Bill of credit
Bill of credit is a phrase from Article One, Section 10, Clause One of the United States Constitution. It refers to a document, similar to a banknote, that is issued by a government representing its indebtedness to the holder and typically designed to circulate as money. Legal writers—as opposed to economic historians—incorrectly assume that the constitutional phrase "Bills of Credit" was simply a synonym for paper money, but it only refers to one, though very important, type of paper currency. The Constitution explicitly prohibits the states from issuing bills of credit and coining money. States are only permitted to make gold and silver legal tender.
British colonies in North America would issue bills of credit in order to deal with fiscal crises, although doing so without receiving them as revenue in like amounts would increase the money supply, resulting in price inflation and a drop in value relative to the pound sterling. The documents would circulate as if they were currency, and colonial governments would accept them as payment for debts like taxes. They were not always considered legal tender for private debts.
Colonial decisions on the issuance of bills of credit were also frequently the subject of disputes between differing factions within the colony, and with royally appointed governors. Between 1690 and 1750 the matter was regularly debated in the Province of Massachusetts Bay, where merchants and lenders stood to lose value when new bills were issued, and borrowers stood to gain, because they could repay their debts with depreciated bills. The Massachusetts bills were finally retired in 1749 when the province received a large payment in coin for its financial contributions to the 1745 Siege of Louisbourg. The Province of New Jersey issued bills of credit beginning in the 1710s, but successfully managed to avoid significant inflationary effects.
During the American Revolutionary War the Continental Congress frequently issued bills. Because of inflation they rapidly declined in value, leading to the unfavorable comparison that something was "not worth a Continental".
United States Notes as obligations of the United States, are examples of Bills of Credit as they used to be inserted by the Treasury into circulation free of interest (production of USN halted in 1971 during termination of the Bretton Woods system). By comparison, Federal Reserve Notes are backed by debt purchased by the Federal Reserve, and thus generate seigniorage, or interest, for the Federal Reserve System, which serves as a lending parent to the Treasury and the public.
- p. 1044-45 http://www.harvard-jlpp.com/wp-content/uploads/2009/02/31-3/Natelson%20Online%20-%20Paper%20Money.pdf
- Fleming, pp. 29-30
- Fleming, Thomas. New Jersey: A History. New York: Norton. 1984.
- "Bills of Credit" section of The Constitutional Law Of The United States, by Westel Woodbury Willoughby