Congress the power to “coin money”, is also debated, with some arguing that to coin had a broader meaning during the Founding Era, including creating money from paper or other materials. The Supreme Court affirmed the constitutionality of paper money in the 1871 Legal Tender Cases, but the issue remains divisive, with some continuing to argue that paper currency is unconstitutional.
| Characteristics | Values |
|---|---|
| Paper currency as legal tender | Permitted, but must be backed by gold or silver coin |
| 'Bills of credit' | Forbidden by the Constitution |
| 'Fiat money' | Forbidden by the Constitution |
| 'Tender in payment of debts' | Only gold and silver coins may be used |
| Federal Reserve Notes | Forbidden by the Constitution |
| Power to regulate the value of currency | Congress does not have the power to alter the value of the dollar |
| Paper currency issued by individual states | Forbidden by the Constitution |
| Paper currency issued by the federal government | Permitted, but not explicitly authorised |
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What You'll Learn
The US Constitution does not explicitly mention paper currency
The Constitution also includes a provision that prohibits states from "mak [ing] any Thing but gold and silver Coin a Tender in Payment of Debts". This was included to prevent states from issuing unbacked paper money, which had been a significant source of inflation during the Revolutionary War.
Despite this, the federal government has issued paper currency since 1812 and made it legal tender in 1862. The constitutionality of paper money was affirmed by the US Supreme Court in 1871.
The interpretation of the Constitution's coinage clause, which gives Congress the power to "coin Money, regulate the Value thereof, and of foreign Coin", is central to this debate. Some argue that the verb "to coin" had two meanings during the Founding Era: to create metallic coins and to fabricate or create. This second meaning is reflected in phrases like "to coin a phrase", which is still used today. Therefore, the Constitution's use of the phrase "to coin" may have been intended to include the creation of paper currency.
Additionally, while the Constitution does not explicitly grant Congress the power to issue paper money, it does give Congress the power to "borrow money on the credit of the United States". Some have argued that the power to emit paper money is implied by this borrowing power.
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Paper currency must be backed by gold or silver coin
The United States Constitution does not explicitly mention "paper money", "paper currency", or "fiat money". However, it does refer to "bills of credit", which were a form of paper money issued by states before the Constitution was adopted. These bills carried a promise to be redeemed in the future and were used to finance the War for Independence.
Article I, Section 10 of the Constitution states that "No State shall... emit Bills of Credit". This was intended to prohibit state paper money and restrict the monetary system to gold and silver coin. Paper money was viewed negatively due to its association with inflation during the Revolutionary War.
Despite this, the Constitution does permit paper currency to serve as legal tender. However, it must be backed by gold or silver coin to be considered "honest money". This is because the term "currency", as used in the Constitution, refers to banknotes or paper money, which require backing by specie or some other commodity to be regarded as legitimate.
The interpretation of the Constitution's coinage clause, which gives Congress the power to "coin Money, regulate the Value thereof, and of foreign Coin", is crucial to understanding this issue. The verb "to coin" during the Founding Era had two meanings: to make metallic coin, and to fabricate or create. The latter meaning was more common during that time, and people spoke of "coining paper" or "coining leather". This suggests that the Constitution's use of the word "coin" may have been intended to include the creation of paper currency.
Furthermore, Congress has the power to "borrow money on the credit of the United States", which can be interpreted to include the emission of promissory paper. The Necessary and Proper Clause, in combination with other enumerated powers, has been used to justify the power to emit paper money.
While the Constitution prohibits states from issuing bills of credit and requiring anything other than gold and silver coin as legal tender, it does not explicitly forbid Congress from issuing paper currency. In fact, Congress has issued paper money since 1812 and made it legal tender in 1862. The Supreme Court affirmed the constitutionality of paper money in the 1871 Legal Tender Cases of Knox v. Lee and Parker v. Davis.
In conclusion, while the Constitution intended to restrict the monetary system to gold and silver coin, it does not explicitly prohibit Congress from issuing paper currency backed by gold or silver. This interpretation is supported by the text of the Constitution, historical context, and legal precedent.
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The Constitution prohibits bills of credit
The United States Constitution does not refer to paper currency or fiat money by name. However, it does contain a direct reference to the origins of what is commonly understood as paper money. This reference is found in Article I, Section 10, which states: "No State shall [...] emit Bills of Credit."
At the time, "bills of credit" referred to paper that circulated as money but was not redeemable in gold or silver. This type of paper currency was viewed as a mechanism for expanding the credit of the issuer. The Constitution's explicit prohibition on bills of credit aimed to prevent states from issuing this form of paper money.
The Constitution also includes an indirect reference to this practice in the same section, stating: "No State shall [...] make any Thing but gold and silver Coin a Tender in Payment of Debts." In other words, only gold and silver coins could be required as legal tender for debts.
