These memos below were drafted by Janelle Smith, a former Research Attorney at the Sustainable Economies Law Center.

The U.S. Constitution and Cities that Wish to Issue Currencies

When a city government wishes to issue a local currency it must tread carefully so that it does not violate the U.S. Constitution.  First, we must understand that Congress has the Constitutional authority to provide a currency for the entire nation.1  The basic intention behind the granting of that power was, reportedly, to promote solidarity, uniformity, and a strong central government.2  To further this goal, the Constitution also prohibits “States” from “emit[ting] bills of credit.”3

But what does that really mean?  And, more importantly, what does that mean for a city that wants to create a local currency?

To start, we must determine if a city would be considered a “State.”  Sources seem to go both ways in answer to this question.  There are several sources that indicate that a municipality would be considered a part of the “State;” at the same time, states like California do not themselves consider municipalities to be an arm of the state.4  In absence of strong precedent and guidance on this question, a city wishing to play it safe may want to assume that it is, indeed, a “State” when looking toward the Constitutionality of local currency issued by a city.

Next, we must consider whether local currency is a “bill of credit.”  In Briscoe, the Court had to define what exactly was a “bill of credit.”  The Court defined a bill of credit as an instrument of indebtedness: issued by the state; on the faith of the state; and designed to circulate as money.5  A local currency quite possibly fits the bill (pun intended).

But Briscoe also addressed a second question: Is a bank, established by a state as a separate entity to issue “bills of credit,” equivalent to the state itself issuing bills of credit?  Three factors came to light to make sure the bank was not just a front for state issued bills of credit: 1) Whether the bills of credit were issued by the state; 2) Whether the bills of credit were issued on the faith of the state; and 3) Whether the holder of the bill had a means of enforcing payment.

These factors should be considered carefully in conjunction with a close reading of the facts of Briscoe.  Quite possibly, a city’s local currency is not a “State” issued “bill of credit” if issued through a bank or other separate entity, instead of directly from the city.6  This is true even if the city is the only stockholder of the entity, so long as the bill is not issued on the credit of the city, and instead backed by property of the entity giving holders of the bills a means of enforcing payment.7

One final “Thing:” Just as the Constitution prohibits states from “emit[ting] bills of credit,” it also prohibits states from “make[ing] any Thing but gold and silver Coin a Tender in Payment of Debts.”  So what if a city accepts local currency to tender a debt, such as in payment of local taxes and parking tickets?  Today, in the age of cash, credit cards, and electronics accounts, we usually do not transact using gold and silver coin.  In fact, the U.S. dollar is no longer backed by gold or silver, making the antiquity of this provision of our Constitution evident.8 Even if a city decided to accept the local currency in payment of taxes or similar “debts,” the fact that electronic payments are widely accepted without being considered illegal greatly favors a city’s ability to also accept a local currency.  But it should be noted that this exact scenario has not been tested by the courts.

Additional research should be done to explore the possibility that a city may issue a currency, even without the creation of a separate bank or entity, and even without backing it with other property.  In the meantime, a safer route would be for a city to create a local currency by using a separately chartered bank or other entity and backing the currency with sufficient property.

 

More Detailed Memo on Whether a City Can Issue a Local Currency

Executive Summary

Under the United States Constitution Art. I § 10 prohibits “States” from “emitting bills of credit” and “making any Thing but gold or silver coin a tender in payment of debt.”  Historically, the prohibition was intended to promote solidarity, uniformity, and a strong central government throughout the nation.

It appears that a city might be considered a state, under federal law. However, there are grounds for uncertainty.  Under state law a municipality is not considered the “state”, but that under federal law and the Supremacy Clause municipalities are treated as a “state.”   In the interest of prudence one should assume that under federal law a city would be treated as a state and prohibited from “emitting bills of credit” and “making any Thing but gold or silver coin a tender in payment of debt.”

A “bill of credit” is defined as money issued by a state solely on the faith and credit of the state and designed to circulate as money.  However, it is Constitutional for states to incorporate banks that issue bills of credit so long as they are backed by more than the mere faith of the state.    They key case interpreting “emit bills of credit” is Briscoe.  The key factors in Briscoe in determining that Kentucky hadn’t issued bills of credit were that:

1) The bills of credit were issued by a bank and not directly by the state.

2) The bills of credit were adequately secured by property and therefore not issued solely on the faith and credit of the state.

3) The holder of the bill of credit had a means of enforcing payment against the bank (as opposed to having no means due to state immunity).

Thus, even if a city is a “state,” a city could avoid problems if they set up the Local Currency Program by:

1)  Creating a separate entity (so the city is not the entity emitting it).

2)  Backing the issuance with property to secure the value of the currency.

3)  No guarantee of redemption value through the city making the Local Currency not issued on the faith of the city. Not backing it with anything. (is it actually a bill of credit if it’s not backed by anything?)

