Legal Tender Laws and the Constitution

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Editor’s Note: Introduced in South Carolina legislature is House Bill 4501 (H4501), which if passed would make Gold and Silver Coin Legal Tender in the state. Cited as authority in the legislation is Article I, Section 10 of the Constitution and the principle of reserved powers under the 10th Amendment.

A number of other states are also considering similar legislation – click here to view the Tenth Amendment Center’s Constitutional Tender Laws Tracking Page.

The article below is an excerpt of a longer essay written by Michael Rozeff for LewRockwell.com in 2008. It covers much of the long history of legal tender laws in the U.S.

Inherent Power and Legal Tender
by Michael Rozeff

Before there were Federal Reserve notes (our current paper money instrument), there were U.S. notes. These were issued by the U.S. Treasury, not the Federal Reserve, which is a central bank created by Congressional action.

Looking at a clear picture of a $20 U.S. note, we see at the top “Legal Tender for Twenty Dollars.” Legal tender means that the note must, by law, be accepted as payment for all debts, public charges, taxes, and dues.

The U.S. Treasury began issuing non-interest bearing notes in 1862 after Congress passed several Legal Tender Acts authorizing their issue. The notes came to be known as greenbacks. The law, which did not distinguish debts contracted before the law was passed from debts contracted thereafter, read as follows:

“Be it enacted …, That the Secretary of the Treasury is hereby authorized to issue on the credit of the United States, one hundred and fifty millions of dollars of United States notes, not bearing interest, payable to bearer, …, and such notes herein authorized shall be receivable in payment of all taxes, internal duties, excises, debts, and demands of every kind due to the United States,…, and shall also be lawful money and a legal tender in payment of all debts, public and private, within the United States,…”

The existing U.S. law is not far different:

“Section 5103 of title 31, United States Code

§ 5103. Legal tender

United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.”

Ex post facto law

The 1862 statute conflicted with the Constitution in several ways. In the first place, it was an ex post facto law. It was retrospective or retroactive. It impaired contracts made before the date of the law. Article I, Section 9, which applies to the federal government, says: “No bill of attainder or ex post facto Law shall be passed.” Article I, Section 10, which applies to the states, says: “No state shall…pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts,…”

In his article written in 1900 titled “Are Our Legal Tender Laws Ex Post Facto?”, Brainerd Taylor DeWitt examines the issue thoroughly. The evidence that the legal tender laws are retroactive and thus, in his view, unconstitutional is overwhelming. His own conclusion is this:

“Laws impairing the obligation of contracts being embraced in the prohibition of Article I, Section 9, under the terms “ex post facto law,” as explained by the Constitution itself, by The Federalist and by the usage of our English ancestors long previous to the formation of the Constitution, the conclusion is unavoidable that our legal-tender laws are ex post facto, and that Congress in enacting them violated an express provision of the Constitution.”

To Justice Strong, who wrote the majority opinion that upheld the legal tender laws, it did not matter if those laws impaired contracts and violated some provisions of the Constitution. There were more important fish to fry. He wrote:

“If, then, the legal tender acts were justly chargeable with impairing contract obligations, they would not, for that [79 U.S. 457, 551] reason, be forbidden, unless a different rule is to be applied to them from that which has hitherto prevailed in the construction of other powers granted by the fundamental law. But, as already intimated, the objection misapprehends the nature and extent of the contract obligation spoken of in the Constitution. As in a state of civil society property of a citizen or subject is ownership, subject to the lawful demands of the sovereign, so contracts must be understood as made in reference to the possible exercise of the rightful authority of the government, and no obligation of a contract can extend to the defeat of legitimate government authority.”

In unambiguous words, Strong asserts that government authority trumps the property of citizens (subjects) and the contracts they may make in civil society. He holds this view, as we shall soon see, because he believes that government itself is entitled to whatever powers it requires to perpetuate and preserve itself. In other words, we not only must have government, we must have the government we now have that was established by the Constitution, and that government has a right to preserve itself. We are subject to it. It is not subject to us.

In some cases, the Framers linked the impairment of contracts by ex post facto laws to the production of paper notes, known then as bills of credit. They knew that historically legal tender laws had the intent of making people accept a devalued currency in place of money instruments like gold and silver and augmenting the power and resources of the sovereign while diminishing the liberty of the sovereign’s subjects. Roger Sherman and Oliver Ellsworth, in recommending the Constitution to their state, wrote:

“The restraint on the legislatures of the several states, respecting emitting bills of credit, making anything but money [gold and silver] a tender in payment of debts, or impairing the obligation of contracts by ex post facto laws, was thought necessary as a security to commerce, in which the interest of foreigners as well as the citizens of different states may be affected.”

In Number 44 of The Federalist, Madison speaks strongly against bills of credit being issued by the states. The Federal Convention refused to grant Congress this power as well.

Emitting bills of credit, then the term for non-interest bearing paper notes to be used as currency, is not the same as making such bills into legal tender. The Supreme Court later held that the federal government could issue bills of credit.

