Gold, Money and the U.S. Constitution

As if the war itself were not enough, the aftermath of the Civil War was a wrenching experience for the nation. In Washington there was high drama - the President was assassinated. His successor was impeached and his trial before the U.S. Senate riveted the occasional inhabitants of that small town. Those of us who spent the Watergate years there can only begin to imagine the preoccupation that must have gripped the populace. But in the halls of justice there was also high drama - less noted by history than the other electrifying political events, but drama nevertheless.

Treasury Secretary Salmon P. Chase, proponent of a national currency, but opposed to making it legal tender, was by his own admission forced by the exigencies of the Civil War to accept the 1862 program of New York Congressman Eldridge G. Spaulding and the House Ways and Mean Committee to issue the federal government's first legal tender notes and suspend the right to redeem the notes in specie. The scheme worked insofar as it succeeded as a means of financing the war without crushing the fragile Northern economy with excessive direct taxes. In the second Legal Tender cases Justice Bradley explained in salutary terms how the device works as an "imperceptible tax" to finance war by invisibly spreading the financial pain:

In this country, the habit had prevailed from the commencement of the eighteenth century, of issuing bills of credit; and the revolution of independence had just been achieved, in great degree, by the means of similar bills issued by the Continental Congress. These bills were generally made a legal tender for the payment of all debts public and private, until, by the influence of English merchants at home, Parliament prohibited the issue of bills with that quality. This prohibition was first exercised in 1751, against the New England colonies; and subsequently, in 1763, against all the colonies. It was one of the causes of discontent which finally culminated in the Revolution. Dr. Franklin endeavored to obtain a repeal of the prohibitory acts, but only succeeded in obtaining from Parliament, in 1773, an act authorizing the colonies to make their bills receivable for taxes and debts due to the colony that issued them. At the breaking out of the war, the Continental Congress commenced the issue of bills of credit, and the war was carried on without other resources for three or four years. It may be said with truth, that we owe our national independence to the use of this fiscal agency. Dr. Franklin, in a letter to a friend, dated from Paris, in April, 1779, after deploring the depreciation which the Continental currency had undergone, said: 'The only consolation under the evil is, that the public debt is proportionately diminished by the depreciation; and this by a kind of imperceptible tax, every one having paid a part of it in the fall of value that took place between the receiving and paying such sums as passed through his hands.' He adds: 'This effect of paper currency is not understood this side the water [i.e., Europe]. And indeed the whole is a mystery even to the politicians, how we have been able to continue a war four years without money, and how we could pay with paper, that had no previously fixed fund appropriated specially to redeem it. This currency, as we manage it, is a wonderful machine. It performs its office when we issue it; it pays and clothes troops, and provides victuals and ammunition.' In a subsequent letter, of 9th October, 1780, he says: 'They [the Congress] issued an immense quantity of paper bills, to pay, clothe, arm, and feed their troops, and fit out ships; and with this paper, without taxes for the first three years, they fought and battled one of the most powerful nations of Europe.' The Continental bills were not made legal tenders at first, but in January, 1777, the Congress passed resolutions declaring that they ought to pass current in all payments, and be deemed in value equal to the same nominal sums in Spanish dollars, and that any one refusing so to receive them ought to be deemed an enemy to the liberties of the United States; and recommending to the legislatures of the several States to pass laws to that effect." 79 U.S. 457, 558. [Footnotes omitted.]

Justice Clifford, acknowledging the above in his dissent, pointed out that the "wonderful machine" described by Dr. Franklin had a dark side:

. . . these measures of violence and terror [i.e., making those refusing to take the Continental dollar enemies to the liberty of the United States], so far from aiding the circulation of the paper, led on to still further depreciation. New emissions followed and new measures were adopted to give the paper credit by pledging the public faith for its redemption. Effort followed effort in that direction until the idea of redemption at par was abandoned. Forty for one was offered and the States were required to report the bills under that regulation, but few of the old bills were ever reported, and of course few only of the contemplated new notes were issued, and the bills in a brief period ceased to circulate, and in the course of that year quietly died in the hands of their possessors. [Footnotes omitted.]