4)  Ensuring that holders of Local Currency have a form of redress for enforcement of payment, i.e. holders must have someone to sue.

A state violates the Constitution if it makes “any Thing but gold or silver coin a tender in payment of debt.”  One key element is that this applies to payment of debts to the state (i.e. for taxes and fees), to payments to private parties.  Since Congress has authorized the payment of debts in something other than gold and silver (as opposed to such authorization coming from the states) the acceptance of forms of payment authorized by Congress is not repugnant to the Constitution.

Further research required for interstate commerce issues. For example, would limiting Local Currency to use by state residents avoid interstate commerce issues?

 

Introduction

The objective of this paper is to investigate whether issuance of a Local Currency by a city is prohibited by the United States Constitution. The paper begins with a historical overview of the creation of our national currency system.  Then evaluates the meaning behind Article I section 10 of the Constitution placing prohibitions of the States and how those prohibitions might apply to the city’s proposed Local Currency Program.

Local Currency and the United States Constitution

The Constitution creates a give and take between the three branches of government as well as between the States and the federal government. When it comes to financial regulation the Constitution grants the federal government the ability to issue and control the national currency.9  Then Article I, section 10 of the Constitution specifically prohibits the States from “emit[ing] Bills of Credit” and “mak[ing] any Thing but gold and silver Coin a Tender in Payment of Debts.”  Article I § 10 of the United States Constitution states, in its entirety:

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.10

But what lead our nations founders to create these constitutional provisions? This paper focuses on what the founder’s concerns were when drafting the Constitution and how courts have since interpreted what the Constitution means when: (1) prohibiting a “State”; from (2) “emit[ing] bills of credit”; and (3) making “any Thing but gold and silver Coin a Tender in Payment of Debts.”

Historical Overview: The Creation of a National Currency

One of the Federalists’ most important goals was to forge a strong set of federally enforceable rights against abusive state governments, a goal evident by the list of rights in Article I giving Congress its powers.  Of those powers, Congress is vested with the Constitutional authority to provide a currency for the entire country,11 and may make any law necessary and proper to carry out that goal.12   These powers served to centralize a strong national government.

The creation of such a strong central government comes from the Federalists’ dissatisfaction with small-scale politics.  Madison’s Federalist No. 10 exemplifies this sentiment:

The influence of factious leaders may kindle a flame within their particular States, but will be unable to spread a general conflagration through the other States. A religious sect may degenerate into a political faction in a part of the Confederacy; but the variety of sects dispersed over the entire face of it must secure the national councils against any danger from that source. A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project, will be less apt to pervade the whole body of the Union than a particular member of it; in the same proportion as such a malady is more likely to taint a particular county or district, than an entire State.13

Disliking small-scale politics and wanting to enlarge the governments geographic sphere to improve public decision making, the framers provided that Congress may restrain circulation as money of state issued notes not issued under Congressional authority.14  In this respect States may not exercise certain powers reserved for the federal government. For example, after the Constitution grants Congress the power to issue and control the national currency, Article I, section 10 of the Constitution sets prohibitions on the states related to currency.

So why were the Constitutional founders devoted to preventing the states from making any currency other than that created by Congress?  In Federalist no. 44, Madison explains that “… it may be observed that 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 to be at liberty to substitute a paper medium in the place of coin. Had every State a right to regulate the value of its coin, there might be as many different currencies as States; and thus the intercourse among them would be impeded.”15  This reference harkens to issues of state currencies creating interstate commerce issues.  How a currency limited to use by state residents might avoid interstate commerce issues is beyond the scope of this paper, but certainly deserves examination.

Both of Madison’s papers refer to paper money.  Note that Federalist No. 10 disclaimed “a rage for paper money” — other founders of the Constitution also appear to have been averse to the idea of federal paper money.16 This aversion stems from fear of the volatility of paper money and the instability it would create.17

But nearly one hundred years later, and despite the founder’s apparent aversion to paper money, the Legal Tender Cases declared that Congress has the Constitutional authority to create paper money.  The Legal Tender Cases gave Congress the power to issue paper money by reasoning that such power derived from the Necessary and Proper clause of the Constitution.  This same reasoning was used when deciding that Congress had the power to charter a national bank as a means for carrying on the financial transactions of the government.18   But while Congress has the power over national currency and the ability to issue paper money the States have prohibitions from such powers.

By the constitution of the United States, the several states are prohibited from coining money, emitting bills of credit, or making anything but gold and silver coin a tender in payment of debts. But no intention can be inferred from this to deny to congress either of these powers.

