Introduction: A Republic Built On Hard Money
On July 4, 1776, the Continental Congress approved the Declaration of Independence, marking the United States’ formal succession from Great Britain.
The Declaration contained revolutionary language, written by men willing to use violence and sacrifice their lives to throw off the bonds of tyranny and secure their rights to self-determination:
“...it is the Right of the People to alter or to abolish [Government], and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”
The Declaration was an act of war. But it was not the first act of war taken by the Continental Congress.
In fact, over a year earlier, Congress had issued bills of credit (that is, paper fiat money not backed by specie such as gold or silver) to raise and fund its army. These unbacked notes were colloquially known as “continentals.”
“Congress launched its first paper issue of $2 million in late June 1775, and before the notes were printed it had already concluded that another $1 million was needed,” as Murray Rothbard wrote in “A History Of Money And Banking In The United States.”
All told, between 1775 and 1779, Congress issued "over $225 million” in continentals, “superimposed upon a pre-existing money supply of $12 million,” per Rothbard.
This rapid expansion of the money supply had debilitating inflationary effects:
“[A]t the end of 1776, the Continentals were worth $1 to $1.25 in specie; by the fall of the following year, its value had fallen to 3-to-1; by December 1778 the value was 6.8-to-1; and by December 1779, to the negligible 42-to-1. By the spring of 1781, the Continentals were virtually worthless, exchanging on the market at 168 paper dollars to one dollar in specie. This collapse of the Continental currency gave rise to the phrase, “not worth a Continental.”
–Rothbard, “A History Of Money And Banking In The United States”
The states, not to be outdone, issued their own paper fiat, adding “a total of 210 million depreciated dollars to the nation’s currency” by war's end.
"Finally in March 1780, with continentals good for about two and one-half cents on the dollar, Congress gave up the pretence that notes were on par with coin,” according to Robert G. Natelson’s “Paper Money And The Original Understanding Of The Coinage Clause.”
Congress stopped issuing paper altogether, and essentially announced a default.
Reflecting on the state of Revolutionary monetary affairs, James Madison explained that paper fiat had been a necessary evil:
“Being engaged in a necessary war without specie to defray the expence, or to support paper emissions for that purpose redeemable on demand, and being at the same time unable to borrow, no resource was left, but to emit bills of credit to be redeemed in future. The inferiority of these bills to specie was therefore incident to the very nature of them. If they had been exchangeable on demand for specie, they would have been equivalent to it; as they were not exchangeable on demand, they were inferior to it.”
The Founders knew fiat money was inferior to hard money like gold and silver specie, but without a sufficient supply of specie on the continent, and engaged in a war for their new country’s very existence, they were left with no choice but to run the money printer. The forced easy-money monetary policy of the Revolutionary era, and its resulting hyperinflation, would profoundly influence the Founders when drafting what was to become the U.S. Constitution.
Indeed, the Founders enshrined their preference for hard money in the various monetary clauses of the Constitution. It may come as a surprise to many that the Constitution does not authorize the Federal government to issue paper fiat money.
“The Constitution specifically provides that gold and silver coins will be the money of the United States and arguably prohibits the issuance of paper money,” as Ali Khan put it in “The Evolution Of Money: A Story Of Constitutional Nullification.”
That is a power that the Supreme Court subsequently conferred upon Congress despite the lack of any textual support. And the states are expressly forbidden from declaring anything but gold and silver legal tender.
The Founders’ primary monetary goal was to limit government’s influence over money, and thereby avoid the economic and societal ills that such influence creates. They understood that commodity money was superior to paper fiat because it was immune to political interference (with gold being the “preeminen[t]” money due to its “greater rarity”).
Had the technology existed at the time, therefore, the Founders would have been Bitcoiners.
This may seem a bold, unprovable claim. But by examining the history of money during the Colonial and Revolutionary eras, and, crucially, the Founders’ own understanding of the Constitution’s prohibitions on fiat, a credible argument can be made that Bitcoin would find itself next to "gold and silver" as Constitutional money, had the technology existed at the founding of the United States.
