Gold, Money and the U.S.

Constitution
Eugene C. Holloway, J.D., L.L.M (Admin. Law & Economic Regulation) ©2003

“Those who cannot remember the past are condemned to repeat it.”
- George Santayana, The Life of Reason

INTRODUCTION

This series of editorial articles and the underlying primary source material are required reading
for U.S. investors in gold who care to predict what might happen to their bullion and coins if a
dollar devaluation, runaway inflation or other national economic crisis occurs.

Most gold investors are vaguely aware of the “continental,” the “greenback,” the legal tender
laws and FDR’s confiscation of gold; but too few know the constitutional history of these events
and the legal history of gold and paper money in the United States. Understanding the actual
facts and details will make us serious realists and more effective advocates not only for the
freedom to use money that cannot be debased, inflated or confiscated, but also for individual
rights generally.

The U.S. history of paper versus gold as money tracks the steady but sure conversion of a near-
anarchistic, frontier society to a servile state in which most citizens are all too willing to trade
their own freedom and the freedom of their fellows for their own security.

First, it is important to acknowledge one of the foundations of international law: Nation-states

belong to the entity that controls the territory. Invariably, the means used for that control is force.
George III lost America, not because the Declaration of Independence was published, but
because he could not control the territory. He met a more effective opposing force. Sure, the
revolutionaries were motivated by ideals of freedom and independence sufficient to raise an
army and to weather great adversity; but prayers and yearning to breathe free did not overthrow
the colonial ruler. In the final analysis it was force. Force is every government’s ultimate power
and the legal monopoly over force is its primary authority.

The 1776 revolutionaries and the founding fathers gave the citizens of the U.S. a legacy unique
in all prior history, a gift of monumental proportions – a written constitution limiting the power
of the government, acknowledging that those powers that are not given to the government are
reserved to the people and recognizing individual rights against the government. That legal
mechanism was intended to provide the means for the citizens to protect themselves against
abuse by the minority who hold the reigns of government power and the means to control those
placed in charge of the monopoly over force.

Second, recognize that the higher law to which the U.S. founding fathers appealed in the
Declaration of Independence is not the law of the land. Preservation of life, liberty and the
pursuit of happiness is a nice objective but, without some legal basis (such as the 5th Amendment
to the U.S. Constitution), it is not the law.

Third, remember that the U.S. Constitution was a charter for a government of enumerated
powers. Shortly after its adoption, the limits of those powers were further clarified in

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Amendments 1-10 – the Bill of Rights. The genius and novelty of the Constitution thus created
was that it established a legal framework that limited the legal authority of the government to
apply its monopoly on force and constrained its authority to enact laws that could be used to
justify the application of force.

Let’s review some of these limitations.

Article I, Section 8 of the Constitution enumerates the powers of the government. It reads in part:

The Congress shall have Power . . .

 To borrow Money on the credit of the United States;

 To regulate Commerce with foreign Nations, and among the several States, and with the
Indian Tribes;

 To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of
Weights and Measures;

 To provide for the Punishment of counterfeiting the Securities and current Coin of the
United States; . . .

 To declare War, grant Letters of Marque and Reprisal, and make Rules concerning
Captures on Land and Water;

 To raise and support Armies, but no Appropriation of Money to that Use shall be for a
longer Term than two Years; . . .—And

 To make all Laws which shall be necessary and proper for carrying into Execution the
foregoing Powers and all other Powers vested by this Constitution in the Government of
the United States, or in any Department or Officer thereof.

The last clause apparently gives the Congress “implied” powers that are “necessary and proper”
for carrying into execution the enumerated powers. The theory of “implied powers” in the
Constitution originated in a debate between Hamilton and Jefferson over the federal authority to
charter the first Bank of the United States. Jefferson argued that the Constitutional Convention
had voted down the authority to establish corporations and that the power was not specifically
enumerated. Hamilton argued that the “necessary and proper” clause grants Congress the power
to pass laws supporting the enumerated powers. Jefferson lost the argument and the first bank
was chartered. Later, in McCulloch v. Maryland, Justice Marshall made the doctrine official:
“Let the end be legitimate, let it be within the scope of the Constitution, and all means which are
appropriate, which are plainly adapted to that end, which are not prohibited, but consistent with
the letter and spirit of the Constitution, are constitutional.”

Article I, Section 10, provides that “No State shall enter into any Treaty, Alliance, or
Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make
any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex
post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.”

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The 5th Amendment provides, in part, “No person shall be . . . deprived of life, liberty, or
property, without due process of law; nor shall private property be taken for public use, without
just compensation.” What “due process” means has been a burning constitutional question
throughout the history of the Republic. (See the annotation at
http://supreme.lp.findlaw.com/constitution/amendment05/11.html - 3.) The issue at times has
been at the center of a power struggle between a judiciary that attempted to protect private
economic rights and a legislature that attempted to impose governmental control over private
business activity and the economy in general.

“The 10th Amendment states simply, “The powers not delegated to the United States by the
Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the
people.” Both this Amendment and the due process clause were used by the courts to confine the
legislative powers of the Congress until FDR’s threat to pack the Supreme Court apparently
caused a change in judicial philosophy, effectively ending the Court’s presumed power to rule on
the substantive content of the economic laws passed by Congress and the States.

In the case of Marbury v. Madison the United States Supreme Court established its role early as
the final interpreter of the Constitution. Good lawyers can find an ambiguity in almost anything
that seems imminently clear, so a great many straightforward statements in the Constitution have
come before the Court for interpretation. The Court’s constitutional pronouncements become the
law of the land and can be overturned only by a later, overruling decision of the Court or by a
Constitutional Amendment, both of which are extremely hard to obtain.

To make them independent, the Constitution provides that Supreme Court Justices may serve for
life “during good Behaviour.” Notwithstanding this independence, the Supreme Court is not an
ivory tower by any stretch of the imagination. It is a political body; and throughout its history it
has made many political decisions, some of which revealed strained interpretations of the
Constitution. Despite its political underpinnings, which are occasionally too obvious, it has
maintained its credibility sufficient to have its rulings accepted and the political order
maintained. Indeed, as illustrated in this series, many of the Court’s decisions about the
government’s power in the realm of money, banking, property rights and private contracts must
be read in the context of turbulent times in order to understand why an independent court would
strain to uphold the power of the central government when right reason and the plain language of
the Constitution indicated otherwise. The answer usually can be found in the unstated but
obvious desire of the Court to preserve the Republic. The tenor of the times is important to
understanding constitutional history. The Court responds in what it considers an appropriate
manner to national emergencies, whether it be confiscation of gold during an economic
meltdown or internment of ethnic groups during wartime – a troubling point to remember when
ruminating about the “forever war” now being promoted in Washington. A few of these
remarkable decisions will be discussed later in this series.

PART 1
THE CONSTITUTIONALITY OF PAPER MONEY

The Revolutionary War era Articles of Confederation contained a clause authorizing the
Continental Congress to coin money and emit bills of credit (paper money), which they did with

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a notorious lack of success. On August 16, 1787, during the Constitutional Convention convened
to replace the Articles of Confederation, the same clause was presented to the convention by the
drafting committee. But the paper money proposal hit a raw nerve. Opposition was vehement. It
was even suggested that the federal government should be affirmatively prohibited from issuing
paper money. According to James Madison’s Records of the Federal Convention (See pp. 308,
309 and 310), the language authorizing the Congress to emit bills of credit was removed; but a
suggestion that an affirmative prohibition be added was not taken up as an amendment.
Madison’s final footnote read:

This vote in the affirmative by Virga. was occasioned by the acquiescence of Mr. Madison
who became satisfied that striking out the words [i.e., striking the authority to emit bills of
credit – paper money] would not disable the Govt from the use of public notes as far as they
could be safe & proper; & would only cut off the pretext for a paper currency and
particularly for making the bills a tender either for public or private debts.

Some scholars interpret the result as ambiguous, pointing to the rejection of an affirmative
prohibition of paper money. But The Letter of Delegate Luther Martin to the Maryland
Legislature on the Proceedings of the Constitutional Convention (pages 47-48, Images 369-370)
relates a significantly different interpretation of the result:

By our original Articles of Confederation, the Congress have power to borrow money and
emit bills of credit on the credit of the United States; agreeable to which was the report on
this system, as made by the committee of detail. When we came to this part of the report, a
motion was made to strike out the words “to emit bills of credit.” Against the motion we
urged, that it would be improper to deprive the Congress of that power; that it would be a
novelty unprecedented to establish a government which should not have such authority; that
it was impossible to look forward into futurity so far as to decide that events might not
happen that should render the exercise of such a power absolutely necessary; and that we
doubted whether, if a war should take place, it would be possible for this country to defend
itself without having recourse to paper credit, in which case there would be a necessity of
becoming a prey to our enemies, or violating the constitution of our government; and that,
considering the administration of the government would be principally in the hands of the
wealthy, there could be little reason to fear an abuse of the power by an unnecessary or
injurious exercise of it. But, sir, a majority of the Convention, being wise beyond every event,
and being willing to risk any political evil rather than admit the idea of a paper emission in
any possible case, refused to trust this authority to a government to which they were
lavishing the most unlimited powers of taxation, and to the mercy of which they were willing
blindly to trust the liberty and property of the citizens of every state in the Union; and they
erased that clause from the system. [emphasis added]

Mr. Martin apparently was in favor of authorizing the government to emit bills of credit and was
forced to report to his legislature in no uncertain terms that he failed to secure that authority. One
wonders: if there were a door left open, why would he have reported that it was closed and he
failed, rather than report that the result was a silent compromise that left the door open if only a
crack?

