Gold, Money and the U.S. Constitution

This article and the imbedded links are a "must read" for those in the U.S. who care to predict what is likely to happen to their physical gold if a dollar devaluation, or deflation, or inflation, or other national emergency or pretext reaches crisis levels.

INTRODUCTION

Because comments periodically appear in this forum regarding the constitutionality of fiat money, it might be useful briefly to review how the U.S. Supreme Court has dealt with the subject. Many of us already know that history generally, but understanding the actual facts and details will make us serious realists and more effective advocates for reform, not only on this issue, but also with respect to individual rights generally.

"Those who cannot remember the past are condemned to repeat it." - George Santayana, The Life of Reason, Volume 1, 1905

The U.S. history of paper versus gold as money illustrates the steady but sure conversion of a near-anarchistic, frontier society to a servile state in which most citizens are all too willing to trade their own freedom and the freedom of their fellows for their own security.

First, it is important to acknowledge one of the foundations of international law: Nation-states belong to the entity that controls the territory. Invariably, the means used for that control is force. George III lost America, not because the Declaration of Independence was published, but because he could not control the territory. He met a more effective opposing force. Surely, the revolutionaries were motivated by ideals of freedom and independence sufficient to raise an army and to weather great adversity; but prayers and yearning to breathe free did not overthrow the colonial ruler. In the final analysis it was force. Force is every government's ultimate power and the legal monopoly over force is its primary authority.

The 1776 revolutionaries and the founding fathers gave the citizens of the U.S. a legacy unique in all prior history, a gift of galactic proportions - a written constitution limiting the power of the government, acknowledging that those powers that are not given to the government are reserved to the people and recognizing individual rights against the government. That legal mechanism was intended to provide the means for the citizens to protect themselves against abuse by the minority who hold the reigns of government power and the means to control those placed in charge of the monopoly over force.

Second, recognize that the higher law to which the U.S. founding fathers appealed in the Declaration of Independence is not the law of the land. Preservation of life, liberty and the pursuit of happiness is a nice objective but, without some legal basis (such as the 5^th Amendment to the U.S. Constitution), it is not the law.

Third, remember that the U.S. Constitution was a charter for a government of enumerated powers. Shortly after its adoption, the limits of those powers were further clarified in Amendments 1-10 - the Bill of Rights. The genius and novelty of the Constitution thus created was that it established a legal framework that limited the legal authority of the government to apply its monopoly on force and constrained its authority to enact laws that could be used to justify the application of force.

Let's review some of these limitations.

Article 1, Section 8 of the Constitution enumerates the powers of the government. It reads in part:

The Congress shall have Power . . .

• To borrow Money on the credit of the United States;
• To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;
• To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
• To provide for the Punishment of counterfeiting the Securities and current Coin of the United States; . . .
• To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water;
• To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years; . . . --And
• To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.

The last clause apparently gives the Congress "implied" powers that are "necessary and proper for carrying into execution the enumerated powers. The theory of "implied powers" in the Constitution originated in a debate between Hamilton and Jefferson over the federal authority to charter the first Bank of the United States. Jefferson argued that the Constitutional Convention had voted down the authority to establish corporations and that the power was not specifically enumerated. Hamilton argued that the "necessary and proper" clause grants Congress the power to pass laws supporting the enumerated powers. Jefferson lost the argument and the first bank was chartered. Later, in McCulloch v Maryland, Justice Marshall made the doctrine official: ''Let the end be legitimate, let it be within the scope of the Constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consistent with the letter and spirit of the Constitution, are constitutional.''

Article I, Section 10, provides that "No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

The 5^th Amendment provides, in part, "No person shall be . . . deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation." What "due process" means has been a burning constitutional question throughout the history of the Republic. (See the annotation at http://supreme.lp.findlaw.com/constitution/amendment05/11.html#3) The issue at times has been at the center of a power struggle between a judiciary that attempted to protect private economic rights and a legislature that attempted to impose governmental control over private business activity and the economy in general.

"The 10^th Amendment states simply, "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." Both this Amendment and the due process clause were used by the courts to confine the legislative powers of the Congress until FDR's threat to pack the Supreme Court apparently caused a change in judicial philosophy, effectively ending the Court's presumed power to rule on the substantive content of the laws passed by Congress and the States.

In the case of Marbury v. Madison the United States Supreme Court established its role early as the final interpreter of the Constitution. Good lawyers can find an ambiguity in almost anything that seems imminently clear, so a great many straightforward statements in the Constitution have come before the Court for interpretation. The Court's constitutional pronouncements become the law of the land and can be overturned only by a later, overruling decision of the Court or by a Constitutional Amendment, both of which are extremely hard to obtain.