This position is fortified by the fact that congress is vested with the exclusive exercise of the analogous power of coining money and regulating the value of domestic and foreign coin, and also with the paramount power of regulating foreign and interstate commerce. Under the power to borrow money on the credit of the United States, and to issue circulating notes for the money borrowed, its power to define the quality and force of those notes as currency is as broad as the like power over a metallic currency under the power to coin money and to regulate the value thereof. Under the two powers, taken together, congress is authorized to establish a national currency, either in coin or in paper, and to make that currency lawful money for all purposes, as regards the nation government or private individuals. The power of making the notes of the United States a legal tender in payment of private debts, being included in the power to borrow money and to provide a national currency, is not defeated or restricted by the fact that its exercise may affect the value of private contracts. If, upon a just and fair interpretation of the whole constitution, a particular power or authority appears to be vested in congress, it is no constitutional objection to its existence, or to its exercise, that the property or the contracts of individuals may be incidentally affected. 19

So we have established that the Constitution grants power to Congress to control a national currency and issue paper money.  To simplify historical intentions, this power was granted in order to promote solidarity, uniformity, and a strong central government throughout the nation. The Supreme Court justifies extending Congressional power over currency as part of their authority under the Necessary and Proper clause.

 

The Prohibitions of Art. I § 10 on Local Currency

The history of how and why the United States has a national currency is relevant to understanding the prohibitions of Article I § 10 on “States” from “emit[ing] Bills of Credit” and “mak[ing] any Thing but gold and silver Coin a Tender in Payment of Debts” and how these provisions affect the issuance of local currencies.

First, the Constitution specifies that the prohibitions of Art. I § 10 apply to the States.  So what does the Constitution mean when it says “State”?  If something is not a State it would not be violating the Constitution, making the definition of “State” a vital inquiry.

The word “state” has various meanings. However, when in the Constitution, the term “state” has a definite, legal, or technical meaning20– the term designates a member of the Union, i.e., the “state” of California.21  Therefore, the term “state” as used in connection with matters of government in the United States usually designates a member of the Union of states of the United States.

Under this definition California is undoubtedly a State.  But California is a legal entity that exists to promote the welfare of its citizens.  And a State and its municipal subdivisions are created as convenient agencies for exercising the governmental powers that the State entrusts to them.22  So is a state chartered city considered a “State” subject to Art. I § 10?

According to Soloman in Local Currency: A Legal and Policy Analysis a city would likely be subject to Art. I § 10.  “The constitutional bar to emitting bills of credit appears to extend to other public bodies as well. The Court has held that a municipal corporation, “a subordinate branch of the domestic government of a State” and with no “purposes of private gain” has no power to issue “paper clothed with all the attributes of negotiability.””23

But bills of credit must be issued by the State or entity with the power to bind the state by acting as its agent.24  In Briscoe, the Supreme Court addressed whether notes issued by a bank established by the state of Kentucky were bills of credit in violation of the Constitution.25  As explained in Briscoe’s dissent, the constitutional prohibitions apply to States but not to private entities:

The Constitution does not prohibit the emission of all bills of credit, but only the emission of bills of credit by a state: and when I say, by a state, I mean by or in behalf of a state, in whatever form issued. It does not prohibit private persons, or private partnerships, or private corporations … from issuing bills of credit. No evils; or, at least, no permanent evils, have ever flowed from such a source…. The mischief was not there…. It was the issue of bills of credit, as a currency; authorized by the state on its own funds, and for its own purposes; which constituted the real evil to be provided against.26

The dissent in Briscoe referring to the “evils” that flow from issuing bills of credit are echoes of the constitutional history explained above – namely, that a national currency and prohibitions on the States in Art. I § 10 was intended to prevent the creation of various factions that would undermine the strength of a unified nation.

But the city, presumably, is not attempting to undermine the national currency nor does it have the authority to bind the State of California to the use of Local Currency Programs as currency.  Generally, state institutions are those owned by the state and acting on its behalf.

In California particular bodies that are not considered institutions of the state have included county institutions as well as a municipalities.27  In In re Houk’s Estate, the California Supreme Court had to decide whether a municipality was a state or state institution before determining the validity of a bequest to the City of Oceanside, which may have been invalidated if the city were considered a the state. The California Supreme Court stated that:

The city of Oceanside, or the city of San Francisco, or the city of Los Angeles, is not the state nor a state institution. It is true that cities and counties are agencies of the state, and for certain purposes branches of the state government, and they are state institutions in the general sense that they are organized by state authority and for state purposes. We have, however, agencies of the state for certain limited and specific purposes, such as prisons, hospitals, asylums, and similar establishments, which are officially known as state institutions, both under the Constitution and the statutes. Const. art. 10; art. 4, § 22; Pol. Code, tit. 5. In Chalfant v. State, 37 Ohio St. 60, state institutions are defined as institutions belonging to and owned by the state, and not such as might belong to particular municipalities. Municipalities are under the law classified by themselves, and we doubt if an instance can be found where a municipal corporation is defined or classified by statutory enactment or judicial construction under the term ‘state institution.’28

In this respect, state law does not consider the City of _____________ to be acting on behalf of the state as a state chartered entity.  So, “while municipalities are institutions in the general sense that they are organized by state authority for state purposes, they do not come within that class of state institutions officially recognized as such by the California Constitution and statutes, and comprising prisons, hospitals, and similar establishments.”29  This is a strong argument supporting the legality of the City of _____________’s Local Currency Program program.  But federal law does not take the same approach.

