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Money and the Constitution


Constitutional Money: A Review of the Supreme Court’s Monetary Decisions by Richard H. Timberlake (Cambridge University Press and Cato Institute 2013), 257 pages.

Most Americans would be surprised to learn that the Federal Reserve Notes in their wallets and the balances in their various accounts are not constitutional money. Yes, what they have is money, but not the kind of money that is authorized under the Constitution. Our fiat, irredeemable, legal-tender money is, Richard Timberlake demonstrates in his new book, entirely at odds with the Founders’ prescriptions. He writes, “My account explains how the Federal Reserve System as a central bank has interacted with the later Court decisions to undermine the Framers’ monetary constitution, and in so doing has promoted continuous inflation and ongoing public uncertainty regarding the future value of money.”

Before starting his analysis of “the monetary constitution,” Timberlake (emeritus economics professor at the University of Georgia) sets the stage with a brief discourse on the emergence of money — a phenomenon of the market — and the detrimental results that have always followed government’s tampering with it. Throughout history, rulers have debased the currency to enrich themselves at the expense of productive people. In fact, it’s hard to find countries where the state has not taken advantage of its control over money to do that.

In the 19th century, Carl Menger speculated that government might be able to improve upon free-market money, but Timberlake offers this rejoinder: “No matter how it might do so, experience through the ages has confirmed that it will not do so.” The best we can do is to limit the power of the government over money to minimize the possibility of manipulation. In writing the Constitution, the Framers tried to accomplish that.

Article I, Section 8 gives Congress the power “to coin money and regulate the value thereof” and Article I, Section 10 provides that state governments may not “coin money, emit bills of credit, or make any thing but gold and silver coin a legal tender in payment of debts.” Also pertinent is the Tenth Amendment, which states that the federal government is to have only those powers granted to it.

Using the power under Article I, Section 8, in 1792 Congress defined the dollar as a coin containing 24.74 grains of pure gold, and also as a coin containing 371.25 grains of pure silver. That meant that the United States was on a bimetallic standard. Such a monetary system is workable, but leads to the problem of changing market ratios between the two metals. For that reason Timberlake argues, the language about “regulating the value” of coined money was included — the Framers knew that from time to time it would be necessary to adjust the dollar’s metal content. (Without such adjustments, we would run into the famous problem of Gresham’s Law, where money that is artificially undervalued starts to disappear from circulation, since it’s worth more in nonmonetary uses. Congress made such a “regulation” in 1834, devaluing the gold dollar by 6.6 percent.)

Setting the stage

The first of Timberlake’s constitutional decisions regarding money is the famous McCulloch v. Maryland, which came to the Court in 1819. In 1818, Maryland enacted a tax on the notes of all banks not chartered in the state, including the recently re-authorized Bank of the United States. To resolve the case, the Court had to decide on the constitutionality of the Second Bank of the U.S. Chief Justice John Marshall ruled that although nothing in the Constitution expressly allowed Congress to set up a bank, it was nevertheless within its powers because establishing the bank was “necessary and proper” in carrying out its fiscal operations.

While McCulloch is applauded by most experts on constitutional law, Timberlake argues that it runs contrary to the limited-government spirit of the Constitution. As for its impact, by opening the Pandora’s Box of justifying expansions of federal power with the Necessary and Proper Clause, the Court set the stage for enormous monetary mischief in the future.

Despite that decision (the Second Bank was killed by Andrew Jackson in 1832) the nation’s monetary system was sound (and in keeping with the Constitution) until the outbreak of the Civil War. The war upset everything.

To pay its enormous expenditures, the federal government had three options: to raise taxes, to borrow more, or to print paper money. As Timberlake observes, “For quick revenue, nothing could match the printing of money” and to a considerable extent, that is what Abraham Lincoln’s government did. Treasury Secretary Salmon Chase pushed hard for it, and in 1862 Congress passed the first Legal Tender Act, which authorized the printing of $150 million in what came to be called “greenbacks.” Those were U.S. notes, not redeemable in gold or silver, and declared to be legal tender for all public and private debts. Two more legal-tender acts raised the total production of greenbacks to $450 million.