Legal tender was not a novel idea. Many states had passed legal tender laws in response to the resolution of the Continental Congress asking the States to pass laws making those who refused to accept Continental dollars enemies of public liberty. But the awful experience with the "Continental" caused he Constitutional Convention to eliminate the express authority to "emit bills of credit." Madison, understanding the necessity for the government to borrow money and issue notes in return, explained that he supported the elimination of this clause because he "became satisfied that striking out the words would not disable the Government 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." In other words, his view was that the Constitutional authority to borrow money and issue the attendant notes could not be used as a pretext for paper currency and "particularly" for making it legal tender.

It was not just the fact of paper money that Madison and others considered unjust and pernicious. Mere paper money is a creature of the free market whose value is gauged by the trustworthiness of the entity that issued it to exchange the paper for real value such as gold and silver. Those banks that could not be trusted to redeem the notes in specie could be avoided and people could refuse to take their notes as payment for debts, and they regularly did. The principal objection to paper money was its designation as legal tender. Legal tender laws inhibit the free market's ability to flee depreciating currency and place the coercive power of the state behind the paper regardless of its intrinsic value so that, when devaluation occurs, it serves as a surreptitious tax on those forced by law to hold and use the money.

Some scoff at the statement that the legal tender laws are coercive. The answer to those skeptics appears in Andrew Dickson White's monograph Fiat Money Inflation in France. In 1793, failure to accept the French paper money was made punishable by death and the punishment was actually imposed as demonstrated by the lists of those condemned to the guillotine. In contrast to the Draconian measures taken after the French revolution, the import of the U.S. legal tender laws has been merely to allow private and public debtors to legally discharge their debts by payment of legal tender currency. But this form of interference by the state in private transactions to appropriate the wealth of creditors is coercive nevertheless; and the French experience illustrates the direction that any kind of state coercion can take once the state's authority to act is established.

The United States passed a number of legal tender laws prior to 1862, beginning with the 1792 Act establishing the United States Mint; but those laws applied to the coinage of the Mint. In addition to establishing the Mint, the 1792 law specified the weights of the respective coins in gold and silver at roughly market value and provided that all of the coins issued by the Mint "shall be a lawful tender in all payments whatsoever, those of full weight according to the respective values herein before declared, and those of less than full weight at values proportional to their respective weights." Maintaining the integrity of the intrinsic value of the United States legal tender coinage was a serious and important matter. Debasement of the coinage was declared to be a felony punishable by death!

The 1792 law established both silver and gold as the coins of the United States in a 15:1 ratio, silver being for the Dollar and smaller denominations and gold being for the larger Eagles ($10), Half-Eagles and Quarter Eagles. By 1834, the free market ratio of silver to gold had become roughly 16:1 and Gresham's Law had begun to operate on the U.S. gold coins in circulation. (See the Letter from the Director of the Mint to the House on January 11, 1833.) At that time the United States had no ability to support the established ratio by market intervention, so the Congress acted to reduce the amount of gold in the Eagle so as to make the ratio to the silver Dollar 16:1. Although it was acknowledged that the transition would create some incidental economic distortions, and there was some debate about whether the adjustment was a debasement of the gold coin, the consensus appeared to be that it was trifling when compared to the effects created by the disproportionate value between gold and silver coins. (Also see the 1834 report of the House Select Committee on Coins and the later, full House debate.)

Then, by trivial increments, in response to the call for more currency, the coinage of the United States began to set some unfortunate precedents - official debasement. In 1851 a bill was introduced and later passed authorizing a legal tender three-cent piece that clearly had less relative silver content than 0.03 Dollars. Two years later the silver content of the half dollar and all smaller denominations were reduced and made legal tender for all debts of 5 dollars or less. The 1853 law also provided that the United States would not accept deposits of these coins. Consequently, these smaller coins operated like paper money, albeit with significant intrinsic value. The Mint's profits on this enterprise were to be paid periodically into the Treasury, an analogy to the effects of printing money.