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A few days later the proposal to expressly prohibit the States from emitting bills of credit was
passed.

In the realm of money, the Constitutional Convention left some unanswered questions - about the
relationship between the power to borrow money and the power to issue paper money, if any;
about the power of state or federally chartered banks to issue notes; and about the power of the
federal government to charter a bank, to issue paper money, to make it legal tender, and to
control state banks.

Despite the open constitutional questions, Congress approved the issuance of treasury notes more
than twenty times between 1812 and 1859; but the notes were not legal tender currency.

The first constitutional suits dealing with the money power involved federal or state banks or the
power struggles between the federal banks and state power. Suffice it to say that until after the
Civil War, the Supreme Court did not discuss, except in passing, the power of the federal
government to issue paper money and, then, without analysis, to simply acknowledge that the
power existed. The last of these cases, while not allowing states per se to issue paper money,
validated the notion that a separate entity – a bank, even one 100% owned by the State – could
issue paper money. See Briscoe v. Bank of Kentucky, 36 U.S. 259 (1837).

Heartened by the Supreme Court’s decision in Briscoe, state banking and state bank notes grew.
Some of the notes were good as gold. Some were not. A leading voice proposing to end such
diversity by the adoption of a national currency was Salmon P. Chase, Governor of Ohio and
former Ohio counsel to the federal bank.

In 1861 Chase became Lincoln’s Treasury Secretary. In an attempt to finance the Civil War and
reform the existing currency system he proposed a safety fund for the banks that would be
comprised of federal bonds to back circulating bank notes. He expressed his opposition to
Congress to the issuance of a federal legal tender currency per se. Nevertheless, the Congress
gave him a banking plan that required state banks to buy government bonds to be deposited in
the U.S. Treasury – in return for which the banks would receive legal tender Treasury Notes at a
90% discount. The purpose and intended effect of the system was to issue a national currency
and eliminate state bank notes. It was the first legal tender paper currency issued by the
Republic. Because the law was not entirely effective in eliminating state bank notes, another law
was passed imposing a 10% tax on the issue of state bank notes.

In 1869, a case came before the Supreme Court in which a Maine bank challenged the 10% tax
as a usurpation of the power reserved to the States by the 10th Amendment and as a direct tax not
within the taxing authority granted to Congress by the Constitution. The bank did not challenge
the government’s power and authority to issue a paper currency. The then Chief Justice of the
United States was none other than Salmon P. Chase. Lincoln had appointed Chase to the Court
specifically to assure that emancipation and legal tender would be upheld.

In writing for the majority, Chase upheld the tax on the Maine bank note issue in a lengthy
opinion addressing the direct tax argument and a comparatively brief response to the 10th
Amendment challenge. With respect to the latter, he said that the power to tax the issuance of
bills of credit was well within the powers of Congress as a proper exercise their revenue

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authority. Then he addressed the complaint that the tax was so excessive as to indicate a purpose
on the part of the Congress to destroy the bank, which, it was argued, was beyond the
constitutional authority of the Congress. Chase dismissed the argument by saying, in effect, that
if the Constitution gives the Congress a power, it is not the role of the judiciary to declare the
extent of the exercise of that power unconstitutional, even if it is oppressive. Then, he made the
following statement to explain why an oppressive tax might be justified:

But there is another answer which vindicates equally the wisdom and the power of
Congress.

It cannot be doubted that under the Constitution the power to provide a circulation of coin
is given to Congress. And it is settled by the uniform practice of the government and by
repeated decisions, that Congress may constitutionally authorize the emission of bills of
credit. It is not important here, to decide whether the quality of legal tender, in payment of
debts, can be constitutionally imparted to these bills; it is enough to say, that there can be no
question of the power of the government to emit them; to make them receivable in payment
of debts to itself; to fit them for use by those who see fit to use them in all the transactions of
commerce; to provide for their redemption; to make them a currency, uniform in value and
description, and convenient and useful for circulation. These powers, until recently, were
only partially and occasionally exercised. Lately, however, they have been called into full
activity, and Congress has undertaken to supply a currency for the entire country. [emphasis
added.]

Veazie Bank v. Fenno, 75 U.S. 533, 548 (1869).

In Chase’s opinion there are no citations to the “repeated decisions,” no discussion of the debate
of the founders in the Constitutional Convention, no appeal to the Federalist Papers (See
Federalist No. 44 for Madison’s view of state power, paper money and justice), and no
references to laws manifesting the “uniform practice” of the government’s issuance of bills of
credit - much less citations to constitutional precedent, if any, validating those laws. Perhaps
counsel for the bank failed to raise Luther Martin’s Letter, or Madison’s footnote. Perhaps he
never had an opportunity because the power to create a national currency was not a part of the
arguments of either side. As we shall see later in this series, counsel did point out these historical
facts to the Court in a subsequent case. Considering Chase’s “grave aversion” to paper money
and his ultimate decision not to follow the late president’s reason for appointing him, he might
have omitted the statement had the argument been made. He certainly would have considered
omitting it had he known that it would be raised against him by the dissent in the first legal
tender case.

It may be noted that the statement by Chase was what the lawyers call “dictum.” The case was
about taxing the issue of state bank notes and not about the right of the federal government to
issue currency. So, technically, it cannot be said that the decision is precedent for the proposition
that paper money is constitutional. The statement merely offered a reasonable basis that the
Congress might have for taxing state bank notes oppressively. Nevertheless, Chase’s
pronouncement and the unchallenged issue of non-legal tender bank notes before the Civil War
further sanctioned, by custom and authority, the notion that paper money was constitutional.

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During and in the aftermath of the Civil War the Supreme Court was called upon to deal with the
origins of an American crisis the proportions of which dwarfed all of those before and all since –
a crisis that was widely believed to be financed by the banks and bank note issues of the South.
Chase undoubtedly felt a sacred obligation to be sure that it would never happen again. At least
from the point of that decision forward, paper money of the United States appeared to be
constitutionally authorized; but Chase had reserved the Court’s judgment on legal tender.

PART 2
THE LEGAL TENDER LAWS

As if the war itself were not enough, the aftermath of the Civil War was a wrenching experience
for the nation. In Washington there was high drama. The President was assassinated. His
successor was impeached and his trial before the U.S. Senate riveted the occasional inhabitants
of that small town. Those of us who spent the Watergate years there can only begin to imagine
the preoccupation that must have gripped the populace. But in the halls of justice there was also
high drama – less noted by history than the other electrifying political events, but drama
nevertheless.

Treasury Secretary Salmon P. Chase, proponent of a national currency, but opposed to making it
legal tender, was by his own admission forced by the exigencies of the Civil War to accept the
1862 program of New York Congressman Eldridge G. Spaulding and the House Ways and Mean
Committee to issue the federal government’s first legal tender notes and suspend the right to
redeem the notes in specie. The scheme worked insofar as it succeeded as a means of financing
the war without crushing the fragile Northern economy with excessive direct taxes. In the second
of the Legal Tender Cases, 79 U.S. 457 (1871) Justice Bradley explained in salutary terms how
the device works as an “imperceptible tax” to finance war by invisibly spreading the financial
pain:

In this country, the habit had prevailed from the commencement of the eighteenth century,
of issuing bills of credit; and the revolution of independence had just been achieved, in great
degree, by the means of similar bills issued by the Continental Congress. These bills were
generally made a legal tender for the payment of all debts public and private, until, by the
influence of English merchants at home, Parliament prohibited the issue of bills with that
quality. This prohibition was first exercised in 1751, against the New England colonies; and
subsequently, in 1763, against all the colonies. It was one of the causes of discontent that
finally culminated in the Revolution. Dr. Franklin endeavored to obtain a repeal of the
prohibitory acts, but only succeeded in obtaining from Parliament, in 1773, an act authorizing
the colonies to make their bills receivable for taxes and debts due to the colony that issued
them. At the breaking out of the war, the Continental Congress commenced the issue of bills
of credit, and the war was carried on without other resources for three or four years. It may
be said with truth, that we owe our national independence to the use of this fiscal agency. Dr.
Franklin, in a letter to a friend, dated from Paris, in April, 1779, after deploring the
depreciation which the Continental currency had undergone, said: “The only consolation
under the evil is, that the public debt is proportionately diminished by the depreciation; and
this by a kind of imperceptible tax, every one having paid a part of it in the fall of value that
took place between the receiving and paying such sums as passed through his hands.” He

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 adds: “This effect of paper currency is not understood this side the water [i.e., Europe]. And
indeed the whole is a mystery even to the politicians, how we have been able to continue a
war four years without money, and how we could pay with paper, that had no previously
fixed fund appropriated specially to redeem it. This currency, as we manage it, is a wonderful
machine. It performs its office when we issue it; it pays and clothes troops, and provides
victuals and ammunition.” In a subsequent letter, of 9th October, 1780, he says: “They [the
Congress] issued an immense quantity of paper bills, to pay, clothe, arm, and feed their
troops, and fit out ships; and with this paper, without taxes for the first three years, they
fought and battled one of the most powerful nations of Europe.” The Continental bills were
not made legal tenders at first, but in January, 1777, the Congress passed resolutions
declaring that they ought to pass current in all payments, and be deemed in value equal to the
same nominal sums in Spanish dollars, and that any one refusing so to receive them ought to
be deemed an enemy to the liberties of the United States; and recommending to the
legislatures of the several States to pass laws to that effect.