Federal Preemption

If under federal law the City of _____________ is considered an arm of the State of California then the issuance of a local currency may be preempted by Art. I § 10.  Article 6, clause 2 of the Constitution, also know as the Supremacy Clause, states that: “This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.”  

For purposes of the Supremacy Clause, constitutionality of local ordinances is analyzed in the same way as that of statewide laws.30  Federal preemption occurs when: (1) Congress enacts a statute that explicitly preempts state law; (2) federal law occupies a legislative field to such an extent that it is reasonable to conclude that Congress left no room for state regulation in that field; or (3) state law actually conflicts with federal law.31

From a federal preemption standpoint, if _____________’s issuance of local currency is considered a state action then understanding what exactly Art. I § 10 prohibits the states from doing is essential to the determination of whether or not a local currency would be federally preempted.   Does Art. I § 10 explicitly preempt state issuance of currency?  Did Art. I § 10, leave room for state regulation in the field?  Does _____________’s Local Currency Program program conflict with Art. I § 10?  All of these questions can only be answered by understanding what exactly this provision of the Constitution prohibits states from doing.

Prohibition on Emitting Bills of Credit

Article I § 10 of the Constitution prohibits states from “emit[ting] Bills of Credit.”32  Historically a “bill of credit” in the late 1700’s was technically “only one kind of paper money—a circulating instrument representing a government debt.”33

The name of this kind of currency probably was inspired by private bills of credit, which were instruments executed by an issuer to a potential creditor, informing the potential creditor that if he (i) extended credit to an identified potential debtor (often the issuer’s agent), and (ii) delivered to the issuer the debtor’s written acknowledgment of the debt, then the issuer would hold the potential creditor harmless. A paper-money bill of credit was analogous to its private counterpart in that the issuing government gave the instrument to one of its creditors to assure the creditor that if he extended credit to his fellow citizens (potential debtors), then he (the creditor) would be held harmless. The government promised to discharge this obligation by future payment or by accepting the bill in lieu of future taxes or other fees. The paper-money bill of credit, however, differed from its private-party analogue in that the public bill was intended to circulate as currency, and the bearer presented the same document, rather than a separate document executed by the debtor, when seeking payment.34

In simple terms, a bill of credit represented the government’s indebtedness to citizens and could be used as currency.  Thus, the term had been used interchangeably to mean “paper money” issued on the credit of the state.

Most Americans were suspicious of state-issued paper money (ie., bills of credit).35  “The best proof of the popularity of the Constitutional ban on state bills comes not from the Constitutional Convention itself, but from the much more richly documented state ratifying conventions. The Constitution’s ban of state bills and tender laws was almost universally approved.”36

In Craig the Supreme Court had the opportunity to address state issuance of “bills of credit” after the Missouri legislature passed an act that established loan offices authorizing the state treasury to issue certificates to be received in payment of taxes and other debts due to the state.37  The Court held that the certificates were “bills of credit,” within the prohibition of the Constitution stating that “[t]o ‘emit bills of credit,’ conveys to the mind the idea of issuing paper intended to circulate through the community for its ordinary purposes, as money, which paper is redeemable at a future day. This is the sense in which the terms have been always understood.”38

In Briscoe, a slightly different question was presented to the Court – whether the notes issued by a bank established by the state of Kentucky were bills of credit in violation of the constitution of the United States.39  In essence, the case involved two questions: first, the Court must again define what exactly was a “bill of credit”?; and second, was a bank established by a state that issued “bills of credit” equivalent to the state itself issuing bills of credit?

As to the first question, both the parties and the Court recognized the difficulty of defining a bill of credit.  The Court and the parties looked “to colonial legislation, and to the practices of states; and we are unable to ascertain from these, the true sources of information, with accuracy, what those who framed the constitution intended.”40  Resolving the definition of a “bill of credit” being essential to the case before addressing whether a state established bank could issue a bill of credit, the Court settled on the following definition:

To constitute a bill of credit, within the constitution, it must be issued by a state, on the faith of the state, and be designed to circulate as money. It must be a paper which circulates on the credit of the state, and is so received and used in the ordinary business of life. The individual or committee who issue the bill, must have the power to bind the state; they must act as agents, and, of course, do not incur any personal responsibility, nor impart, as individuals, any credit to the paper.41