Beginning with the Act of February 25,1862, until the end of the War, a series of laws were passed authorizing the issue of legal tender notes. Ultimately, more than $400 million in notes was authorized and issued. The notes, which came to be known as "greenbacks," circulated alongside gold and silver coins and fluctuated in value relative to coin depending upon the United States' success in the fighting. During the floor debate in the House of Representatives on February 5, 1862, Congressman J.W. Crisfield of Maryland argued eloquently and at length that the legal tender measure was unconstitutional and expressed "amazement" at the contrary opinion of the Attorney General written for Congressman Spalding's use in the debates. The law was enacted despite the constitutional objections.

When Chief Justice Taney died in 1864, Lincoln appointed Chase to his successor, in part to uphold the 1862 Legal Tender Act. But, ironically, Chase, who was philosophically in favor of a national currency, had grave reservations about the wisdom of paper money and, when faced with the question directly, he believed that legal tender for paper money was unconstitutional. In the final analysis, as the Legal Tender Cases demonstrate, his attempt to parse the issues failed; and he was left with seemingly contradictory positions to counter the political forces that came to the Court after his appointment.

Legal Tender I

The first case to come before the Supreme Court challenging the constitutionality of legal tender for the 1862 notes was Hepburn v. Griswold, 75 U.S. (8 Wall.) 603 (1870) ("Legal Tender I"), reprinted in part in Henry Mark Holzer, Government's Money Monopoly. pp. 119-131 (iUniverse.com, Inc. 2000). This was a suit on a $11,250 promissory note that had been signed in 1860 and became due on February 20, 1862 while gold and silver coin were still the only lawful money. In 1864 when the holder sued for payment, the debtor paid greenbacks and asked the court for discharge, which was denied. He appealed. At the time, greenbacks were worth substantially less than the coin originally contemplated by the parties. The only issue that the Supreme Court needed to decide was whether the law of February 25, 1862, should be applied to a note that became due 5 days before the law was enacted. Rather than adopt a narrower ruling, the Court proceeded to hold that the 1862 legal tender provisions were unconstitutional.

Chief Justice Chase, writing for the majority in a 4 to 3 decision, considered whether the law was authorized under any of the enumerated powers in the Constitution - to coin money, to regulate commerce, to borrow money, to carry on war - and for each decided in the negative. Interestingly, consistent with his statement in the Veazie case, he repeated his view that the government had the authority to emit bills of credit (meaning paper currency), but he said that, as in the case of the authority of the Continental Congress, the U.S. Congress had no authority to make that currency legal tender. He then considered whether the Act was authorized as an implied power under the necessary and proper clause, again reviewing "whether an expedient of this sort is an appropriate and plainly adapted means for the execution of the power to declare and carry on war" or regulate commerce or borrow money, deciding in the negative as to each. He also expressed the opinion that legal tender was a form of taking property without due process of law. At the conclusion of his opinion, Chief Justice Chase made a remarkable and poignant apology for his role in accepting and implementing the legal tender laws:

It is not surprising that amid the tumult of the late civil war, and under the influence of apprehensions for the safety of the Republic almost universal, different views, never before entertained by American statesmen or jurists, were adopted by many. The time was not favorable to considerate reflection. . . . If power was assumed from patriotic motives, the assumption found ready justification in patriotic hearts. . . . Some who were strongly averse to making government notes a legal tender felt themselves constrained to acquiesce in the views of the advocates of the measure. Not a few who . . . acquiesced in that view have, since the return of peace, and under the influence of the calmer time, reconsidered their conclusions. 75 U.S. at 625-26.

Justice Miller, in his dissent, followed the same analytical methodology and came to the opposite conclusion, leaning heavily on the war power -- and quoting Justice Chase's opinion in the Veazie case justifying taxing state bank notes out of existence to support a national currency:

, , , "that, having, in the exercise of undoubted constitutional power, undertaken to provide a currency for the whole country, it cannot be questioned that the Congress may constitutionally secure the benefit of to the people by appropriate means." Which [asked Justice Miller] is the more appropriate and effectual means of making the currency established by Congress useful, acceptable, perfect - the taxing of all other currency out of existence, or giving that furnished by the government the quality of lawful tender for debts?

