http://www.fff.org/freedom/fd0609a.asp
The Federal War on Gold, Part 2
by Jacob G. Hornberger, Posted January 17, 2007
Part 1 | Part 2 | Part 3
Presidents Abraham Lincoln and Franklin Roosevelt revolutionized the monetary
system of the United States and set the nation on the road of inflationary
plunder that has characterized other nations in history. The actions of these
two presidents also provide a textbook example for understanding the animosity
and antipathy that government officials historically have had toward precious
metals (i.e., gold and silver coin) as a medium of exchange.
Through the U.S. Constitution, the American people brought into existence one
of the soundest monetary systems in history. It wasn't perfect in that it
didn't provide for a free market in money, but, by establishing gold and silver
coin as the official money for the United States, it did protect the American
people from the inflationary ravages of paper money.
Keep in mind, first, that our American ancestors didn't trust government, for
they understood that the greatest threat to the liberty and well-being of a
citizenry lay with its own government.
Thus, while the Constitution brought the federal government into existence, it
simultaneously limited its powers to those enumerated in the document. If the
power wasn't listed, it simply could not be exercised, no matter how important
the need, no matter how severe the crisis or emergency. To make certain that
government officials got the message, soon after the Constitution was enacted
several amendments were added providing guarantees and expressly enumerating
fundamental rights that federal officials could not violate.
It bears repeating: The Constitution was born from the severe distrust that our
American ancestors had for the federal government. They understood what people
throughout history had learned the hard way - that more often than not, people
had lost their freedom at the hands of their own government.
One of the ways that our ancestors attempted to protect their freedom and
property from federal assault was through the establishment of a monetary
system based on precious metals, specifically gold and silver coin.
As students of history, they understood the inflationary horrors that
governments all over the world had inflicted on their citizenry through the
issuance of paper money. Moreover, they themselves had experienced the ravages
of the Continental currency during the Revolutionary War ("It's not worth a
Continental") and the inflationary damage during the period of the Articles of
Confederation, when the states were free to issue paper money.
Thus, it is not surprising that the Framers would establish a monetary system
based on gold and silver coin. They wanted to ensure that their own government
could not use the printing press to plunder and despoil them through the
issuance of paper money.
Lincoln's war loans
Then, along came Lincoln.
In 1862, Congress granted Lincoln's request to issue $150 million in Treasury
notes to finance the war effort during the War Between the States. In simple
terms, the federal government was borrowing money, and the money it was
borrowing was the gold and silver coins that had been established as the legal
money under the Constitution.
The situation would be comparable to a person who walked into a bank in 1862
and asked to borrow $10,000. If the loan were granted, the customer would sign
a promissory note promising to pay the bank $10,000, and the bank in turn would
deliver $10,000 in gold coin to the customer. When the note came due, the
customer would be required to pay the bank back $10,000 in gold coin and he
would receive back his promissory note with the notation "Paid" or "Cancelled"
on it.
To belabor the obvious, the money was the gold coins. The note was a promise to
repay the money, not money itself.
The same principle held true with respect to the Treasury notes authorized to
be issued by the Lincoln administration. Everyone understood that the notes
didn't constitute money but rather were a promise to pay back money (i.e., gold
coins) it received in exchange for the notes. When the notes came due, the
Treasury would have to repay the lender in money - that is, in gold coins.
Given that the power to borrow money was among the powers that the Constitution
delegated to Congress, there was obviously nothing unconstitutional about what
Congress had done . . . except for one major factor that ultimately formed the
basis for one of the most revolutionary transformations in American life: at
the same time it authorized the issuance of the Treasury notes, Congress
provided that the notes would constitute "legal tender."
Lincoln's legal-tender law
What did "legal tender" mean? It meant paper money. And it meant that for the
first time since the founding of the nation, Americans would be required to
accept the federal government's paper money as a medium of exchange.
Why was that important to Abraham Lincoln? Like so many other government
officials in history, Lincoln was resorting to the printing press - inflation -
to finance his war expenditures.
In 1862, Treasury notes were trading at a deep discount relative to their face
value. For example, a note promising to pay $1,000 might fetch in the
marketplace only $500 because of the doubts that people had regarding the
federal government's ability to repay the loans in gold when they ultimately
came due.
In the absence of the legal-tender law, even though the government could
continue borrowing money, people could still protect themselves from the
ravages of inflation by stipulating their contracts in gold coin. The effect of
the legal-tender law was to remove that protection by requiring creditors to
accept depreciated paper money in lieu of gold and silver coin stipulated in
the contract.
That was exactly what happened to Henry Griswold and many other people. Prior
to the enactment of the legal-tender law, Griswold had lent $11,250 to Susan
Hepburn. Obviously, both parties understood that when the note came due Hepburn
would be required to repay the debt in the medium in which she had received the
loan - gold coin.
