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The Supreme Court’s Money

That’s what Dick Timberlake originally planned to call the fantastic book that Cambridge University Press has recently published under the modified title, Constitutional Money: A Review of the Supreme Court’s Monetary Decisions.

I’m rather partial to the old title, for it conveys better than the new one does the fact that the basic money of the United States today really is something that has been “made” by the Supreme Court rather than something “Constitutional” in the sense of being obviously permitted, much less expressly authorized, by what is still, nominally at least, the supreme law of the land.

That law contains only two references to money, both of which occur within its first Article. Section 8 of that Article gives Congress the power “To coin Money” and to “regulate the value thereof.” Section 10 in turn declares that “No state shall…coin money; emit Bills of Credit; [or] make any Thing but gold and Silver Coin a Tender in payment of Debts.”

It ought to be perfectly evident, from the writings of the founders themselves, from opinions expressed (according to James Madison’s notes) during the Constitutional Convention, and from the understanding common to all authoritative commentaries on the Constitutional debates, that the overarching objective of these clauses was to guarantee that neither the states nor the Federal government should ever again be able to issue irredeemable paper currency as several colonies, as well as the Continental Congress, had done in order to avoid having to pay their bills with specie. The idea, as Roger Sherman put it at the time, was that of “crushing paper money” once and for all.

Nor, as any competent Constitutional scholar will tell you, does the fact that states alone are expressly prohibited from emitting “bills of credit” or from making legal tender out of anything save gold or silver mean that the founders thought it A-O-K for Congress to do either of those things. On the contrary: as the 10th amendment was supposed to make clear, in case anyone was dull enough to forget it, the whole point of the Constitution was to set forth those powers that states had elected to delegate to the central government, the others being “reserved to the States respectively” or (if prohibited to the States) “to the people.”

All of which, of course, raises two obvious questions: (1) How did we end up having, as our nation’s official money, Federal Reserve notes–notes which, being irredeemable in gold or silver or anything else, are precisely the sort of “bills of credit” the founders intended to proscribe?; and (2) How did the government manage to make these notes “legal tender for all debts public and private”? Those questions in turn raise a third obvious question, to wit: Where the heck was the Supreme Court while all this was goin’ down?

The answer to the last question is, of course, that the Supreme Court was there all along, torturing the Constitution until it submitted to the decisions that led us where we are today. The details concerning the infernal devices the Court employed to twist and to stretch and eventually to eviscerate the Constitution’s monetary clauses (and, with them, much of the rest of that document’s sinews), the men who wielded them, and those who protested, are the subjects of Dick’s story–a story he tells as only the leading historian of American monetary policy could tell it. And he tells it both with great aplomb and with a rectitude which, in light of the maddeningly perverse nature of some of the sophistries he must contend with, seems in places almost super-human.

According to Timberlake’s retrospective account, it was largely owing to Chief Justice John Marshall’s 1819 decision in McCulloch v. Maryland–a case concerning Congress’s power to charter a bank–that the fiat money camel was able, first to poke its nose, and eventually to force its way entirely, into the Constitution’s precious-metal wigwam. Marshall offered two reasons for holding that Congress did indeed have the power in question. First he observed that “There is nothing in the Constitution that excludes it.” Then, as if he’d suddenly remembered the 10th amendment, he added that the Bank’s constitutionality rested upon Congress’s power to make “all laws which shall be necessary and proper” for carrying out its express powers, as set forth in Article 1, Section 8, and elsewhere. The latter argument, admittedly, also comes to grief if one takes “necessary” to mean “indispensable” or “absolutely required” or “essential,” as dictionaries tend to do. But Marshall had an answer for that, too: “Necessary,” he began by observing, means “convenient, useful, and essential.” Having thus arbitrarily restricted the meaning of “necessary” to include only things both essential and convenient, he then quietly went on arguing as if he’d written “or” instead of “and.” Thus Congress’ implied powers, instead of being narrowly confined according to the Convention’s own choice of words, were so extended as to make all the fastidious language setting-forth Congress’s express powers appear otiose.

