In the nineteenth century, Mississippi, Arkansas, Florida, Kentucky, and Indiana all had their own state-owned banks. Some were extremely successful (Indiana had a monopoly state-owned bank). These banks, too, withstood constitutional challenge at the US Supreme Court level.
Were the prohibitions against "lending the credit of the state" simply ignored in these cases? Or might that language have meant something else?
The Constitutional Ban on "Bills of Credit": Colonial Paper Money
Constitutional provisions against lending the state's credit go back to the mid-nineteenth century. California's is in its original constitution, dated 1849. There was then no national currency, and the National Bank Act had not yet been passed.
Several decades earlier, the states had been colonies that issued their own currencies in the form of paper scrip. Typically called "bills of credit", these paper bills literally involved the extension of the colony's credit. They were credit vouchers used by the colony to pay for goods and services, which were good in trade for an equivalent sum in goods or services in the marketplace.
Prior to the constitutional convention in the summer of 1787, the colonies exercised their own sovereign power over monetary matters, including issuing their own paper money. After the collapse of the Continental currency during the Revolutionary War, largely due to counterfeiting by the British, the framers were so afraid of paper money that they expressly took that power away from the colonies-turned-states, and they failed to expressly give it even to the federal government. Article I, Section 10, of the U.S. Constitution provides:
No State shall . . . coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; . . . .
Congress was given the power "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures." But language authorizing Congress to "emit Bills of Credit" was struck out after much debate.
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