Monetarism and the Constitution: Making Paper Money Fit the Framers’ Intent

The Texualist’s Dilemma

Judge Robert Bork, a well-known proponent for strict constitutional interpretation, stated during his Supreme Court nomination hearings that “this Nation has grown in ways that do not comport with the intentions of the people who wrote the Constitution.” Nevertheless, Bork admitted that “it is simply too late to go back and tear… up” much of the legal precedent that has been created: “I cite to you the Legal Tender cases… Scholarship suggests that the framers intended to prohibit paper money. Any judge who today thought he would go back to the original intent really ought to be accompanied by a guardian rather than be sitting on a bench.”1

Judge Bork’s statements show the dilemma faced by constitutional textualists who disagree with legal tender laws. Textualists must either concede defeat of the Constitution and work to improve what they believe is unconstitutional precedent (i.e., the Legal Tender cases) or they can stay faithful to the Constitution and advocate changes that are both impractical and unrealistic, such as eliminating paper money and returning to the gold standard. This latter course of action, despite its seeming futility, does have its adherents.

Dr. Edwin Vieira, for instance, in his article The Forgotten Role of the Constitution in Monetary Law, asks “Why… do so many monetary reformers act as if the Constitution were irrelevant to their concerns?” The answer, he believes, “may be that these ‘non-constitutional’ monetary reformers consider a campaign for constitutional reform hopelessly quixotic. Indeed, many people scoff that any variety of constitutional reform is ultimately delusive, inasmuch as modern-day politicians, legislators, judges, and bureaucrats have successfully (and apparently with public approbation) set aside the original intent of the Constitution and substituted a ‘living’ Constitution.” To Vieira, “the only delusion here is in the minds of those espousing such cynical views.”2 What, then, is the doctor’s solution?

Vieira suggests that “only a few articles in prestigious journals should be necessary to establish beyond any further debate what a constitutional dollar is. And, once established as a silver coin, the dollar cannot, without amendment of the supreme law, be redefined.”3

While probably no one would suggest that Dr. Vieira “ought to be accompanied by a guardian,” many would likely find his ideas a bit farfetched. It is almost impossible to believe that a few journal articles could return this country to a commodity-based currency. And, supposing they could, would a commodity-based currency be either feasible or desirable? The answer is no, according the noble-prize-winning economist Milton Friedman.

Dr. Friedman readily acknowledges the framers’ intent to create a commodity-based currency: “When the Constitution was enacted, the power given to Congress ‘to coin money, regulate the value thereof, and of foreign coin’ referred to a commodity money: specifying that the dollar shall mean a definite weight in grams of silver or gold.”4 But, despite the framers’ intent, Friedman believes that today “[i]t is neither feasible nor desirable to restore a gold—or silver—coin standard.”5

This is because paper money, though incongruent with the Constitution, has become universally accepted as our economy’s medium of exchange. As Friedman argues, “each person accepts [paper money] because he is confident that others will. The pieces of paper have value because everybody thinks they have value. Everybody thinks they have value because in his experience they have had value.” And this acceptance is vital since “[t]he United States could not operate at more than a small fraction of its present level of productivity without a common and widely accepted medium of exchange.”6 Thus, pulling the rug out from under this system, as Dr. Vieira suggests, could greatly damage Americans’ confidence in their currency and could lead to irreparable economic harm.

Nevertheless, the constitutional problem still remains. Paper money, though universally accepted and vital for the efficient exchange of goods, still violates the Constitution. And the honest few who still value and respect the Constitution, men such as Dr. Vieira, will continue to remind us of this. But what can be done? How can we remedy the constitutional problems caused by paper money without hurting our economy? To attempt to answer these questions, we must turn again to Milton Friedman.

Friedman’s Amendments

Friedman, like those who drafted the Constitution, believed in protecting individual liberty. In Capitalism and Freedom, he states that “[a]s liberals,7 we take freedom of the individual… as our ultimate goal in judging social arrangements.”8 Protecting individual freedom meant abolishing arbitrary government powers. He, therefore, wanted to establish “a monetary system that is stable and at the same time free from irresponsible governmental tinkering, a system that will provide the necessary monetary framework for a free enterprise economy yet be incapable of being used as a source of power to threaten economic and political freedom.”9

To accomplish these goals, Friedman sought to return to an ideal held by many of our Founding Fathers, the ideal of “a government of law instead of men.” This could be done, he believed, “by legislating rules for the conduct of monetary policy that will have the effect of enabling the public to exercise control over monetary policy through its political authorities, while at the same time… prevent[ing] monetary policy from being subject to the day-to-day whim of political authorities.”10 In a later book, Free to Choose, Friedman proposes two constitutional amendments that might achieve such a monetary system.