Another big step came in 1884, with Juilliard v. Greenman–the third and last of the so-called “Legal Tender Cases.” Here Chief Justice Horace Gray wrote the majority opinion, to wit, that in issuing irredeemable Greenbacks and making them legal tender Congress was merely exercising “a power universally understood to belong to sovereingty…at the time of the framing and adopting of the Constitution of the United States. The governments of Europe, ” Gray continued, “had and have as sovereign a power of issuing paper money as of stamping coin.” In short, because various, mostly monarchical, European governments assumed, among their other sovereign prerogatives, that of engaging in paper-money finance, Congress surely ought to be able to do the same. That the founders had set up a republic, based on popular sovereignty, rather than an absolute monarchy, was a detail apparently beyond either Justice Gray’s comprehension or that of the other (mostly Republican) justices who joined his majority opinion.

Although it managed to survive Juiliard v. Greenman the gold standard did not survive the Great Depression, when the Roosevelt administration, further testing the limits of the Federal government’s “implied powers,” turned Federal Reserve notes into the latest version of Congressionally-sanctioned bills of credit, confiscated all private holdings of monetary gold, reduced the dollars’ official gold content, and declared specific gold-payment provisions in both private and public contracts null and void. In all this, it almost goes without saying, the Supreme Court happily acquiesced, in a final paroxysm of monetary iniquity known as the Gold Clause decisions.

Perhaps some, reading this summary, will think, “So, the High Court overruled the founders, and got us off gold. Bully for them: had they done otherwise, those metallic ‘fetters’ of which the founders were so fond might have us still shackled tight to the very depths of the Great Slump. The founders, after all, cannot have imagined all the means now at our disposal for promoting happiness, or its pursuit. They supposed that gold and silver were the best of all possible monies; but they were mistaken.”

To such reasoning several replies seem in order. First, so far as the U.S. case is concerned, the assertion that the gold standard stood in the way of monetary expansion is wrong. As Timberlake himself points out (p. 185), at the trough of the great monetary contraction “the Fed-Treasury gold stockpile, even with all the reserve requirements in place, was still large enough to generate nearly twice as much common money–hand-to-hand currency and bank deposits subject to check–as then existed.” What’s more the Fed had the authority to relax it’s own very hefty gold reserve requirements, which included a minimum 40 percent requirement against its outstanding notes, whenever circumstances seemed to warrant doing so. In short, the collapse of the U.S. money stock was the result, not of the Fed’s commitment to maintain the gold standard, but of it’s unwillingness to part with surplus gold when doing so might have averted panic.

Second, the authors of the Constitution never pretended that they could anticipate future developments that might make some changes in the law desirable. On the contrary: it was precisely to provide for such modifications that they included Article 5, spelling-out amendment procedures. The requirements are strict; but (as experience proves) they are hardly insurmountable. And that’s just as it ought to be if the Constitution is to remain an expression of the will of the people, or at least of a majority of them.

Finally and most importantly, to apologize for the Supreme Court’s running roughshod over the Constitution’s money clauses, as so many fans of fiat money are inclined to do, is to thumb one’s nose at the rule of law itself. It is to treat constitutions and such as mere scraps of parchment, to be caste aside the moment that numbers displayed on some lightning utility calculator indicate that a new arrangement, though patently against the law, might boost social welfare.

But it’s such thinking itself that’s really mistaken: it isn’t a question of determining which arrangements might yield the greatest utility, even supposing such a calculation to have scientific merit notwithstanding the peril it poses to particular underrepresented persons, whether redheads or creditors or others, whose Hicks-Kaldor compensation checks are likely to remain forever in the mail. It is a matter of having rules that guard against arrangements which, whatever their potential advantages, have an at least equal potential to do harm. That irredeemable paper money might prove beneficial was in fact not an argument of which the founders were unaware; Ben Franklin, for one, made it in his usual, eloquent and spirited way. But the odds were then and have remained ever since against the likelihood that such paper money would be managed responsibly. Fans of the Constitution get that. It’s sad that so many of today’s calculating economists don’t.

