Gold, Paper and the 10th Amendment
Many Americans know that the Constitution defines and helps protect what their rights are. Few Americans know what precipitated the creation of the Constitution, and what destroyed the rights and livelihood of all Americans under the ill-fated Articles of Confederation. It's the same scourage that we today as Americans are still battling: paper, fiat currency.
Most Americans are taught as school-children that Ben Franklin had little formal school but nevertheless was able to strike it big on his own as a printer. What Americans are never told is what exactly it was that Franklin was printing that made him so wealthy: the answer is, paper money. Which is not to say that Franklin was some nefarious usurer out to profit off the labor of others and destroy their livelihoods in the process. He certainly wasn't. But it is to say that back in those days, we didn't understand the principles of inflation and monetary quite as clearly as we do today. Few people in that era saw much wrong (morally, economically or otherwise) with the practice of issuing fiat, paper currency.
Franklin even printed and published pamphlets in support of the practice, at least one of which still survives to this day:
A Modest Enquiry into the Nature and Necessity of Paper Currency
Ben Franklin: Master of the printing press and,
along with that, the issue of paper, fiat currency
Like I said, few people of that era understood the deleterious effects that hyperinflation and fiat currency can have on an economy. Said one patriotic old lady, perhaps somewhat ironically, "What a shame it is that Congress should let the poor soldiers suffer when they have power to make just as much money as they choose."(1) Little did she understand that the cause of the soldier's suffering and misery was the fact that Congress had the power to make just as much money as they choose.
This conception of fiat currency was widespread during the colonial era, and just following the War of Independence. Said one colonial legislator of the time: "Do you think, gentlemen, that I will consent to load my constituents with taxes when we can send to our printer and get a wagon load of money, one quire of which will pay for the whole?" (2). The effects of such sagacious statesman-like wisdom were of course classic and undeniable: by the late 1750s, prices had inflated by 800% in Connecticut, 900% in the Carolinas, 1000% in Massachusetts, and over 2300% in Rhode Island.
The Constitutional Convention, 1787, Philadelphia
The folly of fiat currency was not lost on all, however. George Washington complained about how "a wagon-load of money will scarcely purchase a wagon-load of provisions." (3) Thomas Jefferson gave some even more sage advice, and correctly identified inflation for precisely what it was: a hidden (and extremely unfair) tax:
“It will be asked how will the two masses of Continental and of State money have cost the people of the United States seventy-two millions of dollars, when they are to be redeemed now with about six million? I answer that the difference, being sixty-six millions, has been lost on the bills separately by the successive holders of them. Every one, through whose hands a bill passed, lost on that bill what it lost in value during the time it was in his hands. This was a real tax on him; and in this way the people of the United States actually contributed those sixty-six millions of dollars during the war, and by a mode of taxation the most oppressive of all.”
-- Thomas Jefferson
How was such an injust and clearly destructive economic system kept in place? The same way we do it today: price and wage controls, as well as legal tender laws.
Fixing the Problem of Funny Money
And it was for this reason that the Founding Fathers decided to convene the Constitutional Convention in Philadelphia. To put an end to paper currency, and to finally put the country firmly onto a gold (or silver) money standard. The sentiments that these delegates brought to bear with them are clear and direct. George Mason wrote to George Washington (prior to the Convention): "They may pass a law to issue paper money, but twenty laws will not make the people receive it. Paper money is founded upon fraud and knavery." John Langdon from New Hampshire warned that he would rather reject the whole plan of a federal union rather than grant the new government the right to issue fiat money. George Reed from Delaware declared that a provision in the Constitution granting the new government the right to issue fiat money "would be as alarming as the mark of the beast in Revelation." Thomas Paine (who did not attend the Convention) was strongly opposed to fiat currency, even more strongly opposed to legal tender laws, and advocated the death penalty for any member of Congress who even suggested passing legislation to that effect.
Spanish "Pieces (or pesos) of Eight", which were later
adopted and modified by the U.S. Congress into Gold Dollars
So what does the Constitution say about money?
Congress shall have the power ---
To borrow money .. to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures, .. [and] to provide for the punishment of counterfeiting.
No state shall .. coin money; emit bills of credit; or make anything but gold and silver coin a tender in payment of debts.
So the Constitution clearly prohibits the states from issuing fiat money (emitting bills of credit), and it clearly prohibits the states from using anything other than gold or silver in tender of payment of debts. However, it does not explicitly prohibit the federal government from doing so. This is unfortunate.. it may or may not be an oversight on the part of the Framers. However, there is a saving grace, and that is the 10th Amendment:
The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."
The power to issue fiat currency is not delegated to the federal government, and it is clearly prohibited to the States. Therefore, if any power to issue fiat currency legally exists in the United States, it is reserved to the people. In other words, individual people and private institutions, such as banks, have the right to issue IOUs and hope that the public will use them as money, but the government - at any level - is clearly prohibited from doing this.