What a high I had last night! It was the first session of my informal seminar on law and economics at George Mason University. The seminar is being co-sponsored by FFF and the GMU Econ Society. The Econ Society is a student-run group composed of students who are interested in libertarianism and Austrian economics. That’s the group that cosponsors our monthly Economic Liberty Lecture Series.
Given that the seminar is just for intellectual fun, I was expecting two or three students to show up. Imagine my surprise when we had a full classroom of about 20 students. All of us were seated around a square set of tables, which helped induce lots of great discussion.
The seminar is going to be held once a month for an hour. This semester I’m orienting the sessions around an analysis of the 1870 Supreme Court decision in the Legal Tender Cases. In that way, the students will get a feel of both constitutional issues and monetary issues within the context of a real-life legal dispute.
Last nights session set the background for the analysis and discussion of the majority opinion in the case. We first discussed the purpose of the Constitution: to call the federal government into existence but, at the same time, to limit its powers to those enumerated in the Constitution and to powers that were necessary and proper to carrying out the enumerated powers.
Why limit the powers? Because people were deeply concerned that this new government would end up infringing upon their freedom and their well-being.
What were the constitutional provisions regarding monetary issues? The federal government was given the power to coin money and regulate the value thereof. It was also given the power to tax and borrow. The list of enumerated powers did not include the power to issue paper money (bills of credit) or the power to enact legal-tender laws.
At the same time, the states were expressly restricted from making anything but gold and silver coins legal tender. They were also expressly restricted from issuing bills of credit (i.e., paper money).
Much of the discussion revolved around the concept of money and the gold standard in the 19th century. Like most everyone, the students have been taught to think that the gold standard meant some sort of gold-backed money that is, paper money backed by gold.
But as I told the students, that’s a misconception. The 19th-century gold standard did not involve gold-backed money. The gold standard simply meant that the American people had chosen gold coins and silver coins (that is, precious metals) as their money as their official medium of exchange. The money was the gold coins and silver coins (and nickel coins and copper coins).
At the same time, the federal government had the power to borrow money and would do so by issuing bonds, notes, and bills. But those were instruments of debt they promised to pay money. And the money they promised to pay was gold and silver.
Thus, the money was the gold and silver coins. The debt instruments were promises to pay money (that is, gold and silver coins), not money themselves. While it was certainly possible for people to begin using such bills and notes as a convenient money-substitute, its important to keep in mind that they remain promises to pay money.
Keep in mind that while the federal government was authorized to borrow money (and issue instruments of indebtedness), it was not authorized by the Constitution to issue debt instruments as money i.e, paper money or bills of credit.
Along comes the Civil War and President Lincolns treasury runs out of money (sound familiar?) that is, out of gold and silver. Lincoln is reluctant to raise taxes owing to the threat of tax revolts. Yet he desperately needs money to pay for his war on the South.
So, what does he do? He begins issuing debt instruments promises to pay money, which begin selling at a discount owing to the possibility of default.
For example, suppose the federal government has issued a bill of credit promising to pay $20 in gold on demand. Suppose also that people lack confidence in the ability of the federal government to pay off when people come demanding payment.
The result is that the bills start trading at a discount. Suppose, for example, someone walks into a hardware store and purchases $20 in supplies. He gives the clerk a federal $20 bill. The clerk responds, I’m sorry, sir, but if you’re going to pay in bills you’re going to have to pay $30 in bills. If you’d like to pay in gold, it will still be $20.
So, the bills are now trading at a reduced value compared to their face value. That did not sit well with Lincoln. That set the stage for the enactment of the first legal-tender law in American history, one whose constitutionality would be decided by the U.S. Supreme Court in 1869 in the case of Hepburn v. Griswold and then again in 1870 in the Legal Tender Cases.