We often hear that the "gold standard" was a system in which paper money was "backed by gold." Nothing could be further from the truth. There was no paper money in the United States. That's because the Constitution did not empower the federal government to issue paper money. It also expressly prohibited the states from issuing paper money.

The Constitution used the term "bills of credit." That was the term people at that time used for paper money. The Constitution expressly forbade the states from issuing "bills of credit" or paper money. It also did not delegate the power to issue "bills of credit" or paper money to the federal government.

Instead, the Constitution empowered the federal government to "coin" money. At the risk of belaboring the obvious, one does not "coin" money out of paper. One "coins" money out of such metallic commodities as gold and silver.

The Constitution also expressly forbade the states from making anything but gold and silver coins "legal tender," or official money, which further established the intent of the Framers.

The Constitution also empowered the federal government to borrow money. That's what U.S. debt instruments — bills, notes, and bonds — are all about. But even though these debt instruments oftentimes circulated as "semi-money" in economic transactions, everyone understood that they were not money itself. Instead, they were promises to pay money, which meant promises to pay gold coins and silver coins.