The Legal Tender Cases were a series of United States Supreme Court cases in the latter part of the nineteenth century that affirmed the constitutionality of paper money. In the 1870 case of Hepburn v. Griswold, the Court had held that paper money violated the United States Constitution. The Legal Tender Cases reversed Hepburn, beginning with Knox v. Lee and Parker v. Davis in 1871,[1] and then Juilliard v. Greenman in 1884.[2]
The Legal Tender Cases primarily involved the constitutionality of the Legal Tender Act of 1862 enacted during the Civil War.[3] In Hepburn, Chief Justice Salmon P. Chase held for a 4-3 majority of the Court that the Act was an unconstitutional violation of the Fifth Amendment. Ironically, Chief Justice Chase had played a role in formulating the Legal Tender Act of 1862, in his previous position as Secretary of the Treasury. On the same day that Hepburn was decided, President Ulysses Grant nominated two new justices to the Court, Joseph Bradley and William Strong, although Grant later denied that he had known about the decision in Hepburn when the nominations were made.[4] Bradley and Strong subsequently voted to reverse the Hepburn decision, in Knox v. Lee and Parker v. Davis, by votes of 5-4. The constitutionality of the Act was more broadly upheld thirteen years later in Juilliard v. Greenman
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The Legal Tender Act of 1862 was enacted to issue paper money to finance the Civil War without raising taxes.[5] The paper money depreciated in terms of gold and became the subject of controversy, particularly because debts contracted earlier could be paid in this cheaper currency.[6]
Article I, Section 10 of the Constitution explicitly forbids the states from issuing "bills of credit" (paper or "fiat" money) or making anything but gold and silver coin "legal tender", whereas there are no corresponding explicit prohibitions against the federal government, nor any explicit authorization. The Tenth Amendment refers to reserved powers that only the states can exercise, as well as powers not delegated that continue to reside in the people. "Concurrent powers" also exist, which may be exercised by either the states or the federal government, such as the power to repel invasions, and arguably including power to make legal tender (e.g. in federal territories or elsewhere). Article I, Section 8 of the Constitution specifically gives Congress power to "borrow money" and also power to "coin money" and "regulate the value" of both U.S. and foreign coins, and regulate interstate commerce, but does not explicitly and unambiguously grant Congress the power to print paper money or make it legal tender.
The federal government first issued paper money in 1861 in order to fund the Civil War.[7] Before that all US paper money was bank issued. Among the more notable examples of this were the paper notes issued by theFirst Bank of the United States, which was a private corporation chartered by the federal government.[8]. Congress had also authorized paper money (e.g. continentals) even before the Constitution was adopted. The Continental was issued by both the individual states and the Continental Congress under the Articles of Confederation. Those Articles specifically allowed the issuance of legal tender paper money, at the time called "bills of credit."[9]
In 1798, Vice President Thomas Jefferson wrote that the federal government has no power “of making paper money or anything else a legal tender,” and he advocated a constitutional amendment to enforce this principle by denying the federal government the power to borrow.[10] Even if Jefferson's suggested amendment had been successful, still (as mentioned above) Article I, Section 8 of the Constitution gives Congress the additional power to "regulate the value" of both U.S. and foreign coins. According to Justice Stephen Johnson Field, dissenting in the Legal Tender Cases, Congress had no power to make paper money a legal tender, but he believed "the Constitution says that Congress shall have the power to make metallic coins a legal tender."[1]
Originalists like Robert Bork have disclaimed any desire to enforce the private intentions of those framers who may have believed that paper money should be prohibited: "Scholarship suggests that the Framers intended to prohibit paper money. Any judge who thought today he would go back to the original intent really ought to be accompanied by a guardian rather than be sitting on a bench."[11] That intent was exemplified during the Constitutional Convention where, on August 16, 1787, in a vote of 9 to 2, the power to "emit bills of Credit" was stripped from the enumerated powers of Congress, listed in a draft version of the US Constitution. [12] [13]It is further exemplified by the prohibition of this power to the states in the body of the US Constitution and expounded on during the ratification debates within #44 of the Federalist Papers (assumed to be authored by James Madison) which discussed Article I, Section 10 of the Constitution and why this power should be prohibited to the states. Madison stated that "the prohibition to bills of credit must give pleasure to every citizen, in proportion to his love of justice and his knowledge of the true springs of public prosperity." He further stated that the issuance of paper money has resulted in "an accumulation of guilt, which can be expiated no otherwise than by a voluntary sacrifice of the power which has been the instrument of it."[14]