To make them independent, the Constitution provides that Supreme Court Justices - indeed, all federal judges - may serve for life "during good Behaviour." Despite this independence, the Supreme Court is not an ivory tower by any stretch of the imagination. It is a political body and throughout its history it has made many political decisions, some of which revealed strained interpretations of the Constitution. Despite its political underpinnings, which are occasionally too obvious, it has maintained its credibility sufficient to have its rulings accepted and the political order maintained. Indeed, as illustrated below, many of the court's decisions about the government's power in the realm of money, banking, property rights and private contracts must be read in the context of turbulent times in order to understand why an independent court would strain to uphold the power of the central government when right reason and the plain language of the Constitution indicated otherwise. The answer usually can be found in the unstated but obvious desire of the Court to preserve the Republic. The tenor of the times is important to understanding constitutional history. The Court responds in what it considers an appropriate manner to national emergencies, whether it be confiscation of gold during an economic meltdown or internment of ethnic groups during wartime - a troubling point to remember when ruminating about the "forever war" to come. A few of these remarkable decisions will be discussed later in this article.

PART 1 - THE CONSTITUTIONALITY OF PAPER MONEY

The Revolutionary War era Articles of Confederation contained a clause authorizing the Continental Congress to coin money and emit bills of credit (paper money), which they did with a notorious lack of success. On August 16, 1787, during the Constitutional Convention convened to replace the Articles of Confederation, the same clause was presented to the convention by the drafting committee. The paper money proposal hit a raw nerve. Opposition was vehement. It was even suggested that the federal government should be affirmatively prohibited from issuing paper money. According to James Madison's Records of the Federal Convention (See pp 308, 309 and 310), the language authorizing the Congress to emit bills of credit was removed, but a suggestion that an affirmative prohibition be added was not taken up as an amendment. Madison's final footnote read:

This vote in the affirmative by Virga. was occasioned by the acquiescence of Mr. Madison who became satisfied that striking out the words would not disable the Govt from the use of public notes as far as they could be safe & proper; & would only cut off the pretext for a paper currency and particularly for making the bills a tender either for public or private debts.

Some scholars interpret the result as ambiguous, pointing to the rejection of an outright prohibition. The Letter of Delegate Luther Martin to the Maryland Legislature on the Proceedings of the Constitutional Convention (pages 47-48) relates a significantly different interpretation of the result:

By our original Articles of Confederation, the Congress have power to borrow money and emit bills of credit on the credit of the United States; agreeable to which was the report on this system, as made by the committee of detail. When we came to this part of the report, a motion was made to strike out the words "to emit bills of credit." Against the motion we urged, that it would be improper to deprive the Congress of that power; that it would be a novelty unprecedented to establish a government which should not have such authority; that it was impossible to look forward into futurity so far as to decide that events might not happen that should render the exercise of such a power absolutely necessary; and that we doubted whether, if a war should take place, it would be possible for this country to defend itself without having recourse to paper credit, in which case there would be a necessity of becoming a prey to our enemies, or violating the constitution of our government; and that, considering the administration of the government would be principally in the hands of the wealthy, there could be little reason to fear an abuse of the power by an unnecessary or injurious exercise of it. But, sir, a majority of the Convention, being wise beyond every event, and being willing to risk any political evil rather than admit the idea of a paper emission in any possible case, refused to trust this authority to a government to which they were lavishing the most unlimited powers of taxation, and to the mercy of which they were willing blindly to trust the liberty and property of the citizens of every state in the Union; and they erased that clause from the system.

Mr. Martin apparently was in favor of authorizing the government to emit bills of credit and was forced to report to his legislature in no uncertain terms that his opposition failed. One wonders - if there were a door left open, why would he have reported that it was closed and he failed, rather than report that the result was a silent compromise that left the door open if only a crack?

A few days later the proposal to prohibit the States from emitting bills of credit was passed.

In the realm of money, the Constitutional Convention left a few unanswered questions - about the relationship between the power to borrow money and the power to issue paper money, if any; about the power of state or federal banks to issue notes; and about the power of the federal government to charter a bank, to issue paper money, to make it legal tender, and to control state banks.

Despite the open constitutional question, Congress approved the issuance of treasury notes more than twenty times between 1812 and 1859; but the notes were not legal tender.

The first constitutional suits dealing with the money power involved federal or state banks or the power struggles between the federal banks and state power. Suffice it to say that until after the Civil War, the Supreme Court did not discuss, except in passing, the power of the federal government to issue paper money and, then, without analysis, to simply acknowledge that the power existed. The last of these cases, while not allowing states per se to issue paper money, validated the notion that a separate entity, a bank, even one 100% owned by the State, could issue paper money. See Briscoe v. Bank of Kentucky, 36 U.S. 259 (1837).