79 U.S. 457, 558. [Footnotes omitted.]

Justice Clifford, acknowledging the above in his dissent, pointed out that the “wonderful
machine” described by Dr. Franklin had a dark side:

. . . these measures of violence and terror [i.e., making those refusing to take the
Continental dollar enemies to the liberties of the United States], so far from aiding the
circulation of the paper, led on to still further depreciation. New emissions followed and new
measures were adopted to give the paper credit by pledging the public faith for its
redemption. Effort followed effort in that direction until the idea of redemption at par was
abandoned. Forty for one was offered and the States were required to report the bills under
that regulation, but few of the old bills were ever reported, and of course few only of the
contemplated new notes were issued, and the bills in a brief period ceased to circulate, and in
the course of that year quietly died in the hands of their possessors. [Footnotes omitted.]

Legal tender was not a novel idea. Many states had passed legal tender laws in response to the
resolution of the Continental Congress asking the States to pass laws making those who refused
to accept Continental dollars enemies of public liberty. But the awful experience with the
“Continental” caused the Constitutional Convention to eliminate the express authority to “emit
bills of credit.” Madison, understanding the necessity for the government to borrow money and
issue notes in return, explained that he supported the elimination of this clause because he
“became satisfied that striking out the words would not disable the Government from the use of
public notes as far as they could be safe & proper; & would only cut off the pretext for a paper
currency and particularly for making the bills a tender either for public or private debts.” In other
words, his view was that the Constitutional authority to borrow money and issue the attendant
notes could not be used as a pretext for paper currency and “particularly” for making it legal
tender.

It was not just the fact of paper money that Madison and others considered unjust and pernicious.
Mere paper money is a creature of the free market whose value is gauged by the trustworthiness
of the entity that issued it to exchange the paper for real value such as gold and silver. Those
banks that could not be trusted to redeem their notes in specie could be avoided – people could

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refuse to take the notes as payment for debts, and they regularly did. The principal objection to
paper money was its designation as legal tender. Legal tender laws inhibit the free market’s
ability to flee depreciating currency and place the coercive power of the state behind the paper
regardless of its intrinsic or market value so that, when devaluation occurs, it serves as a
surreptitious tax on those forced by law to hold and use the money.

Some scoff at the statement that the legal tender laws are coercive. The answer to those skeptics
appears in Andrew Dickson White’s monograph Fiat Money Inflation in France. In 1793, failure
to accept the French paper money was made punishable by death and the punishment was
actually imposed, as demonstrated by the lists of those condemned to the guillotine. In contrast
to the Draconian measures taken after the French revolution, the import of the U.S. legal tender
laws has been merely to allow private and public debtors to legally discharge their debts by
payment of legal tender currency. But this form of interference by the state in private
transactions to appropriate the wealth of creditors is coercive nevertheless; and the French
experience illustrates the direction that any kind of state coercion can take once the state’s
authority to act is established.

The United States passed a number of legal tender laws prior to 1862, beginning with the 1792
Act establishing the United States Mint; but those laws applied to the coinage of the Mint. In
addition to establishing the Mint, the 1792 law specified the weights of the respective coins in
gold and silver at roughly market value and provided that all of the coins issued by the Mint
“shall be a lawful tender in all payments whatsoever, those of full weight according to the
respective values herein before declared, and those of less than full weight at values proportional
to their respective weights.” Maintaining the integrity of the intrinsic value of the United States
legal tender coinage was a serious and important matter. Debasement of the coinage was
declared to be a felony punishable by death!

The 1792 law established both silver and gold as the coins of the United States in a 15:1 ratio,
silver being for the Dollar and smaller denominations and gold being for the larger Eagles ($10),
Half-Eagles and Quarter Eagles. By 1834, the free market ratio of silver to gold had become
roughly 16:1, Gresham’s Law had begun to operate and the U.S. gold coins in circulation had
begun to shrink. (See the Letter from the Director of the Mint to the House on January 11, 1833.)
At that time the United States had no ability to support the established ratio by market
intervention, so the Congress acted to reduce the amount of gold in the Eagle so as to make the
ratio to the silver Dollar 16:1. Although it was acknowledged that the transition would create
some incidental economic distortions, and there was some debate about whether the adjustment
was a debasement of the gold coin, the consensus appeared to be that it was trifling when
compared to the effects created by the disproportionate value between gold and silver coins.
(Also see the 1834 report of the House Select Committee on Coins and the later, full House
debate.)

Then, by trivial increments, in response to the call for more currency, the coinage of the United
States began to set some unfortunate precedents – official debasement. In 1851 a bill was
introduced and later passed authorizing a legal tender three-cent piece that clearly had less
relative silver content than 0.03 Dollars. Two years later the silver content of the half dollar and
all smaller denominations were reduced and made legal tender for all debts of 5 dollars or less.
The 1853 law also provided that the United States would not accept deposits of these coins.

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Consequently, these smaller coins operated like paper money, albeit with significant intrinsic
value. The Mint’s profits on this enterprise were to be paid periodically into the Treasury, an
analogy to the effects of printing money.

Beginning with the Act of February 25, 1862, until the end of the War, a series of laws were
passed authorizing the issue of legal tender notes. Ultimately, more than $400 million in notes
was authorized and issued. The notes, which came to be known as “greenbacks,” circulated
alongside gold and silver coins and fluctuated in value relative to coin depending upon the
United States’ success in the war. During the floor debate in the House of Representatives on
February 5, 1862, Congressman J.W. Crisfield of Maryland argued eloquently and at length that
the legal tender measure was unconstitutional and expressed “amazement” at the contrary
opinion of the Attorney General written for Congressman Spalding’s use in the debates. The law
was enacted despite the constitutional objections.

When Chief Justice Taney died in 1864, Lincoln appointed Chase to be his successor, in part to
uphold the 1862 Legal Tender Act. But, ironically, Chase, who was philosophically in favor of a
national currency, had grave reservations about the wisdom of paper money and, when faced
with the question directly, he believed that legal tender for paper money was unconstitutional. In
the final analysis, as the legal tender cases demonstrate, his attempt to parse the issues failed; and
he was left with seemingly contradictory positions to counter the political forces that came to the
Court after his appointment.

Legal Tender I

The first case to come before the Supreme Court challenging the constitutionality of legal tender
for the 1862 notes was Hepburn v. Griswold, 75 U.S. (8 Wall.) 603 (1870) (“Legal Tender I”),
reprinted in part in Henry Mark Holzer, Government’s Money Monopoly, pp. 119-131
(iUniverse.com, Inc. 2000). This was a suit on a $11,250 promissory note that had been signed in
1860 and became due on February 20, 1862 while gold and silver coin were still the only lawful
money. In 1864 when the holder sued for payment, the debtor paid greenbacks and asked the
court for discharge, which was denied. He appealed. At the time, greenbacks were worth
substantially less than the coin originally contemplated by the parties. The only issue that the
Supreme Court needed to decide was whether the law of February 25, 1862, should be applied to
a note that became due 5 days before the law was enacted. Rather than adopt a narrower ruling,
the Court proceeded to hold that the 1862 legal tender provisions were unconstitutional.

Chief Justice Chase, writing for the majority in a 4 to 3 decision, considered whether the law was
authorized under any of the enumerated powers in the Constitution – to coin money, to regulate
commerce, to borrow money, to carry on war - and for each decided in the negative.
Interestingly, consistent with his statement in the Veazie case, he repeated his view that the
government had the authority to emit bills of credit (meaning paper currency), but he said that, as
in the case of the authority of the Continental Congress, the U.S. Congress had no authority to
make that currency legal tender. He then considered whether the Act was authorized as an
implied power under the necessary and proper clause, again reviewing “whether an expedient of
this sort is an appropriate and plainly adapted means for the execution of the power to declare
and carry on war” or regulate commerce or borrow money, deciding in the negative as to each.
He also expressed the opinion that legal tender was a form of taking property without due

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process of law. At the conclusion of his opinion, Chief Justice Chase made a remarkable and
poignant apology for his role in accepting and implementing the legal tender laws:

It is not surprising that amid the tumult of the late civil war, and under the influence of
apprehensions for the safety of the Republic almost universal, different views, never before
entertained by American statesmen or jurists, were adopted by many. The time was not
favorable to considerate reflection. . . . If power was assumed from patriotic motives, the
assumption found ready justification in patriotic hearts. . . . Some who were strongly averse
to making government notes a legal tender felt themselves constrained to acquiesce in the
views of the advocates of the measure. Not a few who . . . acquiesced in that view have, since
the return of peace, and under the influence of the calmer time, reconsidered their
conclusions.

