INTRODUCTION

Before 1789, the individual colonies that would ultimately make up the United States were free to issue their own currencies, and all of them did. The U.S. Constitution, adopted in 1789, took this power away from the individual states. Thus, it might appear that the Constitution left the federal government, which minted gold and silver coins, as the sole creator of currency in the new country.

However, this did not turn out to be the case. Although the Constitution took away the power of states to issue money, it left them with the power to charter and regulate note-issuing banks. All of the states ultimately utilized this power, and some went as far as wholly or partially owning banks. In addition, the federal government chartered the (First) Bank of the United States from 1791 to 1811 and the (Second) Bank of the United States from 1816 to 1836. Virtually all of these banks issued notes, and these notes circulated as currency. Thus, by the early 1800s, there were far more entities issuing currency in the United States than there had ever been before 1789. The regulation of these currency issuers varied from place to place and from time to time.

We have argued elsewhere (Rolnick, Smith, and Weber 1994) that the intention of the framers of the Constitution was to make the United States a monetary union or a uniform currency area.