  • McKinney

    Nice! Changing the meanings of words does not change the law; it only proves one’s dishonesty. The greatest criminals in US history have been members of the Supreme Court. They all have broken the supreme law of the land.

    • Jule Herbert

      One of the more enjoyable facets in law school was setting there while some progressive constitutional law professor would go through the gyrations of trying to demonstrate that the decisions of the U S Supreme Court were all consistent (outside, of course, of that brief but dreaded Lochner era where the court took economic liberty seriously) and, when quilted together, consist of a seamless garment of progress and of American Exceptionalism. Needless to say, this was pretty easy stuff to shoot down, but where does it get us?

      In the great number of these cases the level of mendacity on the part of the Court was not great. Not so with the money cases! There is easy enough to see that the whole business was rigged and that only a very few members of that Court were not part of some conspiracy against the people.

  • Jule Herbert

    The hardback edition is being sold at for $25.95, rather than the $82 at other places.

    • George Selgin

      Thanks much for pointing this out, Jule: I’ve switched to the Cato link, which I looked for earlier, but evidently without looking hard enough!

  • Rick

    According to Selgin, the “nominally … at least … supreme law of the land … contains only two references to money, both of which occur within its first Article. Section 8 of that Article gives Congress the power ‘To coin Money’ and to ‘regulate the value thereof.’ Section 10 in turn declares that ‘No state shall…coin money; emit Bills of Credit; [or] make any Thing but gold and Silver Coin a Tender in payment of Debts.'”

    George, I find your disrespect and contempt for the U.S. Constitution disturbing, but FYI there are three references to “money” in Article 1, not two. You forgot the most significant one, which is contained in Section 8, Clause 2: “Congress shall have power . . . to borrow money on the credit of the United States.”

    Also, there are eight Legal Tender Cases, not three. If you had adequately studied the Legal Tender Cases, you would know that paper and electronic money are issued under the Borrowing Clause (I:8:2), not the Coinage Clause (I:8:5) (which is not to mention that the Article 1, Section 10 reference to money you mentioned has nothing to do with federal money-creation powers).

    Stated differently, one of your references to “money” in Article 1 is irrelevant (because Article 1, Section 10 only refers to pre-Civil War state money-creation powers), and you neglected to include the most relevant reference to modern federal money, which is the Borrowing Clause (I:8:2).

    • George Selgin

      Rick, you test my patience, as usual. First of all by “money” I mean (as all economists do) “generally accepted media of exchange.” The term’s casual use to mean “funds” or “wealth” etc. is another thing altogether. The word could be used in the latter looser sense a zillion times in the document, for all I know (or care). Such appearances simply aren’t inconsistent with my (perfectly correct) claim.

      The rest of your comments are also all perfectly irrelevant to anything I say, as well as being pedantic, misleading (e.g., your fatuous claim concerning the number of legal tender cases), and occasionally ludicrous–like your claim that, because Art. 1 s. 10 limits states’ powers w.r.t. money it has no bearing on the question of the constitutionality of “modern federal money”–a claim contrary to the plain language of the 10th amendment. So much for “respecting” the Constitution!

      In all these respects your remarks here resemble all too closely the vast majority of observations you supply to this forum, sorely tempting me to have you removed from it, as I am perfectly capable of doing, have done already to one other such participant, and am inclined to do again for the sake of preventing from becoming a place for you to disseminate disinformation.

