They protect liberty and prosperity — when we follow them.
Seven clauses of the United States Constitution touch on questions that might be described as relating to monetary policy.
Properly interpreted, these seven clauses together form a system of rules that strongly protects economic prosperity and political liberty.
Four of the clauses include the word ‘money,’ three the word ‘coin,’ and two the word ‘dollars.’ /1
Below is the text of each of the clauses, followed by some definitions and comments. I’ve modernized the punctuation for readability.
The Seven Money Clauses
- Congress shall have power to borrow money on the credit of the United States. ~ Art. I, sec. 8, cl. 2.
- Congress shall have power to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures. ~ Art. I, sec. 8, cl. 5.
- Congress shall have power to provide for the punishment of counterfeiting the securities and current coin of the United States. ~ Art. I, sec. 8, cl. 6.
- No money shall be drawn from the Treasury, but in consequence of appropriations made by law. ~ Art. I, sec. 9, cl. 7.
- The migration or importation of such persons as any of the states now existing shall think proper to admit, shall not be prohibited by the Congress prior to the year one thousand eight hundred and eight, but a tax or duty may be imposed on such importation, not exceeding ten dollars for each person. ~ Art. I, sec. 9, cl. 1.
- No state shall coin money, emit bills of credit, or make any thing but gold and silver coin a tender in payment of debts. ~ Art. I, sec. 10, cl. 1.
- In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved. ~ Amdt. VII.
The Constitution’s Five Monetary Rules
Read in conjunction with the Ninth and Tenth Amendments, and the obligation-of-contracts clause (Art. I, sec. 10, cl. 1), we can identify five monetary policies that are constitutionally requisite in the United States:
- The basic unit is the dollar, a silver coin containing 371.25 grains of pure silver.
- Only gold or silver coins and currency (specie-backed banknotes) can be legal tender.
- No state may issue coins or currency.
- No one may counterfeit U.S. Government-issued coins or currency.
- Fiat money notes (‘bills of credit’) are forbidden.
The remainder of this article defines some of the foregoing terms, and explains how we get to the five rules.
The Constitution makes the ‘dollar’ the basic unit of account for the republic. It does not explicitly define the dollar. Why? Because no definition was necessary. Everyone at the time knew what a dollar was. It was a silver coin of a fixed weight and fineness, the most popular edition of which was the Spanish milled dollar. That popular coin, remembered today as ‘pieces of eight,’ contained on average 371.25 grains of pure silver or 416 grains of standard silver. ‘Standard silver’ is pure silver mixed with other metals, such as nickel or copper, for added durability. /5
Prior to the Coinage Act of 1792, also called the Mint Act, the Spanish dollar was basically the only ‘dollar’ Americans knew. The U.S. government did not mint its own version of the coin until after the ratification of the Constitution (1788) and the Bill of Rights (1791). In the Coinage Act, Congress codified the existing, universally understood definition of ‘dollar’:
DOLLARS OR UNITS — each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.
A coin of that weight and fineness, and only such a coin, is a dollar for constitutional purposes. Banknotes backed by dollars may circulate as dollars.
The value of the dollar is fixed, because it is a known quantity incorporated by reference into the constitutional text. Congress has no power to alter the value of the dollar. Only a constitutional amendment could do that.
Definition: ‘Regulate the Value’
The term ‘power to regulate the value thereof,’ with respect to ‘coined’ money, means simply the power to adjust the amount of gold in U.S. gold coins, in order to keep both gold and silver money in circulation — that is, to counteract Gresham’s Law. (Indeed, because of the Legal Tender Clause, this is not just a power but a duty.) Additionally this power allows Congress to adjust the Mint exchange rates of foreign specie coins vis-à-vis their U.S. equivalents. It does not allow Congress to redefine the value of the dollar arbitrarily.
The term ‘currency,’ as I use it here, is synonymous with banknotes, paper money. When banknotes are backed by specie or some other commodity, they may be regarded as honest money. When unbacked by anything of value, they are typically called ‘fiat money.’ The Constitution refers to them as ‘bills of credit.’ Such money is forbidden. Neither the federal or state governments may issue it.
Definition: ‘Legal Tender’
The term ‘legal tender’ means a specific kind of coin or currency that the government requires creditors to accept in payment of debts. (‘Public’ debts can refer to government taxes, fines, charges, dues, and the like.) Under the Constitution, only gold and silver coins may be required to be used as legal tender (‘a tender in payment of debts’). Today in the United States, legal tender is statutorily defined as all coins and currency issued by the United States Treasury or the Federal Reserve System, including fiat money coins and notes (31 U.S.C. 5103). This obviously includes all Federal Reserve Notes, those little green pieces of paper we carry about in our pockets. As we shall see when we get to the term ‘fiat money,’ this definition exceeds Congress’s power under the Constitution. Federal Reserve Notes notes are bills of credit, which the Constitution forbids. Therefore, they cannot be legal tender.