Legal Tender II

The same day that the decision in Legal Tender I was handed down, President Grant nominated two new justices to the court, and the worm turned. When the two justices ascended to the high bench, the Court immediately docketed two cases, Knox v. Lee and Parker v. Davis ("Legal Tender II") involving the constitutionality of the legal tender laws. The court heard every possible argument - from Madison's footnote and Luther Martin's letter to the coinage adjustment in 1834, making debased coins legal tender in 1853, and the exigencies of war. Then, on May 1, 1871, in a move as yet unprecedented for its proximity to a prior case and a historically unwelcome exposure of the political nature of the body, the three dissenters combined with the two new justices to overrule Legal Tender I.

Those with a thirst for detail will want to read the very lengthy Legal Tender II decision and arguments of counsel. It is sufficient for this article to highlight two aspects of the case - first, the human spectacle of a great man who compromised his principles and lived to regret it, and second, to illustrate how crises, whether real or imagined, can be - and often are - used to diminish individual liberties and devolve ever increasing power to the state.

In oral argument, the Attorney General pulled no punches. He hurled the Chief Justice's own words at him:

Some have found the authority in the power to coin money and regulate its value. They think that the word 'coin' is here used in the large sense- to make, to fabricate; and the meaning of the word 'money' is not limited to metallic coinage, but extends to everything which had been in general use as money, or which may answer the purposes of money-a definition which will embrace a government's promises to pay, of a form and denomination designed for circulation as currency. . . . Probably this view was in the mind of Congress when the act of 1862 was framed, and suggested the words, 'shall be lawful money.' Perhaps it was in the mind of the statesman who then had charge of the national finances, who issued the legal tender notes, and who afterwards, in vindicating this policy before the people, said: 'Under these circumstances I coined the credit of the nation.' [The footnote reads, "Hon. S. P. Chase, at Louisville, Ky., in 1864."]

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[Opposing] counsel quotes from the debates in the Federal Convention of 1787 to show that members of that body were opposed to making paper a legal tender. The very quotations prove that the members considered that the power to emit bills of credit involved the power to make them a legal tender, and hence they struck out of the draft of the Constitution the power to emit bills. But it is no uncommon experience that the words of a constitution or statute are found, in their fairest interpretation, to import more than their authors distinctly designed. It is not given to man, when framing a constitution, to foresee all the cases to which the conferred powers will properly extend. And in this very matter, notwithstanding that the power to emit bills of credit was struck out, this court has held that the power exists; and why, then, does it not exist with all that in 1787 was supposed the belong to it? [Note the logic here: The Constitutional Convention struck the authority to emit bills of credit because they were opposed to paper money as a legal tender, but inasmuch as the authority to emit bills of credit has now been recognized, legal tender ought to come along as well because the founders felt that they went hand in glove!]

Justice Strong, writing for the majority, was no less gentle with the Chief Justice:

The case of Veazie Bank v. Fenno presents a suggestive illustration. There a tax of ten per cent. on State bank notes in circulation was held constitutional, not merely because it was a means of raising revenue, but as an instrument to put out of existence such a circulation in competition with notes issued by the government . There, this court, speaking through the Chief Justice, avowed that it is the constitutional right of Congress to provide a currency for the whole country; that this might be done by coin, or United States notes, or notes of National banks; and that it cannot be questioned Congress may constitutionally secure the benefit of such a currency to the people by appropriate legislation. It was said there can be no question of the power of this government to emit bills of credit; 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 make them a currency uniform in value and description, and convenient and useful for circulation. Here the substantive power to tax was allowed to be employed for improving the currency. It is not easy to see why, if State bank notes can be taxed out of existence for the purposes of indirectly making United States notes more convenient and useful for commercial purposes, the same end may not be secured directly by making them a legal tender.

