In the December term of 1870, the Supreme Court considered the constitutionality of a statute authorizing the issuance of U.S. notes (or “greenbacks”) and making those notes “legal tender in payment of all debts, public and private.” That statute, the Legal Tender Act of 1862, was signed into law less than a year after the introduction of the nation’s first federal income tax, a time of transformation during which the government of the United States seized an alarming host of new powers. As historian Jeffrey Rogers Hummel contends, the Civil War was “the great watershed in American history,” the point at which the trend of “long-term, secular erosion of power at all levels of government” reverses. The Court’s opinion in the Legal Tender Cases foreshadows a willingness to yield to the accretion of power in the federal government; in the years to follow and throughout the next century, ever fewer fundamental rights, particularly economic rights, would rate serious judicial review, the judiciary increasingly acquiescing to government abuses of power.
But the Legal Tender Cases were not the first time that the Supreme Court would consider the constitutionality of the Act. In 1869, the Court heard arguments in Hepburn v. Griswold, a suit involving the Act’s impact on a promissory note executed prior to its passage. In 1860, Susan Hepburn had promised to pay Harry Griswold the sum of 11,250 dollars on February 20, 1862, “dollars” having always signified denominations of gold or silver. Passed just five days after the note fell due, the Legal Tender Act was a response to the enormous fiscal stresses of the on-going Civil War, an unprecedented catastrophe rapidly depleting the federal coffers. The law authorized the secretary of the Treasury to print $150 million in greenbacks, the equivalent of almost $3.6 billion today; and that number would be tripled before the war had reached its conclusion, with subsequent authorizations in June 1862 and March 1863.
When Griswold sued in early 1864, Mrs. Hepburn tendered payment in greenbacks. The Supreme Court was called upon to decide, in essence, whether the Legal Tender Act could retroactively alter the terms of the parties’ debt instrument.
In a most improbable twist of fate, the man who wrote the opinion of the Court, Chief Justice Salmon P. Chase, had been Lincoln’s secretary of the Treasury from 1861 to 1864, during which period the Act under challenge was passed. For Chase, the federal government’s issuance of paper money was not so very troubling or minacious, at least not on its own. The government had possessed this power even under the Articles of Confederation. Chase instead worried about the Act’s investing of this paper money with legal-tender status, a quality empowering it to alter the terms of existing private contracts by requiring acceptance of the government’s notes “as settlement of debts even by those who stipulated in their contracts for payment in specie.” Whether such an expansive power was “necessary and proper,” appropriately connected to the execution of a power explicitly granted in the Constitution, was not at all clear. Noting that the Court “approaches the consideration of questions of this nature reluctantly,” Chase’s majority opinion stresses that any benefits associated with the statute were far outweighed by “the long train of evils which flow from the use of irredeemable paper money.” Among them is the deprivation of property that attends the interference with contracts, which, Chase holds, are a protected property interest just like any other. As Randy Barnett observes, the Hepburn opinion thus embraced a rather libertarian substantive due-process theory, concluding that the Due Process Clause safeguarded the economic rights at issue in the case regardless of the validity of the procedural steps.
That gives the lie to the claim — to which both conservatives and progressives cling — that substantive due process was simply invented out of whole cloth much later to serve political or ideological agendas. Whether or not the doctrine belongs in constitutional jurisprudence, it seems to be of much older vintage than many of its detractors would have us believe. Thus did the man who oversaw the issue of hundreds of millions of U.S. notes during a pivotal moment in the nation’s history now declare it unconstitutional to call them legal tender. Had his views changed? Chase readily admitted that the exigencies and apprehensions of the war yielded conditions “not favorable to considerate reflection upon the constitutional limits of legislative or executive authority.”
Nevertheless, the Hepburn decision’s vindication of liberty was not only remarkably short-lived but apparently was little trusted or relied upon. Indeed, as legal scholar Joseph M. Cormack wrote in 1929, “the public [so] expected that the legal tenders would yet be held constitutional” that the price premiums on precious metals did not react at all to the announcement of the decision in Hepburn.
Decided in 1871, the Legal Tender Cases were actually two actions in which the Legal Tender Act affected the existing financial arrangements of the parties. The facts of the first case, Knox v. Lee, are similar in one important respect to those of Hepburn. In both cases, parties relied on the argument that the Legal Tender Act — by either permitting accounting in or forcing the acceptance of greenbacks — would deprive them of the difference between the value of those notes and that of specie money.
In the first case, the plaintiff, Mrs. Lee, sued Knox for “taking and converting [her] sheep,” which he had purchased from the Confederate government in Texas during the Civil War; the Confederates had confiscated the flock in 1863, considering the sheep the “property of an ‘alien enemy,’” because Mrs. Lee was a resident of Pennsylvania.
In the second of the two cases, Parker v. Davis, Davis brought suit on an agreement for the purchase and sale of real property, asking for specific performance of the contract, for a court order instructing Parker to convey the land. The parties’ contract was properly executed before the Legal Tender Act became law, but an order of the supreme court of Massachusetts following the passage of the law instructed Davis to “pay into court a certain sum of money,” with Parker “thereupon execut[ing] a deed to him of the land in question.” Davis tendered payment in greenbacks, and Parker argued that he was entitled to payment in “coin,” by which he meant gold or silver dollars. After another hearing, the supreme court of Massachusetts disagreed with Parker and ordered him to accept payment of a “specific sum in notes of the United States.”
