Money and the Constitution

At this year’s National Lawyers Convention, in November, the Federalist Society’s Financial Services and E-Commerce Practice Group is sponsoring a panel discussion on Money and the Constitution.  It is a broad topic, but a very important, foundational one.  In preparation for that discussion, I am offering, as a member of the practice group, what I see as some basic, key points that need to be understood.  These points will surely raise questions, which is my hope.

Since Section 8 of Article I of the Constitution granted Congress the power "to borrow Money on the credit of the United States," and since Federal Reserve notes held by the public effectively represent credit extended to the federal government, through the Federal Reserve, by the holders of those notes, the Federal Reserve's issuance and redemption of Federal Reserve notes appears to be constitutionally permissible.

Although called a Federal Reserve Note, individual pieces of U.S. currency effectively are non-interest-bearing bearer bonds of no fixed maturity.  Because the Federal Reserve System, a federal entity, issues Federal Reserve Notes, they clearly are debt obligations of the federal government.  Further, these "notes" can be exchanged, without restriction and at par, or face value, through commercial banks, for interest-bearing Treasury debt.

Coins issued by the Treasury Department can readily be exchanged at par for Federal Reserve notes or for interest-bearing Treasury debt.  Therefore, from a constitutional perspective, no distinction needs to be drawn between U.S. coins and Federal Reserve notes.

The quantity of Federal Reserve notes and U.S. coins in circulation – both domestically and outside the United States – is totally demand-driven; that is, no one is forced to hold Federal Reserve Notes or U.S. coins or barred from exchanging those notes and coins for interest-bearing Treasury debt.  Consequently, there cannot be an overissuance of U.S. currency (Federal Reserve notes plus coins issued the U.S. Treasury).  Overissuance of currency is the usual cause of high rates of inflation in other countries, such as is occurring at this time in Venezuela.

Because the federal government some time ago voluntarily ceased paying any of its obligations in coin and currency, today it lacks the mechanisms to force currency into circulation.  Countries with runaway inflation pay many of their obligations in non-redeemable currency instead of by checks or electronic funds transfers that can be put back, at par, to the government by financial intermediaries.