Some members of Congress questioned the constitutionality of resorting to paper money that citizens would be compelled to accept, but Chase and other administration supporters crushed opposition by claiming that in an “emergency” the federal government could do whatever was “necessary and proper.” The government simply had to have more money and therefore any expedient was permissible. Timberlake shows, however, that the great majority of the federal government’s wartime expenditures were covered without the greenback pseudo-money — borrowed funds paid for most of the cost — and concludes that using the printing press to pay for the war was “crisis hyperbole.”

At the war’s end the federal debt was more than $3 billion and the country was flooded with paper money. Timberlake writes, “No one in his most deranged moments considered a government paper currency as a defensible alternative to gold and silver, especially if the paper was irredeemable.” The problem was how to get back to the gold standard, which presented serious legal and political problems. The book covers them in detail.

One problem was the legal tender feature of the greenbacks — what if someone had a right to receive payment in something else under a contract? That was the issue in the 1868 case Bronson v. Rodes. An 1857 contract gave Bronson the right to receive payment in gold or silver coin. The case arose when, in 1865, Rodes tendered the sum due in greenbacks, which were legal tender, but worth only a little more than 44 percent of the payment in gold. Had Rodes satisfied the contract?

An intriguing wrinkle in the case is the fact that Salmon Chase had resigned as treasury secretary and had been appointed and confirmed as the chief justice. Stranger still is the fact that although he had championed the greenbacks while in the cabinet, his decision in the case upheld the priority of gold clauses over the government’s legal- tender decree. Of course, that did not mean that the greenbacks were illegal, but only that the government could not wipe out private contractual provisions for payment in whatever money the parties had agreed to.

Justice Samuel Miller dissented. He had been appointed by Lincoln in 1862 and his views were entirely in keeping with Whig/Republican thinking. He argued that the Legal Tender Acts overrode all private contracts. Timberlake notes that his opinion “was the confirmation of the power of consolidated government to do whatever it wished, regardless of the Constitution….” Sadly, his view would soon prevail.

Necessity and sovereignty

The year after Bronson, another monetary case came before the Court, Veazie Bank v. Fenno. During the war, Congress had enacted the National Banking Act, and in 1865 it amended that law in an effort to stamp out state banks. The law imposed a 10 percent tax on state bank notes, with the objective of forcing state banks into the national system — an idea that appealed to the central-power-loving Republicans. The question was whether Congress had authority to use the taxing power to achieve that end.

A 6-to-2 majority of the Court (including Chase) upheld the tax. The Constitution gave Congress the power to tax, and how it used that power was immaterial, the majority held. The two dissenting justices saw that the decision badly unbalanced the Framers’ conception of federalism because it allowed the federal government to intrude on matters that under the Tenth Amendment were reserved for the states, such as chartering banks.

Timberlake notes that neither the majority nor the dissenting justices mentioned McCulloch. If it was not permissible for the states to use taxation to destroy federal institutions, as that case had held, why was it permissible for the federal government to destroy state institutions? His conclusion about the impact of Veazie Bank is sharp: “The decision was a critical element in the transition of states’ powers to the federal government….”

The next year, the Court heard another monetary case, one that centered directly on the constitutionality of declaring the greenbacks to be legal tender. Hepburn v. Griswold arose out of a contract entered into in 1860. It required Hepburn to pay Griswold 11,250 “dollars” in February 1862 — a time when only gold or silver coin was legal tender. Hepburn did not make payment at that time, and after being sued on the contract in 1864 tendered the sum (plus accrued interest) in greenbacks. Griswold refused the tender, but could he do so?

The Court had to decide whether the federal government could, under the Constitution, replace gold and silver coin with paper money. To its great credit, the majority held that it could not. Chief Justice Chase delivered the opinion, writing, “The power to issue paper money is certainly not the same power as the power to coin money. Nor is it in any reasonable or satisfactory sense an appropriate or plainly adapted means to the exercise of that power. Nor is there reason for saying that it is implied in, or incidental to, the power to regulate the value of coined money….”

