The Illegality of Legal Tender
DECEMBER 01, 1986 by PHILIP W. NEWCOMER
Philip Newcomer is a senior at Grove City College, majoring in economics.
The coming of the Civil War brought with it four years of savage fighting, resulting in an unprecedented loss of life and property. Both the Union and the Confederacy, however, failed to anticipate the sustained nature of this conflict. In fact, Northern troops, at first, were enlisted for only ninety days. This lax attitude toward the war was shared by Lincoln’s Secretary of the Treasury, Salmon P. Chase. As a result, the taxes levied at the sug gestion of Chase during the beginning of the conflict provided little of the revenue needed to meet Federal expenditures. During the fiscal year ending June 30, 1862, revenues were a mere eleven per cent of the government’s outlays.
To meet these growing expenses, President Lincoln signed the first Legal Tender Act on February 25, 1862. This act authorized the printing of $150,000,000 in United States notes, that amount being increased by later legislation to $450,000,000. These notes were declared to be “lawful money and legal tender in payment of all debts, public and private, within the United States, except duties on imports and interest on the public debt.” Because they were printed in green ink, the United States notes quickly became known as greenbacks.
As the bill made its way through Congress, it sparked considerable debate. Chase reluctantly submitted the currency scheme to a subcommittee chaired by Representative Elbridge G. Spaulding of New York. Spaulding led the drive to pass the legislation, claiming that its acceptance was necessary for the survival of the Union. Many congressmen, however, refused to view the bill in this light. This proposal was, after all, a “. . . radical departure from traditional monetary theory and practice.” Historians have indicated that the proponents of the bill did not fully explore traditional methods of public finance. Wesley Clair Mitchell noted, in his History of the Greenbacks, that no United States notes were issued until three months after all specie payments were suspended. Mitchell points out:
Had these three months been utilized energetically in passing a few simple sanctions of an internal revenue tax act, . . . and in organizing machinery for the sale of bonds, there seems to be slight reason for believing that the government would have failed to obtain sufficient funds, particularly when account is taken of the improvement of credit caused by the military successes of the winter and spring.
Despite evidence that the Act wasn’t needed, many political leaders, viewing it as a desirable alternative to an unpopular increase in taxes, found the measure to be warranted during this state of war. Since the Act was considered as a part of Congress’ war powers, few people questioned the constitutionality of legal tender. That issue was not addressed until after the war, when controversies concerning the Legal Tender Acts reached courts throughout the nation. The opinions resulting from decisions handed down concerning greenbacks, both in favor of and against their tender status, show that the concept of legal tender is repugnant to the spirit of the Constitution of the United States.
The first cases dealing with greenbacks to reach the Federal courts did not specifically address the issue of constitutionality. These cases, however, focused attention upon the legal tender question. In Lane County v. Oregon, 74 U.S. 71 (1868), the Supreme Court placed a restriction upon the application of the Legal Tender Acts, holding that states may require payment of taxes to be made in specie rather than in United States notes. The power of a state government to tax was viewed as essential to the operations of that state. Federal legal tender requirements interfered with the states’ ability to declare a method of payment. In the majority opinion, the Court stated, “There is nothing in the Constitution which contemplates or authorizes any direct abridgement of this power by national legislation.” The principle established in Lane County, and later cited in National League of Cities v. Usery, 426 U.S. 833 (1976), proclaimed that the states were free to exercise their inherent governmental powers without fear of Congressional intervention.
This principle had a significant implication when applied to the concept of legal tender. Since Congress could not interfere with the fundamental powers of a state government, it was fair to deduce that Congress also was forbidden to tamper with constitutional restrictions upon those powers. In Article I, Section 10, Clause 1 of the Constitution, states were forbidden to “make any Thing but gold and silver coin a Tender in Payment of Debts.” It was clear, therefore, that Congress could not force a state to pay its creditors in legal tender notes. To do so would violate the constitutional legal tender disability placed upon the states. The decision of Lane County v. Oregon, then, opened the question of Congressional legal tender powers for further judicial review.
The constitutionality of the Legal Tender Acts was first challenged in a number of state courts. Initially, many states, including New York, Pennsylvania, and Indiana upheld the acts as a logical extension of Congressional warpowers. In 1864, however, Indiana reversed its earlier decision by declaring, in Thayer v. Hayes, 22 Ind. 282, that the acts were unconstitutional. The Kentucky Court of Errors also recognized the invalidity of legal tender in its decision of Griswold v. Hepburn, 63 Ky. 20 (1865). In this case, Griswold sued Hepburn for interest and principal due on a promissory note signed in 1860. Legal tender notes offered in payment by Hepburn had been refused by Griswold. Considering the intent of the Founding Fathers, the court’s opinion stressed that, “When the people who adopted it [the Constitution] delegated to Congress exclusive power ‘to coin money,’ they intended that nothing else than metallic coin should be money.” Despite the strength of the court’s argument, it was the appeal of this case which led to the most resounding condemnation of the legal tender concept.
