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<font face="Arial" size="2">http://www.mises.org/fullstory.asp?control=1324</font>
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<font face="Arial" size="2"><font face="Verdana" color="#002864" size="5"><strong>Did the Framers Favor Hard Money?</strong></font>
Â
<p class="MsoNormal"><font face="Verdana" size="4">By H.A. Scott Trask</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">[Posted
September 15, 2003]</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2"><img alt src="http://www.mises.org/images3/colcoin.jpg" align="right" border="0" width="187" height="191">The
Old Republican leader John Randolph, the aristocratic liberal from</font> <ST1:STATE>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">Virginia</font></ST1:PLACE>
</ST1:STATE>
<font face="Verdana, Helvetica" size="2">, once famously remarked that the
framers intended ours to be"a hard-money government."Â Is it
true? Contrary to the efforts of academics and judges to obscure this
issue, the framers' intentions in regard to money and banking were quite plain
and are easily reconstructed.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">On balance, the
framers' views can be summarized as follows. On the one hand, they believed in
fractional-reserve banking, generally following Adam Smith's currency and
banking theories. On the other hand, they were resolutely opposed to
government-issued paper money, fiat money, legal tender laws, inconvertible
paper currency, and land banks. On the question of a national bank, they were
divided, but they all believed in a hard dollar (defining the dollar as a
certain weight of silver and/or gold). On a spectrum, their views would be
closer to those of Murray Rothbard and Ron Paul than John Maynard Keynes and
Alan Greenspan.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">To understand
the founders' views, one must grasp the meaning of two essential
constitutional doctrines—delegation and enumeration. By ratifying the
Constitution the states delegated a few defined powers to the federal
government, every one of which was enumerated (i.e. written down) in
the document. Except by amendment, the federal government has no other powers.
The history of the period, the relevant documents, the records of the
ratifying conventions, and the text of the Constitution offer overwhelming
evidence that these doctrines merely state the prevailing understanding of the
period.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">If that were not
enough, the Tenth Amendment codifies it."The powers not delegated to the</font>
<ST1:COUNTRY-REGION>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">United States</font></ST1:PLACE>
</ST1:COUNTRY-REGION>
<font face="Verdana, Helvetica" size="2">by the Constitution, nor prohibited
by it to the States, are reserved to the States respectively, or to the
people."Â Its importance cannot be exaggerated.</font> <ST1:PLACE>
<font face="Verdana, Helvetica" size="2">Jefferson</font></ST1:PLACE>
<font face="Verdana, Helvetica" size="2">called it the"cornerstone of
the Constitution."Â </font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">What were
"Bills of Credit"?</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">One must also
grasp what the framers meant by"bills of credit." At the time,
there was no confusion or uncertainty at all about their character or nature.
They were government-issued irredeemable paper money made receivable for taxes—in
other words, fiat money. Seven states had issued them just two years
before, and the colonies had issued them over and over again throughout the
century. They had done so to finance their wars with the French and the
Indians, but they had also seized upon them as a means of reviving trade and
solving the ever-recurring"shortages of money."Â </font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Sometimes the
bills were made legal tender, other times not.</font> <ST1:STATE>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">Massachusetts</font></ST1:PLACE>
</ST1:STATE>
<font face="Verdana, Helvetica" size="2">was the first colony to print paper
money in 1690 when it used them to pay the soldiers and discharge the debts
incurred during an armed expedition against Quebec. A little later, the
colonies created loan offices to lend such bills to citizens on the security
of land or real estate. The borrowers were to pay interest, and the bills were
made receivable for taxes. Finally, during the early eighteenth century,
groups of merchants and others formed private"banks" to print
currency and lend it out on interest. These"banks" had no capital,
but the associates promised to accept the paper as lawful money. Some of them
had legislative charters, others did not, and still others operated in
violation of the law. It is significant that although these were privately
issued notes, everyone considered them to be bills of credit too.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">The British
government did not look with favor upon these experiments with paper currency.