The term "legal tender" refers to a specific type of coin or currency that creditors are legally obligated to accept as payment for debts, including government taxes, fines, charges, and dues. While the Constitution initially limited legal tender to gold and silver coins, the definition has since expanded. Today, legal tender in the United States includes all coins and currency issued by the United States Treasury or the Federal Reserve System, encompassing Federal Reserve Notes and fiat money coins and notes.
Despite the Constitution's explicit prohibition on bills of credit, states historically found ways to circumvent this restriction. One common method was through the establishment of state-chartered banks that issued their own currency. Additionally, the interpretation of the Constitution's coinage clause, which grants Congress the power to "`coin Money, regulate the Value thereof, and of foreign Coin,`" has evolved over time. During the Founding Era, the verb "to coin" had two meanings: to create metallic coins and to fabricate or create. The latter meaning was more prevalent during that time, encompassing phrases like "to coin a phrase." While the Constitution does not provide clarity on the intended meaning of "to coin," the second definition is considered more probable in this context.
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Congress has no power to alter the value of the dollar
The Constitution of the United States grants Congress the power to
The term "power to regulate the value thereof", with respect to "coined" money, means the power to adjust the amount of gold in US gold coins to keep both gold and silver money in circulation. This power also allows Congress to adjust the Mint exchange rates of foreign specie coins in relation to their US equivalents.
The Constitution does not explicitly define the dollar. This is because, at the time of drafting in 1787, everyone knew what a dollar was. It was a silver coin of a fixed weight and fineness, with the most popular edition being the Spanish milled dollar.
The term "currency" is synonymous with banknotes or paper money. When these banknotes are backed by specie or some other commodity, they may be regarded as honest money. When they are unbacked by anything of value, they are typically called "fiat money" or "bills of credit". The Constitution forbids the use of such money.
The Constitution does permit paper currency to serve as legal tender, but this currency must be backed by gold or silver coin.
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Paper currency has been issued by the federal government since 1812
The United States Constitution does not explicitly mention "paper money", "paper currency", or "fiat money". However, it does refer to "bills of credit", which were a form of paper money issued by states or Congress that could be used as legal tender. The Constitution prohibits states from issuing bills of credit and limits legal tender to gold and silver coins.
Despite this, the federal government has issued paper currency since 1812, and it was made legal tender in 1862 during the American Civil War. The constitutionality of paper money was affirmed in the 1871 Legal Tender Cases (Knox v. Lee and Parker v. Davis). The Supreme Court ruled that United States Notes could be used to repay pre-existing debts, even though they were not backed by gold or silver.
The interpretation of the Constitution's coinage clause, which gives Congress the power to "coin Money, regulate the Value thereof, and of foreign Coin", has been a subject of debate. Some argue that the verb "to coin" had two meanings during the Founding Era: to make metallic coins and to fabricate or create. This second meaning is reflected in phrases like "to coin a phrase", and it is possible that this was the sense intended in the Constitution.
While the Constitution prohibits bills of credit, it does not explicitly forbid the federal government from emitting them. The Ninth and Tenth Amendments suggest that in the absence of clear evidence to the contrary, Congress does not have the power to do so. However, some argue that Congress has the authority to issue paper currency based on its power to borrow money and the Necessary and Proper Clause.
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Frequently asked questions
The US Constitution does not mention paper money, paper currency, or fiat money by name. However, it does contain a limitation on the power of the states in Article I, Section 10, which reads, "No State shall ... emit Bills of Credit ..." Paper that circulated as money but was not redeemable in gold or silver was called bills of credit.
Paper currency has been deemed constitutional. However, some argue that the constitution should be interpreted very strictly, and believe that the Federal Reserve System and paper money are unconstitutional. They argue that Congress only has the powers specifically enumerated in the Constitution, and that the power to create a central bank or print paper money is not explicitly granted.
Prior to the constitutional convention in 1787, states often issued their own paper money, typically called 'bills of credit', and declared some foreign coins as legal tender. During the Revolutionary War, many states issued paper money to excess, resulting in severe price inflation. The constitution prohibited further emissions of paper money, but states found ways to circumvent this, especially through the chartering of state banks. In 1862, paper currency was made legal tender, and in 1863, Congress authorized the Treasury to issue circulating notes designed "in the best manner to guard against counterfeiting and fraudulent alterations".
Today, all circulating US currency notes are Federal Reserve Notes, printed by the Bureau of Engraving and Printing (BEP) and placed into circulation by the Federal Reserve. These notes are legal tender for "all debts, public charges, taxes, and dues". Currency issued between 1862 and 1971 was known as "United States notes", and any remaining in circulation are still valid and redeemable at full face value.