Fiat Money And Economic Chaos In The Colonial And Confederation Eras
The Revolutionary era was not America’s first experience with fiat money. The Colonial era was marked by repeated episodes of paper fiat emissions by the colonies, which led to inflation and economic hardship.
The colonies lacked specie, being on the other side of the world from the economies of Europe, and so at first, the colonial markets used money substitutes such as agricultural commodities like tobacco, rice, wheat, beef, pork, fish, corn and beaver skins. Collectible monies such as wampum (shell beads) also served as money for trade with Native Americans.
But commodity money, or paper money backed by commodities, did not allow for quick expansion of the money supply. And so it was that Massachusetts introduced the western world to paper fiat money.
"Apart from medieval China, which invented both paper and printing centuries before the West, the world had never seen government paper money until the colonial government of Massachusetts emitted a fiat paper issue in 1690,” according to Rothbard.
The impetus for Massachusetts’s historic emission of paper fiat was (as is ever the case) war. Massachusetts was at war in Canada and needed to finance soldier salaries, supplies and arms. The results were, predictably, disastrous.
“[W]ithin a year after the initial issue, the new paper pound had depreciated on the market by 40 percent against specie,” Rothbard wrote.
In 1692, Massachusetts declared its paper money official legal tender. In so doing, it invoked Gresham's Law:
“This legal tender law had the unwanted effect of Gresham’s Law: the disappearance of specie circulation in the colony. In addition, the expanding paper issues drove up prices and hampered exports from the colony. In this way, the specie ‘shortage’ became the creature rather than the cause of the fiat paper issues.”
–Rothbard, “A History Of Money And Banking In The United States”
Over the following decades, other colonies emulated Massachusetts by issuing their own paper fiat legal tenders:
“Similar consequences — dramatic inflation, shortage of specie, massive depreciation despite compulsory par laws — ensued in each colony. Thus, along with Massachusetts’ depreciation of 11-to-1 of its notes against specie compared to the original par, Connecticut’s notes had sunk to 9-to-1 and the Carolinas’ at 10-to-1 in 1740, and the paper of virulently inflationist Rhode Island to 23-to-1 against specie. Even the least-inflated paper, that of Pennsylvania, had suffered an appreciation of specie to 80 percent over par.”
–Rothbard, “A History Of Money And Banking In The United States”
In what was to become a recurring theme, Rhode Island was the worst offender:
“Notes issued by Rhode Island in 1740, later called ‘old tenor’ lost so much in value that in 1771 £8 ‘old tenor’ were accepted by the state Treasury in payment of taxes for 6 shillings ‘lawful money,’ a depreciation of almost 96%.”
–Nussbaum, “Money In The Law”
By most measures, the colonial experiment with paper fiat money was unsuccessful, and in 1751, the British Parliament sought to stanch the bleeding by "prohibit[ing] the colonies from issuing any further Paper Bills or Bills of Credit, of any Kind or Denomination whatsoever," and that “no paper money in New England should be legal tender," Natelson wrote. In 1764, Parliament "extended the ban on issuance of legal tender paper currency from New England to all American colonies," bringing an end to the colonial fiat era.
The period immediately following the Revolution is known as the Confederation Era, after the Republic’s first governing document, the Articles of Confederation, which was effective from March 1, 1781 to June 21, 1788. The Articles — unlike the subsequent Constitution — expressly empowered the Confederation Congress to emit paper money, but it declined to do so.
Ten of the states, however, did issue paper fiat. Rhode Island, once again, was a notorious abuser of this power, imposing draconian compulsory tender laws that nearly sparked a constitutional crisis within its borders. After the state’s courts declared the compulsory tender laws unconstitutional, Rhode Island’s Assembly “constituted itself into a tribunal taking the judges to account because of their disobedience toward legislation duly enacted by the Assembly. The procedure was not carried through but four of the judges, it seems, were not reelected,” per Nussbaum.
The Founders Intended To Prohibit Paper Fiat
This history, much of it experienced firsthand by the Founders, shaped their views on money. The Founders were certainly not a monolith, and discerning their original intent with respect to many provisions of the Constitution can be fraught. But their shared hatred for fiat money is undeniable.