75 U.S. at 625-26.

Justice Miller, in his dissent, followed the same analytical methodology and came to the opposite
conclusion, leaning heavily on the war power – and quoting Justice Chase’s opinion in the
Veazie case justifying taxing state bank notes out of existence to support a national currency:

. . . that, having, in the exercise of undoubted constitutional power, undertaken to provide a

currency for the whole country, it cannot be questioned that the Congress may
constitutionally secure the benefit of to the people by appropriate means. Which [asked
Justice Miller] is the more appropriate and effectual means of making the currency
established by Congress useful, acceptable, perfect - the taxing of all other currency out of
existence, or giving that furnished by the government the quality of lawful tender for debts?

Legal Tender II

The same day that the decision in Legal Tender I was handed down, President Grant nominated
two new justices to the court, and the worm turned. When the two justices ascended to the high
bench, the Court immediately docketed two cases, Knox v. Lee and Parker v. Davis (“Legal
Tender II”) involving the constitutionality of the legal tender laws. The court heard every
possible argument – from Madison’s footnote and Luther Martin’s letter to the coinage
adjustment in 1834, making debased coins legal tender in 1853, and the exigencies of war. Then,
on May 1, 1871, in a move as yet unprecedented for its proximity to a prior case and a
historically unwelcome exposure of the political nature of the body, the three dissenters
combined with the two new justices to overrule Legal Tender I.

Those with a thirst for detail will want to read the very lengthy Legal Tender II decision and
arguments of counsel. It is sufficient for this article to highlight two aspects of the case – first,
the human spectacle of a respected public servant who compromised his principles and lived to
regret it; and second, to illustrate how crises, whether real or imagined, can be – and often are –
used to diminish individual liberties and devolve ever increasing power to the state.

In oral argument, the Attorney General pulled no punches. He hurled the Chief Justice’s own
words at him:

Page 11
 Some have found the authority in the power to coin money and regulate its value. They
think that the word “coin” is here used in the large sense- to make, to fabricate; and the
meaning of the word “money” is not limited to metallic coinage, but extends to everything
which had been in general use as money, or which may answer the purposes of money – a
definition which will embrace a government’s promises to pay, of a form and denomination
designed for circulation as currency. . . . Probably this view was in the mind of Congress
when the act of 1862 was framed, and suggested the words, “shall be lawful money.” Perhaps
it was in the mind of the statesman who then had charge of the national finances, who issued
the legal tender notes, and who afterwards, in vindicating this policy before the people, said:
“Under these circumstances I coined the credit of the nation.” [The footnote reads, “Hon. S.
P. Chase, at Louisville, Ky., in 1864.”]

***

[Opposing] counsel quotes from the debates in the Federal Convention of 1787 to show
that members of that body were opposed to making paper a legal tender. The very quotations
prove that the members considered that the power to emit bills of credit involved the power
to make them a legal tender, and hence they struck out of the draft of the Constitution the
power to emit bills. But it is no uncommon experience that the words of a constitution or
statute are found, in their fairest interpretation, to import more than their authors distinctly
designed. It is not given to man, when framing a constitution, to foresee all the cases to
which the conferred powers will properly extend. And in this very matter, notwithstanding
that the power to emit bills of credit was struck out, this court has held that the power exists;
and why, then, does it not exist with all that in 1787 was supposed the belong to it? [Note the
logic here: The Constitutional Convention struck the authority to emit bills of credit because
they were opposed to paper money as a legal tender, but inasmuch as the authority to emit
bills of credit has now been recognized, legal tender ought to come along as well because the
founders felt that they went hand in glove!]

Justice Strong, writing for the majority, was no less gentle with the Chief Justice:

The case of Veazie Bank v. Fenno presents a suggestive illustration. There a tax of ten per
cent. on State bank notes in circulation was held constitutional, not merely because it was a
means of raising revenue, but as an instrument to put out of existence such a circulation in
competition with notes issued by the government . There, this court, speaking through the
Chief Justice, avowed that it is the constitutional right of Congress to provide a currency for
the whole country; that this might be done by coin, or United States notes, or notes of
National banks; and that it cannot be questioned Congress may constitutionally secure the
benefit of such a currency to the people by appropriate legislation. It was said there can be no
question of the power of this government to emit bills of credit; to make them receivable in
payment of debts to itself; to fit them for use by those who see fit to use them in all the
transactions of commerce; to make them a currency uniform in value and description, and
convenient and useful for circulation. Here the substantive power to tax was allowed to be
employed for improving the currency. It is not easy to see why, if State bank notes can be
taxed out of existence for the purposes of indirectly making United States notes more
convenient and useful for commercial purposes, the same end may not be secured directly by
making them a legal tender.

Page 12
Chase stood up to the bar and responded with a testament that his acquiescence in the legal
tender scheme had been “erroneous:”

The reference made in the opinion just read, as well as in the argument at the bar, to the
opinions of the Chief Justice, when Secretary of the Treasury, seems to warrant, if it does not
require, some observations before proceeding further in the discussion.

It was his fortune at the time the legal tender clause was inserted in the bill to authorize the
issue of United States notes and received the sanction of Congress, to be charged with the
anxious and responsible duty of providing funds for the prosecution of the war. In no report
made by him to Congress was the expedient of making the notes of the United States a legal
tender suggested. He urged the issue of notes payable on demand in coin or received as coin
in payment of duties. When the State banks had suspended specie payments, he
recommended the issue of United States notes receivable for all loans to the United States
and all government dues except duties on imports. In his report of December, 1862, he said
that “United States notes receivable for bonds bearing a secure specie interest are next best to
notes convertible into coin,” and after stating the financial measures which in his judgment
were advisable, he added: “The Secretary recommends, therefore, no mere paper money
scheme, but on the contrary a series of measures looking to a safe and gradual return to gold
and silver as the only permanent basis, standard, and measure of value recognized by the
Constitution.” At the session of Congress before this report was made, the bill containing the
legal tender clause had become a law. He was extremely and avowedly averse to this clause,
but was very solicitous for the passage of the bill to authorize the issue of United States notes
then pending. He thought it indispensably necessary that the authority to issue these notes,
should be granted by Congress. The passage of the bill was delayed, if not jeopardized, by
the difference of opinion which prevailed on the question of making them a legal tender. It
was under these circumstances that he expressed the opinion, when called upon by the
Committee of Ways and Means, that it was necessary; and he was not sorry to find it
sustained by the decisions of respected courts, not unanimous indeed, nor without contrary
decisions of State courts equally respectable. Examination and reflection under more
propitious circumstances have satisfied him that this opinion was erroneous, and he does not
hesitate to declare it. He would do so, just as unhesitatingly, if his favor to the legal tender
clause had been at that time decided, and his opinion as to the constitutionality of the
measure clear.

High drama indeed.

Legal Tender III

Following the War, the government began to retire the greenbacks while not resuming
redemption in specie. The consequence was an ultimate contraction of the money supply from
1875 to 1878, an effect engineered in conjunction with a complementary fiscal policy so that
redemption in specie could be resumed. (For an extensive treatment of the economic, political
and monetary history of the greenback period, see Milton Friedman and Anna Schwartz’s A
Monetary History of the United States, 1867-1960. The book contains a very good treatment of
the politics of resumption.) On January 14, 1875, the Resumption Act, 18 Stat. 296, was passed
setting January 1, 1879 as the date to resume specie payments. (“Stat.” refers to the United States

Page 13
Statutes at Large, which are not yet published on the internet.) In response to calls to place more
money in circulation, a later Act of May 31, 1878, 20 Stat. 87, forbade further retirement of
greenbacks and provided that they should be reissued when presented; but the law did not change
the date to resume specie payments. This would set the stage for the final legal tender case,
addressing the question whether Congressional authority was a temporary measure inherent in
the war power or a permanent power inherent in the government’s role as manager of the
economy, a role that it had assumed as part of its efforts to wage war.

Juilliard v. Greenman, 110 U.S.421 (1884) (“Legal Tender III”) was another case in which a
creditor declined to accept legal tender notes in payment for goods delivered to the defendant.
The plaintiff’s problem was that he knew that if he presented the notes to a bank, rather than
receiving coin he would receive new legal tender notes. He declined to accept the notes from the
debtor and challenged the constitutionality of the 1878 law, arguing that legal tender was no
longer necessary under the war powers in 1878.

The Court upheld the constitutionality of the law in an 8 to 1 decision:

The power of issuing bills of credit, and making them, at the discretion of the legislature, a
tender in payment of private debts, had long been exercised in this country by the several
colonies and states; and during the revolutionary war the states, upon the recommendation of
the congress of the confederation, had made the bills issued by congress a legal tender. . . .
The exercise of this power not being prohibited to congress by the constitution, it is included
in the power expressly granted to borrow money on the credit of the United States.

This position is fortified by the fact that congress is vested with the exclusive exercise of
the analogous power of coining money and regulating the value of domestic and foreign coin,
and also with the paramount power of regulating foreign and interstate commerce. Under the
power to borrow money on the credit of the United States, and to issue circulating notes for
the money borrowed, its power to define the quality and force of those notes as currency is as
broad as the like power over a metallic currency under the power to coin money and to
regulate the value thereof. Under the two powers, taken together, congress is authorized to
establish a national currency, either in coin or in paper, and to make that currency lawful
money for all purposes, as regards the nation government or private individuals. The power
of making the notes of the United States a legal tender in payment of private debts, being
included in the power to borrow money and to provide a national currency, is not defeated or
restricted by the fact that its exercise may affect the value of private contracts. If, upon a just
and fair interpretation of the whole constitution, a particular power or authority appears to be
vested in congress, it is no constitutional objection to its existence, or to its exercise, that the
property or the contracts of individuals may be incidentally affected.