As to the second question, whether a bank established by a state that issued “bills of credit” is equivalent to the state itself issuing bills of credit, the Court found that the bills of credit issued by the Bank of Commonwealth of Kentucky was not equivalent to the state itself issuing bills of credit.  The Court reasoned that, while the federal government is one of delegated powers, all powers not delegated to the federal government or inhibited to the states, are reserved to the states or to the people.  In other words, the federal government only has power explicitly granted to it by the Constitution while the States get all the “left over” powers unless explicitly prohibited by the Constitution.  The explicit prohibition at issue here is that States cannot emit bills of credit, but they are empowered to grant acts of incorporation“[t]his power is incident to sovereignty; and there is no limitation in the federal constitution, on its exercise by the states, in respect to the incorporation of banks.”42

But the obvious question arises – doesn’t this allow the states to issue bills of credit simply by opening a bank and issuing the bills in the name of the bank?  Three major factors contributed to the Court’s finding that the Bank of the Commonwealth of Kentucky was not just a front for state issued bills of credit: 1) Were the bills of credit issued by the state?; 2) Were the bills of credit issued on the faith of the state?; and 3) What means of enforcing payment from the state does the holder of the bill of credit have?  The Court found that “[u]pon their face, they do not purport to be issued by the state, but by the president and directors of the bank. They promise to pay to bearer, on demand, the sums stated.”43  The Briscoe Court also found that “[t]he notes contain no pledge of the faith of the state, in any form. They purport to have been issued on the credit of the funds of the bank, and must have been so received in the community.”44  And finally, the Court found that “[e]very holder of them could not only look to the funds of the bank for payment, but he had, in his power, the means of enforcing it. The bank could be sued… by a depositor; who obtained from the bank… the full amount of his judgment, in specie.”45  The importance of the ability to sue the bank for recovery, making it different from state issued bills of credit is explained by the following passage:

What means of enforcing payment from the state had the holder of a bill of credit? It is said by the counsel for the plaintiffs, that he could have sued the state. But was a state liable to be sued? In the case Chisholm’s Executors v. State of Georgia, in 1792, it was decided, that a state could be sued before this court; and this led to the adoption of the amendment of the constitution, on this subject. But the bills of credit which were emitted, prior to the constitution, are those that show the mischief against which the inhibition was intended to operate.46

So it is explained that the Briscoe Court recognized the fear that the framers of the Constitution had regarding state issued bills of credit – which would be backed by the faith of the state and not by actual funds, and the state could not be sued making the bills of credit uncertain and a “mischief” which the framers intended to prevent.

If the leading properties of the notes of the Bank of the Commonwealth were essentially different from any of the numerous classes of bills of credit, issued by the states or colonies; if they were not emitted by the state, nor upon its credit, but on the credit of the funds of the bank; if they were payable in gold and silver, on demand, and the holder could sue the bank; and if, to constitute a bill of credit, it must be issued by a state, and on the credit of, the state, and the holder could not, by legal means, compel the payment of the bill; how can the character of these two descriptions of paper be considered as identical? They were both circulated as money; but in name, in form, and in substance, they differ.47

Distinguishing Briscoe from Craig theCourt stated that in Craig “the certificates were loaned on good security, at different loan-offices of the state; and were signed by the auditor and treasurer of state…. the interest accruing to the state; and all estates purchased by officers under the provisions of the act, and all the debts then due, or which should become due to the state, were pledged and constituted a fund for the redemption of the certificates; and the faith of the state was also pledged for the same purpose.”48

It is only necessary to compare these certificates with the notes issued by the Bank of the Commonwealth, to see that no two things which have any property in common, could be more unlike. They both circulated as money, and were receivable on public account; but in every other particular, they were essentially different. If, to constitute a bill of credit, either the form or substance of the Missouri certificate is requisite; it is clear, that the notes of the Bank of the Commonwealth, cannot be called bills of credit. To include both papers under one designation, would confound that most important distinctions; not only as to their form and substance, but also as to their origin and effect.49

In sum, the Bank of the Commonwealth of Kentucky, under its charter, had no power to emit bills under the name of the sovereignty of the state of Kentucky, or which contain a pledge of its faith. “It is a simple corporation, acting within the shere of its corporate powers; and can no more transcend them than any other banking institution.”50 The Court held that the act incorporation the Bank of the Commonwealth was “a constitutional exercise of power by the state of Kentucky: and consequently, that the notes issued by the bank are not bills of credit, within the meaning of the federal constitution.”51

In 1850 the Court found bills of credit issued by a state chartered bank to be in violation of the Constitution because “[i]n procuring the notes of the bank, these securities had a right to rely, and no doubt did rely, upon the guaranty of the state to receive them in payment of debts.”52

But in 1851 the Court decided that the state could back such bills so long as the bank was adequately secured. Darrington held that “[t]he bills of a banking corporation, which has corporate property, are not bills of credit within the meaning of the Constitution, although the State which created the bank is the only stockholder, and pledges its faith for the ultimate redemption of the bills.”53  Darrington meant that the state backed bills of credit, when issued by an incorporated bank – regardless of whether the state was the sole shareholder – were not in violation of the Constitution so long as the bank has corporate property that could also back the bills.  This buffer of bank property to uphold the value of the issued bills seems to be a major key in the legality of such bills of credit.

