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.1 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
suggestion 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. "2 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.3 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."4 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.5
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 I 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.6 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 war powers. 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.7 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.8 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 property 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 non-monetary economic regulations by applying this substantive
approach to the due process clauses of the Fifth and Fourteenth
Amendments.9 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.10 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." 11 Such a position was inconsistent
with the traditional concept of judicial review. 12 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."13 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.
A Necessity?
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."
14 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.15
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."16 Even if the legislation were
necessary, "the doctrine of I necessity' has no logical place in
constitutional law under any circumstances."17 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."18 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."19 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.20
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.
Greenbacks Reissued
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.21 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.22 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."23 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.24 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.]25
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
. . ."26 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. , "
27 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."28 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.
At the time of the original publication, Philip
Newcomer was a senior at Grove City College, majoring in
economics.
1. Robert G. Athearn, American Heritage New Illustrated
History of the United States, vol. 8 (New York: Fawcett Publications,
1971), p. 635.
2. Wesley C. Mitchell, A History of the Greenbacks
(Chicago: University of Chicago Press, 1903), pp. 78-79.
3. Ibid., p. 45.
4. Walter T.K. Nugent, The Monetary Question During
Reconstruction (New York: WW. Norton & Co., Inc., 1967), p. 25.
5. Mitchell, A History of the Greenbacks, pp. 73-74.
6. Edwin Vieira Jr., Pieces of Eight (Old Greenwich,
Conn.: Devin-Adair Publications, 1983), p. 152.
7. Robert E. Cushman, Leading Constitutional Decisions
(New York: F.S. Crofts & Co., 1935), p. 130.
8. John A. Sparks, "The Legal Standing of Gold-Contract
Versus Status," in Gold Is Money, ed. by Hans F. Sennholz (Westport,
Conn.: Greenwood Press, 1975), p. 85.
9. Allgeyer v. Louisiana, 165 U.S. 578 (1897), cited by
Paul G. Kauper and Francis X. Beytagh, Constitutional Law, 5th ed.
(Boston: Little, Brown, and Company, 1980), pp. 702-707.
10. Cushman, Leading Constitutional Decisions, p. 13 1.
11. Knox v. Lee, 79 U.S. 457 (187 1), cited by Vieira,
Pieces of Eight, p. 202.
12. Vieira, Pieces of Eight, p. 202.
13. Gibbons v. Ogden, 22 U.S. 1 (1824), cited by Kauper
and Beytagh, Constitutional Law, p. 154.
14. Knox v. Lee, 79 U.S. 457 (187 1), cited by Vieira,
Pieces of Eight, p. 215.
15. Mitchell, A History of the Greenbacks, p. 71.
16. Ludwig von Mises, Theory of Money and Credit
(Irvington, N.Y.: Foundation for Economic Education, 1971) p. 426.
17 Vieira Pieces of Eight p. 199.
18 Cushman, Leading Constitutional Decisions, pp.
132-133.
19. Ibid.
20. Ibid., p. 134.
21. Juilliard v. Greenman, 110 U.S. 421 (1894), cited
by Emlin McClain, Cases on Constitutional Law (Boston: Little, Brown,
and Company, 1900), p. 443.
22. Sparks, "The Legal Standing of Gold . pp. 89-90.
23. McClain, Cases on Constitutional Law, pp. 453454.
24. Vieira, Pieces of Eight p. 233.
25. McClain, Cases on Constitutional Law, p. 447.
26. Hans F. Sennholz, Money and Freedom (Spring Mills,
Pa.: Libertarian Press, Inc., 1985), p. 26.
27. Ibid., p. 24.
28. Ibid., p. 29.
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
December 1986, Vol. 36, No. 12.
Yourname@libertyhaven.com
