The ability of banks to issue money raises some interestingquestions about the nature of money and about the legal aspectsof its issuance in the United States. On these topics I will nowbriefly digress. Money is nothing more than a common numerairewhich reduces the search costs associated with conductingbeneficial trades. Money is also a psychological abstraction.Literally anything can serve in this capacity as long as peopleare willing to accept it as a medium of exchange, if it maintainsits purchasing power reasonably over time, and if it can serve asa convenient unit of measure. An official government edict isnot necessary to create money.
The Constitution contains only two sections dealing withmonetary issues. Section 8 permits Congress to coin money and toregulate its value. Section 10 denies states the right to coinor to print their own money. The framers clearly intended anational monetary system based on coin and for the power toregulate that system to rest only with the federal government.The delegates at the Constitutional convention rejected a clausethat would have given Congress the authority to issue papermoney. They also rejected a measure that would have specificallydenied that ability to the federal government (Hammond, 92).Although the Constitution does not state that the federalgovernment has the power to print paper currency, the SupremeCourt in McCulloch vs Maryland (1819) ruled unanimouslythat theSecond Bank of the United States and the banknotes it issued onbehalf of the federal government were Constitutional.
If the federal government only is permitted to issuemoney,coin or paper, then how could state banks issue money? Statebanks did not coin money, nor did they print any "official"national currency. However, state banks could print bills ofcredit in exchange for specie deposits. These notes would bearthe issuing bank's name and entitle the bearer to the note's facevalue in gold or silver upon presentation to the bank. Statebank notes were a form of representative money; they were notgold or silver, but they represented it. The notes were moreconvenient for conducting large transactions than their speciecounterparts, and, more importantly for the extension of credit,could be produced easily whereas the gold and silver stock of thenation was relatively small and for the most part declining(Hixson, 12-13). The Supreme Court ruled in 1837 in BriscoevsBank of Kentucky that state banks and the notes they issuedwerealso constitutional.
One potential problem with such a system is that banks mayissue notes far in excess of their specie deposits. Customersappeared from time to time wanting to exchange their banknotesfor specie. The banks, of course, made allowances for this bykeeping some of the specie on hand at all times. If thespecie/banknote ratio was too low, even a small unexpectedincrease in the withdrawal rate could force the bank intoinsolvency. Remaining depositors who had not withdrawn theirspecie would be left with worthless banknotes.
The public accounted for this risk of non-redemption bydiscounting the notes of banks that were considered risky. Forexample, a $20 banknote issued by a bank with a reputation ofredemption problems might carry a 5 percent discount off its facevalue. In other words, a local merchant might only give acustomer $19 worth of goods for a $20 note with the differencecompensating the merchant for the risk of accepting the banknote.Discounts on notes among functioning banks ranged from about 95percent for the riskiest banks to zero for banks with a highdegree of public confidence. On the advent of the free bankingera, there were 712 state banks in operation in the UnitedStates, each with its own currency (Kidwell, 59). Imagine thedifficulty for a local merchant in tracking the riskiness andvalue of perhaps dozens of different banknotes in addition to theother concerns of his business.
FAQs
Article I, Section 8, Clause 5: [The Congress shall have Power . . . ] To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; . . . National Bank v.
Why is the History of central banking book banned? ›
Stephen Mitford Goodson created a masterpiece on the origin of Central Banking and the usury system. This book is prohibited in some countries because it tells different stories than the ones taught in schools and universities.
What does the Constitution say about central banks? ›
The Federal Reserve is the central bank of the United States. The Constitution does not specifically say that there should be a central bank. Describe how you might defend Congress' delegation of the power to coin money and regulate the value of money to the Federal Reserve.
What is the history of central banking? ›
The story of central banking goes back at least to the seventeenth century, to the founding of the first institution recognized as a central bank, the Swedish Riksbank. Established in 1668 as a joint stock bank, it was chartered to lend the government funds and to act as a clearing house for commerce.
How did the Constitution fix money? ›
Section 8 permits Congress to coin money and to regulate its value. Section 10 denies states the right to coin or to print their own money. The framers clearly intended a national monetary system based on coin and for the power to regulate that system to rest only with the federal government.
How did the Constitution fix debt? ›
The Taxing Clause of Article I, Section 8, is listed first for a reason: the Framers decided, and the ratifiers of the Constitution agreed, that Congress must itself possess the power “to lay and collect Taxes . . . to pay the Debts and provide for the common Defence and general Welfare of the United States.” Congress ...
What is the most banned book in the US history? ›
What Is the Most Banned Book in America? For all time, the most frequently banned book is 1984 by George Orwell.
Which founding fathers were against the central bank? ›
Not everyone agreed with Hamilton's plan. Thomas Jefferson was afraid that a national bank would create a financial monopoly that might undermine state banks and adopt policies that favored financiers and merchants, who tended to be creditors, over plantation owners and family farmers, who tended to be debtors.
Which president got rid of the central bank? ›
Andrew Jackson had railed against the use of the national bank for political purposes by his opponents, but he was more than willing to grant special privileges to state-chartered banks, particularly those that were, according to Treasury Department official and influential "Kitchen Cabinet" member Amos Kendall, "in ...
Who has the power to borrow money? ›
Article I, Section 8, Clause 2: [The Congress shall have Power . . . ] To borrow Money on the credit of the United States; . . .
The Constitution prohibits states from coining money but allows them to make “gold and silver Coin a Tender in Payment of Debts.” By prohibiting everything except “gold and silver Coin” the Constitution clearly considers gold and silver coinage to be legitimate, no matter who issues it.
Who owns the 12 Federal Reserve banks? ›
Federal Reserve Banks' stock is owned by banks, never by individuals. Federal law requires national banks to be members of the Federal Reserve System and to own a specified amount of the stock of the Reserve Bank in the Federal Reserve district where they are located.
When did central banking begin in the US? ›
Owen incorporated modifications by Woodrow Wilson and allowed for a regional Federal Reserve System, operating under a supervisory board in Washington, D.C. Congress approved the Act, and President Wilson signed it into law on December 23, 1913.
Why doesn't the US have a central bank? ›
Agrarian and progressive interests, led by William Jennings Bryan, favored a central bank under public, rather than banker, control. But the vast majority of the nation's bankers, concerned about government intervention in the banking business, opposed a central bank structure directed by political appointees.
Who controls the central bank? ›
Board of Governors of the Federal Reserve System
The Board of Governors--located in Washington, D.C.--is the governing body of the Federal Reserve System. It is run by seven members, or "governors," who are nominated by the President of the United States and confirmed in their positions by the U.S. Senate.
What does the Constitution say about lawful money? ›
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title ...
What Law protects your money in the bank? ›
The FDIC insures your bank account to protect your money in the unlikely event of a bank failure. Bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC), which is part of the federal government. The insurance covers accounts containing $250,000 or less under the same owner or owners.
What amendment involves money? ›
In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.
What does the Constitution say about taking out money from the Treasury? ›
Article I, Section 9, Clause 7: No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.