With those sentences, Chase not only smashed the arguments that had been made in favor of “interpreting” the Constitution as permitting Congress to do something the Framers clearly abhorred (undermining the nation’s monetary system with irredeemable paper), but also reversed his view while treasury secretary that if the government “needed” some power, the Constitution implicitly authorized it.

Justice Miller wrote a predictably statist dissent, arguing that the power to print paper money and declare it legal tender was necessary, and stating that doing so was simply a constitutional “regulation” of the value of money. He also acknowledged that forcing one party to a contract to accept a debased payment impaired the obligation of contracts. The states are specifically prohibited from doing that, but he claimed that the Constitution did not prevent the federal government from doing it. As Timberlake notes, that argument ignores the fact that the federal government was to have only the powers enumerated, which did not include tampering with contracts.

Unfortunately, the Court’s membership changed after Hepburn and the new Court quickly reversed it. In Knox v. Lee, a Republican-dominated Court held that there was nothing unconstitutional about the greenbacks. Not only were they legal tender for debts before and after the passage of the Legal Tender Acts, but the majority opinion went further, saying that the government has “general power over the currency, which has always been an acknowledged attribute of sovereignty.”

That idea is completely at odds with the meaning of the Constitution, which certainly did not give the government any such “general power.” Timberlake says that the majority simply offered “a nationalistic apologia” for unrestrained government authority over money. By combining the “necessity” argument with the “sovereignty” argument, the Court destroyed the monetary constitution.

Chief Justice Chase, Justice Nathan Clifford, and Justice Stephen Field (who would become famous for his opinions against governmental attacks on property rights) each wrote strong dissents based on the Constitution — but their arguments were futile against a majority bent upon rewriting the Constitution.

The floodgates open

Oddly enough, while the Court’s jurisprudence regarding money was getting worse, the nation’s actual policy was improving. In 1879 the government returned to the gold standard and the nation enjoyed monetary stability, and in turn rising prosperity. Nevertheless, in 1884 the Court decided one more legal-tender case (Juilliard v. Greenman) and the holding opened the floodgates to future monetary mischief. An 8-1 majority managed to read into the constitutional power “to borrow money” an implicit power to issue legal-tender paper money that could be used to pay back any borrowed money.

Timberlake shows what an absurd construction that is, writing, “If Congress, having borrowed money — meaning real resources — can then repay in legal-tender paper currency that it issues, why should it bother to borrow money in the first place?” He also devotes several pages to Justice Field’s dissent. Among Field’s prescient insights was this: “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 latter chapters of the book deal with the Federal Reserve System. No case testing the constitutionality of the Fed and its paper money or its operations has ever reached the Supreme Court (probably owing to the fact that the Legal Tender decisions said that whatever Congress wanted to do with money was within its “sovereign” powers), but Timberlake masterfully analyzes the economic damage that the Fed wrought in the late 1920s and 1930s. Especially intriguing is his discussion of the way the Fed kept the gold standard from working once the Depression began, thus deepening and prolonging the economic agony.

In his conclusion, Timberlake argues that the United States needs to get away from “the rule of men” when it comes to money (especially the Fed chairman) and get back to “the rule of law,” which is to say a system that accords with the Constitution — a system not susceptible to political manipulation. He proposes a means of divesting the federal government of its gold holdings and putting that gold back into the hands of the people. We would again have a golden anchor for our monetary system, and the century of “monetary omnipotence” by the Fed would end.

Constitutional Money is a superlative work of research and analysis. I think that almost every Future of Freedom reader will find it to be a fascinating book.

This article was originally published in the March 2014 edition of Future of Freedom.

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    George C. Leef is the research director of the George C. Leef is the research director of the Martin Center for Academic Renewal in Raleigh, North Carolina. in Raleigh, North Carolina. He was previously the president of Patrick Henry Associates, East Lansing, Michigan, an adjunct professor of law and economics, Northwood University, and a scholar with the Mackinac Center for Public Policy.