During that vote, Nathaniel Gorham explained at the Constitutional Convention that he "was for striking out" an explicit power of Congress to issue paper money, but Gorham was also against "inserting any prohibition."[15] for "if the words stand they may suggest and lead to the measure". Among the other voters opinions ranged from those of Mr. Read who commented that "the words, if not struck out, would be as alarming as the mark of the Beast in Revelations." and Mr. Langdom who would "rather reject the whole plan than retain the three words "(and emit bills")" to those of Mr. Mercer who was in favor of retaining the words since "It was impolitic also to excite the opposition of all those who were friends to paper money" That is what ultimately happened at the Convention: language explicitly giving the federal government power to issue legal tender paper money was removed on a vote of 9-2. An option allowing the issuance of paper money together with a prohibition against making it legal tender, proposed by Madison was not acted upon. After the vote Article I, Section 8 of the Constitution gives Congress power to "borrow money on the credit of the United States,". During that vote Gorham further stated that the power to borrow was the only power necessary, or safe, to grant Congress. "The power [e.g. to emit promissory paper], as far as it will be necessary or safe, is involved in that of borrowing."[16]
The power to emit paper money (e.g. bank notes) has been justified by invoking the Necessary and Proper Clause in combination with the other enumerated powers which include the power to borrow money.[17] The power to "issue bills of credit" (paper money) is explicitly mentioned in the Constitution as a prohibition on the States, and could therefore be interpreted as a power so momentous that it would have to be conferred explicitly on the federal government rather than inferred from the Necessary and Proper Clause. The US Supreme Court originally took the position that the power was unconstitutional, but the addition of two additional Supreme Court Justices by President Grant, both in favor of paper money, later reversed that position and declared that the issuance of legal tender paper money was in fact constitutional. This reversal was declared to be "unprecedented" by the dissent to the later ruling.[18]
James Madison's notes, from the Constitutional Convention in 1787, include a footnote where he says that the Constitution would allow the federal government to make "use of public notes as far as they could be safe & proper", but would not allow the federal government to use paper as currency or legal tender, though there is no indication whether or not all the contents of his footnote were uttered aloud at the Convention.[19]
Paper money is a form of currency that is physically printed by the Bureau of Engraving and Printing, under authority of the Federal Reserve System. The Bureau of Engraving and Printing is part of the U.S. Treasury Department, whereas the Federal Reserve is not. In contrast to paper money, coins are physically produced by the U.S. Mint, within and under authority of the U.S. Treasury. The Federal Reserve System can authorize as much paper money as it sees fit, but the U.S. Treasury is restricted by law to a certain maximum amount of coinage in circulation.
The Federal Reserve System can increase the money supply by creating money to purchase U.S. Government securities on the open market. Those "open market operations" involve the buying and selling of U.S. government securities, including federal agency securities and also (in response to recent economic turmoil) mortgage-backed securities.[20] Federal agency securities have been issued by the federal government to finance deficit spending. Article I, Section 8 of the Constitution explicitly contemplates U.S. Government "securities."
The Federal Reserve System can also increase the money supply by allowing banks to issue more loans, which is accomplished by reducing the reserve requirement ratio. This regulation of banks is pursuant to the Commerce Clause.
Conversely, the Federal Reserve System can reduce the money supply by selling securities or by increasing the reserve requirement ratio.
It is now established, upon a foundation impregnable, that deliberately, on specific motion, and by ayes and noes, the Convention, overruling its committee, denied to Congress the power to emit "bills of credit," or to authorize the States to make a paper issue a legal tender, but explicitly and rigidly confined the former to the power to "coin money"—that is, to make specie, to render it current, at a regulated value, and the States to that, and that only, as a legal tender.