No State shall...coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts....Article I, Section 10, Clause 1
The prohibition on the states to create any form of money signaled the shift of the power to make economic policy from the states to the federal government. In the late eighteenth century, money and trade were the prime mechanisms for regulating the economy, and the Constitution gave both exclusively to the new central government.
"Bills of Credit" was the generic name for various forms of paper money not backed by gold or silver (known as "specie"). Up until near the end of the Revolution, the states had managed, as they had when they were colonies, the issuance of paper money as a means of stimulating and cooling the economy, not unlike the practice of the modern Federal Reserve. After issuing a currency to increase investment, the colony or state would later call in, or "sink," the currency by levying taxes payable in that particular issue. The colony would then issue a new currency (sometimes overlapping with the collection of the previous one) to begin (or maintain) the cycle again. Inevitably, currencies became depreciated, and the complexities of determining who owed how much in which currency to whom confounded transactions and the courts. See Deering v. Parker (1760).
During the latter half of the eighteenth century, Parliament laid increasing monetary regulations on the colonies until 1764, when, as part of its program of centralizing control in London, it put a complete ban on making bills of credit legal tender. During the Revolution, the states began issuing paper currencies again, having a somewhat better record in financing the war than Congress had. After 1783, however, specie dried up in a popular rush to purchase imported goods, and the states' currency issues exacerbated the serious depression of 1784. In early 1787, Massachusetts, which had resisted currency issues, was faced with Shays's Rebellion, whose partisans demanded new currency. In Philadelphia, the Framers were determined to put an end to the practice that they believed had contributed to so much economic and political dislocation. Rhode Island, a major issuer of paper money, refused to send delegates to the Constitutional Convention precisely because it feared monetary reform.
At the Convention, the delegates found a proposal to allow the states to issue bills of credit with the approval of Congress not stringent enough, and James Wilson and Roger Sherman successfully moved to insert the current language. In the ratifying conventions, the Anti-Federalists quickly saw what was afoot. The states could no longer debase the currency with new issues of paper tender. Luther Martin asserted that the states would no longer be able "to prevent the wealthy creditor and the monied man from totally destroying the poor though even industrious debtor." After ratification, the full force of the constitutional changes soon came to fruition; Alexander Hamilton pushed through a program by which the federal government absorbed all previous federal and state debt, established a national bank, and levied new tariffs and internal taxes.
The need for circulating currency, however, did not abate. Soon, private and state chartered banks were issuing bank notes redeemable in specie. States still could not enter the monetary field directly. In Craig v. Missouri (1830), the Supreme Court struck down state loan offices that had issued loan-office certificates, but in Briscoe v. Bank of Kentucky (1837), the Court upheld the constitutionality of bank notes issued from a state-chartered bank because they were not formally issued by the state. By the time of the Civil War, there were more than 1,600 state-chartered banks in the country. With never enough specie to back the notes, their value fluctuated widely. In order to control these problems and support the adoption of a federal currency, the Congress levied a ten percent tax on state bank notes. After the Supreme Court upheld the tax in Veazie Bank v. Fenno (1869), state bank notes began their journey to extinction. State banks then turned to more modern financial devices, such as deposit accounts and checks, to stay in business.
- David F. Forte
- Professor of Law
- Cleveland-Marshall College of Law