Hepburn v. Griswold
In 1869, Hepburn v. Griswold came before the Supreme Court. On February 7, 1870, the Court, by a four to three vote, upheld the earlier decision of the Court of Errors of Kentucky. In so holding, the Court clearly rejected the constitutionality of the Congressional legal tender legislation. Ironically, the majority opinion was written by Chief Justice Salmon P. Chase, who, as Lincoln’s Secretary of the Treasury, originally endorsed the first Legal Tender Act. The reasoning of his argument greatly clarified the legal tender issue.
In writing his opinion, Chase searched in vain for a constitutional basis for legal tender. Clearly, Article I, Section 10 denied legal tender power to the states. Yet, this fact did not automatically imply that such power resided in the federal government. Chase found no expressed Congressional legal tender power within the text of the Constitution. He also declared that such actions cannot be reasonably implied as necessary and proper to the execution of any expressed power. John A. Sparks noted in his essay, “The Legal Standing of Gold—Contract Versus Status,” that the Tenth Amendment reserved for the states powers which were not delegated to the United States. Powers denied to the states which were not delegated to the United States, therefore, were reserved for the people. Since the declaration of legal tender was forbidden to states and was not delegated to Congress, the acceptability of a currency was to be determined freely in the marketplace.
After finding no constitutional basis for the legislation, Chase isolated the ill effects of these laws. The Fifth Amendment stated that the United States cannot deprive any person of “life, liberty or property, without due process of law.” By requiring the repayment of debts in a depreciated medium of exchange, the Legal Tender Acts impaired the obligation of contracts. Creditors, therefore, were denied prep-erty by Congress without due process of law. Chase declared the legislation to be nothing less than a violation of the due process clause of the Fifth Amendment. This holding was in keeping with later substantive interpretation of the due process clause. Under this interpretation, a person could be denied due process even when all procedural due process requirements were met. In later cases, such as Allgeyer v. Louisiana, 165 U.S. 578 (1897), the Court struck down various nonmonetary economic regulations by applying this substantive approach to the due process clauses of the Fifth and Fourteenth Amendments. Chase’s opinion in Hepburn recognized the true nature of legal tender laws: Such legislation is an unconstitutional economic regulation.
Shortly after the Hepburn decision was handed down, a change in the Court’s composition forever altered judicial interpretation of legal tender. On the day that Hepburn v. Griswold was decided, President Grant sent the names of William Strong and Joseph P. Bradley to the Senate as candidates to fill vacancies on the Supreme Court. Both men were confirmed by the Senate and appointed to their seats by March of 1870. Four days after their appointments, the Attorney General moved that the Court consider the two legal tender cases still undecided. With a five to four vote, the Court ordered re-examination of the legal tender question. Not only did this action undermine public opinion of judicial integrity, it signaled the formation of a new majority in favor of legal tender. The Court then took up both cases, Knox v. Lee and Parker v. Davis, 79 U.S. 457
(1871), together and overturned the ruling of Hepburn v. Griswold.
Justice Strong, in writing his majority opinion of Knox, unknowingly made a powerful argument against the constitutionality of legal tender. The errors of Strong began with his concept of the role of the judiciary. He wrote that, “decent respect for a co-ordinate branch of the government demands that the judiciary should presume, until the contrary is clearly shown, that there has been no transgression of power.” Such a position was inconsistent with the traditional concept of judicial review. This concept was defined by Chief Justice John Marshall when he stated in Gibbons v. Ogden, 22 U.S. 1 (1824), that the judiciary must act “with that independence which the people of the United States expect from this department of the government.” Failure to do such would result in the collapse of the Federal balance of power. Strong’s defense of the actions of Congress failed to address this critical point.
In arguing for legal tender, Strong contended that the necessity of the legislation gave it merit. In fact, he did not even consider the necessity of such laws to be a questionable notion. According to Strong, the idea that the Legal Tender Acts did “save the government and the Constitution from destruction is not to be doubted.” This point, however, was questioned by Chief Justice Chase in his dissent.
Was the making of the notes a legal tender necessary to the carrying on of the war? In other words, was it necessary to the execution of the power to borrow money? . . . In their legitimate use the notes are hurt, not helped, by being made a legal tender. The legal tender quality is only valuable for the purpose of dishonesty. Every honest purpose is answered as well and better without it . . . the making of these notes a legal tender was not a necessary or proper means to the carrying on of the war or to the exercise of any express power of the government.
Strong’s necessity doctrine was also attacked in Mises’ Theory of Money and Credit, which stated that “In order to appraise correctly the weight of this emergency argument in favor of inflation, there is need to realize that inflation does not add anything to a nation’s power of resistance, either to its material resources or to its spiritual or moral strength.” Even if the legislation were necessary, “the doctrine of ‘necessity’ has no logical place in constitutional law under any circumstances.” The constitutionality of legislation never should be determined solely by the apparent importance of the law in question.