In 1741, in order to suppress the private paper-money"banks,"
Parliament extended the Bubble Act to the colonies. In 1751, they forbade the</font>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">New England</font></ST1:PLACE>
<font face="Verdana, Helvetica" size="2">colonies from issuing bills of credit
except to pay for administration or meet an emergency, and they forbade them
from making them legal tender under any circumstances. In 1764,
Parliament extended the prohibition on legal tender paper money to all
the colonies. During the War of Independence, both Congress and the states
issued bills of credit to finance the war. The depreciating Continentals were
bills of credit. In the postwar period, seven states issued bills of credit to
pay debts, revive business, and relieve debtors.</font>
<p class="MsoNormal" align="center"><img height="318" alt src="http://www.mises.org/images3/statemoney.jpg" width="600" align="middle" border="0">
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Notes on
Chart: Credit bills were paid to various public
creditors (bond holders, ex-soldiers, public officials). Loan bills
were lent to citizens on the security of land. Both were made receivable for
taxes, and were to be retired after a designated period of time. Depreciation
figures record the depreciation of the notes in relation to specie after one
year of issuance.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">The Relevant
Financial Sections of the Constitution:</font>
<ul>
~
<div class="MsoNormal">
<font face="Verdana, Helvetica" size="2">Loans:Â "The
Congress shall have power … to borrow money on the credit of the</font>
<ST1:COUNTRY-REGION>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">United States</font></ST1:PLACE>
</ST1:COUNTRY-REGION>
<font face="Verdana, Helvetica" size="2">."</font>
</div>
~
<div class="MsoNormal">
<font face="Verdana, Helvetica" size="2">Coinage:"The
Congress shall have power … to coin money, regulate the value thereof,
and of foreign coin, and fix the standard of weights and measures."</font>
</div>
~
<div class="MsoNormal">
<font face="Verdana, Helvetica" size="2">Indebtedness:"All
debts contracted and engagements entered into before the adoption of
this Constitution shall be as valid against the</font> <ST1:COUNTRY-REGION>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">United States</font></ST1:PLACE>
</ST1:COUNTRY-REGION>
<font face="Verdana, Helvetica" size="2">under this Constitution as
under the Confederation."</font>
</div>
~
<div class="MsoNormal">
<font face="Verdana, Helvetica" size="2">Restrictions on the States:
"No state shall coin money; emit bills of credit; make anything but
gold and silver a tender in payment of debts."</font>
</div>
</li>
</ul>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">As one can see,
the federal government does not have the authority to print paper money, issue
bills of credit, establish a legal tender, or impair contracts; and the states
were explicitly forbidden from doing any of these things. Some have
argued that the absence of a specific federal prohibition means that Congress
can exercise these powers, but the records of the federal convention say
otherwise.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">A Federal
Currency Power?</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">The committee of
detail, which drew up the initial draft of the Constitution, explicitly gave
the federal government the power"to emit bills on the credit of the
United States."Â They presented their work to the full convention
for consideration on 6 August 1787. The debate was soon joined. Although some
delegates spoke in favor of granting the power (including James Madison), the
majority were resolutely opposed.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Oliver Ellsworth
of Connecticut remarked that since"the mischiefs of the various
experiments which had been made were now fresh in the public mind, and had
excited the disgust of all the respectable part of America, [it was]"a
favorable moment to shut and bar the door against paper money. … The power
may do harm, never good."Â George Read of</font> <ST1:STATE>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">Delaware</font></ST1:PLACE>
</ST1:STATE>
<font face="Verdana, Helvetica" size="2">warned that the power"if not
struck out, would be as alarming as the mark of the beast in Revelation."
