Paper money has long been debated in the United States since the beginning. Paper money was used in the colonies and much of the American Revolution was financed by printing what was called “Continental currency“, which was controlled by the Continental Congress.

These notes were printed in large quantities to pay for the war, but in such excess that they became virtually worthless. The memory of this was fresh in the minds of those at the Constitutional Conventions and can be seen in notes on debate that took place on August 16, 1787.

A debate occurred over the language of Article 1, Section 8, Clause 2 of the US Constitution which originally read:

“To borrow  Money AND EMIT BILLS on the credit of the United States; ”[emphasis added]

A motion was made to strike out “and emit bills”, a second motion was made and a debate ensued. The concern was primarily over the issue of whether such ‘bills’ would be considered ‘legal tender’ in the form of paper money or simply contained to be an instrument of debt. The following quotes are highlights from the debate. [Notes on the Convention]

Mr. Govr. MORRIS moved to strike out “and emit bills on the credit of the U. States”-If the United States had credit such bills would be unnecessary: if they had not, unjust & useless.

Mr. ELSEWORTH thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By witholding the power from the new Governt. more friends of influence would be gained to it than by almost any thing else. Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good.

Mr. WILSON. It will have a most salutary influence on the credit of the U. States to remove the possibility of paper money. This expedient can never succeed whilst its mischiefs are remembered, and as long as it can be resorted to, it will be a bar to other resources.

Mr. BUTLER. remarked that paper was a legal tender in no Country in Europe. He was urgent for disarming the Government of such a power.

Mr. READ, thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelations.

Mr. LANGDON had rather reject the whole plan than retain the three words “(and emit bills”)

From the debate notes it is clear that their primary concern was that the language of “emit bills” could be used to permit the issuance of paper currency by the new legislature.  With direct statements like those from Oliver Ellsworth, their intent to ‘shut the door on paper money’ was unambiguous and leaves little to the imagination.

The motion to strike out the phrase “and emit bills” was approved with a vote of 9 to 2.

Other Quotes on Paper Money from the Period:

“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.”
– George Washington, Letter to Thomas Jefferson on Aug. 1, 1786

“Paper money is unjust…Unconstitutional [as it] affects Rights of property as much as taking away equal value in land.”
– James Madison, Notes for Speech Opposing Paper Money, 1 Nov. 1786

“Paper is poverty,… it is only the ghost of money, and not money itself.”
–Thomas Jefferson to Edward Carrington, 1788

“Experience has proved to us that a dollar of silver disappears for every dollar of paper emitted.”
– Thomas Jefferson to James Monroe, 1791

“Specie [hard money] is the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war.”
–Thomas Jefferson to John Wayles Eppes, 1813

“The trifling economy of paper, as a cheaper medium, or its convenience for transmission, weighs nothing in opposition to the advantages of the precious metals… it is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted.”
– Thomas Jefferson to John W. Eppes, 1813

“Private fortunes, in the present state of our circulation, are at the mercy of those self-created money lenders, and are prostrated by the floods of nominal money with which their avarice deluges us.”
– Thomas Jefferson to John W. Eppes, 1813

“That paper money has some advantages is admitted. But that its abuses also are inevitable and, by breaking up the measure of value, makes a lottery of all private property, cannot be denied.”

– Thomas Jefferson to Josephus B. Stuart, 1817

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”
– John Maynard Keynes, The Economic Consequences of the Peace, 1919

Inflation has been accepted by many and even promoted by some as a ‘natural phenomenon’, where it is believed that money naturally loses its value over time and prices rise. However, under any serious school of economic thought, no matter what its view on inflation (positive or negative) this is understood to be nonsense. To understand why, you must understand what ‘inflation’ is.  Inflation itself is often misidentified. Inflation in the strict sense is the actual expansion (ie. inflation) of the money supply. All things being equal, when the supply of money increases in relation to total goods/services outstanding, the value of said money decreases. This requires more of the same currency to purchase the same unit of wealth (eg. loaf of bread) as it did before . This pricing effect can be seen in exaggerated form in Zimbabwe, where enormous amounts of paper money were printed, causing the value of the currency to plummet, eventually requiring an arm full of money to purchase every day items as each new increase in denomination (adding zeros to the currency) was not enough to keep up with the rapid decline in the value of the currency.