Strong then searched beyond necessity for further grounds upon which he could uphold legal tender. He quickly noted that legal tender was “a power confessedly possessed by every independent sovereignty other than the United States.” Legal tender, therefore, was a right which was inherent in the sovereignty of all nations. Such reasoning, however, was not common to the Supreme Court. Except in cases of international relations, “the Court has never since suggested that the federal government enjoyed powers implied from the mere fact of its being a sovereign nation.” The Constitution, not the act of another nation, provided the foundation upon which the American government was built. The actions of that government must be judged according to the standard established by the Constitution. The alleged sovereign right to declare legal tender was not proof of constitutionality.
Continuing in his reasoning, Strong looked to the text of the Constitution to find justification for the Legal Tender Acts. At this point, Strong forged his resulting powers doctrine, which he summarized as follows:
And here it is to be observed it is not indispensable to the existence of any power claimed by the federal government that it can be found specified in the words of the Constitution, or clearly and directly traceable to some one of the specified powers . . . Powers thus exercised are what are called by Judge Story, in his Commentaries on the Constitution, resulting powers, arising from the aggregate powers of the government.
Strong, when unable to find an expressed power of legal tender, dispensed with the necessity to do so. The resulting powers doctrine gave virtually limitless power to the legislature. Congress found no need to confine its role to that for which its powers were delegated. This doctrine was clearly outside the realm of the Framers’ intent. Strong’s failure to find a reasonable constitutional basis for legal tender was evidence that Chase was correct in claiming that no such basis existed.
Judicial interpretation of the legal tender issue did not cease with the decision of Knox v. Lee. In 1878, an Act of Congress provided for the peacetime reissuing of greenbacks. Under this law, the notes retained their legal tender quality. In 1884, the validity of this reissue was challenged in Juilliard v. Greenman, 110 U.S. 421 (1884), which was heard by the Supreme Court on a writ of error from a Federal circuit court. With the exception of Justice Field, all the judges agreed that the greenbacks were an extension of the Congressional power to borrow money. Using reasoning similar to that of Strong in Knox, Justice Gray delivered a majority opinion which was equally unconvincing.
Quoting Strong, Gray claimed that the federal government possessed the right to impair contracts. Strong had earlier cited the power to declare war and the power to make bankruptcy laws as examples of sanctioned interference with contract obligations. These powers, however, were delegated to Congress. As Chase noted in both Hepburn and his dissent in Knox, no such delegated power existed for legal tender. Gray never commented upon Chase’s assertion concerning the impairing of contracts. This interference, Chase realized, was hostile to the spirit of the Constitution.
Like Strong, Gray relied upon necessity as an argument for the validity of legal tender. With the excuse of war gone, Gray implied that the legislation was essential due to “the inadequacy of the supply of gold and silver coin to furnish the currency needed for the uses of the government and the people.” Gray, like many others, believed that a growing money supply is a prerequisite for a strong economy. In making his statement, Gray failed to realize the basic economic principle that inflation only dilutes the value of each unit of currency. The eventual result of inflation is stagnation, not economic growth. Had Gray realized that fact, he would not have viewed the legislation as necessary.
Gray was not content to find precedent for his decision solely in Knox v. Lee. He also looked beyond America’s borders to find aid for his reasoning. He cited a contemporary case in England which upheld the exclusive power of the Emperor of Austria to emit legal tender notes. In doing such, Gray relied upon the same fallacy that Strong had earlier committed. In American law, English common law was only addressed when one considered the origins of the Constitution. Contemporary foreign proceedings have no bearing upon the Constitutionality of American legislation.
In upholding legal tender as a peacetime measure, Gray referred to Marshall’s opinion in McCulloch v. Maryland, 17 U.S. 316 (1819), which stated:
We admit, as all must admit, that the powers of the government are limited, and that its limits are not to be transcended. But we think the sound construction of the constitution must allow to the national legislature that discretion, with respect to the means by which the powers it confers are to be carried into execution, which will enable that body to perform the high duty assigned to it, in the manner most beneficial to the people. [Emphasis mine.]
Gray, however, wrongly applied Marshall’s words to this legal tender issue. The legal tender power is not beneficial to the people. Upon that power rests the government’s ability to inflate the money supply. As Dr. Hans F. Sennholz points out, “Legal tender laws permit government to take income and wealth without the people’s consent . . .” Furthermore, “Legal tender legislation is one of the great evils of our time, the necessary basis of inflation and monetary destruction. It gnaws at the moral and economic foundations of economic society, largely because it is misunderstood and ignored.” Such legislation, because of its harmful nature, could not be the proper subject for the application of Marshall’s words. By quoting Marshall, Gray actually found no support for the validity of the legislation. Gray, like Strong, offered a weak defense of the concept of legal tender.
These flawed decisions upholding legal tender, when considered in conjunction with the reasoning of earlier cases, indicate that legal tender laws lack a firm basis in constitutional law. Even without that basis, the decisions of Knox v. Lee and Juilliard v. Greenman served as dangerous precedents for the government’s monetary monopoly. Because of those decisions, legal tender compulsion was given the approval of this nation’s judiciary. That approval began with the decision of five justices in Knox v. Lee. Yet, “Another day may come when five other justices will read the Constitution and arrive at a different conclusion.” Should that day come, those judges will find ample support for their actions in the reasoning of the various cases addressing the issue of greenbacks.