Chase stood up to the bar and responded with a testament that his acquiescence in the legal tender scheme had been "erroneous:"

The reference made in the opinion just read, as well as in the argument at the bar, to the opinions of the Chief Justice, when Secretary of the Treasury, seems to warrant, if it does not require, some observations before proceeding further in the discussion.

It was his fortune at the time the legal tender clause was inserted in the bill to authorize the issue of United States notes and received the sanction of Congress, to be charged with the anxious and responsible duty of providing funds for the prosecution of the war. In no report made by him to Congress was the expedient of making the notes of the United States a legal tender suggested. He urged the issue of notes payable on demand in coin or received as coin in payment of duties. When the State banks had suspended specie payments, he recommended the issue of United States notes receivable for all loans to the United States and all government dues except duties on imports. In his report of December, 1862, he said that 'United States notes receivable for bonds bearing a secure specie interest are next best to notes convertible into coin,' and after stating the financial measures which in his judgment were advisable, he added: 'The Secretary recommends, therefore, no mere paper money scheme, but on the contrary a series of measures looking to a safe and gradual return to gold and silver as the only permanent basis, standard, and measure of value recognized by the Constitution.' At the session of Congress before this report was made, the bill containing the legal tender clause had become a law. He was extremely and avowedly averse to this clause, but was very solicitous for the passage of the bill to authorize the issue of United States notes then pending. He thought it indispensably necessary that the authority to issue these notes, should be granted by Congress. The passage of the bill was delayed, if not jeopardized, by the difference of opinion which prevailed on the question of making them a legal tender. It was under these circumstances that he expressed the opinion, when called upon by the Committee of Ways and Means, that it was necessary; and he was not sorry to find it sustained by the decisions of respected courts, not unanimous indeed, nor without contrary decisions of State courts equally respectable. Examination and reflection under more propitious circumstances have satisfied him that this opinion was erroneous, and he does not hesitate to declare it. He would do so, just as unhesitatingly, if his favor to the legal tender clause had been at that time decided, and his opinion as to the constitutionality of the measure clear.

High drama indeed.

Legal Tender III

Following the War, the government began to retire the greenbacks while not resuming redemption in specie. The consequence was an ultimate contraction of the money supply from 1875 to 1878, an effect engineered in conjunction with a complementary fiscal policy so that redemption in specie could be resumed. (For an extensive treatment of the economic, political and monetary history of the greenback period, see Milton Friedman and Anna Schwartz's A Monetary History of the United States, 1867-1960. The book contains a very good treatment of the politics of resumption.) On January 14, 1875, the Resumption Act, 18 Stat. 296, was passed setting January 1, 1879 as the date to resume specie payments. In response to calls to place more money in circulation, a later Act of May 31, 1878, 20 Stat. 87, forbade further retirement of greenbacks and provided that they should be reissued when presented; but the law did not change the date to resume specie payments. This would set the stage for the final legal tender case, addressing the question whether Congressional authority was a temporary measure inherent in the war power or a permanent power to inherent in the government's role as manager of the economy, a role that it had assumed as part of its efforts to wage war.

Juilliard v. Greenman ("Legal Tender III") was another case in which a creditor declined to accept legal tender notes in payment for goods delivered to the defendant. The plaintiff's problem was that he knew that if he presented the notes, rather than receiving coin, he would receive new legal tender notes. He declined to accept them and challenged the constitutionality of the 1878 law, arguing that legal tender was no longer necessary under the war powers in 1878.

The Court upheld the constitutionality of the law in an 8 to 1 decision:

The power of issuing bills of credit, and making them, at the discretion of the legislature, a tender in payment of private debts, had long been exercised in this country by the several colonies and states; and during the revolutionary war the states, upon the recommendation of the congress of the confederation, had made the bills issued by congress a legal tender. . . . The exercise of this power not being prohibited to congress by the constitution, it is included in the power expressly granted to borrow money on the credit of the United States.

