12.17.2012

The Legal Tender Cases - Part I

A while back, I wrote about a pending academic research project on digital currencies I was embarking upon with Jeremiah Newhall, a good friend of the site. Below you will find a draft version of a section of our paper addressing the legal context under which Congress has been granted power over all currencies in the US. Part of the reason I am posting this is to solicit feedback, so please feel free to submit your thoughts in the comments section below, and please bear with us on the citations, the poor grammar, odd formatting  etc. etc.

Given the national controversy over the Congress’s passing of the Legal Tender Act, it was perhaps inevitable that the Supreme Court would be the ultimate arbiter of what, exactly could be classified as legal tender in the US. Settling the point in a series of cases familiar to legal scholars as the Legal Tender Cases, the Supreme Court made it clear that Congressional authority over the status of ‘money’ in the US is absolute.

However, the classification of paper money as legal tender was far from a foregone conclusion initially. Indeed, in the first of the Legal Tender Cases, the Court decided entirely the opposite as the initial attempt of Congress to declare paper money to be legal tender was voided by the Court in Hepburn[i]. While the Court there did affirm that Congress had the power to print paper currency, it noted that it could do so only for the purpose of creating a medium of exchange and not as a legal tender[ii]. In other words, and in a decision that reflected a pre-Legal Tender Act conception of the concept of legal tender, the Court in Hepburn declared that the pieces of paper Congress was printing, despite congressional intent, served only as promises to pay gold or silver coins (i.e. legal tender) at some later time.

Not only were greenbacks not a de jure legal tender under this analysis (as Congress intended), they were arguably not even a de facto legal tender through practice as an unwilling party could reject accepting them as a right.

This created clear problems from the perspective of a Congress which had just tried to legislate the exact opposite outcome. The government had incurred large debts to finance the Civil War, and if it had remained the case that creditors would have no obligation to accept payment in greenbacks, if gold coins on demand had become the only accepted means of payment to private creditors, it is a strong possibility that the US government would have had to default on its debts[iii] [iv].

However, those who backed a coins-only legal tender regime didn’t have long to gloat after Hepburn, and the national problems identified above were solved by the Court not too long after the Court created them[v]. Indeed it was less than two years before two new appointments to the Court rebalanced it and were able to turn the proposition that only coins were legal tender entirely on its head[vi]. However, before that came a case which would prove critical to later decisions.

In [1] Veazie Bank v. Fenno, 75 U.S. 533, 548 (1869), the Court, while not going so far as to say that paper money was legal tender, did take a critical step in that direction by recognizing that the Congress had the right to make debts receivable in bills and also to make those bills a consistent, uniform means of measure (something opponents would claim was solely the realm of specie):
 
"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[vii][viii]."


[i] For those unfamiliar with the case, the facts follow. Griswold loaned Hepburn money under a promissory note that required payment in “dollars.” Hepburn was past due, and interest was accruing at the point that Congress declared treasury notes to be legal tender. Relying upon this, Hepburn tendered payment of just over $12,000 in treasury notes. As a result, Griswold sued, him claim being that he was entitled to payment in dollar coins. After Griswold won in the Kentucky courts, Hepburn appealed to the Supreme Court. Griswold argued that changing the definition of money amounted to a taking under the Fifth Amendment; dollars had been worth more when they were coins, rather than the paper money that was rapidly deflating in value. The Court agreed with Griswold. It held that Congress could not declare anything to be legal tender for private debts except for metal coins.
[ii] With the critical distinctions between mere currency and legal tender discussed at length above
[iii] While this was, of course, disappointing from the perspective of creditors, Justice Bradley’s concurrence in Knox pointed out that the union was (at least in his opinion) more important than money:
But the creditor interest will lose some of its gold! Is gold the one thing needful? Is it worse for the creditor to lose a little by depreciation than everything by the bankruptcy [sic] of his debtor? Nay, is it worse than to lose everything by the subversion of the government? What is it that protects him in the accumulation and possession of his wealth? Is it not the government and its laws? Legal Tender Cases, 79 U.S. 457, 564 (1870) (Bradley, J. concurring).
 
[iv] While interesting for the purposes of this paper, it is also interesting from a currency history perspective for reasons which retain their relevance in the present day. One of the factors in the great credit rating the US has historically enjoyed, which has facilitated everything from the dollar becoming the preferred global medium of exchange to the ability of the US to issue debt at low rates to finance downturns, social programs and wars, was the lack of default on the historic balance sheet of the nation. Had the US defaulted in the 1860’s, it is very likely that the 1900’s would have failed to materialize as the so-called ‘American Century’. There are some who might snigger and mutter under their breath about butterfly effects, correlating this logic to that of any number of academic-world boys who cried wolf. C’est la vie.
[v] Perhaps the Court didn’t technically create the initial problem of Congress not being able to print money as legal tender at will. However, to the extent that Congress had identified the lack of an ability to do so as a problem, and then legislated a solution to that problem, the Court certainly didn’t oblige.
[vi] Mrs. Lee was a Pennsylvania citizen who owned sheep in Texas during the Civil War; the Confederacy confiscated her sheep as she was an “enemy alien.” She sued and won, but there was a dispute as to the value of the sheep. Would the value be measured in greenbacks (the U.S. Treasury Notes) or in specie, or coin, dollars? Knox argued that the sale of the sheep to him by the Confederate government was valid, but the Court had held in Texas v. White that acts passed by the Confederate government were invalid. He also argued that the judge erred in letting the jury consider the difference in value between paper money and coined money, because the Legal Tender Acts had made them equal in value as a matter of law.
[vii] Veazie Bank v. Fenno, 75 U.S. 533, 548 (1869).
 
[viii] Despite this, the reliance upon Veazie was somewhat disingenuous as the critical reconstitution of the Court to its more government (at least in the context of the current legal tender fight) friendly version had already occurred by the time Veazie was decided. Therefore, the new justices were essentially relying upon themselves to overturn that which had been decided just one year previously. Nonetheless, these political machinations didn’t, of course, reduce the Knox Court’s power to declare paper money as legal tender in the US.
 

Jeremiah Newhall is a graduate of The George Washington University Law School and currently serves as a law clerk in Chicago. He can be reached via the miracle of email. Joshua Sturtevant is also a GW Law grad, and currently serves as an in-house legal fellow at a renewable energy financing and development firm.

3 comments:

  1. An excellent piece. Looking forward to Part II.

    ReplyDelete
  2. Thanks very much for the feedback. Part II is up now, and there will be two more installments through the week.

    Best,
    Josh

    ReplyDelete
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