The Gist: Why the Founders thought of money itself as a vital check and balance against the abuse of power.
A partial review of Pieces of Eight, Constitutional Money, and Money, Free and Unfree.
In 2020, the U.S. government printed and digitally conjured $3.38 trillion, a number almost impossible to fathom. That single year’s total is more than double what the government printed in the Federal Reserve’s first 95 years of existence (1913-2008), when we had to pay for two world wars (among other things). That dollar amount was more than 150% of the combined total net worth of half of Americans – over 160 million people who typically have to actually work for extra cash. And it increased the total amount of dollars in circulation by over 20%.
Figure 1. If you somehow spent $4 million every single day since Jesus Christ was born, you still would not have spent $3.38 trillion. The average American spends less than $4 million in her entire lifetime.
But of course you didn’t become 20% richer – your money actually has been losing value through inflation. Instead, the government bought its own debt, the burden of which was lightening by the day through that same inflation, as well as the debt of mismanaged local governments and the junk debt of mismanaged companies.
In contrast, in the first seventy years of our republic, the total amount of dollars that the U.S. government printed was… Zero. The common understanding was that the Constitution forbade the federal government from doing so. How is that possible and why was that the case?
Figure 2. They had not yet discovered the Sims cheat “rosebud”.
The key is that money used to be precious metal. The Founders were not unaware of paper money – they just thought it was a super-controversial threat to the commercial republic they were laying the foundation for. And, notably, the paper money they feared was not the kind of mere paper or bits we use today but was instead more or less a receipt for gold and silver that was supposed to be eventually demandable in return. The Founders understood, based on both recent experience and historical study, that the trust involved in paper currency could be abused by the government.
Figure 3. As the old joke goes: They say George Washington was able to throw a dollar clear across the Potomac. I am not surprised. The dollar went a lot further then.
The British common law that the Founders grew up with tended to treat “money” as gold and silver itself but there was often a shortage of the actual metals in the colonies which, combined with political agitation, attracted some colonial legislatures to overprint beyond their capacity to redeem. At one point, Parliament responded by forbidding colonial governors from consenting to the printing of paper money on the penalty of immediate dismissal, a permanent ban from public office, and a personal fine of 1,000 pounds (the rough equivalent of $200,000 today).
During the American Revolution, as authorized by the Articles of Confederation, the Continental Congress resorted to the printing press to try to pay for the war. We won, but the economic results were ugly. “Prices doubled in 1776 and doubled again in both 1777 and 1778. By 1781, prices were up 80-fold relative to the continental.” In other words, the amount of butter (or any other good) you could have for one continental in 1776 required 8,000 continentals in 1781. Combined with the war’s other negative externalities, we suffered a “sharp decline in real per capita income, nearly as severe as the reduction during the Great Depression of the early 1930s.” And yet although it asked states to do so, the Continental Congress declined to make its currency “legal tender,” which would have required the paper be accepted by all parties to satisfy debts. The Founders weren’t sure that they had the legal power to do so and they feared forcing a rapidly depreciating currency on the commercial sphere would undermine support for the Revolution.
The Articles of Confederation soon proved unworkable, perhaps most vividly in the federal government’s impotence in helping put down Shays’ Rebellion. While this is most often cited as an example of the need for a federal government of sufficient power to suppress domestic insurrection, the demands of Shays’ Rebellion are also relevant: they were a violent precursor of Bernie bros, shutting down courts of law and taking merchants hostage, and their principal objective was that the government print more money so they could easily satisfy their debts. The Founders, though radical in their love for commercial freedom, wanted an ordered liberty that did not sacrifice the value of a contract to the mob.
Figure 4. The mob was making an offer the Founders could refuse.
So by the time that the Founders arrived at the Constitutional convention, they were, according to one participant, “smitten with the paper money dread.” After 8,000%+ inflation and a failed insurrection, one report of the Continental Congress had declared paper money a “fallacious medium.” And the Father of the Constitution, James Madison, insisted paper money was an “epidemic malady.” A debate occurred and the states voted 9-2 to deny the federal government the power to print paper money.
That vote might be enough to convince some that we’ve become unmoored from the Founders’ vision but we’ve sailed so far away that judges have wrung a meaning out of the text consistent with our practices (rather than their job to comply our practices with the text). I’ve included a deeper textual analysis at the end of this email for those who want to dive in – but for now, consider how the Founders were trying to enshrine ordered liberty: How would it make sense to give government unlimited power to debase currency but forbid it from seizing property without just compensation? Today, the federal government can’t legally seize a blade of grass on your property without paying you its fair market value – but it can induce catastrophic hyperinflation without risk of violating the courts’ view of the Constitution.