The first of his amendments would aim to keep the annual inflation rate within a fixed range. The amendment specifies that, “Congress shall have the power to authorize non-interest bearing obligations of the government in the form of currency or book entries, provided that the total dollar amount outstanding increases by no more than 5 percent per year and no less than 3 percent.”11

Friedman also suggests adding a mechanism to this amendment that would allow Congress to inflate the currency beyond the annual rate of 5 percent whenever Congress exercises its power to declare war.12

The next amendment would aim at removing government’s incentives for deprecating our money. Government uses inflation as an underhanded way to raise revenue. Rather than using the honest, though “politically unattractive,” means of raising revenue (such as direct taxation), the federal government takes the politically expedient route of inflation.13 This enables the government to raise revenue in two key ways.

First, inflation allows government to take our money in a way that does not require us to physically hand over our property. It does this by simply printing new money. “The extra money printed is equivalent to a tax on money balances. If the extra money raises prices by 1 percent, then every holder of money has in effect paid a tax equal to 1 percent of his money holdings.”14

Second, our paper currency allows the government, as a debtor, to pay back its obligations by merely printing new dollars. But, by printing new money to pay its debts, the government actually devalues all currency, and the money it uses to pay back its lenders is actually less valuable than the money the government originally borrowed.

To prevent lenders from suffering such a loss, Friedman argues that “what is required is the extension of the Fifth Amendment provision that ‘[n]o person shall… be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use without just compensation.’” His proposed amendment reads as follows: “All contracts between the U.S. Government and other parties stated in dollars, and all dollar sums contained in federal laws, shall be adjusted annually to allow for the change in the general level of prices during the prior year.”15

Dr. Friedman spent decades persuasively arguing for these and many other ideas that held “freedom of the individual” as the ultimate goal. And, while he convincingly demonstrates that his theories would have positive economic and political outcomes, he makes no case to satisfy those who advocate for a strict adherence to the language of the Constitution and the intentions of its framers.

Thus, the question becomes, would Friedman’s amendments solve the problem textualists face concerning legal tender laws? Would these amendments allow us to remain faithful to the ideas of our Founders and the Constitution, while at the same time promote economic prosperity?

To find an answer, Friedman’s amendments must be considered in relation to some of the strongest constitutional arguments against the legal tender laws—the arguments of Justice Chase in the Legal Tender cases.

Friedman’s Amendments and the Legal Tender Cases

The question at issue in the Legal Tender cases was whether Congress had the constitutional authority to issue legal tender notes (i.e., paper dollars) which were not redeemable for gold or silver. These notes, as legal tender, could be used by debtors to pay off their private debts. However, once debtors began paying creditors with green pieces of paper instead of gold and silver, creditors, with just cause, sought legal relief claiming that legal tender notes were unconstitutional.

In all of the Legal Tender cases both the majority and the dissent openly admit that issuing legal tender notes is not a power expressly granted to the Congress in the Constitution. Therefore, the question turned to whether issuing such notes was justified by the “necessary and proper” clause in Article 1 Section 18.

The Court had interpreted the “necessary and proper” clause decades earlier in McCullough v. Maryland. In McCullough, Chief Justice Marshall, on behalf of the majority, wrote “Let the end be legitimate, let it be within the scope of the Constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consistent with the letter and spirit of the Constitution, are constitutional.”16 It is from this interpretation of the “necessary and proper” clause that Justice Chase begins his arguments against legal tender.

In Hephurn v. Griswold, the first Legal Tender case, Chase writes that, “In the rule stated by Chief Justice Marshall, the words appropriate, plainly adapted, really calculated, are qualified by the limitation that the means must be not prohibited but consistent with the letter and spirit of the Constitution. Nothing so prohibited or inconsistent can be regarded as appropriate, or plainly adapted, or really calculated means to any end.”17 (Italics added.)