Another key to the Constitution’s prohibition of bills of credit issued by a state is that the bill of credit, according to Briscoe, must be intended to circulate as money.  The Court has allowed states to directly issue instruments that are not intended to circulate as money, holding they are not within the definition of bills of credit.  For example, state issued coupons receivable for taxes the payment and redemption of which were based on the credit of the state because were not considered “bills of credit” prohibited by the Constitution because they were not emitted by the state as a substitute for money.54

To summarize, the general principles of a bill of credit that is prohibited by Art. 1 § 10 of the Constitution are that the bill, note, or similar instrument of indebtedness is: 1) issued by the state; 2) on the faith of the state; and 3) designed to circulate as money.55  A state obligation is not considered a bill of credit if it is not intended to circulate as money.56  Bills issued by banks incorporated by the state, even if intended to circulate as money, are not considered emitted by the state and therefore do not violate the Constitution.57  This is so even if the state is the only stockholder of the bank so long as the bill is not issued on the credit of the state, and instead backed by property of the bank, then it is not a bill of credit prohibited by the Constitution.58

So we must ask whether under federal law and the U.S. Constitution the City of _____________ would necessarily be considered an arm of the State of California.  Like a bank, it is an entity created under the sovereign powers of the state, but the Supremacy Clause treats local ordinances the same way as statewide laws.59

Perhaps the best way to ensure the constitutionality of _____________’s Local Currency Program program would be to institute a “double buffer”.  Two layers of insulation will likely remove the Local Currency Programs sufficiently from being “state issued” so that federal preemption via Art. I § 10 can be prevented.  The first buffer is the fact that the City of _____________ is a municipal corporation; the second buffer would be to have the City of _____________ be the sole shareholder of a bank backed by property to support the issuance of Local Currency Programs.  Both measures serve to remove the Local Currency Program program from the “evils” that Art. I § 10 was meant to prevent – namely, the volatile currency market created by money issued on the faith of the several states.

Prohibition on Making Any Thing but Gold and Silver Coin a Tender in Payment of Debts

Just as the Constitution prohibits states from “emit[ing] bills of credit,” it also prohibits states from issuing any Thing used to tender debt.  Again, understanding that the Constitution grants the federal government the ability to issue and control the national currency while prohibiting states from exercising related power over currency can help to understand what the framers of the Constitution envisioned – stability and a unified national currency.

But today, in the age of the internet, we do not transact using gold and silver coin.  In fact, the U.S. dollar is no longer backed by gold or silver, making the antiquity of this provision of our Constitution evident.  Putting a spotlight on how inconceivable this section of the Constitution is, in Leitch v. Bradbury a man in Oregon paid the state in gold and silver coins to register as a mayoral candidate – he then brought suit against the state for accepting another “Thing” in payment of debt from the other candidates.60  Leitch’s petition for certiorari was denied, no doubt because even entertaining the idea that a state could not accept payment except in gold and silver would mean that any and all payment of taxes for the last 40 plus years has been in violation of the Constitution.

A similar case was brought before the Alabama Supreme Court, which explained the legality of the state’s acceptance of legal tender other than gold and silver coin:

It is apparent that both constitutional provisions relied upon by the plaintiff place restrictions upon the powers of the state. The United States Supreme court, considering the constitutionality of a congressional act making United States notes legal tender, stated long ago in the case of Juilliard v. Greenman, 110 U.S. 421, 4 S.Ct. 122, 28 L.Ed. 204 (1884):

‘By the constitution of the United States, the several states are prohibited from coining money, emitting bills of credit, or making anything but gold and silver coin a tender in payment of debts. But no intention can be inferred from this to deny to congress either of these powers. * * *’

It does not appear here that the State of Alabama has attempted in any way to make paper money legal tender in payment of debts.61

Therefore, it can be understood that since Congress has authorized the payment of debts in something other than gold and silver, as opposed to such authorization coming from the states, that the acceptance of forms of payment authorized by Congress is not repugnant to the Constitution.

So is an “Local Currency Program” a Thing used to tender debt? The answer seems to be no.  Not unless the state decided to accept Local Currency Programs as payment for taxes or other debts and _____________ itself was considered a state (see discussion above).  Local Currency Programs, when traded between individuals and businesses would not be received by the state in payment of debt and would not threaten to violate this provision of the Constitution.  However, if _____________ were to 1) be considered a state; and 2) accept payment of debts to the city in the form of Local Currency Programs, then an Local Currency Program might be just the “Thing” that could violate this provision of the Constitution.