Which brings us to the rule: Only gold and silver coins, and notes freely redeemable in and fully backed by such coins, may serve as legal tender in the United States. The Founders did not legislate this rule by accident, they put it in the Constitution knowing very well what they were doing. Honest money is not just a good idea, it’s the law.
Definition: ‘Fiat Money’
The term ‘fiat money’ means currency with legal-tender status that is not backed by anything of value.
Fiat money retains its value only so long as its users have confidence that its issuer (the government) will faithfully repay its debts. When that confidence evaporates, fiat money begins to lose value and can even become worthless.
The Supreme Court, in its famous Legal Tender and Gold Clause Cases, ruled that Congress has ‘plenary power’ to issue fiat money and dictate its value, pursuant to its power to ‘regulate the value’ of foreign and domestic coin. This interpretation is erroneous. Congress has no such ‘plenary’ power. Its power to regulate the value of gold and silver coins is a limited power that exists for the limited purpose of ensuring that both kinds of coin remain in circulation, that is, to counteract Gresham’s Law.
In these famous rulings, the Court made the incorrect assumption that the people had endowed their federal government with attributes of ‘national sovereignty’ like those found in European governments. That assumption has no grounding in the constitutional text and turns the American Revolution on its head. The whole point of the Revolution, indeed its greatest achievement, was to deny the existence of ‘sovereignty’ in the ‘rulers’ and recognize it in the people, considered as individuals. ‘All men are created equal’ — even you, King George. From which it follows that government must be by consent, and the power of the rulers (understood as the people’s servants) must be limited. Congress’s powers are limited in numerous ways. Among these ways are the five monetary rules that derive from the Constitution’s seven money clauses.
To be absolutely clear (for the true pedant), the Constitution does permit paper currency to serve as legal tender. But that currency must be backed by gold or silver coin. /6
Definition: ‘Bills of Credit’
The term ‘bills of credit’ in the Constitution refers to government-issued notes that represent a debt to the holder, and are typically intended to circulate as money in private transactions.
Bills of credit are a form of paper money that can be backed by something of value, but might not be. Typically they are not. When they are not, they run afoul of the Constitution’s explicit prohibition on bills of credit.
Interestingly, the Constitution is silent on whether the federal government may emit bills of credit. Does this mean it may? No. A provision specifically authorizing Congress to do so was struck from a draft of the Constitution. And more importantly the Ninth and Tenth Amendments tell us that, in the absence of clear evidence to the contrary, we must assume that Congress has not been granted a power. Like the states, Congress may not make anything but gold and silver coin a legal tender in payment of debts.
In short, in the United States only gold and silver coins, or banknotes readily redeemable in such coins, can be legal tender.
To my knowledge, there have been three federal issues of bills of credit since 1788:
- United States Demand Notes, issued in 1861 and 1862.
- United States Notes, issued from 1862 to 1971.
- Federal Reserve Notes, which have been issued since 1914.
All of these issues are unbacked by anything of value. Therefore, as a legal matter, they are bills of credit. And thus unconstitutional.
By contrast, among the federal issues that are not ‘bills of credit’ in the constitutional sense, because they are fully backed by gold or silver coin, are:
- United States Gold Certificates, issued from 1863 to 1933.
- United States Silver Certificates, issued from 1878 to 1964.
Fractional Reserve Banking
Does the Constitution require banks to maintain 100 percent reserve ratios? Does it ban fractional reserve banking? Not at all. But does it require that legal tender be honest money? Absolutely.
Aside: Do I think fractional-reserve lending is a bad thing? I do not. It is naturally self-regulating: the same money that a bank creates through making too many loans is destroyed when those loans are repaid. And it adds helpful flexibility to the system.
Fractional-reserve lending is not a problem so long as market forces can operate freely. Government money-printing, by contrast, tends not to be self-regulating and thus tends to be destructive of people’s freedom and prosperity. Certainly, it has not been self-regulating since we stopped following the Constitution’s five money rules.