As observed by Mr. Justice STRONG, in delivering the opinion of the court in the Legal-
tender Cases, “Every contract for the payment of money, simply, is necessarily subject to the
constitutional power of the government over the currency, whatever that power may be, and
the obligation of the parties is, therefore, assumed with reference to that power.”

***

Page 14
 Such being our conclusion in matter of law, the question whether at any particular time, in
war or in peace, the exigency is such, by reason of unusual and pressing demands on the
resources of the government, or of the inadequacy of the supply of gold and silver coin to
furnish the currency needed for the uses of the government and of the people, that it is, as
matter of fact, wise and expedient to resort to this means, is a political question, to be
determined by congress when the question of exigency arises, and not a judicial question, to
be afterwards passed upon by the courts.

Thus, the Supreme Court not only upheld the power of the Congress to make paper money a
legal tender in times of war and peace, it withdrew entirely and for all time from reviewing the
wisdom and justice of the manner in which the government exercises that power.

Justice Field, who dissented in Legal Tender II and who here was the lone dissenter, disagreed
with the majority’s approach to the necessary and proper laws. In his view, the majority had said
that, if the Constitution does not forbid a power, the government has it. He responded to the
contrary:

If the power is not in terms granted, and is not necessary and proper for the exercise of a
power which is thus granted, it does not exist. And in determining what measures may be
adopted in executing the powers granted, Chief Justice MARSHALL declares that they must
be appropriate, plainly adapted to the end, not prohibited, and consistent with the letter and
spirit of the constitution. Now, all through that instrument we find limitations upon the
power, both of the general government and the state governments, so as to prevent
oppression and injustice. No legislation, therefore, tending to promote either can consist with
the letter and spirit of the constitution. A law which interferes with the contracts of others,
and compels one of the parties to receive in satisfaction something different from that
stipulated, without reference to its actual value in the market, necessarily works such
injustice and wrong.

***

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 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 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 opinions of Supreme Court dissenters have an unfortunate and perverse way of defining the
scope and import of the majority rulings of the Court. The implication of this dissent is that the
Court has ruled that there is no “restraint upon unlimited appropriation by the government” using
the printing press. That implicit ruling now has become the accepted and contemporary view of

Page 15
the unrestrained money power of the government, notwithstanding that it stands in stark contrast
to the drafting history of the Constitution and expressed opposition of the drafters.

In fact, there was some restraint on the printing press in 1878. Gold coin circulated alongside
greenbacks, allowing holders of greenbacks to flee the currency and providing an avenue of
escape for those concerned about devaluation. But the unrestrained money power would be used
in a later era to close that loophole and impose more effective measures to free the government
from the discipline of objective value and give it absolute control over the medium of exchange.

PART 3
CONFISCATION AND THE GOLD CLAUSE

Even knowing that it actually happened, it still is almost unthinkable that the United States
government would nationalize the personal assets of its citizens, give paper in exchange at 60%
of the value of the assets – and book a profit. The public begrudgingly recognizes that the
government can take private property for public use as long as the taking is accomplished by due
process (such as an eminent domain proceeding) and the owner receives just compensation.
However, we expect those cases to be relatively isolated and infrequent, and for the property to
be used for roads and needed government buildings. In 1933, the U.S. government devalued the
dollar by 40% in less than eight months, but not before it ordered a docile population to
exchange their gold for paper and banned gold ownership and transactions in gold to keep
citizens from escaping the devaluation. The combined actions operated as a confiscation of the
property of every citizen, all at once, with no compensation.

The constitutional validation of these actions followed a similar pattern to the validation of the
legal tender laws: (1) unchallenged legislative precedent falling into accepted custom, (2)
incremental changes in constitutional interpretations over a period of time and (3) the
precipitation of a major crisis that the government chose to address by assuming theretofore
unexercised and unauthorized power.

The gold standard had been re-established in 1879 and was firmly in place by 1896 when the free
silver movement ended. Between 1879 and 1933, gold coin circulated domestically as money
although a wide variety of other forms of money were created and used on different levels –
among consumers, in commercial transactions, among banks, in foreign commerce and among
nation states. While justifiable criticism may be levied against a banking and currency system
that creates leveraged or unbacked money, it must be conceded that the system until 1933 still
allowed individuals to enjoy the convenience of paper currency and demand deposits yet with
relative ease to convert the paper to gold at any time at the teller’s window. To be sure, some
banks failed and others had occasional liquidity problems. But – quite apart from the economic
wisdom or morality of fractional reserve banking, or mixing it with a gold standard – the system
at least operated to allow the individual to control his own destiny – to hold his hard assets or to
trust his bank and the government to produce them on demand. Even though the system did not
operate to perfection in practice, the individual nevertheless had the legal capability and right in
theory to protect his wealth from irresponsible government and unsafe banks. Unfortunately, by
1933 that right had been circumscribed in a way that laid the groundwork for its elimination.

Page 16
In 1910, the Supreme Court decided an obscure case against a Chinese national, Ling Su Fan v.
United States, 218 U.S. 302 (1910), over the individual’s right to export his silver from the
Philippines. At the time, the U.S. occupied the Philippines. In the law establishing the Philippine
Mint the U.S. Congress granted the Philippine Commission authority to pass additional measures
to preserve the value of the silver peso against the gold peso. Because silver was trading in
Hong Kong at 9% greater than the face value of the peso, the Commission forbade export of
silver pesos and bullion made from coins upon penalty of forfeiture, fines and imprisonment.
Ling Su Fan attempted to export his silver contrary to the law, his silver was seized and he was
criminally prosecuted. He challenged the law as a taking of his property without compensation
or due process. The Supreme Court upheld his conviction with the following words:

The power to “coin money and regulate the value thereof, and of foreign coin,” is a
prerogative of sovereignty and a power exclusively vested in the Congress of the United
States. The power which the government of the Philippine Islands has in respect to a local
coinage is derived from the express act of Congress. Along with the power to strike gold and
silver pesos for local circulation in the islands was granted the power to provide such
measures as that government should ‘deem proper,’ not inconsistent with the organic law of
July 1, 1902, necessary to maintain the parity between the gold and silver pesos. Although
the Philippine act cannot, therefore, be said to overstep the wide legislative discretion in
respect of measures to preserve a parity between the gold and silver pesos, yet it is said that if
the particular measure resorted to be one which operates to deprive the owner of silver pesos
of the difference between their bullion and coin value, he has had his property taken from
him without compensation, and, in its wider sense, without that due process of law
guaranteed by the fundamental act of July, 1902

Conceding the title of the owner of such coins, yet there is attached to such ownership
those limitations which public policy may require by reason of their quality as a legal tender
and as a medium of exchange. These limitations are due to the fact that public law gives to
such coinage a value which does not attach as a mere consequence of intrinsic value. Their
quality as a legal tender is an attribute of law aside from their bullion value. They bear,
therefore, the impress of sovereign power which fixes value and authorizes their use in
exchange. As an incident, government may punish defacement and mutilation, and constitute
any such act, when fraudulently done, a misdemeanor. . . .

However unwise a law may be, aimed at the exportation of such coins, in the face of the
axioms against obstructing the free flow of commerce, there can be no serious doubt but that
the power to coin money includes the power to prevent its outflow from the country of its
origin. To justify the exercise of such a power it is only necessary that it shall appear that the
means are reasonably adapted to conserve the general public interest, and are not an arbitrary
interference with private rights of contract or property. The law here in question is plainly
within the limits of the police power, and not an arbitrary or unreasonable interference with
private rights.

The Court takes three important positions here. First, the power to coin money includes the
power to prevent its outflow from the country. Second, even though the bullion is the property
of the individual, by its conversion to legal tender it has been impressed with the interest of the
sovereign and thus becomes something over which the government has the right to exercise

Page 17
control as part of the prerogatives of sovereignty. Third, depriving the owner of the opportunity
to realize the difference between the face value and the bullion value of coins is not an
unconstitutional taking of property without due process.

In 1913, the Federal Reserve System was chartered to oversee a more “elastic” currency and to
help avoid occasional and seasonal liquidity crises. What exactly caused the stock market to
crash 16 years later and the economic and banking crisis that followed remains to this day a
subject of discussion among economists. In his treatise, America’s Great Depression, the late
Professor Murray Rothbard, with an inclusive definition of money, demonstrates that the crash
arose in classic Austrian business cycle fashion from an inflation of the money supply ending
with an abrupt monetary contraction. Chicago School Professors Friedman and Schwartz, with a
somewhat narrower definition of money simply describe a contraction resulting in the crash,
indicating that the stable price levels in the 1920’s do not evince any inflation. History reveals a
debate in Washington in the late 1920’s about how to quell stock market speculation, a signal
that, indeed, there was excess liquidity coming from somewhere. Whatever the cause of the
crash, the view is almost unanimous that it was indecision and squabbling within the Fed that
killed all chances for a quick recovery and brought on a major banking crisis. See Walker F.
Todd, The Federal Reserve Board Before Warner Eccles, Working Paper 9405 (Federal Reserve
Bank of Cleveland 1994).

