The Legal Tender Cases were a series of United States Supreme Court cases in the latter part of the nineteenth century that affirmed the constitutionality of paper money. In the 1870 case of Hepburn v. Griswold, the Court had held that paper money violated the United States Constitution. The Legal Tender Cases reversed Hepburn, beginning with Knox v. Lee and Parker v. Davis in 1871,[1] and then Juilliard v. Greenman in 1884.[2]
The Legal Tender Cases primarily involved the constitutionality of the Legal Tender Act of 1862 enacted during the Civil War.[3] In Hepburn, Chief Justice Salmon P. Chase held for a 4-3 majority of the Court that the Act was an unconstitutional violation of the Fifth Amendment. Ironically, Chief Justice Chase had played a role in formulating the Legal Tender Act of 1862, in his previous position as Secretary of the Treasury. On the same day that Hepburn was decided, President Ulysses Grant nominated two new justices to the Court, Joseph Bradley and William Strong, although Grant later denied that he had known about the decision in Hepburn when the nominations were made.[4] Bradley and Strong subsequently voted to reverse the Hepburn decision, in Knox v. Lee and Parker v. Davis, by votes of 5-4. The constitutionality of the Act was more broadly upheld thirteen years later in Juillard v. Greenman.
Legal Tender Act of 1862
The Legal Tender Act of 1862 was enacted to issue paper money to finance the Civil War without raising taxes.[5] The paper money depreciated in terms of gold and became the subject of controversy, particularly because debts contracted earlier could be paid in this cheaper currency.[6]
Background about constitutionality of paper money
Article I, Section 10 of the Constitution explicitly forbids the states from issuing "bills of credit" (paper or "fiat" money) or making anything but gold and silver coin "legal tender", whereas there are no corresponding explicit prohibitions against the federal government, nor any explicit authorization. The Tenth Amendment refers to reserved powers that only the states can exercise, as well as powers not delegated that continue to reside in the people. "Concurrent powers" also exist, which may be exercised by either the states or the federal government, such as the power to repel invasions, and arguably including power to make legal tender (e.g. in federal territories). Article I, Section 8 of the Constitution specifically gives Congress power to "coin" and "regulate the value" of both U.S. and foreign coins, but does not explicitly grant Congress the power to print paper money or make it legal tender.
Regarding paper money, Nathaniel Gorham explained at the Constitutional Convention that he "was for striking out" an explicit power of Congress to issue paper money, but Gorham was also against "inserting any prohibition."[7] That is what ultimately happened at the Convention. Article I, Section 8 of the Constitution gives Congress power to "borrow money on the credit of the United States," and therefore Gorham envisioned that "The power [to emit paper money], as far as it will be necessary or safe, is involved in that of borrowing."[7] In other words, the power to emit paper money (e.g. bank notes) has been justified by invoking the Necessary-and-proper clause in combination with the power to borrow money. The power to "issue bills of credit" (paper money) is mentioned in the Constitution as a prohibition on the States, and could therefore be considered a Constitutional-level power and not a "lesser" power that can be authorized under the Necessary and Proper Clause, although that is not what Gorham envisioned, nor what has occurred in practice.
The federal government began issuing paper money long before the Legal Tender Act of 1862. In 1791, the First Bank of the United States began issuing paper bank notes.[8]
In 1798, Vice President Thomas Jefferson wrote that the federal government has no power “of making paper money or anything else a legal tender,” and he advocated a constitutional amendment to enforce this principle by denying the federal government the power to borrow.[9] Even if Jefferson's suggested amendment had been successful, still (as mentioned above) Article I, Section 8 of the Constitution gives Congress the additional power to "regulate the value" of both U.S. and foreign coins. According to Justice Stephen Field, dissenting in the Legal Tender Cases, Congress had no power to make paper money a legal tender, but believed "the Constitution says that Congress shall have the power to make metallic coins a legal tender."[1]
To the extent that there is any doubt nowadays about the constitutionality of paper money, or about its status as legal tender, or about the status of coins as legal tender, courts have historically used a standard of review that seeks to reconcile statutes with the Constitution whenever possible, by invoking a presumption of constitutionality. Either the Supreme Court did so in the Legal Tender Cases, or else the decisions may be regarded as merely politically supportive of president Ulysses S. Grant.