John Langdon of New Hampshire said that he would"rather reject the whole
plan than retain the three words 'and emit bills.'"Â The vote was
then taken. Nine states voted for striking out the phrase"and emit bills
on the credit of the</font> <ST1:COUNTRY-REGION>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">United States</font></ST1:PLACE>
</ST1:COUNTRY-REGION>
<font face="Verdana, Helvetica" size="2">." Â Only two states
(</font><ST1:STATE>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">New Jersey</font></ST1:PLACE>
</ST1:STATE>
<font face="Verdana, Helvetica" size="2">and</font> <ST1:STATE>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">Maryland</font></ST1:PLACE>
</ST1:STATE>
<font face="Verdana, Helvetica" size="2">) voted to retain it.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">It should be
stressed that not all the delegates who favored the power were friends of
paper money. George Mason of</font> <ST1:STATE>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">Virginia</font></ST1:PLACE>
</ST1:STATE>
<font face="Verdana, Helvetica" size="2">confessed to a"mortal hatred to
paper money" and Edmund Randolph, also of</font> <ST1:STATE>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">Virginia</font></ST1:PLACE>
</ST1:STATE>
<font face="Verdana, Helvetica" size="2">, admitted to feeling great"antipathy
to paper money." However, with great naïveté, both thought the
federal government should have the power for"emergencies."</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">The heroic
Elbridge Gerry of</font> <ST1:STATE>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">Massachusetts</font></ST1:PLACE>
</ST1:STATE>
<font face="Verdana, Helvetica" size="2">was so alarmed by the prospect of the
federal government having this power that he wanted an explicit prohibition,
but the other delegates thought it unnecessary. Experience soon vindicated
Gerry's apprehension and desire for additional safeguards.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">During the
second war with England, President Madison issued treasury notes to help
finance the war. Because these notes were interest-bearing and redeemable in
one year, they were not bills of credit, but they were just as inflationary.
Murray Rothbard observed that the state banks used these notes as"high-powered
money" or"reserves" upon which they could pyramid additional
currency and credit; and William Graham Sumner noted, they"at once
stimulated banking issues in the Middle States."Â </font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Even worse, at
the end of the war, Congress authorized the printing of noninterest bearing
treasury notes of small denomination (as low as $3.00). These were bills of
credit in all but name (i.e. government paper currency).</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">The historian of
early American banking, Bray Hammond, leaves no doubt as to the conclusion
that any honest historian or constitutional scholar should draw:</font>
<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Was it
intended that though the states might not issue paper money, establish other
legal tender, and impair contracts, the federal government might do so?Â
The question is not to be answered by the Supreme Court's subsequent
decision that the federal government does have the power nor by the fact
that the federal government has exercised the power. The question is
historical and is not answered by jurisprudence or by subsequent practice.
Was the power intended? The answer … seems clear enough: it
is no.</font>
[/i]
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">There is an
additional question of great importance. Were state bank notes bills of credit,
thus falling under the prohibition of the Constitution? The framers
thought not, but their knowledge of such notes was based on the experience of
only three commercial banks, all of which were specie-paying: the Bank of
North America (c. 1781), the Massachusetts Bank (c. 1784), and the Bank of New
York (c. 1784). They clearly did not foresee the multiplication of banks after
1800, the gradual substitution of state bank paper for gold and silver coin as
the exclusive circulating medium of the country, and the tricks and
threats employed by bankers to escape paying their notes and deposits in hard
money.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">The question of
the constitutionality of bank paper actually came before the Supreme Court in
the case of Briscoe vs. Bank of Kentucky (1837). The court ruled by a
vote of 6 to 1 that such notes were not bills of credit. They were
wrong. In an eloquent and learned dissent, Justice Joseph Story (</font><ST1:STATE>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">Mass.</font></ST1:PLACE>
</ST1:STATE>
<font face="Verdana, Helvetica" size="2">) pointed out that state bank notes
possessed all the characteristics of the colonial bills of credit.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Although they
were not issued by the state government itself, they were issued by
state-chartered banks, and it was an established legal principle that what the
principal cannot do, its agent cannot do. The convertibility of the notes was
mostly nominal, not real. They were accepted for taxes and bonds. The
historian Sumner added that they had the effect of driving specie from
circulation, creating a currency of inconvertible and depreciated paper, and
fueling a business cycle of boom and bust. In short, they had reproduced all
the evils of the colonial bills of credit.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Sumner condemned
the Court's decision in the strongest terms."In Briscoe's case the court
… made the prohibition of bills of credit nugatory. … Wild-cat banking was
granted standing ground under the Constitution, and the boast that the
Constitutional Convention had closed and barred the door against the paper