Chase believed that the letter and spirit of the Constitution directly conflicted with legislation allowing Congress to issue legal tender notes. To make his argument, Chase uses several sections of the Constitution and the Bill of Rights. The sections included Article 1 Section 10, which prohibits states from interfering in our right to form contracts, and the Fifth Amendment which was intended to prevent the federal government from taking our “life, liberty, or property without due process of law” or taking private property for public use “without just compensation.”

The following sections of this essay will lay out each of these arguments and then will attempt to show how the amendments proposed by Friedman would help mitigate or even eliminate the constitutional conflicts observed by Chase.

Article 1 Section 10: The Right to Contract

Article 1 Section 10 of the Constitution says that “No state shall… pass any law… impairing the obligations of contracts.” When discussing this clause in Federalist 44, Madison wrote that “laws impairing the obligation of contracts are contrary to the first principles of the social compact, and to every principle of sound legislation.”18 Likewise, Justice Chase saw the citizens’ right to contract without government interference as fundamental to a free society: “That Congress possesses the general power to impair the obligation of contracts is a proposition which… ‘must find its vindication in a train of reasoning not often heard in courts of justice.’”19

To understand how paper money impairs contractual obligations, one must understand the basic economic theory of Gresham’s Law. The law simply states that “bad money drives out good.” In other words, debtors will always use the least valuable currency possible when paying creditors. In the Legal Tender cases, for instance, paper bills with no intrinsic value were being used by debtors to satisfy contractual obligations. This process then began driving out gold and silver currency which did have intrinsic value. Paying debts with paper rather than gold was, of course, beneficial to debtors. But the affect on creditors was clearly detrimental.

While paper money benefited all debtors, it was especially useful to the government which could exercise unchecked control of the currency. Government was no longer confined to a commodity based currency, i.e., a currency based on a finite supply of gold and silver that took time, effort, and expense to acquire. Instead, the switch to paper money gave the government, as a borrower, the power to simply print new money to pay lenders. But, as discussed above, the newly printed bills are always less valuable than those the government originally borrowed, leaving the lender worse off. The only way to fix this problem is to restrain the government’s power to print new money. And the only way to restrain government power is to amend the Constitution.

Friedman’s amendment fixing the rate of inflation between 3 and 5 percent annually would, first and foremost, slow the overall rate of inflation. If the government cannot inflate the money supply past 5 percent, then government spending and borrowing practices will have to be restrained accordingly. And should the government wish to continue spending excessively, then it must acquire the revenue through constitutionally proscribed measures, e.g., taxing, borrowing, selling publicly owned lands, etc.20 By forcing the government to rely on constitutionally proscribed measures for raising revenue, Friedman’s amendment would bring the practices of government more in line with the original intent of the framers.

Those opposed to the amendment might argue here that limiting the government’s ability to inflate the currency past 5 percent would be dangerous during times of war when the government needs immediate access to large amounts of revenue. In fact, James Madison worried of this too, and during the constitutional convention, he proposed that Congress should be authorized to issue bills of credit in times of emergency.21 Friedman had similar concerns. Thus, he thought that “[i]t might be desirable to include a provision that two-thirds of each House of Congress… can waive [the requirement that inflation not exceed 5 percent] in case of a declaration of war, the suspension to terminate annually unless renewed.”22 Not only would this allow Congress to raise the funds necessary to finance war, but it would also require Congress to abide by the Constitution and not go to war without first passing a declaration of war in accord with Article 1 Section 8, Clause 11—an important clause of the Constitution which has been much neglected over the past half century.

In addition to the amendment slowing the inflation rate, Friedman also proposes an amendment that would take away the government’s incentives for inflating the money supply. The amendment, as mentioned, would require the government’s debts, measured in dollars, to adjust annually according to the value of the dollar. Thus, the government could not elude its lenders by paying off debts with devalued dollars. The two amendments, taken together, would thus eliminate much of the government’s practices which impair contracts. The amendments would give contracting parties greater predictability and would assure creditors that their property, in the form of contractual obligations, would not be substantially impaired. This assurance of the creditor’s interest would also ameliorate another of Justice Chase’s arguments, the argument that paper money infringes upon creditors’ Fifth Amendment right to property.