Original intent
The idea that originalism would necessarily require courts to strike down paper money and send the economy into a tailspin is a very common misconception.[10] Even if some (or most) of the framers may have privately intended to prohibit paper money, judges look primarily to the actual words used in the Constitution. As long ago as 1833, constitutional scholars like Joseph Story agreed that the mere private intentions of the people who wrote the Constitution are not binding on the judiciary.[11] In other words, according to Story, the original meaning should prevail over the original intent.
Originalists like Robert Bork have disclaimed any desire to enforce the private intentions of those framers who may have believed that paper money should be prohibited: "Scholarship suggests that the Framers intended to prohibit paper money. Any judge who thought today he would go back to the original intent really ought to be accompanied by a guardian rather than be sitting on a bench."[12]
James Madison's notes, from the Constitutional Convention in 1787, include a footnote where he says that the Constitution would allow the federal government to make "use of public notes as far as they could be safe & proper", but would not allow the federal government to use paper as currency or legal tender, but there is no indication that he made that contention out loud at the Convention.[7]
How money is issued in the U.S. today
Paper money is a form of currency that is physically printed by the Bureau of Engraving and Printing, under authority of the Federal Reserve. The Bureau of Engraving and Printing is part of the U.S. Treasury Department, whereas the Federal Reserve is not. In contrast to paper money, coins are physically produced by the U.S. Mint, within and under authority of the U.S. Treasury. The Federal Reserve can authorize as much paper money as it sees fit, but the U.S. Treasury is restricted by law to a certain maximum amount of coinage in circulation.
The Federal Reserve can increase the money supply by creating money to purchase U.S. Government securities on the open market. These U.S. Government securities have been issued by the federal government to finance deficit spending. Article I, Section 8 of the Constitution explicitly contemplates U.S. Government "securities."
The Federal Reserve can also increase the money supply by allowing banks to issue more loans, which is accomplished by reducing the reserve requirement ratio. Such regulation of banks is pursuant to the Commerce Clause.
Conversely, the Federal Reserve can reduce the money supply, by selling securities or by increasing the reserve requirement ratio.
See also
Footnotes
- ^ a b Knox v. Lee, 79 U.S. 457 (1871).
- ^ Juilliard v. Greenman, 110 U.S. 421 (1884).
- ^ Act of Congress, Statutes at Large, Volume 12, 37th Congress, Session II, Chapter 33, pp. 345–348 (1862-02-25). This Act authorized issuance of $150,000,000 in United States Notes, commonly referred to as greenbacks, plus $500,000,000 in interest-bearing bonds.
- ^ Pusey, Merlo. Matter of Delicacy: The Court Copes With Disability, Supreme Court Historical Society 1979 Yearbook.
- ^ Newcomer, Philip. The Illegality of Legal Tender, The Freeman: Ideas on Liberty, December 1986 Vol. 36 No. 12.
- ^ Legal Tender cases, The Columbia Encyclopedia, Sixth Edition. 2001-05.
- ^ a b c The Debates in the Federal Convention of 1787, ed. Madison, James (1787-08-16). Retrieved 2007-02-24. One delegate at the Constitutional Convention went so far as to say that an express power to emit paper money would be "as alarming as the mark of the Beast in Revelation".
- ^ Federal Reserve Bank of San Francisco, Fun Facts About Money. Retrieved 2007-02-24.
- ^ Jefferson, Thomas. Letter to John Taylor (November 26, 1798), reprinted in The writings of Thomas Jefferson, Volume 4, page 260 (1859).
- ^ Paulsen, Michael. "How to Interpret the Constitution (and How Not To)," 115 Yale Law Journal 2037, 2061 n. 46 (2006): "Among the most common canards in critiques of originalism is that, under the original meaning of the Constitution, the issuance of paper money as legal tender would be unconstitutional, sending our economy into disarray."
- ^ Story, Joseph. Commentaries on the Constitution (1833):
But, whatever may have been the private intentions of the framers of the constitution, which can rarely be established by the mere fact of their votes, it is certain, that the true rule of interpretation is to ascertain the public and just intention from the language of the instrument itself, according to the common rules applied to all laws. The people, who adopted the constitution, could know nothing of the private intentions of the framers. They adopted it upon its own clear import, upon its own naked text. Nothing is more common, than for a law to effect more or less, than the intention of the persons, who framed it; and it must be judged by its words and sense, and not by any private intentions of members of the legislature.
- ^ Hearings Before Senate Committee on the Judiciary, 100th Congress, 1st Session, Nomination of Robert H. Bork to be Associate Justice of the Supreme Court of the United States (1987).