money with which the colonies had been cursed was without foundation."Â
He goes on to point out that these"private" paper-money banks (so
beloved by contemporary 'free bankers')"went on their course and carried
those States [which authorized it] down to bankruptcy and repudiation."Â
What was worse, fractional-reserve banking"miseducated the people of
those States until they thought irredeemable government issues an unhoped-for
blessing."Â </font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Here was a case
where a branch of the federal government had the power to do the right thing
but did not do it. To have denied the legal standing of fiduciary media would
have been to deprive the state governments of their chief means of funding the
construction of public works, and the federal government of its chief
source of borrowed funds for war. The</font> <ST1:CITY>
<ST1:PLACE>
<font face="Verdana, Helvetica" size="2">Madison</font></ST1:PLACE>
</ST1:CITY>
<font face="Verdana, Helvetica" size="2">administration had financed the War
of 1812 by selling bonds for state bank notes and issuing federal treasury
notes. Without manufactured paper money to draw from, both would have had to
resort to taxation, which was unpopular and would arouse the attention of the
masses. Hence, the Court ruled to protect what was then the government's chief
source of borrowed funds. Surprised? </font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">A Federal
Banking Power?</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Does the Federal
Government have the power to charter a mixed public/private bank, establish a
central bank, or regulate the currency supply? The question was raised
only three years after the ratification of the Constitution when Secretary of
the Treasury Alexander Hamilton proposed the chartering of a national bank (mixed
private/public ownership) with the power to discount notes, issue currency,
lend money to the government, and hold and disburse government funds.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Hamilton argued
that although the federal government did not have an express warrant to
establish such a bank the power was implied because a national bank
would help the federal government borrow money, service the debt, keep the
revenue, and pay its creditors. His rule of interpretation:"If the end
be clearly comprehended within any of the specified powers, and if the measure
have an obvious relation to that end, and is not forbidden …, it may
safely be deemed to come within the compass of the national authority."Â
This was ingenious, but it was also subversive.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">When Secretary
of State Thomas Jefferson heard of the bank plan, he was greatly alarmed. He
saw immediately that the doctrine, if once accepted, would break down the
guards on federal power provided by the Constitution. He wrote,"To take
a single step beyond the boundaries thus specially drawn around the powers of
Congress is to take possession of a boundless field of power, no longer
susceptible of definition."Â He then drove a stake through
Hamilton's argument by citing the records of the federal convention."It
is known that the very power [to charter a bank] now proposed as a means
was rejected as an end by the Convention which formed the Constitution.
A proposition was made to them to authorize Congress to open canals, and an
amendatory one to empower them to incorporate. But the whole was rejected, and
one of the reasons for rejection urged in debate was, that then they would
have a power to erect a bank."Â Â </font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">In other words,
not only did the framers not intend the power, they thought it was forbidden.
Alas, a Federalist-controlled, mercantilist-minded Congress passed Hamilton's
charter, and President Washington signed it into law in early 1791. It is
worth noting that the charter forbade the bank from issuing bank notes less
then ten dollars ($200 in today's money). Even the Federalists intended the
circulating currency of the country to be composed of gold and silver coin.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">During the 1815
debate over chartering a second national bank (the charter for the
first Bank expired in 1811 and was not renewed by the Republican Congress),
supporters raised an additional argument. A national bank was an indispensable
means for regulating the currency supply. Opponents responded by
arguing that the federal government had no power to regulate the currency. The
political economist Condy Raguet pointed out with great force,"Congress
has no more authority under it to regulate the currency, excepting that
portion of it which consists of coin, than it has to regulate the emission of
promissory notes by individuals."Â The federal compact never"placed
the national currency under the regulation of Congress."Â He was
right. Congress has the authority to regulate only the value (i.e. determine
the weight and fineness) of gold and silver coin not that of various kinds of
paper currencies.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Two centuries
later, our money supply is composed entirely of government-issued fiat
currency and bank deposits redeemable in the same currency. The money supply
and the banking system are largely controlled by means of federal laws and the
existence of a powerful central bank. None of which are authorized by the
Constitution. It is yet more evidence that our government is no more
constitutional than it is democratic or liberal.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">---------</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Historian Scott
Trask is an adjunct scholar of the Mises Institute. hstrask@highstream.net.
See his article
archive. </font></font><font size="2" face="Verdana">
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