Hepburn v. Griswold

The first test of the constitutionality of the legal tender law came in 1869. The Supreme Court found that the law was unconstitutional.

The Court said that (1) the Constitution contained no express provision to make any credit currency a legal tender in payment of debts, and (2) the legal tender laws were not justifiable under the “necessary and proper” clause:

“The making of notes or bills of credit a legal tender in payment of preexisting debts is not a means appropriate, plainly adapted, or really calculated to carry into effect any express power vested in Congress, is inconsistent with the spirit of the Constitution, and is prohibited by the Constitution.”

The Court pointed out another major conflict of legal tender laws with the Constitution. The Fifth Amendment declares that “no person shall be deprived of life, liberty, or property, without due process of law.” The legal tender laws by directly impairing the value of contracts deprived persons of property without due process of law.

Knox v Lee

Knox v. Lee

The Court reversed Hepburn v. Griswold in the following year in two cases: Knox v. Lee and Parker v. Davis. Such a reversal was unprecedented. The majority of 5-3 in Hepburn changed into a 5-4 decision favorable to legal tender laws with the Chief Justice dissenting. One of the original five had retired. The remaining four maintained their position. The minority of three became four when a vacant seat was filled, and it became the majority of five through a new appointee when the court was expanded from 8 to 9 seats in December, 1869.

Statements made by the majority in support of the legal tender laws are what interest us. They are of the utmost importance to us today, inasmuch as we hear them echoed on all sides as every government, Democrat and Republican, reaches for more power.

Justice Strong made several arguments. He began with this statement:

“If it be held by this court that Congress has no constitutional power, under any circumstances, or in any emergency, to make treasury notes a legal tender for the payment of all debts (a power confessedly possessed by every independent sovereignty other than the United States), the government is without those means of self-preservation which, all must admit, may, in certain contingencies, become indispensable, even if they were not when the acts of Congress now called in question were enacted.”

This statement contains justifications for the government power. Not one of them refers directly to the Constitution. A first technique of subverting the Constitution is simply to ignore its language and bring in other considerations. This technique is always in vogue.

Strong mentions extreme circumstances and emergencies in which Congress should have power to act, such power being constitutional, even if it be not present in that document. His idea is that practical necessity is the real ruler at times. He is saying that there is a tradeoff of constitutional constraints on power for another urgent need. This assumes that the Constitution is of second-order or third-order importance. Necessities hold sway.

A second technique of subverting the Constitution is thus to cry “Emergency!” This technique, which relegates the Constitution to secondary status, is also always in vogue. Any leader can easily find a dozen pressing needs, problems, disasters, exigencies, and necessities. He will then urge that they be dealt with no matter what the Constitution says. The Constitution, being the general document that it is, is denigrated as being unable to handle events that it could not have foreseen. Room must be made for stretching its words to fit the necessities of today. Under this philosophy one may well ask, why bother to have a constitution?

Obviously, if the Constitution is ignored in times of emergency or pressing need, then it is no longer the fundamental or supreme law of the land. Something else is, namely, practical need or pragmatism. They are assumed to be more important than the law. The problem with this approach is that it is lawless. Practical needs are not defined by law. They are defined by men, and that means there is no constitution acting as law. Once the Constitution has been ignored or twisted so as to conform to some supposed need, it is then easy to ignore it again and again. It cannot retain its former character as a constraint on government power. When pragmatic matters are primary, the role of the Constitution is that of providing a patina of legality that covers over the actual illegality.

Ignoring the Constitution’s limitations on government power in time of emergency or practical exigency not only assumes that the Constitution is of second-order importance, it also presumes that the government is the only means of possible action. It presumes that the government is the sole organization that can and must act and that it must be empowered to find the solution to the supposed emergency. But this is hardly ever so. In case after case, the government is the worst possible organization chosen to handle problems.

The question at issue in the legal tender case is whether or not the government has the power constitutionally to make everyone accept its paper money as legal tender. Justice Strong begs that question. He presumes that we as persons need the government to solve various problems and have put that government in place as the sole and only means to solve these questions. He presumes that we are incapable of organizing ourselves in any other ways to resolve particular problems. Having made that postulate, he easily deduces the implication that the legal tender power is necessary and proper for the government’s exercise of its other powers.

If one glorifies government to begin with, by placing it on a pedestal, by assuming that it and no other organizations and associations, it and no other means, can solve the common problems we as persons face, one then is ineluctably led to the conclusion that any powers that the government exercises that are needed to support its unique position in solving our problems must be necessary and proper to those exercises of power. If one assumes the uniqueness and singular importance of a government, one is led away from a government with limited powers. One is led to a government with unlimited powers. But since the Constitution established the national government as a unique government, it left itself open to expansive interpretations such as Justice Strong’s.

Strong’s second argument begins in the offhand remark that every other independent sovereignty had the power to make its note into legal tender. He views this as an indispensable means to the “self-preservation” of governments. This argument is false on several grounds, both theoretical and constitutional.