The Constitution’s prohibition on state legal tender, and the absence of a federal power to issue paper fiat, was primarily designed to avoid inflationary monetary policy like that practiced by the colonies, Continental Congress and later, the states under the Articles of Confederation.
“The colonists had long recognized that depreciating currency enriched some social groups at the expense of others,” according to Natelson. Among those thought to be on the losing side of inflationary paper monetary policies were "widows, orphans, clergy, and "[s]alary [m]en," per Natelson. The winners were, of course, known to be the "debtors," whose obligations were depreciated by inflation.
Madison's notes from the Constitutional Convention detail the overall disgust held for paper money. For example, during the Convention’s opening remarks, Edmund Randolph, "speaking of the defects of the [C]onfederation” era, stated that “the havoc of paper money had not been foreseen” by the authors of the Articles of Confederation.
Madison’s notes further reveal that Roger Sherman, as part of the committee drafting what would become Article I, Section 10’s prohibition on state legal tender laws, sought to add “emit bills of credit, nor make any thing but gold and silver coin a tender” to the prohibition because he “thought [the Convention was] a favorable crisis for crushing paper money."
Likewise, the record of the ratification process, conducted by state conventions, "includes many general comments that the Constitution would put an end to paper money," Natelson wrote. The state legal tender paper laws "were cited as justification of the ban at ratification conventions, and 'were attacked both as immoral efforts to redistribute wealth from some constituencies to others and as a source of bad international and interstate relationships.'"
And a number of references to the clause prohibiting state tender laws are found in the Federalist Papers, which describe the section as removing from the states the power to issue “paper medium,” (“the same reasons which shew the necessity of denying to the states the power of regulating coin, prove with equal force that they ought not be at liberty to substitute a paper medium in the place of coin,” Madison wrote), or “paper money” (“The States, by the plan of the convention, are prohibited from doing a variety of things… The imposition of duties on imported articles, and the emission of paper money, are specimens of each kind,” Hamilton wrote). In Federalist No. 44, Madison explained the need to prohibit the states from issuing paper money:
“The loss which America has sustained since the peace, from the pestilent effects of paper money on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government, constitutes an enormous debt against the States chargeable with this unadvised measure, which must long remain unsatisfied; or rather an accumulation of guilt, which can be expiated no otherwise than by a voluntary sacrifice on the altar of justice, of the power which has been the instrument of it.”
In a later letter discussing Federalist No. 44, Madison confirmed “[t]he evil which produced the prohibitory clause in the Constitution of the United States was the practice of the States in making bills of credit, and in some instances appraised property, ‘a legal tender.’”
Another after-the-fact exchange between two additional Founders demonstrates a continuing opposition to paper fiat. Writing to Thomas Jefferson in 1819, John Adams commented:
“[Debasing the coinage] is to steal. A theft of greater magnitude and still more ruinous is the making of paper. It is greater because in this money there is absolutely no real value. It is more ruinous because by its gradual depreciation during all the time of its existence it produces the effect which would be produced by an infinity of successive deteriorations of the coin.”
Jefferson responded (perhaps self-servingly):
“The paper bubble is then burst. This is what you and I, and every reasoning man, seduced by no obliquity of mind or interest, have long foreseen. Yet it's [sic] disastrous effects are not the less for having been foreseen.”
Although the Founders clearly hated paper money, they "were unsure about placing a total ban on Congress's power to issue paper money," according to Khan. Many thought by failing to expressly grant the power, the federal government (possessed of only those powers granted to it by the people and states) would not be able to issue paper fiat and declare it legal tender. It is clear, however, that "they were certain about denying states even a conditional power of issuance,” Khan wrote.
On the other hand, at the time of the founding, gold and silver “constituted the preferred money of the world primarily because supply was limited,” per Khan. That “natural scarcity … was a virtue to be preserved in both law and economics.”
For that reason, and "at the urging of Alexander Hamilton, [the Founders] adopted a bimetallic standard,” Khan added. Gold, of course, was known to be superior to silver due to its greater scarcity. But, "[s]ilver, the ancient money of the American colonies, had its status deeply entrenched in the consciousness of the people and realities of the market," and was thus allowed as parallel legal tender.