The process of increasing the money supply destroys savings, among other poverty inducing effects. That is not to say that some do not benefit. However, the beneficiaries of inflation are usually the politically connected.

The following example illustrates how the process of inflation confiscates real wealth.

Suppose you have $100 in your saving account and the market value of wheat is $10 per bushel. The value of your savings account can be translated into real wealth of 10 units of wheat.

Now, suppose the money supply is doubled, but your savings account remains the same. All things being equal, the value of your savings will fall by half. It will require twice as many dollars to acquire the same amount of wealth as before. So, the price of wheat will rise to $20 per unit. This means your savings of $100 can now only purchase 5 units of wheat at the new price.

Where did the other 5 units of wheat go? They were confiscated by $100 of the newly created currency which can now buy them at the new price of $20 per unit. Whoever received some of the newly created money can now buy that other 5 units of wheat you used to be able to purchase.

Notice, the dollar amount in your savings account has not dropped, only the purchasing power. The value of your savings in real terms has been cut in half. Without picking a lock, breaking a window or busting down a door, 5 units of wheat were confiscated from your savings account through the process of inflation.

Typically, the money supply is not increased as rapidly as Zimbabwe, but this wealth confiscation and transfer occurs at any rate of inflation, whether it is 3% or 50%. This is known as the ‘secret’ tax. Many argue it is outright theft.

“Specie [hard money] is the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war.”
–Thomas Jefferson to John Wayles Eppes, 1813

“Mr. Ellsworth thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By witholding the power from the new Governt. more friends of influence would be gained to it than by almost any thing else. Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good.”
– Notes on motion to strike out ‘and emit bills on the credit of the United States’ from Article 1, section 8. Motion passed, Constitutional Convention, Philadelphia, PA August 16, 1787

“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.”
– George Washington, Letter to Thomas Jefferson on Aug. 1, 1786

“Paper is poverty,… it is only the ghost of money, and not money itself.”
–Thomas Jefferson to Edward Carrington, 1788

“Paper money is unjust…Unconstitutional [as it] affects Rights of property as much as taking away equal value in land.”
– James Madison, Notes for Speech Opposing Paper Money, 1 Nov. 1786

“That paper money has some advantages is admitted. But that its abuses also are inevitable and, by breaking up the measure of value, makes a lottery of all private property, cannot be denied.
–Thomas Jefferson to Josephus B. Stuart, 1817

“The regional Federal Reserve banks are not government agencies. …but are independent, privately owned and locally controlled corporations.”
— Lewis vs. United States, 680 F. 2d 1239 9th Circuit 1982

“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principles of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale”
— Thomas Jefferson

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
—Henry Ford

This video is a great introduction to our banking and monetary system. It is a fairly comprehensive overview of the history of money, US currency and the Federal Reserve. Learn why our current banking and monetary system is actually a major source of instability in our economic system.

If you would like to get started on this subject with a shorter video, we recommend the history of money video.

“Experience, however, shows that neither a state nor a bank ever have had the unrestricted power of issuing paper money without abusing that power; in all states, therefore, the issue of paper money ought to be under some check and control; and none seems so proper for that purpose as that of subjecting the issuers of paper money to the obligation of paying their notes either in gold coin or bullion.”
— David Ricardo

“The Congress shall have Power…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.”
— US Constitution Article I, Section 8, Clause 5

“No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.”
— US Constitution Article I, Section 10, Clause 1

This video gives a very good historical summary of US currency and its slow mutation from a Constitutional form of money which is gold or silver; to a fiat currency system which is simply paper and not backed by anything of real value.