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Legal Tender and the Civil War
by Jacob G. Hornberger, November
2000
FACED WITH A LACK of
Northern enthusiasm for his war against the South, President Lincoln
resorted to drastic means to finance his war effort. If Lincoln had resorted
to a traditional method of government finance — taxation — he
knew that he might be faced with tax riots among the people of the North.
And he knew that if he relied on another traditional method —
government borrowing — the government-issued notes would soon be
trading at a deep discount as a result of the inflation of the notes.
Thus, Lincoln and the U.S. Congress
resorted to a method of government finance on which tyrannical
governments throughout history had relied. They authorized an increase in
the issuance of government notes and then ordered that the notes be
accepted by everyone at face value, even if they were depreciating in value
in the marketplace. It was the first time since the enactment of the
Constitution in 1787 that a legal-tender law had been imposed on the
American people.
Throughout history, people have
suffered the ravages of government debasement of their currency. Inflation
has been a time-honored way for governments to plunder their citizenry in a
secret, insidious manner.
Prior to the invention of the printing
press, people used gold, silver, and copper coins as their media of exchange.
At times there were private minters who would coin money and certify its
quality and fineness. For example, a private minter might issue a one-ounce
gold coin, certifying that it did in fact contain exactly one ounce of gold. If
the minter had a good reputation, the coin would trade in the marketplace at
face value — that is, as one ounce of gold.
Realizing that there was a profit to be
made in the coining business, kings began monopolizing the enterprise. The
king would issue the coins and certify their quality. (Oftentimes, they even
put their pictures on the coins to give them an aura of quality.)
Clipping the coin
But as everyone knows, the needs of
government are always insatiable. The first resort was to taxation to
increase revenues, but there is usually a limit to how much people will permit
themselves to be taxed. Thus, kings discovered another ingenious way to
plunder their citizenry. They began “clipping the coin” before it
was released into the marketplace. They would shave a little bit off the
edges or, in flagrant cases, simply punch a hole in the coin and then
accumulate the extra gold and make a new coin out of it. New money out of
thin air!
Gradually, however, people would realize
that their coin contained less than what had been certified on the coin. The
result was that the king’s coin would begin trading at a discount
— that is, trading for less than one ounce, which of course was a
tremendous insult to the honor of the king. To remedy the situation, he
would order that all his coins be accepted at their face value, despite the
fact that the coins contained less than that amount of gold as a result of
the “clipping.”
The invention of the printing press
made political plunder even easier. The process began with
government’s simply borrowing funds in the marketplace and
delivering a government note in return. Thus, for example, the government
would borrow 10 one-ounce gold coins and issue a note promising to repay
the lender 10 one-ounce gold coins. It was always understood that the money
was the gold coin and the note was simply a promise to repay the money.
What would happen if a government
began issuing an ever-increasing supply of promissory notes and using them
to purchase items in the marketplace? The notes would begin trading at a
discount owing to the uncertainty of repayment. For example, suppose a
government issued an overabundance of promissory notes for 10 gold coins.
As people in the marketplace began discovering this inflation of notes,
merchants would accept the note as worth, for example, only 9 gold coins.
So, how did governments react when
their notes began trading at a discount? They would make their notes legal
tender, requiring people to accept them at face value rather than at market
value.
Under the Articles of Confederation,
the American people had suffered the ravages of paper money and
legal-tender laws. Remember the phrase “not worth a Continental”?
It referred to the paper money that the Continental Congress had issued in
ever-increasing amounts.
Thus, when the Constitution was
enacted, the Founders were very familiar with the horrible abuses of
inflation, paper money, and legal-tender laws that governments had
perpetrated on their citizenry throughout history. By means of the
Constitution, the Founders made certain that the American people would
never have to experience the monetary tyranny that people throughout
history had suffered.
But the Framers failed to anticipate
one thing: a president who would assume dictatorial powers and who would
ignore both the Constitution and the dictates of the Supreme Court,
considering them simply inconvenient interferences with his dictatorship.
They failed to anticipate Abraham Lincoln, the man who is portrayed in every
public school across America as a person who had great reverence for the
law and the rights of the people.
Money and the Constitution
The Constitution called into existence a
federal government whose powers were limited to those listed in the
Constitution. If a power wasn’t enumerated, it couldn’t be
exercised. There were several express provisions with respect to money
that were clear and unequivocal. The states were expressly prohibited from
making anything but gold and silver coin a medium of exchange. The states
were also prohibited from issuing “bills of credit,” a term
denoting paper money.
The federal government was given the
power to borrow (and tax) but not the power to emit bills of credit. The
states were prohibited from impairing the obligation of contracts and the
federal government was not given a power to impair contracts. The federal
government was also not given the power to enact legal-tender laws. The
power that the federal government was expressly given was the power to
coin money and to regulate the value of such money.
Thus, from 1787 through 1862, the
established media of exchange for the American people were primarily gold
and silver coins. State and local governments had the power to tax and
borrow; and the indebtedness was simply represented by notes which
promised to repay the amount of gold (or silver) borrowed. Governments
knew that if they overissued the notes, they would begin trading at a
discount in the marketplace.
