[Peace-discuss] Legal Tender and the Civil War - Lincoln vs the Constitution

[Michael Shapiro]

This is a real interesting article. Any thoughts?

http://www.fff.org/freedom/1100a.asp

*Legal Tender and the Civil War*

*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?
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