Other Local Currencies

Local currencies have been issue throughout the U.S., but always by private individuals or non-profit groups.  For example, BerkShares are “a local currency designed for use in the Berkshire region of Massachusetts issued by BerkShares, Inc., a non-profit organization.”62 According to the Berkshare website the exchange rate is ninety-five cents per BerkShare.63 BerkShares are printed in 1, 5, 10, 20, and 50 denominations and federal dollars remain on deposit at the BerkShare Exchange Banks to redeem excess BerkShares at a five percent discount.64

Another local currency, Ithaca Hours, in Ithaca, New York was started by an individual named Paul Glover and is run by him from his home.65  One Ithaca HOUR is valued at $10 U.S. dollars and is recommended to be used as payment for one hour’s work.  The Ithaca Hours currency has been successfully supported by the community and Mr. Glover offers a “starter kit” for other community that wish to start similar programs.

Although these are examples of successful uses of local currencies, they were not, nor has this author been able to find a local currency that was run by a municipality.66

Conclusion

The issuance of a Local Currency by a city may not be prohibited by the United States Constitution. America’s history and aversion to paper money during the drafting of the Constitution led to the elimination of state issued currency and the creation of our national currency system.

The two prohibitions in the Constitution that this article explores are contained in Art. I § 10, preventing “States” from “emitting bills of credit” and “making any Thing but gold or silver coin a tender in payment of debt”.  We have learned that under state law a municipality is not considered the “state”, but that under federal law and the Supremacy Clause municipalities are treated as a “state”.  It has also become clear that a “bill of credit” is essentially defined as money issued by a state solely on the faith and credit of the state.  And after passage of the Constitution case law and the evolution of our monetary system has allowed states to incorporate banks that issue bills of credit so long as they are backed by more than the mere faith of the state.  At first blush this activity would appear prohibited by Art. I § 10 of the Constitution but the Supreme Court has rationalized the legality of such issuances because it does not have the dangers that the founders of the Constitution were trying to prevent when they instituted the prohibition.

Further, the fact that the Constitution prohibits states from making any Thing but gold or silver a payment for debts has been interpreted to mean that while a state cannot do so Congress can.  And since Congress has authorized the payment of debts in something other than gold and silver the acceptance of forms of payment authorized by Congress does not violate to the Constitution, making it acceptable for states to receive payment in the forms we used today.

A city may issue a local currency, but with caution.  Incorporating a bank to issue the Local Currency and backing the issuance with property to secure the value of the currency would be wise, creating sufficient protection against the dangers of state issued money that the Constitutional provisions discussed in this article were meant to prevent.

 

Cases that cite: Briscoe v. Bank of Commonwealth of Kentucky

36 U.S. 257 (U.S. Ky. Jan Term 1837)

Discussed:

Legal Tender Cases, 1870 WL 12742, *7+, 79 U.S. 457, 465+, 20 L.Ed. 287, 287+, 12 Wall. 457, 457+ (U.S.Tex. Dec Term 1870)

Darrington v. Bank of Alabama, 1851 WL 6683, *1+, 54 U.S. 12, 12+, 13 How. 12, 12+, 14 L.Ed. 30, 30+ (U.S.Ala. Dec Term 1851) ”

Cited:

Alden v. Maine, 119 S.Ct. 2240, 2244+, 527 U.S. 706, 708+, 144 L.Ed.2d 636, 636+, 67 USLW3683, 3683+, 67 USLW 4601, 4601+, 138 Lab.Cas. P 33,890, 33890+, 5 Wage & Hour Cas.2d (BNA) 609, 609+, 99 Cal. Daily Op. Serv. 4913, 4913+, 1999 Daily Journal D.A.R. 6329, 6329+, 1999 CJ C.A.R. 3654, 3654+, 12 Fla. L. Weekly Fed. S 467+ (U.S.Me. Jun 23, 1999) (NO. 98-436)

Atherton v. F.D.I.C., 117 S.Ct. 666, 672, 519 U.S. 213, 222, 136 L.Ed.2d 656, 656, 97 FCDR 330, 330, 97 Cal. Daily Op. Serv. 335, 335, 97 Daily Journal D.A.R. 522, 522, 97 CJ C.A.R. 79, 79, 10 Fla. L. Weekly Fed. S 249, 249 (U.S.N.J. Jan 14, 1997) (NO. 95-928)

Principality of Monaco v. State of Mississippi, 54 S.Ct. 745, 748, 292 U.S. 313, 323, 78 L.Ed. 1282, 1282 (U.S.Miss. May 21, 1934) (NO. ORIGINAL)

Houston & T.C.R. Co. v. State of Tex., 20 S.Ct. 545, 552+, 177 U.S. 66, 86+, 44 L.Ed. 673, 673+ (U.S.Tex. Mar 26, 1900) (NO. 81)