During the First World War Congress passed a number of war measures, including the 1917
Trading With the Enemy Act, that were designed to marshal the economy to support the war
effort. The laws gave much power to the executive branch and were generally acknowledged to
be authorized under the constitutional war powers. As originally enacted, Section 5(b) of the
Trading With the Enemy Act, 40 Stat. 411, provided:

That the President may investigate, regulate, or prohibit, under such rules and regulations
as he may prescribe, by means of licenses or otherwise, any transactions in foreign exchange,
export or earmarkings of gold or silver coin or bullion or currency, transfers of credit in any
form (other than credits relating solely to transactions to be executed wholly within the
United States), and transfers of evidences of indebtedness or of the ownership of property
between the United States and any foreign country, whether enemy, ally of enemy or
otherwise, or between residents of one or more foreign countries, by any person within the
United States; and he may require any such person engaged in any such transaction to
furnish, under oath, complete information relative thereto, including the production of any
books of account, contracts, letters or other papers, in connection therewith in the custody or
control of such person, either before or after such transaction is completed.

A 1918 statute expanded this power to allow the President to prohibit the hoarding of gold, but
the statute provided that it was to expire two years after the termination of the war with Germany
and it was never used to prohibit domestic hoarding.

In 1932-33, as the Hoover Presidency was ending and the banking crisis was worsening, the
Federal Reserve Board attempted to persuade Hoover to declare a bank holiday. The Fed’s
counsel, Walter Wyatt, drafted a proclamation to that effect based upon the Trading with the
Enemy Act. But Hoover, who was in favor of less drastic measures to bolster confidence in the
banking system, rejected the idea of a bank holiday as well as the notion that the Trading with

Page 18
the Enemy Act was still in force. Franklin Roosevelt, following his election but before his
inauguration, declined to work with the Hoover administration for a measure to diminish the
crisis and allowed it to continue deteriorating. As related in Mr. Todd’s Working Paper, cited
above, there was considerable disagreement whether the Trading with the Enemy Act could
support the banking holiday proclamation proposed by the Fed. But Roosevelt was not deterred.
Apparently working behind the scenes with the Fed, knowing that he could very quickly secure
the legal support from the Democrat Congress, he declared a bank holiday on March 6, 1933,
two days after his inauguration. (Proclamation No. 2039). Three days later, without seeing the
bill and with only 38 minutes of debate, Congress ratified the new President’s Proclamation in
the Emergency Banking Act, 48 Stat. 1, and amended section 5(b) of the Trading with the
Enemy Act to read as follows:

(b) During time of war or during any other period of national emergency declared by the
President, the President may, through any agency that he may designate, or otherwise
investigate, regulate, or prohibit, under such rules and regulations as he may prescribe, by
means of licenses or otherwise, any transactions in foreign exchange, transfers of credit
between or payments by banking institutions as defined by the President, and export,
hoarding, melting, or earmarking of gold, or silver coin or bullion or currency, by any person
within the United States or any place subject to the jurisdiction thereof; and the President
may require any person engaged in any transaction referred to in this subdivision to furnish
under oath, complete information relative thereto, including the production of any books of
account, contracts, letters or other papers, in connection therewith in the custody of or control
of such person, either before or after such transaction is completed. Whoever willfully
violates any of the provisions of this subdivision or of any license, order, rule or regulation
thereunder, shall, upon conviction, be fined not more than $10,000, or, if a natural person,
may be imprisoned for not more than ten years, or both; and any officer, director, or agent of
any corporation who knowingly participates in such violation may be punished by a like fine,
imprisonment, or both. As used in this subdivision the term ‘person’ means an individual,
partnership, association, or corporation. [Emphasis added.]

Thus, what was solely a wartime measure that many believed had expired was converted into a
statute granting war time powers to the President in times of a self-declared “national
emergency,” a term which was not defined in the law (and which, if such an emergency existed
in 1933, itself had been precipitated by government mismanagement). This law identified a new
“enemy” – domestic “hoarders” who would be subject to imprisonment for violating any rule laid
down by the President at any future time during a period of national emergency declared by him
based on undefined criteria. Professor Henry Mark Holzer’s monograph How Americans Lost
Their Right To Own Gold And Became Criminals in the Process catalogues the events of 1933,
and more; and it should be read as an adjunct to this article, which despite its appearances is a
relatively superficial treatment of the subject.

On April 5, 1933, the President issued Executive Order No. 6102, which forbid the hoarding of
gold under the newly amended Trading with the Enemy Act and required citizens to turn in their
gold to Federal Reserve banks or member banks. Then, on June 5, 1933, the Congress passed a
joint resolution, 48 Stat. 112, declaring gold clauses in all public and private contracts to be
against public policy:

Page 19
 Whereas the holding of or dealing in gold affect the public interest, and are therefore
subject to proper regulation and restriction; and

Whereas the existing emergency has disclosed that provisions of obligations which purport
to give the obligee a right to require payment in gold or a particular kind of currency of the
United States, or in an amount in money of the United States measured thereby, obstruct the
power of the Congress to regulate the value of the money of the United States, and are
inconsistent with the declared policy of the Congress to maintain at all times the equal power
of every dollar, coined or issued by the United States, in the markets and in payment of debts.

Now, therefore, be it resolved that (a) every provision contained in or made with respect to
any obligation which purports to give the obligee a right to require payment in gold or a
particular kind of coin or currency or an amount in dollars of the United States measured
thereby, is declared to be against public policy; and no such provision shall be contained in
or made with respect to any obligation hereafter incurred. Every obligation, heretofore or
hereafter incurred, whether or not any such provision is contained therein or made with
respect thereto shall be discharged upon payment, dollar for dollar, in any coin or currency
which at the time of payment is legal tender for public and private debts.

On May 12, 1933, the Congress enacted the Thomas Amendment to the Agricultural Adjustment
Act, 48 Stat. 51, which contained a provision authorizing the president to lower the gold content
of the dollar by as much as 50 per cent. By mid 1933 Roosevelt was ready to devalue the dollar.
His instrument for doing so was the Reconstruction Finance Corporation, which issued $150
million in short term obligations and began a gold purchasing program on behalf of the United
States through the Federal Reserve Bank of New York. By January 1934 the market price of
gold had been bid up from its pre-1933 value of $20.67 to over $34. On January 30, 1934, the
Congress passed the Gold Reserve Act, 48 Stat. 337, establishing the Exchange Stabilization
Fund, authorizing the President to fix the gold weight of the dollar between 50 and 60 per cent of
its former official value and vesting in the United States title to all of the gold collected by and
held by the Federal Reserve System, the Federal Reserve banks and their agents. The next day
the President issued Proclamation No. 2072 fixing the official price of gold at $35.00 per ounce,
devaluing the dollar to 59.06% of the $20.67 official value that had been maintained since 1834
– for almost a century.

Because the gold collected pursuant to the April 5 Proclamation was redeemed to its owners at
$20.67, the devaluation enabled the United States to book a profit of $2.8 billion, $2 billion of
which was assigned to the Exchange Stabilization Fund.

Forbidding the payment of private contracts in gold probably would not have created much of a
stir if the dollar had not been devalued. But businessmen saw the abrogation of their gold
clauses as a 40% confiscation of the agreed-to value of their contracts, contracts that were
written by businessmen in time-honored language precisely to avoid their becoming victims of a
devaluation.

Norman v. Baltimore & Ohio R. Co., decided with United States v. Bankers Trust Co., 294 U.S.
240 (1935), was a suit to collect the coupon on a bond of a railroad that was in bankruptcy. “The
bond provided that the payment of principal and interest ‘will be made ... in gold coin of the

Page 20
United States of America of or equal to the standard of weight and fineness existing on February
1, 1930.’ The coupon in suit was payable on February 1, 1934.” When the $22.50 coupon was
presented for payment on February 1, 1934, the plaintiff asked for $38.10, representing the
February 1, 1934 dollar value of the coupon in February 1, 1930 gold. The Reconstruction
Finance Corporation and the United States, which were creditors of the railroad, intervened in
the suit and asserted that the gold clause was invalid and that the interest and principal should be
paid in the amount of $22.50 in legal tender currency, rather than gold, pursuant to the Joint
Resolution of June 5, 1933. The bondholder challenged the constitutionality of the law and,
losing in the lower court, appealed.

After a lengthy analysis, the Supreme Court (Chief Justice Hughes writing for the majority in a
5-4 decision) concluded that this clause was one for money and not for gold coin as a commodity
and therefore fell within the ambit of the government’s monetary prerogatives. At the same time
the Court acknowledged that the clause was intended to protect the bondholders “against a
depreciation of the currency and against the discharge of the obligation by a payment of lesser
value than that prescribed.” Nevertheless, the Court held that the government’s money power
trumps the individual’s right privately to secure such protection, citing the Legal Tender cases
and Ling Su Fan as precedent. To the argument that the Congress was interfering with the
private right to contract, the Court responded,

This argument is in the teeth of another established principle. Contracts, however

express, cannot fetter the constitutional authority of the Congress. Contracts may create
rights of property, but, when contracts deal with a subject-matter which lies within the
control of the Congress, they have a congenital infirmity. Parties cannot remove their
transactions from the reach of dominant constitutional power by making contracts about
them.

