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 include the word ‘coin,’ and two include the word ‘dollars.’ /1
Below is the text of each of the clauses, followed by some definitions and comments.
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 is forbidden.
The remainder of this article defines some of the foregoing terms, and explains how we get to these five rules.
The Constitution makes the ‘dollar’ the basic unit of account for the republic. It does not explicitly define the dollar. Why? Because everyone at the time knew exactly what a dollar was. It was a silver coin of a fixed weight and fineness: 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, ‘pieces of eight’ was the only ‘dollar’ Americans knew or used. The U.S. government did not mint its own version of the dollar coin until after the ratification of the Constitution (1788) and the Bill of Rights (1791).
In the Coinage Act of 1792, sometimes also called the Mint Act (because it established the first United States Mint to coin the first United States dollars), Congress duly codified the existing, universally understood definition of ‘dollar, which it formally defined as follows:
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.
That is what a ‘dollar’ is, for constitutional purposes.
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. 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 arbitrarily redefine the value of the dollar any way it pleases.
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, I call them ‘fiat money.’ The Constitution refers to fiat money as ‘bills of credit.’
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, 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. As we shall see when we get to the term ‘fiat money,’ this definition exceeds Congress’s power under the Constitution. The existing legal tender law (31 U.S.C. 5103), first passed in 1862, declares Federal Reserve Notes to be legal tender. But such notes are not legal tender in the constitutional sense, because they are fiat money and bills of credit, which the Constitution forbids.
The Founders intended that 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. And they put this intention into the constitutional text. Therefore, 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 becomes 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 of course limited in myriad ways. Among these 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 the Ninth and Tenth Amendments remind us that, in the absence of clear evidence to the contrary, we must assume Congress has not been granted a power. From this conclusion follows the important policy conclusion that Congress, like the states, 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.
In American history, examples of federal bills of credit include:
- 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 and are therefore, as a legal matter, unconstitutional.
By contrast, notes that are not ‘bills of credit’ in the constitutional sense, because they are fully backed by gold or silver coins, include:
- 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? That is, does it ban fractional reserve banking? No, it does not. But legal tender does have to be honest money.
Aside: Do I think fractional-reserve lending is a bad thing? No, 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.
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 a jury trial is not required in civil disputes involving amounts less than twenty dollars. They claim the dollar’s value has changed since the eighteenth century, to an extent we cannot fathom. This is silly. Our modern Federal Reserve Notes are labeled as ‘dollars,’ but they are not dollars in the constitutional sense, and are therefore not relevant to the twenty-dollar rule. In applying that rule, a judge need not be intimidated. All he has to do is translate FRNs into constitutional dollars. This is not too difficult. It takes knowing a little middle-school math, and having a bit of familiarity with how precious metals are weighed and measured. Precious metals are defined in terms of troy ounces (note: not imperial ounces), which are subdivided into grains. One troy ounce is 480 grains. A constitutional dollar equals 371.25 grains of pure silver, which is the same as 77.344 percent of a troy ounce. Therefore, when a troy ounce of silver is worth one dollar in FRNs, a constitutional dollar is worth 77.33 cents in FRNs. And when a troy ounce of silver is worth ten dollars in FRNs, a constitutional dollar is worth $7.73 in FRNs. And so on. Got it? Okay. Now let’s do the calculation for the twenty-dollar rule. Take the current troy-ounce price of pure silver in terms of FRNs and multiply it by 77.344 percent. The result is one constitutional dollar, expressed in FRNs. Now multiply that figure by twenty. You’ve got it! Now just compare your resulting figure to the amount of money in controversy, which is expressed in FRNs. If twenty constitutional dollars, expressed in FRNs, is less than the amount in controversy, the plaintiff is entitled to a jury trial. If not—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/ Interestingly, 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: federal powers are to be construed narrowly. 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 so-called ‘gold clause contracts,’ contracts that 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. Congress bans the agreements to facilitate inflation. It does so by emitting ‘bills of credit,’ paper money unbacked by anything of value. Gold clauses frustrate this design. Congress’s inflationary scheme is unconstitutional. Article I of the Constitution, in sections 8 and 10, bars the states explicitly, and Congress implicitly, from emitting bills of credit or impairing the obligation of contracts, including gold-clause 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.