June 19, 2019 Wednesday

Bedtime Story 

The Fate of Continental Currency Had its impact on the Constitution

The indebtedness of the newly formed government of a just-born nation was both to the foreign governments (mainly France whose heavy spending bought it to the verge of bankruptcy and revolution) and to the people of the nation since if you remember this new currency was a form of promissory note or a loan from the people to the government.

The people of the Thirteen Colonies such as the soldiers, farmers and businessmen had accepted the Continentals and sold away their food, horses and other supplies to the Patriot forces in the hope that the new government would eventually repay their loans. 

In the end the Continental currency had virtually collapsed along with runaway inflation and this scarred the minds of nearly all the Founding Fathers who were a part of the Revolution.

It is for this reason that the Founding Fathers from their bitter experience made sure that there was no provision in the constitution for issuing of paper currency.

The constitution in fact explicitly states that the states could only have gold or silver money as their legal tender and nothing else.

This is the famous Contract Clause in Article I Section 10 that is known informally as the gold and silver clause which states:

“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 of Nobility.”

The relevant part that applies to our story is the fifth component of the Contract Clause:

“No state shall…make any Thing but gold and silver coin a Tender in Payment of Debts.”

Yet there was a loophole left in the Constitution to exploit later during the Civil War.

While the constitution did not explicitly grant the power to federal government to issue paper currency, it laid no restrictions on borrowing money.

Thus the United States Note when printed as a form of debt would bypass the restriction of issuance of paper currency as long as it would be repaid by the government.

Of course in this loophole yet another catch is that if the paper currency or the Treasury Notes are loans they should come with interest.

This is why the Legal Tender Act of 1862 did provide for this condition by making the United States Notes receivable by the government for short term deposits at 5% interest though in practice the Notes had become purely fiat with little hope of anyone getting reimbursed for it either in gold or silver.

Thus even the United States Constitution is prone to manipulation and “useful interpretation” as and when desired.

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Good night Mon Ami and my fellow cousin ape.