The Supreme Court ruled in the Legal Tender Cases after the Civil War that the power to coin money implied the power to print money under the Necessary and Proper Clause, legitimizing the Greenbacks issued by President Lincoln. But in 1850, no state government had the power to extend its own credit in the form of bills of credit or paper money, and whether the federal government had that power was a subject of debate.
However, the expanding economy needed a source of freely-expandable currency and credit, and when local governments could not provide it, private banks filled the void. They issued their own "bank notes" equal to many times their gold holdings, effectively running their own private printing presses.
Was that constitutional? No. The Constitution nowhere gives private banks the power to create the national money supply -- and today, private banks are where virtually all of our circulating money supply comes from. Congress ostensibly delegated its authority to issue money to the Federal Reserve in 1913; but it did not delegate that authority to private banks, which have only recently admitted that they do not lend their depositors' money but actually create new money on their books when they make loans. In the Bank of England's latest Quarterly Bulletin, it states:
Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money.
This broad exercise of the money power by private banks is nowhere to be found in our federal or state constitutions, but courts have managed to get around that wrinkle. In Constitutional Law in the United States, Emlin McClain summarizes the case law like this:
A state cannot, even for the purpose of borrowing money, exercise the sovereign power of emitting paper currency (Craig v. Missouri). But this prohibition does not interfere with the power of a state to authorize banks to issue bank notes in the form of due-bills or of similar character, intended to pass as currency on the faith and credit of the bank itself, and not of the state which authorizes their issuance.The anomalous result is that state-chartered banks are able to issue credit that passes as currency, while state governments are not. But so the cases hold, and they apply to public banks as well as private banks.
Public Banks Held Constitutional
John Thom Holdsworth wrote in Money and Banking (1937) that in the mid-nineteenth century, "several of the states established banks owned entirely or in part by the state. There was some question as to the right of these state institutions to issue circulating notes, but the Supreme Court held that such notes were not 'bills of credit' within the meaning of the constitutional prohibition."
In Briscoe v. Bank of Kentucky, 36 U.S. 257 (1837), the Court observed that the charter of the challenged Kentucky state bank contained "no pledge of the faith of the state for the notes issued by the institution. The capital only was liable; and the bank was suable, and could sue." The Court "upheld the issuance of circulating notes by a state-chartered bank even when the Bank's stock, funds, and profits belonged to the state, and where the officers and directors were appointed by the state legislature."
The Court narrowly defined the sort of "bill of credit" prohibited by Article 1, Section 10, as a note issued by the state, on the faith of the state, designed to circulate as money. Since the notes in question were redeemable by the bank and not by the state itself, they were not "bills of credit" for constitutional purposes. The Court found that the notes were backed by the resources of the bank rather than the credit of the state. Moreover, the bank could sue and be sued separate from the state.
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