Justice Antonin Scalia routinely observed that what really protects Americans’ liberty is not the promise of a bill of rights – plenty of dictatorships wax poetic about those – but the very architecture of checks and balances within the government. The question of money was a much more important part of the Founders’ vision for those checks and balances than we commonly realize. Certain money can place real limits on government’s ability to expand. Many have wondered why the Founders didn’t have a balanced budget provision – this is an important explanation.
Certainly some Founders wanted to legally constrain borrowing but the very nature of contemporary lending was enough constraint for most. If the government is forced to go to the marketplace and ask for physical gold and silver, there is only so much precious metal available. Private actors are going to demand sufficient interest rates in return to make the proposition attractive versus other possible investments. In contrast, “since , Fed purchases of Treasury debt have funded as much as 60% to 80% of the entire government borrowing requirement,” such that we have a wild accounting scheme wherein the government owes money to itself at very generous interest rates, leaving the market helpless to discipline. As a result, politicians can propose new multi-trillion dollar spending schemes without being laughed out of the room. If you want to reverse engineer how government got so big, there are really two answers: The first is the general abdication of the government to follow the original meaning of the Constitution. And the second – and it turns out very related – is that the government rearranged its own financing.
Eventually, such mismanagement leads to inflation, a hidden tax and an especially clever one because you might think you have more when you in fact have less. Democracies especially have an incentive to flood the market with money before an election (which is always), but that behavior eventually catches up to the economy, which is trying to rely on money as an honest measuring stick of profit and loss. If inflation gets too bad, responsible savers who want to hold on to value instead are incentivized to spend as much as they can before their money loses all of its worth – and that creates a whole host of other problems.
All of which is to say that the government has different incentives for money than you and I do. The Founders understood this and tried to preemptively reign in government’s abuse: sound money protects private property while limiting government’s ability to borrow, spend, and grow.
Very importantly, just because the government did not print money does not mean that no paper money existed. Private banks could and did provide the convenience of paper money backed up by the gold in their vaults – and commercial actors were free to evaluate the strength of such paper on the reputation of the issuing bankers. This turns out to be rather good economics. As Friedrich Hayek observed, government’s exclusive control over currency “has the defects of all monopolies: one must use their product even if it is unsatisfactory, and, above all, it prevents the discovery of better methods of satisfying a need for which a monopolist has no incentive.” Free banking, the term for the system Hayek preferred, allows money to be chosen by consumers – you and me – not imposed by the nation’s largest debtor. Politicians can afford to be irresponsible with a monopoly state currency everyone is required to accept. Bankers have to be responsible with any currency they issue or else no one would use it and they would go out of business. Hayek concluded, “Blessed indeed will be the day when it will no longer be from the benevolence of the government that we expect good money but from the regard of the banks for their own interest.”
Unfortunately, while free banking thrived in places like Canada and Scotland, in the United States it wasn’t so free. States wound up over-regulating these currency providers – requiring licensure from legislatures that encouraged cronyism, limiting banks to one single location which hurt diversification, and mandating banks hold uncreditworthy state debt as collateral. While such over-regulation was well within the states’ power, there was a separate question of whether the states could properly charter banks to print money when the state governments were not permitted to do so themselves. The U.S. Supreme Court upheld most such practices, even when it probably shouldn’t have (in one case, the state owned 100% of the relevant bank). The republic then as now had plenty of disagreement: the losers at the constitutional convention had wanted a government paper money, another minority wanted an economic system built exclusively on precious metals, most seemed to want the federal government to provide the core precious metal currency but were willing to see it as the base for private enterprise.
Figure 5. Imagine having to wine and dine state legislators to secure the right to start (and keep) your bank but they only give you the opportunity to open one location in a small town – and you have to keep all of your reserves in their junk Illinois government bonds rather than precious metals or viable securities. That was the sorry state of much American banking and led to routine waves of failure.
However you may have noticed in your day to day life that modern commerce operates rather differently than as described here. You denominate your wealth in paper and digital dollars provided and mandated by a government that gets ever larger. How we got from the Founding to now and how to reconcile the two will be explored in my next email.
…But for the legal nerds who really want to understand the full textual argument, see below for analysis mostly derived from the work of Edwin Viera, a Harvard JD/PhD who has written thousands of pages on the legal evolution of money in the United States.
The only way that the Constitution authorizes the government to bring money into existence is to “coin.” I’ll admit that when I first read this in law school, I thought, based on present practice, that “coin” might extend to the printing press in the same way that the First Amendment protects free speech on the internet and not just on parchment. Naturally, no class ever actually discussed the provision. As it turns out, the Founders meant “coin” quite literally (literally in the literal sense of the word.) And it was understood as such – remember, the U.S. government only coined money for its first 70 years.
