Monetary and Economic Studies Vol.28 / November 2010

The Future of Central Banking: A Lesson from United States History

Bennett T. McCallum

The United States Constitution evidently calls for monetary arrangements with a strict metallic standard-gold, silver, or bimetallic. How were these provisions overturned so as to result in today's fiat-money arrangement with no trace of a metallic standard? A crucial step involved Supreme Court decisions after the Civil War with regard to the constitutionality of the fiat "greenbacks" issued during the war. The reasoning expounded by the Supreme Court in these decisions relied importantly on a failure to distinguish between monetary and fiscal policy provisions. Essentially the same failure has been present in much of the recent discussion concerning the financial crisis of 2007-09.

Keywords: Metallic standard; Fiat money; U.S. Constitution; Legal tender cases; Monetary versus fiscal policy

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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