Lincoln’s legal-tender law
Lincoln knew that Northerners would be
unlikely to go along with the level of taxation needed to finance his war. Thus
he resorted to the process that dictators throughout history had resorted
to: printing money. And to ensure that the inflation did not interfere with his
ability to continue issuing an ever-increasing supply of notes, he resorted to
the final act of monetary tyranny: he made the notes legal tender for all
debts, public and private.
Here’s what Lincoln’s act
did to people in the private sector. Let’s assume that John Doe had
lent the Pennsylvania Railroad $10,000 in gold coin and that the debt was
represented by a railroad promissory note pledging to pay Doe $10,000 in
gold coin. Lincoln then begins issuing government promissory notes,
let’s say, in denominations of $10,000. As an increasing number of
notes are issued, they begin trading at a discount in the marketplace, e.g.,
$5,000.
What Lincoln did with his legal-tender
law was entitle the railroad to repay John Doe, who was owed $10,000 in gold,
with government notes having a (depreciated) value of $5,000 in gold. Doe
was required by law to accept the depreciated notes in full payment of his
debt.
After the war ended, the issue reached
the U.S. Supreme Court in the famous case of Hepburn v. Griswold. In
a 4–3 decision, the Court held that Lincoln’s legal-tender law
violated the Constitution of the United States. (At that time, the Court
consisted of eight justices. The reason there were only seven votes was that
Justice Robert Grier had retired shortly before the judgment was announced.
Before his retirement, however, he had expressed his agreement with the
judgment of unconstitutionality.)
Chief Justice Salmon P. Chase, who
interestingly had served as Lincoln’s secretary of the treasury when
the legal-tender law was being enforced, delivered the opinion of the court.
Chase pointed out that there was no express power in the Constitution
authorizing legal-tender laws. And he rejected the notion that the express
power to wage war included an implied power to enact legal-tender legislation,
observing that the Constitution expressly gave the government the powers
to tax and borrow to finance its wars. Addressing the issue of legalized
theft, Chase wrote:
We confess ourselves unable to perceive any solid distinction between such
an Act and an Act compelling all citizens to accept, in satisfaction of all
contracts for money, half or three-quarters or any other proportion less
than the whole value actually due, according to their terms.... We are obliged
to conclude that an Act making mere promises to pay dollars a legal tender
in payment of debts previously contracted ... is prohibited by the
Constitution.
The Court’s reversal
Fifteen months later, however, the
decision was overturned in the case of Knox v. Lee. Recall that four
justices had voted in favor of unconstitutionality and three had dissented,
with Justice Grier, who had expressed agreement with the majority, having
retired before the final vote was taken.
In the meantime, Congress had
expanded the size of the Court to nine justices. Thus, President Grant got to
name two persons to the Court and he knew that both of the lawyers he
nominated favored the constitutionality of the legal-tender laws.
In one of the most disgraceful acts in
the history of the Supreme Court, the new majority voted to reconsider the
matter and, behaving more like a legislature than a court, overruled
Hepburn v. Griswold and upheld the constitutionality of
Lincoln’s legal-tender law.
In his dissenting opinion, Justice
Stephen J. Field referred to the politics of the matter: “I shall not
comment upon the causes which have led to a reversal of that judgment.
They are patent to everyone.”
Commenting on the Founders’
understanding of evils of inflation, Justice Field wrote,
The statesmen who framed the Constitution ... had seen in the experience of
the Revolutionary period the demoralizing tendency, the cruel injustice, and
the intolerable oppression of a paper currency not convertible on demand
into money, and forced into circulation by legal tender provisions and penal
enactments.
Referring to the political immorality
associated with paper money and legal tender, Field said,
There are unchangeable principles of right and morality, without which
society would be impossible, and men would be but wild beasts preying upon
each other, so there are fundamental principles of eternal justice, upon the
existence of which all constitutional government is founded, and without
which government would be an intolerable and hateful tyranny.
Commenting on the federal repudiation
of debts resulting from legal-tender laws, Field wrote,
Whenever the fulfillment of the obligation in the manner stipulated is
refused, and acceptance of something different from that stipulated is
enforced against the will of the creditor, a breach of faith is committed; and
to the extent of the difference of the value between the thing stipulated and
the thing which the creditor is compelled to receive, there is repudiation of
the original obligation. I am not willing to admit that the Constitution, the
boast and glory of our country, would sanction or permit any such legislation.
Repudiation in any form, or to any extent, would be dishonor, and for the
commission of this public crime no warrant, in my judgment, can ever be
found in that instrument.
In a later case upholding the
legal-tender law, Juilliard v. Greenman, Field concluded his dissent with
the following prophecy:
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 mature? 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 20th century
Little could Field know that in the 20th
century, the ravages of paper money would lead to the Great Depression,
President Franklin Roosevelt’s nullification of gold clauses in
contracts, his confiscation of gold, and his attempt to pack the Supreme
Court with cronies who would do his bidding. And that the American people
would ultimately be saddled with an irredeemable paper money that would be
used to surreptitiously confiscate their wealth and savings by the federal
government, decade after decade.
How many Americans know that the
root of American monetary tyranny lies with Abraham Lincoln, a president
who refused to permit the Constitution to stand in the way of his tyranny?
Mr. Hornberger is founder and president of The Future of
Freedom Foundation.
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