Article I, Section 10, Clause 1: “No state shall...coin money; emit Bills of Credit; make
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any Thing but gold and silver Coin a Tender in Payments of Debt...”State constitutions also may allow the states to regulate those banks and issues due to
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their broad impact on their citizens. The proper handling of paper money issues by privatefractional-reserve banks remains an unresolved problem to this day.
The U.S. Constitution and Money: Cases on State Bills of Credit
by Michael S. Rozeff
Prefatory Remarks
This article is Part 3 in a series on Edwin Vieira Jr.’s two-volume book,
Pieces of Eight The Monetary Powers and Disabilities of the U.S. Constitution.
This part covers pp. 352-370 and391-454. As in Part 2, although the core effort is to summarize Vieira’s work, the result is arather free translation in which I do not attempt to capture, and probably could not do so if Itried, all of the many threads and emphases of Vieira’s arguments. Some of his work is omitted,other of it is amplified. I introduce arguments and integrating material of my own as well asarrange the result in a form that aims to make the arguments flow logically and understandably. Ihope that even those who have access to his work will find these articles useful as a supplement,containing an addition to the subject matter of the U.S. Constitution and money.
Introduction
The individual states are explicitly disabled in the Constitution from emitting bills of credit(paper money). What are bills of credit? Chief Justice Marshall defined bills of credit as
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follows:“To ‘emit bills of credit’ conveys to the mind the idea of issuing paper intended tocirculate through the community for its ordinary purposes, as money, which paper isredeemable at a future day. This is the sense in which the terms have been alwaysunderstood.”Justice Story wrote:“...when bills of credit are spoken of, the words mean negotiable paper, intended to passas currency or as money, by delivery or endorsement. In this sense, all bank notes, or, asthe more common phrase is, bank bills, are bills of credit. They are the bills of the partyissuing them, on his credit, and the credit of his funds, for the purposes of circulation ascurrency or money.”The states may constitutionally charter private-sector banks that issue bank notes (paper money). These private banks have always been termed “state” banks, due to the incorporation
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coming from the state. However, they are not state-controlled, not state agencies, not entities of the state, not part of the state, and not departments of the state.
A surviving example of a state-owned bank is the
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Bank of North Dakota. A snippet of history of the state-owned banks ishere. The author writes “While the experience of these banksowned and managed by the state were for the most part disastrous, a few stand out asconspicuously successful.”An indirect route to emitting state bills of credit exists. The incorporation of state banks createsthe possibility of unconstitutional actions by states, if the states create a state bank that
they own
,control, or otherwise enable to emit bills of credit by various legislative means of state. Such an
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institution, by looking very much like a chartered private state bank, might get away withemitting bills of credit even though the state is behind the institution and issuance procedure. Anumber of states followed this route of creating banks that were agents of the state. This createdconstitutional issues. The main cases we consider involve Missouri, Kentucky, Arkansas, andTennessee.On November 29, 1820, the legislature of Kentucky established the Bank of the Commonwealthof Kentucky as the exclusive property of the commonwealth; the legislature chose its presidentand directors. On June 21, 1821, the legislature of the State of Missouri passed “An act for theestablishment of loan offices, etc.” to issue loans in the form of low-denomination certificatesgood for paying taxes. In 1823, the state of Alabama established the Bank of the State of Alabama using funds of the state in its Treasury. On November 2, 1836, the legislature of Arkansas chartered the Bank of the State of Arkansas. The whole capital was subscribed by thestate, and the state appointed the president and directors of the bank.These banks gave rise to Supreme Court cases in which the Court ruled on the constitutionalityof the notes, certificates, paper money, coupons, warrants, and/or bills of credit issued by the banks. In addition, we touch on cases that involve Tennessee, Texas, and Virginia.Vieira’s review of the cases involving state bills of credit leads him to conclude that the SupremeCourt (p. 391) had a “tendency to digress further and further from sound constitutional doctrinein the monetary area as time progressed.” Further (pp. 449-450):“The foregoing discussion should prove to even the most skeptical reader the self-contradictions and absurdities Justices of the Supreme Court have historically embracedin order to salvage paper-money schemes for the States...All this perfectly exemplifiesthe ‘living’ Constitution in action: The judges first decide for themselves that some ‘veryimportant and necessary power’ of government must be sustained in the teeth of theConstitution, and then achieve this end through double-talk sheltering behind thesupposed ‘finality’ of ‘judicial review’. Thus, this set of cases highlights why suchirresponsible ‘judicial review’ is utterly destructive of constitutional government by WETHE PEOPLE.”