Fifth Amendment Protection of Property

The Fifth Amendment states that “no person shall be deprived of life, liberty, or property, without due process of law.” To Chase, “It is quite clear, that whatever may be the operation of [legislation sanctioning legal tender], due process of law makes no part of it.” He asks, “Does [legal tender] deprive any person of property?” The answer, he believes, is yes. This is because “[a] very large proportion of the property of civilized men exists in the form of contracts. These contracts almost invariably stipulate for the payment of money… And it is beyond doubt that the holders of these contracts were and are as fully entitled to the protection of this constitutional provision as the holders of any other description of property.” Therefore, Chase believed that government tampering with the money supply would create a “direct and inevitable” loss to creditors which would violate their right to property under the Fifth Amendment.23

While Friedman’s amendments would not eliminate this problem entirely, they would certainly reduce the harm. The harm would be reduced because the large proportion of property that exists in the form of contracts could not be tampered with to the same extent as it now is. Furthermore, creditors could do a much better job protecting themselves with interest rates when they know with certainty that inflation will not exceed 5 percent.

Chase also cites to the latter part of the Fifth Amendment which provides that property shall not “be taken for public use, without just compensation.” This provision, according to Chase, “does not, in terms, prohibit legislation which appropriates the private property of one class of citizen to the use of another; but if such property cannot be taken for the benefit of all, without compensation, it is difficult to understand how it can be so taken for the benefit of a part without violating the spirit of the prohibition.”24

However, rather than taking property for the benefit of all, inflation simply transfers wealth from one group to another, usually from the middle- and lower-income classes to investors and bankers. As one author explains, “As the [government] expands the money supply, it reduces the value of all existing dollars… The first party to get the new money can spend it at its old purchasing power. Only after filtering through the economy does the money bid up prices for goods. But who gets the new money? Who experiences the boom from the credit injection? The bankers and insiders, of course.”25 While this harm may still happen to some degree under the new amendments, the harm would be greatly mitigated by slowing the inflation rate. For, so long as national output grew between 3 and 5 percent per year, there would be hardly any inflation under Friedman’s amendment.

Therefore, it seems that Friedman’s amendments would, to a great extent, bring our monetary system back in line with both the letter and the spirit of the Constitution. This doesn’t mean, however, that Friedman’s amendments are infallible or that they wouldn’t face serious opposition from several directions.

The Arguments Against Friedman’s Amendments

Undoubtedly, strong arguments could be made against Friedman’s amendments from both economists and jurists. The remainder of this essay will briefly discuss three of the more viable arguments against the amendments. The first argument is put forward by gold-standard advocates from the Austrian School of Economics. The next argument is from those who suggest that the electorate’s apathy or ignorance to monetary matters is insurmountable and thus the people will be unreceptive to any substantial monetary changes. And, finally, and possibly most damaging, is the argument of textualists who assert that any constitutional amendment will simply be ignored by self-interested politicians or misconstrued by judges who adhere to the notion of “the living constitution.”

The Austrian School

In his pamphlet What Has Government Done to our Money?, Murray Rothbard states what he and other Austrian School economists see as the primary flaw in Friedman’s amendments: “The grave political flaw is to hand total control of the money supply to the Nation-State, and then to hope and expect that the State will refrain from using that power.”26 To those of the Austrian School, Friedman’s amendments would do little more than mitigate the problems of inflation.

Ron Paul, a U.S. Congressman and member of the Austrian School, criticizes Friedman’s fixed inflation rate in his book Freedom under Siege: the U.S. Constitution after 200 Years: “Friedman claims that if money is increased at five percent a year and productivity is five percent a year, prices remain stable and there is ‘no inflation.’ It is true that average prices may remain stable, but it’s not true that there is no inflation or malinvestment. The Austrian economists’ view that all prices, interest, and wages do not go up evenly is vitally important in understanding why even a four or five percent inflation in the money supply per year will still cause harmful and serious cumulative effects. When money is increased at five percent per year, someone or some group must benefit from this new money, so the political problems of favoritism exist, even if it’s on a lower scale.”27