When the note came due, however, Hepburn delivered to Griswold paper money -
that is, U.S. Treasury notes that were the subject of the legal-tender laws.
Griswold objected because the notes, while nominally in the sum of $11,250,
were worth significantly less in the marketplace.
In other words, what Hepburn effectively did was go into the marketplace and
use, say, $5,000 in gold coin to purchase $11,250 in Treasury notes and then
handed the notes to Griswold in payment of the debt. He refused to accept the
payment and instead demanded gold coin with a face value of $11,250 plus
interest owed.
The Supreme Court's ruling
Hepburn v. Griswold reached the U.S. Supreme Court in 1869, five years after
the war had ended. The Court ruled in favor of Griswold, holding in a 4-3
decision that legal-tender laws violated the U.S. Constitution.
The majority opinion distinguished between money and notes to pay money:
There is a well-known law of currency, that notes or promises to pay, unless
made conveniently and promptly convertible into coin at the will of the holder,
can never, except under unusual and abnormal conditions, be at par in
circulation with coin. It is an equally well-known law, that depreciation of
notes must increase with the increase of the quantity put in circulation and
the diminution of confidence in the ability or disposition to redeem. Their
appreciation follows the reversal of these conditions. No act making them a
legal tender can change materially the operation of these laws.
The Court also explained that the power to coin money, which the Constitution
delegates to Congress, did not constitute a power to convert promissory notes
into money:
It is not doubted that the power to establish a standard of value by which
all other values may be measured, or, in other words, to determine what shall
be lawful money and a legal tender, is in its nature, and of necessity, a
governmental power. It is in all countries exercised by the government. In the
United States, so far as it relates to the precious metals, it is vested in
Congress by the grant of the power to coin money. But can a power to impart
these qualities to notes, or promises to pay money, when offered in discharge
of pre-existing debts, be derived from the coinage power, or from any other
power expressly given?
It is certainly not the same power as the power to coin money.
With the holding in Griswold, the federal government was left with the power to
borrow to finance its operations but without the authority to force people to
accept its notes at face value for the payment of debts. Thus, the American
people could still protect themselves from a profligate government by expressly
providing that notes and contracts could be repaid only in money (i.e., gold
coin), not in federal promises to repay money.
Overturning Griswold
One year later, however, the legal situation changed dramatically. President
Ulysses S. Grant, who had commanded Union forces during the war, appointed two
new justices to the Supreme Court who promptly joined the minority in Griswold.
In Knox v. Lee, decided in 1879, the Supreme Court voted to overturn the
decision in Griswold and to uphold the constitutionality of Lincoln's
legal-tender law.
The new majority reasoned that the power to enact a legal-tender law was an
implied power that fell under the president's war powers and the power over
monetary affairs that the Constitution had granted to Congress.
But as the dissent pointed out, the implied-powers doctrine cannot be used to
create new powers. The war power, for example, entails the power to pay for war
expenditures but the means by which to pay for such expenditures were limited
to those enumerated in the Constitution, i.e., through taxes and borrowing.
As the dissent also emphasized, the congressional power over monetary affairs
was specifically limited to the coinage of money and did not extend to the
enactment of laws requiring people to accept federal promissory notes in lieu
of such money.
In a separate dissenting opinion, Justice Stephen J. Field pointed out the
obvious:
The power "to coin money" is, in my judgment, inconsistent with and repugnant
to the existence of a power to make anything but coin a legal tender. To coin
money is to mould metallic substances having intrinsic value into certain forms
convenient for commerce, and to impress them with the stamp of the government
indicating their value. Coins are pieces of metal, of definite weight and
value, thus stamped by national authority. Such is the natural import of the
terms "to coin money" and "coin;" . . ..
... The power to coin money is, therefore, a power to fabricate coins out of
metal as money, and thus make them a legal tender for their declared values as
indicated by their stamp. If this be the true import and meaning of the
language used, it is difficult to see how Congress can make the paper of the
government a legal tender.
Field placed the constitutional issue in a historical context:
The statesmen who framed the Constitution understood this principle as well
as it is understood in our day. They 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.
Field also pointed out that the Constitution had not delegated to Congress the
power to impair private contracts.
With Knox v. Lee the seeds were sown for a monetary revolution in American life
- a revolution that would bring the inflationary plunder and moral debauchery
that have characterized nations throughout history. The revolution began with
Lincoln. But it would culminate in one of most massive assaults on private
property in U.S. history - President Franklin Roosevelt's nullification of gold
clauses in contracts and his confiscation of gold from the American people.
Part 1 | Part 2 | Part 3
Jacob Hornberger is founder and president of The Future of Freedom Foundation.
Send him email.
This article originally appeared in the September 2006 edition of Freedom
Daily. Subscribe to the print or email version of Freedom Daily.