The historical record of the Founders’ writings and debates, therefore, establishes that the chief concern animating the decision to limit state legal tender to gold and silver, and refusing to grant the federal government an express power to adopt fiat money, was the history of inflationary paper money issuance and compulsory tender laws forcing its acceptance.
Bitcoin’s Qualities As “Digital Gold” Comport With The Founders’ Original Intents For The U.S.
The Founders permitted states to declare gold and silver tender because these metals were largely immune to government interference, which had produced inflation and economic instability. This immunity stemmed from scarcity. As Hamilton noted, gold’s “preeminence” as money was owed to its “greater rarity.”
Not only is gold scarce within the earth, but it’s also very costly to produce (mine, refine, smelt, coin), and difficult to forge or fake. These additional properties ensure that gold’s scarcity remains intact despite new gold being brought to market. As described by Saifedean Ammous in “The Bitcoin Standard,” at the time of the founding, gold had the lowest rate of inflation of any monetary good, meaning it was the “hardest” money, because the existing stock was so much larger than the flow of new gold into the market.
These combined properties (scarcity, high cost to produce and difficulty to fake) have been described as “unforgeably costly.” Because gold was not only “hard money,” but also unforgeably costly, state adoption of gold as legal tender would not lead to inflation within the Republic. States could not quickly issue more gold coins to fund their governments.
Gold, therefore, was the best monetary technology in existence at the founding for solving the problems identified by the Founders with state legal tender laws and paper money. Accordingly, the states only retained their power to adopt this hard, unforgeably costly money as tender.
The Evolution Of Money: Bitcoin Succeeds Gold
As Professor Khan so presciently observed nearly 23 years ago, although “the monetary clauses of the Constitution … incorporated a universal truth at the time of their adoption,” they nonetheless “failed to halt the evolution of money.”
With credit cards having mostly replaced cash, and as the Federal Reserve and Congress explore issuing a central bank digital currency,” Khan’s prediction that “the dollar will eventually become an abstract unit of currency with no specific embodiment in metal or paper” has proved correct.
But non-state, monetary goods like gold have evolved too. Introducing his early electronic gold protocol, Nick Szabo explained:
“Precious metals and collectibles have an unforgeable scarcity due to the costliness of their creation. This once provided money the value of which was largely independent of any trusted third party. Precious metals have problems, however. It's too costly to assay metals repeatedly for common transactions. Thus a trusted third party (usually associated with a tax collector who accepted the coins as payment) was invoked to stamp a standard amount of the metal into a coin. Transporting large values of metal can be a rather insecure affair, as the British found when transporting gold across a U-boat infested Atlantic to Canada during World War I to support their gold standard. What's worse, you can't pay online with metal.
“Thus, it would be very nice if there were a protocol whereby unforgeably costly bits could be created online with minimal dependence on trusted third parties, and then securely stored, transferred, and assayed with similar minimal trust. Bit gold.”
Szabo’s “Bit gold” was a forerunner to what many today consider to be the “digital gold” of bitcoin.
This is how Bitcoin’s pseudonymous creator, Satoshi Nakamoto, described Bitcoin: “The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation.”
While a comprehensive discussion of Bitcoin’s operation is beyond the scope of this article, suffice it to say, “Bitcoin is a peer to peer electronic cash, a new form of digital money that: [1] can be transferred between people or computers without any trusted middleman (such as a bank), and [2] whose issuance is not under the control of any single party,” as Yan Pritzker put it in “Inventing Bitcoin.”
In other words, bitcoin — like gold — is a bearer asset that is not issued by the state, a bank or a corporation.
And as a truly decentralized network, Bitcoin’s issuance rate, or monetary policy is practically immutable, thus eliminating the risk of inflation. Unlike fiat currencies such as those issued by the colonies, Continental Congress or states, which were issued on a variable schedule at the whim of politicians or bureaucrats, often with very little notice, Bitcoin’s code sets the issuance rate of new bitcoin and caps the overall supply at 21 million.
“There is no central authority that determines the evolution of the Bitcoin software and no single programmer is able to dictate any outcome,” Ammous wrote. Thus, because no central authority can produce more bitcoins at will, Bitcoin is immune to the inflationary debasement to which fiat currencies are prone.
