How War Caused Paper Currency to be Considered Constitutional

If there be anything in the history of the constitution which can be established with moral certainty, it is that the framers of that instrument intended to prohibit the issue of legal-tender notes both by the general government and by the states, and thus prevent interference with the contracts of private parties.[1]

In 1862, civil war was raging and the government needed soldiers, equipment, and supplies to repel the armed uprising. The Congress was spending over a million dollars a day in its effort to crush the armed rebellion and taxes were simply insufficient to cover the expenditures. The treasury was empty and European financial institutions had practically cut-off America. The future of the United States of America was threatened.

Congress needed money and they needed it fast. At last, a Congressman suggested that they make U.S. notes (greenbacks) legal tender for all debts public and private and then issue $150,000,000 worth of the notes to pay for soldiers and supplies. It was suggested that the act might be considered constitutional under the national power to carry on war, for without the required resources the government would surely fail.

There was Congressional debate, but since soldiers and supplies were needed, money was required, so Congress felt compelled to pass the legal tender acts of 1862 and 1863 making U.S. notes legal tender for all debts public and private. Despite these laws, the notes depreciated in value hitting a low of two dollars and eight five cents per one dollar of gold coin in 1864.

As the value of the U.S. notes fell, all creditors wished to be paid in gold coin, while all debtors insisted on paying their creditors in U.S. notes. To nobody’s surprise, litigation quickly ensued.

In 1870, the United States Supreme Court heard its first legal tender case, Hepburn v. Griswold. Chief Justice Chase delivered the opinion of the Court where it was held that the federal government had no constitutional authority to compel creditors to accept U.S. notes in payment of debt incurred before the enactment of the legal tender laws.

The Court explained that the legal tenders laws violated Article I, Section 10, Clause 1 of the constitution by impairing the obligations of contracts because the laws forced creditors to accept something other than what they expected (coin) when entering into private contracts.  The Court also examined the Fifth Amendment, which in part prohibits the national government from taking private property without just compensation.  The Court discussed how large amounts of man's property was held in contracts and by forcibly changing the terms of those contracts property was being taken and therefore the Constitution demanded just compensation.

The dissenting justices suggested that paper currency might be held constitutional under the national government's power to carry on war, for there is no doubt that the legal tender acts were passed to pay the government's expenses associated with crushing the armed rebellion.

Hepburn v. Griswold was not a decision that came down lightly, it was decided by a divided Court where the decision was essentially five to three.  One of the five justices resigned before delivering the opinion of the Court and a Congressional act increased the number of justices from eight to nine. So, approximately a year later the Court heard Knox v. Lee, another case with practically the same implications.  A question still exists today as to whether President Ulysses S. Grant intentionally picked Justices to reverse the decision in Hepburn v. Griswold.

Knox v. Lee overruled much of what was decided in Hepburn v. Griswold.   The Court wasn’t explicit as to which Constitutional power provided Congress with the authority to make U.S. notes legal tender, but the Court generally rested its hat on either the war, or coining power.

The legal tender laws were enacted when war was raging and the national government and the constitution itself were threatened.  The public treasury was nearly empty and credit was stretched thin.  Taxation was insufficient to even pay the interest on the debt, let alone pay for standing armies.  The Congress needed supplies and they simply did not have the coin to pay for it, so to survive the government printed money and declared it legal tender.

In Knox v. Lee, The Court noted that Congress is expressly authorized by the constitution to coin money and regulate the value thereof and this provision was designed to provide the same currency throughout all the states.  This is why the states are  forbidden from coining money, whereas Congress is not. Generally when a power was expressly denied to the states, but not denied to the Federal government, it was for the purpose of making the Federal power “more complete and exclusive.”

The dissenters in Knox v. Lee wrote lengthy opinions with immense passion. Chief Justice Chase, who was the secretary of treasury when the legal tender acts were passed in 1862 and 1863, wrote that he didn’t believe that making U.S. treasury notes legal tender was necessary to carry on war.  He pointed out that the national government could have simply made their notes receivable for national taxes.  He said “[w]hen the government compels the people to receive its notes … it practically represents itself insolvent.”[2]

Justices Clifford and Field each wrote separate dissenting opinions although their arguments were similar to what Chief Justice Chase wrote. Justice Field exclaimed that he agreed with the Chief Justice, but due to the importance of the issue he felt it was necessary to write separately.

All three separately written opinions discussed some of the dialogue that was exchanged during the convention that framed the constitution. For example, it was written that Mr. Webster said ‘[m]ost unquestionably there is no legal tender and there can be no legal tender in this country, under the authority of this government or any other, but gold and silver … This is a constitutional principle perfectly plain and of the very highest importance.’

In 1884, the Supreme Court heard another legal tender case, Julliard v. Greenman. In this case the Supreme Court held that during peace time, or war, the national government could make U.S. notes legal tender under the federal power to borrow money coupled with the coining power. By this time, the Court had changed and the decision came down eight to one, with Justice Field being the lone dissenter.

In closing, Justice Field wrote:

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 nature? 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 restrain 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?[3]

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