referred to bank notes issued by local banks that could be readily redeemed in specie . This term became embedded in US law .
Indeed , an 1864 law states : No one “ shall utter or pass ... any coins of gold or silver , or other metals or alloys of metals , intended for the use and purpose of current money , whether in the resemblance of coins of the United States or of foreign countries , or of original design .”
Meanwhile , an 1862 law used the term “ lawful money ,” which appears to refer to official money : “ no private corporation , banking association , firm or individual shall make , issue , circulate or pay any note , check , memorandum , token or other obligation , for a less sum than one dollar , intended to circulate as money or to be received or used in lieu of lawful money of the United States .” It seems that current money was being conflated with lawful money .
By the 20th century , the two terms were synonymous , and the courts had to define what they actually meant . This was done in 1906 , in the case State v . Quackenbush , 108 N . W . 953 ( Minn . 1906 ). Here , current money was defined :
Whatever is lawfully and actually current in buying and selling , of the value and as the equivalent of coin . Current money means money which passes from hand to hand and from person to person and circulates through the community . It is synonymous with lawful money . Whatever is intended to , and does actually , circulate as money … Current money , that which is generally used as a medium of exchange .
So , how could this history impact the future of cryptocurrency ? For one thing , there is precedent for having multiple forms of legal tender . This means the Federal Reserve note can coexist with a Federal Reserve central bank digital currency — what some are already calling the “ digital dollar .”
However , the conflated definition of current and lawful money calls into question the legality of any cryptocurrency that wants to become a widespread medium for retail payments . In other words , any cryptocurrency that seeks to challenge the dollar as a means of payment in everyday transactions , like Facebook ’ s proposed Diem stablecoin , will be identified as current money and thus in violation of the 1864 law cited above .
The Money Monopoly
It was not an accident that the legal conflation of current and lawful money occurred during the 1860s . It was during the Civil War that the US government moved to secure a monopoly on money , banning private currency . Thus , we see the law mentioned above that makes it illegal for any organization or individual to issue any obligation that is used in lieu of lawful money at a value of less than one dollar . The law also forbids anyone to make any coin , including of their own design , that could compete with US currency . One might add to these laws the Legal Tender Acts that resulted in the greenback and opened the door to the Treasury issuing its own paper currency . From this point forward , Article I , Section 8 , Clause 5 of the US Constitution ( the coinage power ) was interpreted to give the government the power to restrain private money .
Part of the government ’ s move toward monopolizing money was the restraint of private bank notes . As noted , during the early 19th century , private banks , operating under state charters , issued thousands of bank notes of varying values . To end this chaotic situation and establish a US currency union , the National Banking System was created in 1863 under the direction of the Office of the Comptroller of the Currency ( OCC ). These new national banks would be able to issue their own notes called national bank notes .
In effect , the OCC re-established the private currency system on a governmentcontrolled collection of national banks that met strict deposit ( 100 % reserves against issuance ) and auditing criteria and issued government approved bank notes . Congress completed the end of Free Banking by taxing private bank notes out of existence . Eventually , the bank notes of the national banks were replaced by those of the Federal Reserve .
Jump forward to September 21 , 2020 . On that day , the OCC issued an interpretive letter allowing national banks to hold stablecoin reserves for stablecoin issuers . This rule allows national banks to facilitate stablecoin issuance when they hold the 100 % backing reserves . One can now envision a nationwide network of stablecoin issuers resting on the National Banking System . National bank notes are replaced with stablecoins .
And , as the backing of these stablecoins will probably be in US dollars , these stablecoins will be some form of US dollar coin . However , this move would make stablecoins akin to current or lawful money ( a dollar-denominated instrument used in retail payments ). As we have seen , this threatens the government ’ s money monopoly established by Congress in the 1860s .
The OCC attempted to steer clear of a potential battle with Congress in another interpretive letter in January 2021 by defining stablecoins as a payment mechanism like debit cards , checks and electronically stored value systems and not current money :
Stablecoins serve as a means of representing fiat currency on an INVN [ independent node verification network ]. In this way , the stablecoin provides a means for fiat currency to have access to the payment rails of an INVN .
The success of this initiative remains to be seen .
Monetary Past , Monetary Future
Monetary history will continue to inform and shape new monetary developments . Cryptocurrencies — such as Bitcoin , Ethereum , Ripple and a variety of others yet to come — will continue to make headlines , but the role they will play will in large part be determined by historical precedent . Therefore , a thorough understanding of the monetary past is necessary to navigate the many challenges that lie ahead for the future cryptocurrency system .
Franklin Noll , Ph . D ., is a recognized authority on the history of money , including bank notes and cryptocurrency . He has extensively written and spoken upon these topics , including making film and radio appearances and writing blogs for the US Treasury and Bloomberg News . He is the president of Noll Historical Consulting .
www . MoAF . org | Summer 2021 | FINANCIAL HISTORY 35