But Bitcoin is not just as good as gold, it’s better:
“Beyond digital scarcity, Bitcoin is also the first example of absolute scarcity, the only liquid commodity (digital or physical) with a set fixed quantity that cannot conceivably be increased.”
–Ammous, “The Bitcoin Standard”
About every ten minutes a new block is added to Bitcoin’s blockchain, yielding a reward, or issuance, of 6.25 new bitcoins, at the current reward level. That issuance is measured against the 19 million bitcoin already in existence. This makes Bitcoin’s growth rate very low — on par with gold’s.
Bitcoin Comports With The Founders’ Understanding Of Hard Money
Like gold before it, bitcoin solves the problem identified by the Founders with state legal tender laws and paper fiat because it is immune to inflationary monetary policies.
The Founders understood gold as the best form of money in existence. Bitcoin has incorporated those properties that made gold the preeminent money at the founding (scarcity and unforgeable costliness), and elevated them through the use of modern communications and computing technology.
It wasn’t because gold was an inert shiny rock that states were allowed to adopt it as tender. Its monetary properties mattered, not the form that it took. Article I, Section 10’s reference to “gold and silver coin” therefore, was a reference to so-called commodity money, not mere elements on a periodic table.
As George Selgin explains, “commodity’ money consists, as the term suggests, of some useful article of trade, that is, something that has a use other than that of being a medium of exchange, and that is also naturally scarce, in that it commands a positive value in equilibrium, which (assuming competing suppliers) is equal to its marginal cost of production.” Commodity money is contrasted against fiat money, i.e., “paper notes, or central bank deposits readily convertible into such notes, which are useful only as exchange media, and which command a value in equilibrium far exceeding their zero or near-zero marginal cost of production.”
If gold was commodity money, then, as George Selgin suggests in “Synthetic Commodity Money,” “Bitcoin raises the intriguing possibility that one might create a synthetic commodity money based upon a production ‘protocol’ such as might replicate the outcome of almost any conceivable monetary rule.”
Bitcoin’s protocol, as previously discussed, has enshrined a “hard money” monetary rule akin to gold.
This transition from commodity money to synthetic commodity money is an example of a new technological development that would be encompassed within the original meaning of the monetary clauses, such as Article I, Section 10.
Justice Neil Gorsuch has explained this originalist analytic with a series of examples from other Constitutional provisions:
“Originalism teaches only that the Constitution’s original meaning is fixed; meanwhile, of course, new applications of that meaning will arise with new developments and new technologies. Consider a few examples. As originally understood, the term ‘cruel’ in the Eighth Amendment’s Cruel and Unusual Punishments Clause referred (at least) to methods of execution deliberately designed to inflict pain. That never changes. But that meaning doesn’t just encompass those particular forms of torture known at the founding. It also applies to deliberate efforts to inflict a slow and painful death by laser. Take another example. As originally understood, the First Amendment protected speech. That guarantee doesn’t just apply to speech on street corners or in newspapers; it applies equally to speech on the Internet. Or consider the Fourth Amendment. As originally understood, it usually required the government to get a warrant to search a home. And that meaning applies equally whether the government seeks to conduct a search the old-fashioned way by rummaging through the place or in a more modern way by using a thermal imaging device to see inside. Whether it’s the Constitution’s prohibition on torture, its protection of speech, or its restrictions on searches, the meaning remains constant even as new applications arise.”
While at first blush, Article I, Section 10’s reference to “gold and silver coin” appears narrow in meaning, it was originally understood to refer to the hardest forms of commodity money — that is, not paper fiat money — then in existence. But “new applications of that meaning” have arisen “with new developments and new technologies,” namely, synthetic commodity money. The hardest form of which is bitcoin.
Conclusion
With an understanding of the history of paper fiat money and legal tender laws in America, the debates at the Constitutional Convention and Ratification Conventions, and the Founders’ views on the subject, it can fairly be said that the Founders’ original intent was to create a Republic based on sound money. At the time, this was gold. Today, we have digital gold — Bitcoin. The Founders would have embraced such a technological evolution of sound money with fervor.
The Founders, in other words, were Bitcoiners.
This is a guest post by Aaron Daniel. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.