The Twenty-Dollar Rule
It is common these days for legal scholars to profess not to know the meaning of the Seventh Amendment’s twenty-dollar rule, the rule that declares that a jury trial is not required in civil disputes involving amounts less than twenty dollars. They claim that the dollar’s value has changed since the eighteenth century, to an extent we cannot fathom. This is silly. Our modern Federal Reserve Notes may be labeled as ‘dollars,’ but they are not dollars in the constitutional sense, and are therefore not the ‘dollars’ spoken of in the twenty-dollar rule. For the purposes of that rule, they might as well be pounds, yen, or euros. To apply the rule in a fiat-money world, we need to know how much a constitutional dollar is worth in modern fiat money, Federal Reserve Notes. We need an exchange rate. It is a floating exchange rate, since the value of FRNs floats relative to silver in the marketplace. So what we need to know is the exchange rate of the constitutional dollar and the FRN dollar at the time the dispute is filed. Okay. To determine that exchange rate, we need to know five specific things: the amount in controversy in FRN dollars, the legal definition of a constitutional dollar, the current market price of silver, the basic unit of measure used for silver, and how to multiply. We already know the legal definition of dollar: a silver coin containing 371.25 grains of pure silver. As for the unit of measure for silver, precious metals are traditionally defined in terms of troy ounces. Troy ounces are about 10 percent bigger than imperial ounces, and are subdivided into grains. One troy ounce is 480 grains. From this information, we can deduce that the amount of silver in a constitutional dollar. Now, 371.25 grains are equal to 77.344 percent of 480 grains, and thus 77.344 percent of a troy ounce. So, when the market price of silver tells us an ounce of silver is worth ten dollars in FRNs, then we know a constitutional dollar is worth $7.73 in FRNs. And when the market price is twenty dollars in FRNs, then a constitutional dollar is worth $15.46 (two times $7.33), and so on. Now, armed with this information, we are ready to determine whether an American plaintiff is legally entitled to a jury trial in a civil suit. This takes three steps. First, multiply the current ounce price of silver in terms of FRNs by 77.344 percent. This tells us the value of one constitutional dollar, expressed in FRNs. Next, multiply that figure by twenty. This is the constitutional threshold value for purposes of applying the twenty-dollar rule, also expressed in FRNs. And finally, compare the two values to see which is the greater. If the amount in controversy is the greater, the plaintiff is entitled to a jury trial. If the threshold amount is the greater, he is not.
Of course, this would all be simpler if there were no FRNs and we just used constitutional dollars.
In the list of money clauses quoted at the beginning of this article:
- The first six of the Constitution’s seven money clauses are part of the original U.S. Constitution, which was proposed on September 17, 1787, and ratified on June 21, 1788.
- The seventh money clause, found in the Seventh Amendment, is part of the Bill of Rights, which was proposed on September 25, 1789, and ratified on December 15, 1791.
- The Coinage Act of 1792 was passed by Congress on April 2, 1792.
- An Act to Provide for a Copper Coinage (whence the humble penny) was signed into law on May 8, 1792. Note: While Congress has the power to issue base-metal coins, such coins cannot be legal tender. That status only applies to gold and silver coins.
1/ The words ‘bank’ and ‘currency’ do not appear in the Constitution, nor its amendments. In this analysis, I have disregarded words like ‘taxes,’ ‘duties,’ and ‘excises’ — revenue provisions.
2/ The principle of enumerated powers expressed in the Tenth Amendment is inherent in the Constitution by virtue of the document’s structure. The federal government would be limited to a finite set of delegated powers even if there were no Tenth Amendment explicitly stating the fact.
3/ The Ninth Amendment is worded in a confusing, eighteenth-century way, but when read in light of eighteenth-century legal concepts and the text of its nearby companion, the Tenth, the amendment’s meaning becomes clear and surprisingly simple: federal powers are to be construed narrowly. That’s it. The Ninth Amendment is not an ink blot. For more on this topic, see the writings of Professor Kurt T. Lash.
4/ The obligation-of-contracts clause is relevant because most contracts involve promises to pay money, and some contracts require payment specifically in gold. Since the 1930s, the federal government has refused to enforce gold-clause contracts, which require payment under certain conditions of some amount of money in physical gold, usually gold coin. Such clauses are used by contracting parties as a shield against inflation. Now, Congress intentionally inflates the currency by emitting ‘bills of credit,’ paper money unbacked by anything of value, and by making this funny money legal tender. If gold clauses were allowed, this deliberate, and unconstitutional, policy of inflating the currency would be frustrated. So Congress bans them. Unfortunately for Congress, banning gold-clause contracts is unconstitutional. Along with banning bills of credit and making only gold and silver coin a legal tender, the Constitution, in Article I, sections 8 and 10, bars the states explicitly, and Congress implicitly, from impairing the obligation of contracts. Gold-clause contracts are contracts.
5/ 371.25 grains equals about 24 grams or about 77 percent of a troy ounce. 416 grains equals about 27 grams or about 87 percent of a troy ounce.
6/ To use the language of modern economists, the Constitution permits representative money to serve as legal tender, but only so long as it represents commodity money.