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

[John W.]

At 07:53 AM 12/8/2007, Michael Shapiro wrote:

>This is a real interesting article. Any thoughts?

Not having any but the most tenuous grasp of economics, it strikes me that 
our nation's gradual shift to paper money as "legal tender", which the 
author asserts started with the diabolical Abraham Lincoln, must not have 
been abused too terribly badly over the past 150 years, or else our economy 
would be in a total shambles and we would not be the "world's 
superpower".  There must be other factors at work.

And what about other countries - members of the European Union, for 
example?  They're doing pretty well economically, and they have comfortable 
middle classes.  Are they on the gold standard, or is the Euro "legal tender"?

John Wason



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