      • Rick

        Law professor Robert G. Natelson, in the Harvard Journal of Law and Public Policy (2008), states in a paper entitled “Paper Money and The Original Understanding of the Coinage Clause:”

        “When used narrowly, the expression “the Legal Tender Cases” refers only to Knox v. Lee and Parker v. Davis, infra. In this Article, however, the term refers to the entire string of connected decisions. In chronological order, they are as follows: Veazie Bank v. Fenno, 75 U.S. 533, 548 (1869) (sustaining the power of Congress to issue paper money, relying primarily on longstanding practice, but reserving the question whether Congress could make such paper legal tender); Hepburn v. Griswold, 75 U.S. 603 (1869) (The Court held, 5-3, that it was not within Congress’s power to make pa- per money legal tender for a debt that had arisen before the legal tender law. The Court held that the legal tender law was not authorized by the Coinage Clause, not incidental to the debt and war powers because neither necessary nor appropriate to carry out those powers, violated the spirit of the Constitution, and, through a kind of substantive due process, violated the Fifth Amendment Due Process Clause. The dissent argued primarily that the measure was necessary, and dismissed the substan- tive due process argument on the ground that it could lead to invalidation of almost any sort of regulation.); Knox v. Lee and Parker v. Davis, 79 U.S. (12 Wall.) 457 (1871) (companion cases that together are known as the Legal Tender Cases) (overruling Hep- burn and holding, 5-4, that Congress could make Civil War paper money legal tender for debts arising both before and after the legal tender enactment); Dooley v. Smith, 80 U.S. 604 (1871) (upholding, 6-3, a tender law covering paper money, relying on the Legal Tender Cases); Railroad Co. v. Johnson, 82 U.S. 195 (1872) (upholding a legal tender law, 6-3); Maryland v. Railroad Co., 89 U.S. 105 (1874) (holding, 7-2, that to sustain a contractual requirement that a debt be paid only in gold there must be a specific term in the contract to that effect); Juilliard v. Greenman, 110 U.S. 421 (1884) (holding, 8-1, that Congress had authority to enact peacetime tender law covering reissued greenbacks).”

        My point is that to really understand what’s going on in the Legal Tender Cases, one can’t refer to two or three cases, but must consider the arguments contained in the entire string of cases.

        • George Selgin

          You dissemble, Rick, and shamefully. Your “point” in fact (as anyone can see by looking) was to try and impugn my post by making it appear as if I lacked even the most basic knowledge of the legal tender cases. But unless you yourself have been ignorant of what has always been the conventional meaning of “the legal tender cases,” you must have known perfectly well that they are traditionally considered to be three in number only. You must, in other words, have known perfectly well that you were trying to pull a fast one.

          In any event, you are quite incorrigible, and I bid you good day!

      • Rick

        ” . . . like your idiotic claim that, because Art. 1 s. 10 limits states’ powers w.r.t. money it has no bearing on the question of the constitutionality of “modern federal money”–a claim contrary to the plain language of the 10th amendment.”

        When Article 1, Section 10 declares that “no state shall . . . coin money, emit bills of credit [or] make anything but gold or silver coin a tender in payment of debt,” it means exactly that, i.e., that no state governmental entity can coin its own money, issue its own paper money, or grant legal tender status to any coined money, foreign or domestic, that is not made of silver or gold. This clause has nothing to do with federal money-creation powers.

        On the other hand, the federal powers under Article 1, Section 8, Clause 5 contain no restriction on Congress’s power to confer legal tender status, nor is there any restriction on the metal type that Congress can use “to coin money.” What is so idiotic about that? Congress can coin gold or steel if it wants to. And what has the 10th Amendment have to do with anything if Congress stays within its Section 8 powers?

        • Jule Herbert

          So, Rick, as I understand your analysis, the enumerated power of Congress “…to borrow Money on the credit of the United States” means Congress has the authority to impress forced loans on the entire population by declaring that its irredeemable paper is legal tender. By spending it into circulation by compulsion and by making it a tender for taxes, it is somehow borrowing “Money” on the credit of the United States.

          But to “borrow Money” is to receive something that is already “Money” (a common medium of exchange) and it also entails an obligation to pay this “Money” back (it having been lent on the “credit of the United States”). Greenbacks don’t cut it as “borrowing”; nor do other forced “loans.”