Hans v. Louisiana, 10 S.Ct. 504, 507, 134 U.S. 1, 16, 33 L.Ed. 842, 842 (U.S.La. Mar 03, 1890)

Poindexter v. Greenhow, 5 S.Ct. 903, 909, 114 U.S. 270, 284, 29 L.Ed. 185, 185 (U.S.Va. Apr 20, 1885)

Veazie Bank v. Fenno, 1869 WL 11597, *14, 75 U.S. 533, 552, 19 L.Ed. 482, 482, 8 Wall. 533, 533, 2 A.F.T.R. 2238, 2238 (U.S.Me. Dec Term 1869) (in dissent)

U.S. v. Eckford, 1867 WL 11214, *4, 73 U.S. 484, 488, 18 L.Ed. 920, 920, 6 Wall. 484, 484 (U.S.Ct.Cl. Dec Term 1867)

The St. Lawrence, 1861 WL 7685, *5, 66 U.S. 522, 529, 1 Black 522, 522, 17 L.Ed. 180, 180 (U.S.N.Y. Dec Term 1861)

Dodge v. Woolsey, 1855 WL 8235, *5, 59 U.S. 331, 336, 18 How. 331, 331, 15 L.Ed. 401, 401, 3 Ohio F.Dec. 300, 300, 4 A.F.T.R. 4528, 4528 (U.S.Ohio Dec Term 1855)

Kearney v. Taylor, 1853 WL 7638, *14, 56 U.S. 494, 511, 15 How. 494, 494, 14 L.Ed. 787, 787 (U.S.N.J. Dec Term 1853)

Curran v. Arkansas, 1853 WL 7633, *14, 56 U.S. 304, 318, 15 How. 304, 304, 14 L.Ed. 705, 705 (U.S.Ark. Dec Term 1853)

Piqua Branch of State Bank of Ohio v. Knoop, 1853 WL 7693, *4, 57 U.S. 369, 372, 16 How. 369, 369, 14 L.Ed. 977, 977, 3 Ohio F.Dec. 133, 133 (U.S.Ohio Dec Term 1853)

Woodruff v. Trapnall, 1850 WL 6893, *8+, 51 U.S. 190, 197+, 10 How. 190, 190+, 13 L.Ed. 383, 383+ (U.S.Ark. Dec Term 1850)

Reeside v. Walker, 1850 WL 6784, *13+, 52 U.S. 272, 287+, 11 How. 272, 272+, 13 L.Ed. 693, 693+ (U.S.Dist.Col. Dec Term 1850)

Nathan v. State of Louisiana, 1850 WL 6841, *9, 49 U.S. 73, 81, 8 How. 73, 73, 12 L.Ed. 992, 992 (U.S.La. Jan Term 1850)

Planters’ Bank v. Sharp, 1848 WL 6448, *7, 47 U.S. 301, 309, 6 How. 301, 301, 12 L.Ed. 447, 447 (U.S.Miss. Jan Term 1848)

Commonwealth Bank of Kentucky v. Griffith, 1840 WL 4618, *3, 39 U.S. 56, 58, 14 Pet. 56, 56, 10 L.Ed. 352, 352 (U.S.Mo. Jan Term 1840)

Holmes v. Jennison, 1840 WL 4626, *13, 39 U.S. 540, 553, 14 Pet. 540, 540, 10 L.Ed. 579, 579 (U.S.Vt. Jan Term 1840)

Mentioned:

McGowan v. Maryland, 81 S.Ct. 1153, 1153, 366 U.S. 420, 459, 6 L.Ed.2d 393, 393 (U.S.Md.May 29, 1961) (NO. 11, 36, 67, 8)

State of Ohio v. Helvering, 54 S.Ct. 725, 727, 292 U.S. 360, 370, 78 L.Ed. 1307, 1307, 4 USTC P 1289, 1289, 13 A.F.T.R. 1172, 1172, 1934-1 C.B. 531, 531 (U.S.Ohio May 21, 1934) (NO. ORIGINAL)

U.S. v. Strang, 41 S.Ct. 165, 166, 254 U.S. 491, 494, 65 L.Ed. 368, 368 (U.S.Fla. Jan 03, 1921)(NO. 206)

State of South Dakota v. State of North Carolina, 24 S.Ct. 269, 282, 192 U.S. 286, 333, 48 L.Ed. 448, 448 (U.S.N.C. Feb 01, 1904) (NO. 8 ORIGINAL) (in dissent)

The Legal Tender Cases, 4 S.Ct. 122, 130, 110 U.S. 421, 448, 28 L.Ed. 204, 204 (U.S.N.Y. Mar 03, 1884)

West River Bridge Co. v. Dix, 1848 WL 6456, *28, 47 U.S. 507, 542, 6 How. 507, 507, 12 L.Ed. 535, 535 (U.S.Vt. Jan Term 1848)