Mr. Justice Clifford, dissenting, demolished Strong’s argument. He pointed out that there was no implied power in the Constitution to make bills of credit into legal tender. Congress already had ample constitutional power to conduct war and preserve the government.

“Congress may appropriate all moneys in the treasury [79 U.S. 457, 630] to carry on the war, or Congress may coin money for that purpose, or borrow money to any amount for the same purpose, or Congress may lay and collect taxes, duties, imposts, and excises to replenish the treasury, or may dispose of the public lands or other property belonging to the United States, and may in fact, by the exercise of the express powers of the Constitution, command the whole wealth and substance of the people to sustain the public credit and prosecute the war to a successful termination.”

In another dissent, the Chief Justice gave an economic or theoretical argument. He laid out the basis for a “tax” foundation for U.S. notes to become currency:

“The real question is, was the making them a legal tender a necessary means to the execution of the power to borrow money? If the notes would circulate as well without as with this quality it is idle to urge the plea of such necessity. But the circulation of the notes was amply provided for by making them receivable for all national taxes, all dues to the government, and all loans. This was the provision relied upon for the purpose by the secretary when the bill was first prepared, and his reflections since have convinced him that it was sufficient.”

Governments do not disappear when they lack the legal tender power. The U.S. has fifty state governments that lack this power. Nor do paper monies issued by governments fail if they are not legal tender. A government can support its note issues as currency, without making them legal tender, by making them payable for the taxes that it assesses. Since the notes can be returned to the government to extinguish tax bills, they can circulate as a money instrument that has value.

Returning to Justice Strong, we find next an amazing argument:

“…the powers conferred upon Congress must be regarded as related to each other, and all means for a common end. Each is but part of a system, a constituent of one whole. No single power is the ultimate end for which the Constitution was adopted. It may, in a very proper sense, be treated as a means for the accomplishment of a subordinate object, but that object is itself a means designed for an ulterior purpose. Thus the power to levy and collect taxes, to coin money and regulate its value, to raise and support armies, or to provide for and maintain [79 U.S. 457, 533] a navy, are instruments for the paramount object, which was to establish a government, sovereign within its sphere, with capability of self-preservation, thereby forming a union more perfect than that which existed under the old Confederacy.”

Strong argues that the Congressional powers, as granted in the Constitution, and the Constitution itself are means to an overriding end: to establish a perpetual government. Government itself is the paramount end! It is true that the Constitution’s preamble says that we the people established the Constitution to form a more perfect union, but it does not say that union of the states is the premier end or even anything but a means to the other objects it lists: justice, domestic tranquility, the common defense, the general welfare, and the blessings of liberty. For us the people, having a union of states makes no sense in and of itself unless it is a means to these other ends.

He quotes approvingly from Justice Marshall:

“Said Chief Justice Marshall, in Cohens v. The Bank of Virginia, 86 ‘America has chosen to be, in many respects and to many purposes, a nation, and for all these purposes her government is complete; for all these objects it is supreme. It can then, in effecting these objects, legitimately control all individuals or governments within the American territory.’”

Some of our Justices seem to have had Hobbes at their elbows or for bedtime reading.

Strong holds that the government, by the necessary and proper clause, can do whatever it wants to that it is not prohibited from doing:

“That would appear, then, to be a most unreasonable construction of the Constitution which denies to the government created by it, the right to [79 U.S. 457, 534] employ freely every means, not prohibited, necessary for its preservation, and for the fulfilment of its acknowledged duties. Such a right, we hold, was given by the last clause of the eighth section of its first article.”

Mr. Justice Bradley, a member of the majority, explained at length why the government had the power to make its paper money a legal tender. He ended up saying that it is “one of those vital and essential powers inhering in every national sovereignty and necessary to its self-preservation.”

The notion of inherent powers, supported by Bradley, arises at the inception of the U.S.A. and carries forward to this day. Hamilton in The Federalist 23 made incredibly broad claims for government power:

“The authorities essential to the common defense are these: to raise armies; to build and equip fleets; to prescribe rules for the government of both; to direct their operations; to provide for their support. These powers ought to exist without limitation, because it is impossible to foresee or define the extent and variety of national exigencies, or the correspondent extent and variety of the means which may be necessary to satisfy them. The circumstances that endanger the safety of nations are infinite, and for this reason no constitutional shackles can wisely be imposed on the power to which the care of it is committed.”

Is it really the case that free people cannot defend themselves without giving up their liberty? Must they commit their lives and liberties to a central power and give that power carte blanche? If they do that, how can they control their controllers? Obviously, a government with no constitutional shackles concerning the war power is exceedingly dangerous and inimical to liberty. It seems that the U.S. has taken the Hamiltonian philosophy to heart. But should it have done so? The passage quoted seems to express an inordinate degree of paranoia and fear combined with an inordinate faith in government as the remedy for that fear. It is hardly wise for an entire country to follow out intemperate and extravagant rambling that has so little balance and restraint.

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.

Copyright © 2008 LewRockwell.com