And the coinage power might have been rather limited. In England, the power to coin money did not mean the power to control the money supply by deciding how much money to convert to coin. Anyone could show up at the mint with metal, and the mint would be obligated to convert it. The Founders seemed to have in mind the same idea.
Viera notes that the power to coin is right next to that mighty power to fix the standards of weights and measures – he suggests that Congress was encouraged to establish that a foot represented a certain length, a year a certain time, and a dollar a certain amount of silver. Insofar as people well-understood feet and years, it turns out they understood “dollars,” too – it was a trusted standard silver coin from Spain that circulated freely in the colonies. That it had a fixed meaning is suggested in the fact that the Constitution elsewhere describes specific dollar amounts, including around the extremely controversial slavery compromise (taxing imported slaves “not exceeding ten dollars”) as well as within the Bill of Rights (which protects the right of a trial by jury – but only in cases “where the value in controversy shall exceed twenty dollars”). If the government had infinite ability to redefine the value of dollars, then these sections of the Constitution would lack precise meaning and be rather pointless to write down. Viera advises:
“Congress may, with constitutional propriety, appoint astronomers, physicists, and other qualified experts to determine with scientific precision what the ‘Year’ actually is. It has no authority, however, to decide for itself what the ‘Year’ ought to be. Analogously, Congress may, with constitutional propriety, appoint economists, monetary historians, and other experts to determine with cliometric accuracy what the ‘dollar’ actually was in the late 1700’s. In fact, this is what Congress did do, under both the Articles of Confederation and the Constitution. Congress has no authority, however, to decide for itself what the ‘dollar’ ought to be.” [underlining in the original]
Figure 6. Shhhhhh! Once Congress discovers that their power over measurement is the same as their power over money, they will redefine a “year” to mean ten million revolutions around the Sun and never have to run for re-election.
Still, the Constitution does give Congress power to “Regulate the value [of the money it coins], and of foreign coin.” My brackets replace “thereof” and the antecedent is extremely important: Congress has the power of regulation only over coins, not over securities. Further, “regulate” does not now nor did it then mean to “bring into existence” but instead to deal with something that already exists. In other words, a reading of the original public meaning of this clause does not permit the government unlimited power to create new currency and determine its value.
So what does “regulate” mean textually? Viera argues that historical context reveals this power to be more specific than Congress’ power to “regulate Commerce.” Viera’s best approximation to give us a sense of the original meaning is “specify.” The early U.S. government published a table of rates so that merchants could understand the metal content of various coins then in circulation and how the government would treat them as tax payments. Viera argues that “the power to ‘regulate the Value of Money’ is distinct from the power to debase its value. For example, to ‘regulate the Value of a silver coin means to compare the weight of pure silver that it contains to the weight of pure silver in the monetary standard, and to declare the coin’s value in terms of that standard.”
19th century Supreme Court Justice and legendary constitutional commentator Joseph Story suggests that “The object of the power is to produce uniformity of value throughout the Union, and thus to preclude us from the embarrassments of a perpetually fluctuating and variable currency.” And indeed Viera argues that in the first seventy years of the republic, “regulation” consisted exclusively of the government trying in good faith to publicize the actual fair market value of the precious metal in circulating coinage – though that did not mean it succeeded. The market constantly outpaced the government’s ability to define it and the biggest impact this clause would have was in whether the U.S. effectively operated on a gold or silver standard (until it abandoned precious metal standards altogether).
The Founders did make one rather large assumption. The Constitution gives Congress the power to coin money, rather than the executive, because as the Virginia judge and legal commentator St. George Tucker noted in 1803,
“The history of England affords numberless instances, where this prerogative [over money] has been exercised to the great oppression of the subject. The power of debasing the value of the coin, at pleasure, has in fact been frequently used as an expedient for raising a revenue, and is accordingly reckoned as one of the indirect modes of taxation. According to the principles of our constitution, therefore, such a tax can not be imposed but by the representatives of the people.”
Story says something very similar:
“In England, this prerogative belongs to the crown; and, in former ages, it was greatly abused; for base coin was often coined and circulated by its authority, at a value far above its intrinsic worth; and thus taxes of a burthensome nature were laid indirectly upon the people. There is great propriety, therefore, in confiding it to the legislature, not only as the more immediate representatives of the public interests, but as the more safe depositaries of the power.”