          • George Selgin


        • George Selgin

          “On the other hand, the federal powers under Article 1, Section 8, Clause 5 contain no restriction on Congress’s power to confer legal tender status, nor is there any restriction on the metal type that Congress can use “to coin money.” What is so idiotic about that? Congress can coin gold or steel if it wants to. And what has the 10th Amendment have to do with anything if Congress stays within its Section 8 powers?”

          To answer the last question: everything. For its purpose is none other than to prevent the very sort of misreading of the which you here are so flagrantly guilty, viz, that of treating the Convention’s failure to spell-out every variety of “restriction” it wished to place upon Congress’s powers as signifying that it in fact intended to grant Congress all the powers not expressly withheld.

        • Pete

          Rick your knowledge of the Constitution is just horrible. The Constitution is a set of powers granted to the Federal government, where all other possible and conceivable powers are left with the people of the states.

          It is a reversal of Constitutional law to assert that powers not expressly granted to the Feds, are somehow powers implicitly held by the Feds. That if the Constitution does not explicitly forbid the Feds from enforcing power X, that this means the Feds have a Constitutionally granted right to enforce power X.

          Apparently you haven’t read the 10th amendment, which states:

          “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.”

          Since the power to impose a monopoly currency system over the whole country is NOT expressly enumerated to the Feds in the Constitution, it means the Feds do not have Constitutional authority to do it.

  • Mike Sproul

    “But the odds were then and have remained ever since against the likelihood that (irredeemable) paper money would be managed responsibly.”

    Unfortunately, the odds are no better that redeemable money will be managed responsibly. Suppose that some issuer (public or private) irresponsibly issues 20% more paper dollars than its assets can cover, thus becoming insolvent. If that issuer faithfully maintains convertibility at an unaffordable rate (say 1 oz/$), then a bank run will drain its assets, while also draining the town of its paper dollars. The unfortunate bank customers who found themselves last in line at the bank will find their dollars worthless.

    By comparison, suppose that our irresponsible bank suspended convertibility. The public will simply value each dollar at 20% less than before. The public’s real balances will also drop by 20%, but this can be fixed if the bank issues 20% more dollars through ordinary loans or open market operations.

    Comparing the two options, suspension seems less bad than maintaining convertibility. The underlying problem of insolvency is not fixed by insisting on convertibility.

    While irredeemable paper currency has certainly had its troubles, its story is as much the story of its use as of its abuse.

    • Jule Herbert

      In fact there no way to predict the residual value of a credit money unit, where the right to redeem it for Money proper has been suspended. For, example, during the 1861 war, the notes of the CSA (in most if not all cases) declared them redeemable in specie five years after an armistice had been reached with the USA (thus it was not actually fiat money, a debt was acknowledged however tenuous were the chances of collection).

      So the exchange value of these notes would be a combination of at least four factors: their just prior exchange value, the chances that the South would successfully prosecute the war to a favorable conclusion, the willingness or ability of the CSA to keep its promises five years thereafter, and, very importantly, the chance that the CSA would get carried away by this scam and keep printing notes without limitation. This last factor is not accounted for in Sproul’s scenario. Any historical example of a one-time injection of liquidity after a suspension is unknown to this writer.

  • Mike Sproul

    I looked through some old notes of mine, and found references to injections of liquidity on p. 39 of Henry Thornton’s “Paper Credit”, p. 99 of Bagehot’s “Lombard Street”, and p. 67 of Gilbart’s “History of Banking”. They generally happened either during a suspension period, or during a banking panic where the lines at the bank were long enough that they might as well have suspended.

    From Gilbart:

    ” The Bank of England issued one-pound notes at that period. Was that done to protect its remaining treasure ?
    Decidedly ; and it worked wonders, and it was by great good luck that we had the means of doing it : because one
    box containing a quantity of one-pound notes had been over- looked, and they were forthcoming at the lucky moment.
    ” Had there been no foresight in the preparation of these
    one-pound notes ? None whatever, I solemnly declare.
    ” Do you think that issuing of the one-pound notes did
    avert a complete drain ? As far as my judgment goes, it saved the credit of the country.”