* * *

The principle is not limited to the incidental effect of the exercise by the Congress of its
constitutional authority. There is no constitutional ground for denying to the Congress the
power expressly to prohibit and invalidate contracts although previously made, and valid
when made, when they interfere with the carrying out of the policy it is free to adopt.

* * *

Despite the wide range of the discussion at the bar and the earnestness with which the
arguments against the validity of the Joint Resolution have been pressed, these contentions
necessarily are brought, under the dominant principles to which we have referred, to a single
and narrow point. That point is whether the gold clauses do constitute an actual interference
with the monetary policy of the Congress in the light of its broad power to determine that
policy. Whether they may be deemed to be such an interference depends upon an
appraisement of economic conditions and upon determinations of questions of fact. With
respect to those conditions and determinations, the Congress is entitled to its own judgment.
We may inquire whether its action is arbitrary or capricious, that is, whether it has reasonable
relation to a legitimate end. If it is an appropriate means to such an end, the decisions of the
Congress as to the degree of the necessity for the adoption of that means, is final.

Page 21
 * * *

We are not concerned with consequences, in the sense that consequences, however serious,
may excuse an invasion of constitutional right. We are concerned with the constitutional
power of the Congress over the monetary system of the country and its attempted frustration.
Exercising that power, the Congress has undertaken to establish a uniform currency, and
parity between kinds of currency, and to make that currency, dollar for dollar, legal tender for
the payment of debts. In the light of abundant experience, the Congress was entitled to
choose such a uniform monetary system, and to reject a dual system, with respect to all
obligations within the range of the exercise of its constitutional authority. The contention that
these gold clauses are valid contracts and cannot be struck down proceeds upon the
assumption that private parties, and states and municipalities, may make and enforce
contracts which may limit that authority. Dismissing that untenable assumption, the facts
must be faced. We think that it is clearly shown that these clauses interfere with the exertion
of the power granted to the Congress, and certainly it is not established that the Congress
arbitrarily or capriciously decided that such an interference existed.

Thus, having bootstrapped its way (based on the Legal Tender Cases, which themselves were
bootstrapped) into recognizing a plenary power that was not granted by the founders, the Court
once again withdrew from any controversy over how Congress ought to exercise the power. The
4-member dissent, penned by Mr. Justice McReynolds, was not especially helpful in its analysis
disagreeing with the result:

There is no challenge here of the power of Congress to adopt such proper “Monetary
Policy” as it may deem necessary in order to provide for national obligations and furnish an
adequate medium of exchange for public use. The plan under review in the Legal Tender
Cases was declared within the limits of the Constitution, but not without a strong dissent.
The conclusions there announced are not now questioned; and any abstract discussion of
congressional power over money would only tend to befog the real issue.

The fundamental problem now presented is whether recent statutes passed by Congress in
respect of money and credits were designed to attain a legitimate end. Or whether, under the
guise of pursuing a monetary policy, Congress really has inaugurated a plan primarily
designed to destroy private obligations, repudiate national debts, and drive into the Treasury
all gold within the country in exchange for inconvertible promises to pay, of much less value.

* * *

The authority exercised by the President and the Treasury in demanding all gold coin,
bullion, and certificates is not now challenged [Note – this issue never came before the high
court prior to or after this case]; neither is the right of the former to prescribe weight for the
standard dollar. These things we have not considered. Plainly, however, to coin money and
regulate the value thereof calls for legislative action.

And after some discussion, the dissenters opined that nullifying gold clauses was not necessary
to the government’s legitimate exercise of the monetary power. They ended their dissent with a
similar complaint to that expressed by Justice Field at the end of his dissent in Legal Tender III:

Page 22
 Under the challenged statutes it is said the United States have realized profits amounting to
$2,800,000,000. But this assumes that gain may be generated by legislative fiat. To such
counterfeit profits there would be no limit; with each new debasement of the dollar they
would expand. Two billions might be ballooned indefinitely-to twenty, thirty, or what you
will.

Loss of reputation for honorable dealing will bring us unending humiliation; the impending
legal and moral chaos is appalling.

Legal and moral chaos notwithstanding, the Court unanimously endorsed the notion that the
Constitution grants the Congress broad and unquestionable monetary powers. Despite the
Constitutional Convention’s elimination of the authority to issue paper money or make it legal
tender, unbacked/fiat money (now euphemistically called the “fiduciary standard”) is the lawful
currency of the United States. And the government’s power to divorce the currency from
objective value and to confiscate gold bullion and coins pursuant to a monetary policy is well-
established in the law – all without the government’s following the required super-majority
procedure of securing a constitutional amendment.

The 1974 legalization of private gold ownership, the 1977 repeal of the Joint Resolution
forbidding gold clauses and the minting of new gold coins by the United States have not restored
the constitutional rights of individuals. Gold ownership and its usage to avoid the ravages of
inflation and currency devaluation now stands, constitutionally, not as a right but as a privilege
that can be revoked at any time by new legislation.

PART 4
COMMENTARY

In this series I have described how a limited government – with a restricted charter to borrow
money, mint coins and regulate their value – attained a peacetime financial dictatorship in just a
few generations. I took care to present historical materials in a relatively matter-of-fact manner,
linking you to source documents in their original forms on government sites. Without that
documentation, the story is not believable; it reads like the outline of a bad Ayn Rand novel
instead of real history.

The story I told hit the highlights of only a few constitutional issues. But there were many more
constitutional issues, and the laws were much more extensive and complicated than I presented.
The complete history of U.S. money from 1787 to 1933 is quite complex, involving business
regulation, high finance, banks and banking, a variety of gold standards, currency exchange
issues, world-wide economics, military and economic war, international relations and intrigue,
apparent propaganda efforts to eradicate a popular understanding of the political value of gold
money, great abuses of position, either incredible stupidity and negligence or callous and
outrageous disregard for humanity and, some allege, the surreptitious hijacking of the birthright
of the American people by arrogant, power hungry men. For those interested, links and
references to works of others – scholarly and not-so-scholarly, fact and opinion, supported and
unsupported, wild-eyed and staid – appear at the end of this commentary. As you read them you
will note how style and presentation color their credibility. But do not be misled. Some authors

Page 23
offer balanced historical bases for strident claims. Others, more scholarly and erudite, blandly
serve up their opinions as gospel without adequate support. Many writers have a thesis and omit
facts supporting contrary conclusions. Pay attention to these differences, glean the objective
facts from all possible sources, apply right reason and draw your own conclusions.

I provided you with a simple story taken from the opinions of the Justices of the U.S. Supreme
Court, debates in the Congress and statutes so that you can demonstrate to your untutored
acquaintances – without inviting a reputation as a nut case – that gold once played an accepted
and respected role in the long term economic stability of the United States and the freedom of its
people and that it was taken from them contrary to the express intent of the drafters of the
Constitution. Your intellectual arsenal is not complete, however, unless you are prepared to
respond to the conventional wisdom that the gold standard did, and will, place the economy in a
straight jacket and did, and will, stunt economic growth and cause debilitating price instability.

Despite what Mr. Greenspan’s initial remarks in his address to the Economic Club of New York
on December 19, 2002, might imply, the era of the gold standard was not an idyllic picture of
stable prices and economic security – that is, when viewed over short horizons.

One of the pieces of the story that I omitted is that, during the period from 1789 to 1933, there
were periodic money panics and runs on banks, causing hardship and injustice to unsuspecting
citizens. Professor Rothbard discussed the Panic of 1819 in his book by that name. I briefly
referred to the problem leading up to the adjustment in the gold weight of the dollar in 1834.
The printing press was openly used to finance almost every major war without raising taxes,
triggering boom and bust cycles with significant adverse economic consequences. And there
were other recurring inflations, bank panics and recessions.

From the very beginning of the nation until 1913 there were huge political battles over the power
and role that the central, national and state banks should take in the evolving economy of the
United States. But it was the common knowledge of the people that kept a lid on things and
succeeded in keeping gold money in circulation. After the worst paper inflation in the history of
the United States, it was the popular understanding of gold as money that forced the country to
return to redeeming paper currency in specie in 1879, ending the greenback era. But the 1875
Resumption Act was passed in the face of significant political resistance and compromise
necessitated the continuation of legal tender paper money. Then came the cry for more currency
spawning the free silver movement. The California and Alaska gold rushes injected the country
with liquidity and caused price levels to rise because the country was on the gold standard – i.e.,
there was a significant increase in the gold supply.

So, while we complain about the loss of our Constitutional right to gold money, we should be
prepared to acknowledge that a gold standard imposes some stringent rules on both government
and the market that will punish not only the people who ignore those rules but also their
unsuspecting victims. It is that discipline that kept prices relatively level – over the long haul –
from 1800 to 1929.

Two major complaints arose during that period. The first is that during a period of relatively
constant money supply, price levels tended to decrease, causing business hardships. Because
capital investment and production labor precede product sales, product price decreases tended to

Page 24
occur in advance of product cost decreases, causing farmers and businessmen to sell more costly
inventory for relatively less than they anticipated when their investments in capital goods and
inventory were made. The second complaint is that there was a recurring problem of liquidity,
especially outside of the more populous money centers. There were complaints about the
unavailability of credit for financing the planting of crops and the growth of industry. And the
recurring panics about whether a bank had sufficient reserves to redeem deposits were
particularly distressing to ordinary citizens and businesses alike.