Craig v. Missouri (1830)
At the outset, in
(1830), the Marshall Court ruled against the state andoverturned the lower court decision that said that the state of Missouri’s loan offices wereconstitutional:
Ironically, Justice McLean was appointed by
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Andrew Jackson, who came to be a foe of all paper money. He was highly “ politically conscious” and sought the presidency on severaloccasions. “McLean emerges as a nationalist who was well aware of the needs of the businesscommunity.” He was also a “judicial activist.”Finkelmanwrites “While on the bench, McLean became increasingly nationalistic, reflecting his growing Whig proclivities.” McLean is bestknown for his dissent in the Dred Scott case.Set-off has a respectable financial and legal history of hundreds of years. It means that
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the issuer accepts liabilities he has issued to pay what is owed him. Someone who owes taxes tothe state can set-off or cancel the taxes payable by submitting to the state some certificates heowns that indicate the state owes the holder money. The two debts then cancel one another. Thisset-off capability provides the certificates with a value (a tax foundation to the value) and givesthem currency since many people owe taxes. Set-off via a tax foundation is a way to create a paper money or liability money that has value and circulates as a medium of exchange or currency.One might also examine some of the tests listed in
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part 2of this series.“A majority of the Court feels constrained to say that the consideration on which the notein this case was given, is against the highest law of the land, and that the note itself isutterly void. In rendering judgment for the plaintiff, the court for the State of Missouridecided in favor of the validity of a law which is repugnant to the Constitution of theUnited States.”After Marshall’s death in 1835, the Supreme Court reversed this position in similar cases fromthe other states. Justice John McLean delivered the majority opinion in the cases involvingKentucky, Alabama, and Arkansas.
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Craig v. Missouri
(1830) was the last case on state bills of credit that showed a strictconstruction of the Constitution. Missouri passed a statute in which the state issued $200,000 of interest-bearing certificates at two percent in amounts of $0.50 to $10. These they used to paycivil and military employees of the state. They were made payable for the taxes and fees due toany state, county, or town in Missouri at state loan offices. The loan offices could lend them tostate citizens on mortgage or personal security at rates no higher than six percent. The state alsoleased salt springs on condition that the salt miners would be paid in these certificates.Apart from the interest-bearing feature, it is evident that Missouri created a paper money and a banking organization intended to promote its circulation. The money was given a tax foundationthrough the set-off feature. The Constitution forbids any and all bills of credit issued by states,
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whether they have a tax foundation or not, whether they are legal tender or not, whether theycarry interest or not, whether there is a fund to redeem them or not, whether the issuers can besued or not, and so on. The prohibition is absolute.The Missouri certificates were indeed bills of credit. The denomination of the bills and their set-off capability in receipt of taxes and debts to the government gave them currency, and they were placed into circulation by the government in several ways.
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Some members of the Court thought that bills of credit necessarily had to be legal tender. TheMarshall Court correctly ruled that that feature was not necessary due to the phrasing of the
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The U.S. Constitution and Money Cases on State Bills of Credit
Part 3 of a series on Vieira's history of the U.S. Constitution and money, this reviews Supreme Court cases on state issues of paper money or bills of credit. The subversion of the Constitution between 1830…
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