Friedman’s solution for inflation, according to Paul, “is like telling an alcoholic to drink only one pint of scotch per day instead of the usual two,” a reference to Friedman’s often used analogy of alcoholism and inflation.28 Thus, Paul concludes, “Getting government out of the money management business completely is the only answer.”29

The problems caused by giving the government control of our money was apparent to Friedman. He admits that “[s]ince time immemorial sovereigns… have been tempted to resort to increasing the quantity of money to acquire resources to wage wars, construct monuments, or for other purposes… Whenever they have, inflation followed close behind.”30 But, as Friedman makes clear, our government-controlled, paper currency has come to be universally accepted by everyone and a universally accepted currency is necessary for the efficient exchange of goods and the general health of the economy. And, so long as such a system must be maintained, Friedman’s solution seems the most plausible and best suited to reducing inflationary harm. Therefore, the arguments put forth by the Austrian School, though convincing in theory, would likely be unworkable in practice.

Furthermore, while history clearly demonstrates that governments have used their power over money mischievously, the text of the Constitution explicitly gives the power to regulate the nation’s currency to Congress. And this, according to Chase, is appropriate. In Hepburn he writes, “It is not doubted that the power to… determine what shall be lawful money and legal tender, is in its nature, and of necessity, a governmental power. It is in all countries exercised by the government. In the United States… it is vested in Congress by the grant of power to coin money.”31 Thus, despite the validity Rothbard and Paul have in their arguments that the government should be stripped of its control of money, such a change could not happen without an implausible overhaul of the U.S. Constitution and judicial precedent, as well as a significant deviation from what is generally practiced throughout the western world.

Public Apathy and Ignorance

In 1920, economist John Maynard Keynes observed that “There is no subtler, no surer means of overtuning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”32 Lord Keynes’ observation is as true today as it was nearly 90 years ago. And for those who are concerned about monetary problems, the public’s ignorance is still a major source of frustration.

Dr. Vieira, in his law article, talks at length regarding the “public ignorance about money and banking.” The average man, according to Vieira, doesn’t understand the differences between fiat currencies and commodity-based currencies; nor does the average man grasp the concept of legal tender and fractional reserve banking. “Rather than educate himself on such matters, however, the average man swallows the propaganda line of the Department of the Treasury and the Federal Reserve System that money and banking are ‘technical’ areas ‘too complicated’ for voters and politicians to understand, better left to ‘experts’ for management in accordance with the arcane theories of contemporary mathematical economics, and certainly too important to become issues in the superficiality, buffoonery, and hurly-burly of electoral campaigns.”33 (The idea that the “average man” has given even this much consideration to U.S. monetary policies seems a bit overly optimistic.)

Vieira then gives strong evidence of Americans’ ignorance—and apparent apathy—toward monetary problems throughout the twentieth century: “This self-imposed ignorance of the great majority of Americans explains the country’s responses to the three major monetary and banking collapses that have followed the creation in 1913 of the Federal Reserve System: the seizure of the people’s gold coins and termination of redemption of FRNs in gold domestically, in 1933; the termination of redemption of FRNs in gold internationally, in 1971. Notwithstanding how radically destructive of the monetary system each one of these events… has been, not one nor all of them together triggered a constitutional, or even political, crisis… with massive participation by the general public.”34

So what can be done, short of an economic catastrophe, to spur the people’s interest in monetary matters? Vieira suggests that education is necessary. “To be sure,” he states, “with the proper guidance, these issues [i.e., banking and money] are easily understood.”35 The proper guidance, according to Vieira, may come from Murray Rothbard’s books, The Mystery of Banking and The Case Against the Fed.36

Though Vieira is correct in suggesting that proper education is necessary to understand our monetary system, the idea that the American public will take it upon itself to read books on banking and money seems highly unlikely.

Now, add to this problem the demanding standards which the Constitution requires for amendment. Article V of the Constitution requires approval from either two thirds of both the Congress and the Senate or two thirds of the state legislatures just to propose an amendment. And the purposed amendment will be ratified only if three fourths of the state legislatures or three fourths of the Congress and Senate approve it. The process is so laborious and demanding that the Constitution has been amended just 27 times in the past 200 years.