Those favoring a fiduciary standard argued that the bank panics and the relentless erosion of
prices were caused by the inability of the gold standard to provide the needed liquidity to the
market and the banks. Gold is inelastic. It cannot expand to meet seasonal requirements,
unexpected demands and financial emergencies; and it does not grow with the economy. Their
solution to this “problem” was the Federal Reserve System and fractional reserve banking. But
they learned very quickly that when the entire banking system makes system-wide errors, a
centrally controlled dual currency system – gold coin and fiat money – by Gresham’s Law will
not work. Even if gold certificates can be redeemed at the teller’s window for gold coin, if gold
coin is available to redeem only 40% of the certificates, the remaining 60% are, in fact, fiat
money. In the final analysis, that is why the people’s gold was confiscated in 1933. The
financial system could not tolerate dual money without runs on the banks (i.e., a flight to gold)
when things got tough. The Federal Reserve System failed and confiscation became the final
solution for avoiding bank runs.

But the complaints against the gold standard were, and are in actuality, complaints against the
unyielding discipline of objective value. The goal of stable prices is inherently inconsistent with
a standard that allows gold to circulate as money. If the money supply is inelastic, as it likely
would be in the case of gold, normal improvements in technology and productivity naturally
ought to cause prices to decline. Businesses have proven throughout history to have a remarkable
ability to adapt individually to market conditions (or to go out of business). If they knew that
there would be no inflation to negate the natural decline in prices, sooner or later they would
figure out how to adjust their business processes to adapt for declining prices – for example, by
using strategic product pricing techniques. Surely we must have learned by now that there are
grave risks associated with a fiat money system and that the market’s call to be relieved of its
function and obligation to deal with objective value is no justification for the government to
saddle its citizens with that risk.

Runs on banks arose when depositors were worried about the safety of their deposits. Come
now, that cannot be the fault of the monetary system. The banks either had the gold or they did
not. But, it is argued, they lent the money to finance farms and businesses and mortgages, to
people who needed it. The response to such arguments is that, obviously they must have lent too
much and did not keep adequate reserves or failed to arrange privately to be covered by other
banks or insurance companies. Even if depositors had given express or tacit permission for the
banks to lend out their money, if a bank promises to redeem bank notes in gold on demand, the
bank ought to be managed to be able to do that. The Federal Reserve System was chartered to
avoid subjecting the bankers to punishment for mismanagement, to avoid causing depositors to
have a healthy skepticism about bank trustworthiness, to insulate the banks from the market’s
preference for trustworthiness and to give the depositors a sense of security by government fiat.
The Fed was created to bail out irresponsible banks and foster price stability by the expansion of

Page 25
money and credit – a most dangerous game, one that has been played with almost universal
failure ever since the first coin was debased.

Instead of allowing the market to fix the problem of declining prices and irresponsible banks, the
new System in 1913 allowed the problem to be assumed by the Fed. But in spreading the risk
over the entire system and theoretically lowering it, the government created a broader risk, a risk
that was national in its scope rather than isolated to individual banks and businesses. When the
Fed realized that its expansion of credit in the 1920’s had created a stock market bubble without
raising consumer prices, it was faced with a most unfortunate problem: it was necessary to
contract the money supply, but there was not a way to keep a deflation of the stock market
bubble from spilling over into the entire economy. The Fed found that it had no precise control
over who would be impacted first by a credit contraction and no way to engineer a deflation to
avoid a general recession. Bubbles usually appear at the fountainhead of inflation and then begin
to permeate the economy. Bursting a bubble cannot be accomplished surgically, as the internet
bubble illustrated. The few who are first in line to benefit from the printing press – people who
borrow at artificially depressed rates and those who receive money early from deficit
government spending – are the beneficiaries; those not-so-fortunate suffer the later appropriation
of their wealth through higher prices and higher interest rates with no up-front benefit. The Fed,
despite nine decades of experience, has yet to devise a way to avoid the unjust transfer of wealth
that inflation causes or to exercise better long term control over the money supply than the gold
standard accomplished. This is the obvious fact that Mr. Greenspan was referring to in his
remarks on December 19, 2002.

War and other crises provide pretexts for increases in government power. Once it is acquired,
rarely does the assumption of that power completely relent when the crisis subsides. The
departure from the discipline of gold money in 1862 with the greenback and in 1933 with gold
prohibition was attended by crises that added measurably – by step-functions – to the U.S.
government’s control over the economy and its ability to confiscate the fruits of the individual’s
labor through inflation. In both cases, there were later repeals, but the repeals represented one
step forward from two steps back. The 1879 Resumption Act did not eliminate the legal tender
laws, which remain in effect today. Likewise the restoration of gold ownership rights in 1974
and the legalization of gold clauses in 1977 did not resurrect the gold standard or put gold coins
back into circulation as money.

We do not know how the government will respond to the upcoming financial difficulties that
appear inevitable from the latest massive increases in deficit spending and reduced taxes. But
the history of gold money in the U.S. and the increased sophistication and technology available
to the government indicate that one may find it difficult to escape the solutions that are handed
down. It will not be enough for a few to understand the benefits that the discipline of gold
creates for long-term political and economic stability if the vast majority of citizens do not
appreciate the political value of a gold standard. It will not be enough to buy gold while it is
legal and hide it before the next prohibition occurs. Where, other than the black market, will it
be useful? It will not be enough to hope that confiscatory laws and regulations will not be
enforced. As will be demonstrated in a later article, the 1933-1974 regulations were enforced. It
will not be enough to draft new gold clauses in an attempt to predict what loopholes might be
overlooked in the next law. The loopholes eventually will be closed both by the legislature and
in the courts. And it will not be acceptable, for me at least, to leave my home in a vain attempt

Page 26
to find a place where I can have greater social, political and economic freedom. I doubt that
there is such a place; and even if there were, why should I allow myself to be driven from my
home? Some of us have now lived long enough to know that despite Lord Keynes’ famous
comment, when the long run has run its course, we will still be here; and even if we are not, our
children certainly will be. So the long run is important.

Many of us do not care to evade the law or become exiles or fugitives. We prefer to live and
remain in a country where our daily affairs can be conducted freely, in private or in the open,
without any concern that, some day, those charged with our protection will turn on us, confiscate
our meager savings and forbid us from engaging in prudent and honest trade with our fellow
citizens. That is the country that Thomas Jefferson and James Madison thought they had created.
I like the idea of living in their country. It is the America that I want to leave to my children and
I will continue to promote it.

It is becoming increasingly apparent that the fiat system is on the verge of an unstable, perhaps
uncontrollable, phase at precisely the time when a major crisis is brewing. Government
budgetary and fiscal policies promoting guns and butter and lower taxes, and monetary policies
designed to fight deflation, “stimulate the economy” and monetize historically high mountains of
debt are classic signals that the worst fears of the founders are being realized on a scale that they
could not have imagined. The accumulation of government power over the individual in such an
environment will be, and is, accelerating. Privacy is almost a thing of the past and the movement
of assets will join the transfer of money as a carefully regulated activity.

The general population today, unlike the citizenry in 1862 and 1933, has no understanding of
monetary economics. Moreover, huge portions of the population (including large and small
business enterprises) are in one form or another feeding at the trough of government largesse
with absolutely no regard for or understanding of the source of the government’s revenues or
how a nation’s wealth is created and what is required to sustain it. They see government money
as a kind of natural resource. It is an easy trap to fall into. But if we do not think about where
the money comes from, except to oppose direct taxes that affect us, we are digging our own
financial graves.

Many people apparently believe, vaguely, that their financial well being is somehow threatened
by those seeking lower taxes and less government. (If they are feeding at the trough, perhaps
they are right.) And they make no connection whatsoever between monetary policy and their
financial security. This wholesale ignorance facilitates, with no serious mainstream criticism,
the appropriation of wealth from one citizen through inflation and taxes and the redistribution of
it to others in the form of government benefits, contracts and programs. I am reminded of the
Roman Emperors who taxed the people and then tossed out bread and gold during parades and
pageants to curry the favor of the masses. The system will not change until we improve the
understanding of the citizens whose votes influence policy.

A libertarian society protected from, and by, a limited government may have been an ideal that
the founders sought; but it has never been achieved. Even so, that fact, and the fact that the
contrary direction appears to have been generally taken, does not mean that the ideal should be
abandoned. If you understand the economic risks posed by the fiduciary (“trust me”) monetary
standard and the moral dimensions of its inevitable consequences, you should attempt at a

Page 27
minimum to educate the people around you about the history, the respectability and the security
that can be found in the gold standard and encourage them to pass the word. Changing popular
understanding begins in your neighborhood, in your business circles and in your associations. It
is a daunting undertaking, but it most certainly will not be accomplished if those who understand
its importance shrink from the task or retreat into cynicism.

In The Regulation Game, a treatise on government’s regulation of enterprise, authors Bruce M.

Owen and Ronald Braeutigam questioned the wisdom of using government power affirmatively
to achieve economic security and justice rather than allowing the market to work. They
concluded, “We do not know the answers to these questions. Nevertheless, we are reminded of
Edward Gibbon’s comment on the fall of Athenian democracy: ‘In the end they valued security
more than they valued freedom, and they lost both.’”

Page 28
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Page 29
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Page 30
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Page 31