Writing for a 5-4 majority, Justice William Strong wrote that “Congress [can] constitutionally give to treasury notes the character and qualities of money,” and, reasoning further, that therefore the notes must retain that character even as applied to agreements made before the Act became the law of the land. Signaling his deferential understanding of the Court’s role, Strong says that “[a] decent respect for a co-ordinate branch of the government” demands a presumption that Congress has not transgressed its power. Strong’s opinion considers the meaning of the Necessary and Proper Clause and employs the idea, borrowed from Justice Joseph Story’s Commentaries on the Constitution, of “resulting powers” — those deriving from the “aggregate powers” of government.
In light of this theory, the portion of the Constitution’s text that grants to Congress the power to coin money and regulate its value should not be taken to limit the legislature to only those tasks, to prevent it from making U.S. notes legal tender. Rather, Strong insists, Congress has “very wide discretion,” sanctioned by the Supreme Court in the past if it has even been questioned at all. As Richard Epstein notes, “The broad construction of the Necessary and Proper Clause in the Legal Tender Cases was instrumental in allowing Congress to create the Federal Reserve System of 1913.” The Supreme Court’s divergent opinions in Hepburn and the Legal Tender Cases remind us that, though they seem to be the impenetrable province of academics and experts, questions of monetary policy are always bound to practical legal and political considerations. Political expediency drives monetary policy far more than does high theory.
The policy questions surrounding money and banking have always been of special import to libertarians. Our fascination, radiating from a deep desire to go to the root, to answer the fundamental questions about government’s relationship with the economy, has split us into various groups — champions of the gold standard, monetarists of various kinds, mutualists, and modern free bankers such as Lawrence H. White and George Selgin, among many other camps. Despite our theoretical disagreements, we tend to unite around the argument that the coercive, centralized power of government monopolies in the banking system ought to be dramatically reduced or abolished altogether. One’s decisions regarding the means and terms of payment that will be acceptable to him ought to be left to his judgment — and likewise for all others.
Free markets mean not only the unobstructed exchange of goods and services themselves, but also the right of all persons to contract freely, that is, to choose the terms upon which exchange takes place, from payment to insurance and shipment. Certainly some contracts and terms are unconscionable, unacceptable to a free and civilized society; contracts for an illegal purpose, such as contracts for murder, are among them. But for an individual person to be fully and truly sovereign, free from arbitrary encroachments upon his legitimate sphere of action, he must retain the right to decline monies not agreeable to him, even those bearing the imprimatur of political authority. By outlawing this important right, legal tender laws privilege the state’s currency, arbitrarily granting it a monopoly status that necessarily yields systemic risk. As Murray Rothbard explains, legal tender laws “arbitrarily [designate] what is meant by ‘money’ even when the creditors and debtors themselves would be willing to settle on something else.” Where competition among currencies would mean a constant reassessment of the relative merits and liabilities of each, legal tender monopolies cut off the exit, thereby damning all economic actors to participate in a great fraud.
Pay no attention to the fact that Federal Reserve notes may be printed ad infinitum, that a small group of bureaucrats is empowered to tweak the dials of the money supply as if they were omniscient demigods with access to secret knowledge. They are not, of course, and their extraordinary powers are another example of the conceit that a small group of special experts can successfully plan an economy.
In fact, there is no economy, no discrete thing to which we might address our complaints about, for instance, the rates of unemployment or inflation. The economy, so called, is billions of people, trillions of dollars, an endless ocean of products, parts, contingencies, and contracts, all in unceasing, perpetual motion. No one could hope to fully understand the complexity of even one of its sectors, much less correctly allocate resources from on high. It is a mistake to regard libertarians as starry-eyed free-market fundamentalists who have too much trust in the invisible hand, credulous to the point of being devout. It is our appreciation of how very little we can know about the economic phenomena surrounding us that leads us to question centralization and planning. The libertarian is, economically speaking, a doubting Thomas. He has trouble believing that anyone (or any group, agency, or bureau) could possess the knowledge and genius necessary to bring so many moving parts into concert. The best we can do, which turns out to be really very good indeed, is to leave each individual free to order his own affairs according to his own interests as he perceives them — insofar as he leaves everyone else equally free.
Today, a constitutional challenge to the legal tender status of Federal Reserve notes is almost unimaginable. Indeed, most people can’t even imagine a system in which any entity but government would be empowered to issue money. Fortunately, thanks to new technologies, it may be that now neither a constitutional revolution nor a legislative one will be necessary to effect something more like a libertarian system of free money and banking. The liberating power of experimentation and innovation is changing our conceptions of money and opening new outlets for free and voluntary exchange. In his opinion in Hepburn, Justice Chase offered a word of caution about “power … assumed from patriotic motives.” In a world in constant economic flux, policymakers would do well to heed Chase’s words, to leave the free sphere of society to do what it does best.
This article was originally posted in the July 2016 of Future of Freedom.