These analyses are notable both because they get at the Founders’ fears over the government abuse of money – but also because they suggest that part of their “solution” was faulty: just transferring the power from one branch to another. But, again, this has to be read within the greater context of the Constitution and in particular the fact that Congress could only coin, not print. Gold and silver coins inherently cannot experience hyperinflation. And if the federal government had circulated coins as the King had, with a stated value above their real value, there would have been public outcry and market resistance. Further, Viera argues that “under English common law, the King exercised all power to coin and regulate the value of money. By the late 1700’s, Parliament had defined this royal prerogative as not including the authority to debase the coinage.” The U.S. Constitution “removed from legislative control the monetary standard itself,” by explicitly making it a known silver dollar.
Separately, the Constitution explicitly forbids states from exercising certain monetary powers: they can’t “coin money, emit Bills of Credit, make any Thing but gold and silver Coin a Tender in Payment of Debts.” To emit bills of credit was the contemporary term of art for printing money. The fact that coining money and emitting bills of credit are listed separately strongly reinforces the idea that they are different powers – otherwise, the text is redundant – and therefore makes further questionable any attempt to smuggle printing money into the federal government’s coinage power. John Marshall subsequently noted in a court case that the Constitution specified “that the real dollar may represent property, and not the shadow of it.” Viera argues that the legal tender provision gave states the opportunity to make metal legal tender if the government failed to coin but prevented them from altering key creditor relationships.
Nathaniel Gortham was one of the dissenters at the Constitutional Convention who lost the vote on giving the federal government the power to print – but he was nevertheless satisfied with the ambiguity of not explicitly preventing it from doing so. Viera responds with fairly conventional originalist analysis:
“One of the fundamental principles of our society is that the very existence of the Constitution necessarily implies the definite and limited nature of the power of the government of the United States. Indeed, by legal hypothesis, the Constitution contains no ‘independent and unmentioned power[s]’; for the contrary assumption would fatally ‘conflict with the doctrine that this is a government of enumerated powers.’ There are no undefined and general powers that some ‘theoretical government’ might possess.…This exact, literal coincidence of prohibition and empowerment, in conjunction with the Tenth Amendment, proves conclusively that Congress received only what the States lost.”
In other words, unless the federal government is explicitly given a power, it doesn’t have it. And, while we’re on the subject, there is no explicit federal government power to make any currency “legal tender.” Only the states can make only gold and silver a currency that people must accept to satisfy debts.
Figure 7. Sorry, Bitcoin
Another contemporary dissenter, Luther Martin, explicitly brought up the prospect of a war in the constitutional debate: shouldn’t the federal government be allowed to print, as it had during the Revolution, to be able to defend the country? Whatever the merits of the argument, he lost 9-2. Benjamin Rush was not present at the convention but provides an answer in a letter to James Madison: “where wars are just & necessary–Supplies may always be obtained by annual taxes from a free people.”
The final provision we’ll mention here is that the Constitution gives the government the power to “borrow money on the credit of the United States.” In that this power was listed separately from the power to print money in the Articles of Confederation and in that the Constitution permits states to borrow money but not to print money, this again suggests that the borrowing power is different from printing. Indeed, there’s a straightforward argument that the original public meaning of this clause meant that the “money” that had to be borrowed is gold and silver. If you’ve gotten this far, congratulations! Hopefully you’re convinced of the Founders’ intent. We’ll explore how we deviated and what it means for today in my next email.
Figure 8. Click here to acquire the unabridged version of Pieces of Eight: the Monetary Powers and Disabilities of the United States Constitution (9/10), a learned and deep textual analysis that I’ve attempted to summarize as best as possible. You can also check out the related original document collection at the University of Chicago for the coinage power and the borrowing power.
Figure 9. Click here to acquire Constitutional Money by Richard Timberlake (8/10), in which an economist reviews the U.S. case law around money and offers both economic commentary and a layman’s legal analysis of original public meaning uncluttered by the typical law school penumbras and gobbledygook. Timberlake insists: “The money clauses in the U.S. Constitution are brief, simple, and explicit; the humblest mind can understand them without elaborate interpretation.”
Figure 10. Click here to acquire Money Free and Unfree by George Selgin (9/10), a collection of essays by one of the leading free banking economists in the United States, opening with a thought experiment about what kind of monetary system a dictator would create to increase his power but also including a history of 19th century U.S. money and an evaluation of how the Federal Reserve has performed according to its own preferred standards in its first 100 years. Also check out his book explaining the theory and practice of free banking.
Thanks for reading! If you enjoyed this, forward it to a friend: Know anyone who is interested constitutional originalism? How about anyone desiring limited government? Or anyone who has ever used money?
I read over 100 non-fiction books a year (history, business, self-management) and share a review (and terrible cartoons) every couple weeks with my friends. Really, it’s all about how to be a better American and how America can be better. Look forward to having you on board!