Are local currencies unconstitutional?

Question

In many places around the United States, localities and organizations have been printing money as a means to drive business toward local establishments and raise money for the community in times of economic hardship. Perhaps the most well established example of this are Berkshares in the Berkshires region of Massachusetts. Berkshares are slightly less valuable than U.S. dollars (you get 100 for $95) and can be obtained at a number of local banks and used in local stores. The IRS even gets in on the act and taxes Berkshares purchases, at their established "exchange rate".

However, Article I, section 10, clause 1 (The Contract Clause) of the United States Constitution says explicitly:

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.

Clearly the Berkshire region is not a state, but the rather explicit endorsement of the currency by the local government, and the local government's recognition by the state of Massachusetts seems to give the currency the tacit approval of the state. As such, how can the alternative local currency, working to devalue the U.S. dollar in the region, be constitutional?

Answer 1

I can't find any case where modern local currencies were actually challenged in court, so it's hard to be sure. Most of the local currencies explored here are probably fine, because they're handled entirely by individuals and businesses. Businesses can choose to accept whatever they want for their goods; if they want to let you pay in apples that's fine, and if it so happens that multiple stores will accept apples as payment, now you've got a local currency

BerkShares are strange in that they're not just a form of payment accepted by random businesses:

• They appear to be endorsed by the local government, even if the government doesn't actually print them
• Banks will exchange dollars for BerkShares

I'm a bit lost as to how they've convinced banks to convert a privately printed currency for legal tender, but that's up to the banks I suppose. You downplayed the beginning of the amendment, "No State shall ...", but that really does seem to be the crux of the argument. I suspect any of these things would go over badly with the federal government:

• Attempting to trade BerkShares outside the state
• Massachusetts printing BerkShares directly
• Businesses accepting exclusively BerkShares and refusing dollars
• The town/state forcing businesses to accept BerkShares
• Not taxing BerkShare purchases
• BerkShares becoming the dominant form of currency in the state

The last is particularly bad; if BerkShares become more valuable than dollars and are widely usable, there's little reason for the state to care about dollars anymore, which eliminates the main method the federal government uses to convince states to enforce federal laws. If the state stops accepting dollars all together, they become a completely isolated economy and might as well be an independent nation

In short, as long as local currencies are optional and stay contained to a small area, it looks like the government is going to ignore them. Trying to displace federal currency or spread to other areas would probably be frowned upon, but I can't find an postbellum instance where it's ever been tried

Answer 2

The United States did not issue its own national currency until the introduction of the greenback in 1859. Prior to that, individual banks would actually issue their own notes, which could or could not be accepted as legal tender based on the preference of the recipient.

This Planet Money Podcast has the story of how the United States functioned - basically using these "bank registrar books" that would help keep track of all the various "currencies" that were out there (8,000 prior to the Civil War!). In short, systems like the Berkshare are fine locally, but scale horribly.

All currency is a claim on another asset. Until 1933, you could exchange dollar bills for gold. (Nixon finally took us off of that in the 70s.) Nowadays, a note is just a claim on the debt of the United States - theoretically, you could exchange them for bonds. The point of currency is that you have a claim on the assets of another. States are prohibited from being the holder of these assets, as it is a power reserved to the federal government. (For historical reasons, this was necessary to prevent another "Articles of Confederation.")

Coning money is a different beast altogether than issuing currency. When you coin money, you are declaring a fixed price for the quantity of the material coined. A gold dollar, for example, is declared by the government to be of a fixed quantity regardless of which one you have. (The ridges on a quarter, for example, are there to prevent you from shaving off the material in question.) Were individual states allowed to coin their own money, there could be a variance between say, a Virginia Dollar and a New York Dollar. Even if only in a fractional ounce worth of gold, that variation would have led to confusion. It is thus the equivalent of establishing "standard weights and measures," also reserved to the Congress.

More to the point of the question, however, is that there is nothing which prohibits private entities from issuing their own currency. Indeed, all banks prior to the Federal Reserve Act of 1913 did just that. The primary impediment would be whether or not others want to accept it. Dollar Bills, on the other hand, even say that these notes are "legal tender for all debts, public and private," meaning that they are to accepted as currency, at full face value for any dollar denominated debt.

Answer 3

Using your example of BerkShares, that particular clause of the Constitution only says that the State of Massachusetts, or any city government thereof, cannot require you to pay public debts (taxes, for example) in BerkShares, nor can it require citizens to accept BerkShares as a form of payment for private debts either (unless it were spelled out in a contract that both parties agreed to).

It CAN, however, require those debts to be paid in gold or silver coin.

Except... no, it can't do that either.

Article 1, Sec. 8, grants Congress the power to:

Coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures

Congress used that power to enact the Federal Reserve Act of 1913, which makes Federal Reserve Notes (i.e. US dollars) legal tender for all debts, public and private, throughout the United States and its territories.

The Supremacy Clause (Article 6, Sec. 2) 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.

Essentially, all states are REQUIRED to accept US dollars as a form of payment for taxes and debts, and may require only US dollars for payment of private debts in their laws.

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In its broader scope, Article 1, Sec 10 is a list of powers prohibited of the states. It's important to remember that these restrictions apply only to the government itself, its agents, or people acting on its behalf. It does not apply to ordinary people or businesses.

You, as a citizen, can accept any form of payment you want, as long as it's within the law (which are themselves limited by the Constitution). Whatever you deem as valuable can be exchanged for anything someone else deems as valuable so long as both parties agree to the transaction. In the case of BerkShares, Bitcoins, clams, or whatever, their value is determined by the various businesses and banks that accept them, and they are all free to do that.

Answer 4

The answer is that these are no different than frequent flyer miles, or BitCoin, or any other medium of exchange other than dollars. There isn't anything illegal about it, as long is it isn't fraudulent. The answer to banks accepting them is that they sell at a 5% discount. 100 Berkshares to 95 USD.