From Constitutional to Fiat Money: The U.S. Experience

14 Pages Posted: 31 Mar 2013

See all articles by Richard Timberlake

Richard Timberlake

University of Georgia - Department of Economics & Finance

Date Written: June 15, 2012


Over the course of more than two centuries, the United States has had two monetary systems. The first was a gold-silver standard that was framed in its essentials by the U.S. Constitution. In practical terms, it said that any legal tender money created by the federal union or the states or the “people” had to be gold or silver coins, or redeemable in gold or silver coins of specified weight and fineness. Since both gold and silver were constitutional media, the country had a bimetallic standard that ultimately became a monometallic gold standard.

During the period in which the gold standard functioned throughout most of the 19th century until 1914 and with some qualifications until 1930, the purchasing power value of the dollar, as measured by any statistically valid price index, was secularly constant. Occasionally, mild inflations or deflations occurred, and from 1862 to 1879 the federal government instituted a paper-money (“greenback”) inflation, but the tendency for the dollar to maintain its exchange value was notable. For all practical purposes, the long-term value of the dollar was constant for more than a century.

In spite of its enviable record for approximating price level stability without human hands-on controls, the gold standard had its critics. Different factions argued for relief from its discipline. Many businessmen chafed at its restrictive effect on monetary availability for industrial expansion, and debtors complained during the occasional bouts of “dear money.” Cheap money, plenty of it, and low interest rates became political slogans, but gold endured the strain. For one thing, a standard based on the naturally limited quantities of a metallic commodity was obviously what the Framers of the Constitution had intended, and, second, nothing else seemed constitutional enough to replace it.

The second monetary institution to appear was the Federal Reserve System in 1913, just as the gold standard system looked enduring and stable. Both a gold standard and a central bank determine an economy’s stock of money. However, the original Fed was not intended to replace the gold standard in that capacity; it was not to be a central bank. It was not an expression of the federal government’s “complete power over the monetary system.” The congressional debates and the Federal Reserve Act’s concluding sentences confirmed the preeminence of the gold standard and, by implication, constitutional constraints over the monetary system. The final bill stated: “Nothing in this Act...shall be considered to repeal the parity provisions contained in an act [Gold Standard Act] approved March 14, 1900.” The Fed was to be nothing more than a group of primarily private, supercommercial banks that would help client “member” banks endure short-term liquidity crises. This low-profile image of the original Fed immediately raises the question: If true, how did the Fed subsequently acquire its monetary omnipotence?

Keywords: federal reserve constitutionality, U.S. monetary policy, gold standard, U.S. fiat currency, monetary system, U.S. dollar, economic policy

JEL Classification: N12, E50, E51, E52, E58, E41, E42

Suggested Citation

Timberlake, Richard, From Constitutional to Fiat Money: The U.S. Experience (June 15, 2012). Cato Journal, Vol. 32, No. 2, 2012, Available at SSRN:

Richard Timberlake (Contact Author)

University of Georgia - Department of Economics & Finance

Athens, GA 30602-6254
United States

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