    As for the “last factor” you mentioned: Naturally, if a government issues more paper money than its assets can cover, that paper money will lose value, just like stocks and bonds lose value when they outrun their backing.

    • Jule Herbert

      Let’s just say that the Bank of England did not cut out its propensity to keep adding “liquidity.” Banking “panics” occur for a reason. And, of course, Great Britain has long since abandoned any sacred, solemn promise of redemption. The pound has long since lost most of its historic value.

  • edificator1

    It seems to me, not being a lawyer, but nevertheless endowed with rational abilities, that “We the People,” which begins the Constitution, that everything assumed a right of the people in the IXth Amendment is available to Congress, even if it is not
    enumerated in the Constitution. That means if there is a prior use in history of certain powers by the people, those powers are implicitly granted to Congress for the People. For example, tort law goes all the way back to Hammurabi and Moses. The people have to remedy harm that some do to others. So, Federal law can remedy torts, even though it is usually left to states. In the present case the interpretation of “coin money” in Art. 1, Sec. 8, “money” precedes the Constitution. So, what does it mean? Is it not true that there were several different conceptions of “money” among the founding fathers? Ben Franklin held a fiat money conception. Those who felt money was confined to metalic money had another conception. But those holding the fiat money conception could still have voted to accept the “coin money” power as stated in the Constitution as simply a specification of one kind of money that the Congress was empowered to create without excluding other conceptions of money. And evidently the cases cited here suggest that the Supreme Court was influenced by these in expanding the conception of what the Congress could do in the form of creating money beyond the literal view some hold here. So, what is ‘money’? I would hold that the essence of money is that it is a token of debt obligations in units of account in exchanges between parties of goods and services in the economy. That allows us to take into consideration the way debts were recorded in England for at least 500 years in the form of wooden sticks on which were carved units of debt, and the sticks split lengthwise along the grain, so that later the holder could return to the lender
    the stick and have the debt value redeemed when the sticks were matched grainwise. In other words money is just a representation of a debt obligation in some quantitative form. Since the people of history have been using money in various ways, this would be a power granted to them, just like tort law is something all peoples have. The values associated with the units are negotiated between the parties, and may vary depending on the goods and services. (Should chief executives of corporations earn 100 times or more than the lowest paid worker in the corporation? Should baseball players be given contracts for $125 million for 8 years?).
    So, I think fiat money, which is the most general and essential form of money is allowed under the Constitution, and the Supreme Court over the years has been influenced by that.
    So, what say you, everybody?

    • George Selgin

      Where to begin? The “reserved powers” clause is called that by most Constitutional scholars for a reason; interpreted your way it would obviously render the whole document otiose. (The Constitution might in that case simply read in its entirety: “Congress can do whatever the heck it wants to”!) And though you may think fiat money the cat’s meow, that was not the opinion that informed the document, or that led to its ratification. Finally, the “debt” theory of money, though de rigueur of late, doesn’t pass muster: in all save the most primitive economies, trade among (largely unacquainted) persons and banks cannot solely be conducted using IOUs; instead there must be resort to “final” means of settlement. Commodity monies fit that bill. And fiat money itself is not “token” or IOU money in any meaningful sense: it is also a final means of payment.

  • edificator1

    I’d like to add, as a second thought, that the Constitution’s Art. 1 sec. 8 does not say that “Congress shall have the power to only coin Money”. It says simply that it shall have the power to coin Money, like the Treasury is allowed to “coin money” today. An
    interpretation then is that Money is a broader concept than coins, encompassing many kinds of money, among them are coin money. And together with preventing the states from coining money, that left the governmental coining of money exclusively with the Federal government. The power to create all kinds of money is implicit, grounded in the very nature of monetary societies as powers of the people.

    Do not forget that during the 19th Century going into the 20th banks were creating money all the time in bank notes. Only after
    the establishment of the Federal Reserve was Federal Reserve Notes used exclusively as money.