Thus, the problem is twofold. First, the people must understand the inherent flaw with paper currency, namely inflation. And, second, they must find the motivation to compel the vast majority of their elected officials (at least three fourths) to ratify the amendments. Unfortunately, it seems that the only way such circumstances could come about would be as the result of some sort of monetary collapse—presumably a collapse much greater than any that occurred in the twentieth century.

Nevertheless, if, by some extraordinary circumstances, the American people were to learn about the U.S. monetary and banking systems and came together to pass Friedman’s amendments, there would still be one more problem. That problem, of course, is getting judges and legislators to adhere to the plain meaning of the amendments.

Chances of Government Officials Obeying the Amendments

The idea that judges and politicians will simply do as they please in spite of the Constitution is possibly the most damaging argument against Friedman’s amendments. Dr. Vieira forcefully makes this argument in his article, claiming that “Officials who knowingly refuse to obey the monetary powers and disabilities set out in the Founding Fathers’ Constitution are not likely to honor a new constitution that substantively embodies the same commands in different, even if more forceful language. For their present refusal rests not on an innocent misunderstanding of the meaning of the Constitution, but on a studied intent to defeat that meaning by misconstruction, misapplication, or simple evasion. A return to constitutionalism requires that those officials first be replaced with individuals of sounder moral character.”37

Vieira’s argument is that we should stay with our original Constitution and simply elect officials who will adhere to it faithfully. But the flaws of such an approach have been repeated throughout this essay. A strict adherence to today’s Constitution—at least according to Dr. Vieira and Justice Chase—would mean returning the nation to a currency system of gold and silver. And this, of course, is unrealistic. Furthermore, while Vieira’s point about the need for officials “of sounder moral character” is true, it is almost impossible for the electorate to know which officials are adhering honestly to the Constitution regarding money and which are not. This is the case with our current monetary system and, unfortunately, would still be the case under Friedman’s amendments.

Suppose, for instance, that Friedman’s amendments were adopted. And then suppose that the government, about 10 years later, inflated our currency beyond 5 percent. Who would be accountable? The President and his Treasury Secretary? The governors of the Federal Reserve, whoever they may be? The 535 members of Congress? Or should we simply hold them all to blame? Each of these groups would, of course, put the blame on each other. What would the average American think, if he cared at all? How could he vote to keep the inflationist officials out of office when he doesn’t even know who to blame for the inflation? Such confusion, unfortunately, would likely occur with whatever currency system we adopted.


Clearly, Friedman’s amendments are not infallible. But what part of the Constitution is? Moreover, the failures of our existing system are not the responsibility of politicians or judges. Responsibility for all government’s failures rests on us, the American people. This is still our Republic. And it is our duty to ensure that our elected officials remain faithful to the Constitution and to the philosophy of our Founders. No combination of amendments can do this for us. No form of currency—whether it be paper, or gold, or silver—will relieve us of our obligation to take an active role in political affairs and to keep a critical eye on our officials.

Friedman’s amendments, if nothing else, would make our job as watchful citizens much easier. The amendments would be a direct order from the people to the government: Do not inflate our currency past 5 percent a year. Should the government ignore this order, evidence of it would be readily apparent. Then, naturally, the burden would fall on us to act. And if we didn’t, then who would really be to blame for our monetary problems?

Thus, adopting Friedman’s amendments would be a major step in the right direction. They would lead us away from an unregulated monetary system controlled exclusively by bankers and government officials and towards a system controlled by laws and regulated by the ultimate arbiters in any free society, the people.

This, in essence, is what the Founders intended. And this is what the textualists who obstinately advocate for the gold standard must realize. It’s time to give up the battle against paper money. The days of gold coins are gone. It’s time to speak with one voice in favor of the Constitution and to advocate for amendments that maybe our last hope of avoiding a future monetary disaster.

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Free the People publishes opinion-based articles from contributing writers. The opinions and ideas expressed do not always reflect the opinions and ideas that Free the People endorses. We believe in free speech, and in providing a platform for open dialog. Feel free to leave a comment!

Justin McCarthy

Justin McCarthy is a Massachusetts attorney and the author of Monetarism and the Constitution: Making Paper Money Fit the Framers’ Intent. He has a wife, two daughters, and a beagle named Winston. His interests include law, economics, and history. For more information about Justin or to contact him directly, please visit jrmccarthy-law.com.

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