This position is fortified by the fact that congress is vested with the exclusive exercise of the analogous power of coining money and regulating the value of domestic and foreign coin, and also with the paramount power of regulating foreign and interstate commerce. Under the power to borrow money on the credit of the United States, and to issue circulating notes for the money borrowed, its power to define the quality and force of those notes as currency is as broad as the like power over a metallic currency under the power to coin money and to regulate the value thereof. Under the two powers, taken together, congress is authorized to establish a national currency, either in coin or in paper, and to make that currency lawful money for all purposes, as regards the nation government or private individuals. The power of making the notes of the United States a legal tender in payment of private debts, being included in the power to borrow money and to provide a national currency, is not defeated or restricted by the fact that its exercise may affect the value of private contracts. If, upon a just and fair interpretation of the whole constitution, a particular power or authority appears to be vested in congress, it is no constitutional objection to its existence, or to its exercise, that the property or the contracts of individuals may be incidentally affected.

As observed by Mr. Justice STRONG, in delivering the opinion of the court in the Legal-tender Cases, 'Every contract for the payment of money, simply, is necessarily subject to the constitutional power of the government over the currency, whatever that power may be, and the obligation of the parties is, therefore, assumed with reference to that power.'

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Such being our conclusion in matter of law, the question whether at any particular time, in war or in peace, the exigency is such, by reason of unusual and pressing demands on the resources of the government, or of the inadequacy of the supply of gold and silver coin to furnish the currency needed for the uses of the government and of the people, that it is, as matter of fact, wise and expedient to resort to this means, is a political question, to be determined by congress when the question of exigency arises, and not a judicial question, to be afterwards passed upon by the courts.

Thus, the Supreme Court not only upheld the power of the Congress to make paper money a legal tender in times of war and peace, it withdrew entirely and for all time from reviewing the wisdom and justice of the manner in which the government exercises that power.

Justice Field, who dissented in Legal Tender II and who here was the lone dissenter, disagreed with the majority's approach to the necessary and proper laws. In his view, the majority said that, if the Constitution does not forbid a power, the government has it. He responded to the contrary:

If the power is not in terms granted, and is not necessary and proper for the exercise of a power which is thus granted, it does not exist. And in determining what measures may be adopted in executing the powers granted, Chief Justice MARSHALL declares that they must be appropriate, plainly adapted to the end, not prohibited, and consistent with the letter and spirit of the constitution. Now, all through that instrument we find limitations upon the power, both of the general government and the state governments, so as to prevent oppression and injustice. No legislation, therefore, tending to promote either can consist with the letter and spirit of the constitution. A law which interferes with the contracts of others, and compels one of the parties to receive in satisfaction something different from that stipulated, without reference to its actual value in the market, necessarily works such injustice and wrong.

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From the decision of the court I see only evil likely to follow. There have been times within the memory of all of us when the legal-tender notes of the United States were not exchangeable for more than one-half of their nominal value. The possibility of such depreciation will always attend paper money. This inborn infirmity no mere legislative declaration can cure. If congress has the power to make the notes a legal tender and to pass as money or its equivalent, why should not a sufficient amount be issued to pay the bonds of the United States as they nature? Why pay interest on the millions of dollars of bonds now due when congress can in one day make the money to pay the principal? And why should there be any restraint upon unlimited appropriations by the government for all imaginary schemes of public improvement, if the printing-press can furnish the money that is needed for them?

The opinions of Supreme Court dissenters have an unfortunate and perverse way of defining the scope and import of the majority rulings of the Court. The implication of this dissent is that the Court has ruled that there is no "restraint upon unlimited appropriation by he government" using the printing press. That implicit ruling now has become the accepted and contemporary view of the unrestrained money power of the government, notwithstanding that it stands in stark contrast to the expressed opposition of those who wrote the Constitution.

In fact, there was some restraint on the printing press in 1878. Gold coin circulated alongside greenbacks, allowing holders of greenback to flee the currency and providing an avenue of escape for those concerned about devaluation. But the unrestrained money power would be used in a later era to close that loophole and impose more effective measures to free the government from the discipline of objective value and give it absolute control over the medium of exchange.