Legal Definitions - bill of credit

A bill of credit refers to a form of paper money issued by an individual state government, rather than the federal government, which is intended to circulate as currency for everyday transactions. The U.S. Constitution, specifically Article I, Section 10, prohibits states from issuing such bills of credit. This constitutional restriction ensures a unified national currency and prevents individual states from creating their own independent monetary systems, which could lead to economic instability and interfere with interstate commerce.

Here are some examples to illustrate this concept:

• Example 1: State-Issued Emergency Notes

  Imagine the fictional state of "Veridia" faces a severe budget crisis. To avoid raising taxes or borrowing from the federal government, the state legislature passes a law authorizing the state treasury to print "Veridia Dollars" – paper notes backed only by the state's promise to accept them for taxes and fees. The state then encourages businesses and citizens to use these Veridia Dollars for all transactions within the state, effectively creating a parallel currency.

  Explanation: These "Veridia Dollars" would be considered bills of credit because they are paper currency issued by a state government, intended to circulate as money. Such an action would be unconstitutional under U.S. law, as states are prohibited from issuing their own currency.

• Example 2: State-Backed Promissory Notes as Currency

  During a local economic downturn, the state of "Aurelia" decides to issue "Aurelia Treasury Notes" to its contractors and employees instead of federal dollars. These notes are printed on official state paper, bear the state seal, and state that they are redeemable for federal currency at state banks after one year. In the meantime, the state encourages local businesses to accept these notes as payment for goods and services, effectively making them a temporary form of currency within the state.

  Explanation: The Aurelia Treasury Notes, designed to circulate as a medium of exchange within the state, even if temporarily and with a future redemption promise, would constitute bills of credit. The state is attempting to create its own form of circulating paper money, which is explicitly prohibited by the U.S. Constitution.

• Example 3: Vouchers Gaining Currency Status

  The state of "Caledon" establishes a new public works program and, to stimulate local commerce, issues "Caledon Works Vouchers" to its workers. These vouchers are denominated in dollar amounts and, while initially intended only for use at state-approved vendors, they become widely accepted by other businesses in the community as payment for goods and services due to their perceived value and the state's backing.

  Explanation: If these "Caledon Works Vouchers" begin to circulate generally as a substitute for federal currency in everyday transactions, they would effectively function as bills of credit. Even if not explicitly declared "money," their widespread acceptance and use as a medium of exchange, issued by the state, would fall under the constitutional prohibition against states issuing their own currency.