Heartened by the Supreme Court's decision in Briscoe state banking and state bank notes grew. Some of the notes were good as gold, some were not. A leading voice proposing to end such diversity by the adoption of a national currency was Salmon P. Chase, Governor of Ohio and former Ohio counsel to the federal bank.

In 1861 Chase became Lincoln's Treasury Secretary. In an attempt to finance the Civil War and reform the existing currency system he proposed a safety fund for the banks that would be comprised of federal bonds to back circulating bank notes. He expressed his opposition to Congress to the issuance of a federal legal tender currency per se. Nevertheless, the Congress gave him a banking plan that required state banks to buy government bonds to be deposited in the U.S. Treasury - in return for which the banks would receive legal tender Treasury Notes at a 90% discount. The purpose and intended effect of the system was to issue a national currency and eliminate state bank notes. It was the first legal tender paper currency issued by the Republic. Because the law was not entirely effective in eliminating state bank notes, another law was passed imposing a 10% tax on the issue of state bank notes.

In 1869, a case came before the Supreme Court in which a Maine bank challenged the 10% tax as a usurpation of the power reserved to the States by the 10^th Amendment and as a direct tax not within the taxing authority granted to Congress by the Constitution. It should be noted that the bank was challenging the tax and not the authority to issue a paper currency. The then Chief Justice of the Supreme Court was none other than Salmon P. Chase. Lincoln had appointed Chase specifically to assure that emancipation and legal tender would be upheld.

In writing for the majority, Chase upheld the tax on the Maine bank note issue in a lengthy opinion addressing the direct tax argument and a comparatively brief response to the 10^th Amendment challenge. With respect to the latter, he said that the power to tax the issuance of bills of credit was well within the powers of Congress as a proper exercise their revenue authority. Then he addressed the complaint that the tax was so excessive as to indicate a purpose on the part of the Congress to destroy the bank, which, it was argued, was beyond the constitutional authority of the Congress. He dismissed the argument by saying, in effect, that if the Constitution gives the Congress a power, it is not the role of the judiciary do declare the extent of the exercise of that power unconstitutional, even if it is oppressive. Then, he made the following statement to explain why an oppressive tax might be justified:

"But there is another answer which vindicates equally the wisdom and the power of Congress.

"It cannot be doubted that under the Constitution the power to provide a circulation of coin is given to Congress. And it is settled by the uniform practice of the government and by repeated decisions, that Congress may constitutionally authorize the emission of bills of credit. It is not important here, to decide whether the quality of legal tender, in payment of debts, can be constitutionally imparted to these bills; it is enough to say, that there can be no question of the power of the government to emit them; to make them receivable in payment of debts to itself; to fit them for use by those who see fit to use them in all the transactions of commerce; to provide for their redemption; to make them a currency, uniform in value and description, and convenient and useful for circulation. These powers, until recently, were only partially and occasionally exercised. Lately, however, they have been called into full activity, and Congress has undertaken to supply a currency for the entire country." Veazy Bank v. Fenno, 75 U.S. 533, 548 (1869) (emphasis added).

In Chase's opinion there are no citations to the "repeated decisions," no discussion of the debate of the founders in the Constitutional Convention, no appeal to the Federalist Papers (See Federalist No. 44 for Madison's view of state power, paper money and justice), and no references to laws manifesting the "uniform practice" of the government's issuance of bills of credit - much less citations to constitutional precedent, if any, validating those laws. Perhaps counsel for the bank failed to raise Luther Martin's Letter, or Madison's footnote. Perhaps he never had an opportunity because the power to create a national currency was not a part of the arguments of either side. As we shall see later in this series, counsel did point out these historical facts to the Court in a subsequent case. Considering Chase's "grave aversion" to paper money and his ultimate decision not to follow the late president's reason for appointing him, he might have omitted the statement had the argument been made. He certainly would have considered omitting it had he known that it would be raised against him by the dissent the first Legal Tender cases.

It may be noted that the statement by Chase was what the lawyers call "dictum." The case was about taxing the issue of state bank notes and not about the right of the federal government to issue currency. So, technically, it cannot be said that the decision is precedent for the proposition that paper money is constitutional. The statement merely offered a reasonable basis that the Congress might have for taxing state bank notes oppressively. Nevertheless, Chase's pronouncement and the unchallenged issue of non-legal tender bank notes before the Civil War further sanctioned, by custom and authority, the notion that paper money was constitutional.

During and in the aftermath of the Civil War the Supreme Court was called upon deal with the origins of an American crisis the proportions of which dwarfed all of those before and all since - a crisis that was widely believed to be financed by the banks and bank note issues of the South. Chase undoubtedly felt a sacred obligation to be sure that it would never happen again. At least from the point of that decision forward, paper money appeared to be constitutionally authorized; but Chase reserved judgment on legal tender.