In what appears to be a seamless transaction, one takes a rectangular piece of paper from a wallet, hands it to a fellow at a newsstand and he graciously returns a paper filled with ideas.
Similarly, one puts these rectangular papers in a machine that seemingly eats them and out comes a card that allows one to travel on an underground train.
These transactions are taken for granted based on the confidence that those rectangular pieces of paper have value that someone embraces.
However, most Americans know very little about these rectangular pieces of paper aka “dollar bills,” and the implications of legal tender as one of the most important issues at the nation’s founding.
Moreover, irredeemable legal tender paper-ticket-electronic dollars are depreciating. You need more of them today to buy the same quantity of goods and services purchased yesterday. And as newscasters are continually asserting, the legal tender dollar is losing value against gold.
For historians who know something about the Constitution, one question invariably emerges: Why aren’t we using gold and silver coins as money as the Constitution requires? In addition, how is it that U.S. Code, Title 31 USC 5103 establishes coins and currency, including Federal Reserve Notes, as legal tender?
The experience of the American founders with legal tender was so dreadful that Thomas Paine, the author of Common Sense, wrote that any member [of Congress] who proposed legal tender should be put to death!
That also explains why Article I Section 10 of the Constitution proclaims: “No State shall . . . make any Thing but gold and silver Coin a Tender in Payment of Debts”, and there is no legal tender power for the General government.
Until August 1861, it was inconceivable that the U.S. Government would issue paper money. Because of difficulty in financing the Civil War, greenbacks, which were declared legal tender in 1862, were issued while Salmon Chase was Secretary of the Treasury.
This resulted in a great deal of litigation. After the Civil War, Chase was then the Chief Justice of the Supreme Court, and the legal tender litigation percolated up to him to help decide whether legal tender was permitted by the Constitution. There were three cases.
The first case, Hepburn v. Griswold, was decided by a vote of four to three, with Chase in the majority. The Court declared legal tender unconstitutional. Although, as Secretary of the Treasury he played a major role in issuing legal tender, Chief Justice Chase said it was issued out of necessity, as a war measure. But since the Civil War was over, so was legal tender.
There were two vacancies on the Court, and there was a lobbying effort to pack the Court with two appointees who would vote in favor of legal tender in a second case, Knox v. Lee. And that’s what happened.
This was also the first time that a Supreme Court case was in part decided not on the Constitution, nor on the legislative history, but on the laws of other countries, i.e., other countries may issue legal tender, so the United States may do so, too.
Now in the minority in this second case, and in a scathing dissent, Chase wrote: “The legal tender quality [of money] is only valuable for the purposes of dishonesty.” In other words, whenever there is a monetary system that incorporates legal tender, it is dishonest! No amount of regulation will cure that defect.
The third case, Julliard v. Greenman, reaffirmed Knox to include redeemable legal tender United States Notes reissued in time of peace.
The prime mover for removing legal tender at the end of the 19th century was the American labor movement, which from inception was in favor of gold and was opposed to paper money.
One of labor’s tag lines was that labor wanted money that didn’t depreciate at home or abroad. The American Federationist magazine asked poignantly: If our money is good money and not bogus, why do we need legal tender laws to force people to use it? And, if our money is not good and is bogus, why should people be forced to use it?
During the early part of the 20th century, Federal Reserve notes, by law, were to be redeemable for “lawful money.” Federal Reserve Notes were accepted as if they were money, but they were in fact only promissory notes to pay money. That is not that same thing.
On March 5, 1933 President Franklin D. Roosevelt froze all transactions in gold. Many believed that this was just a temporary measure. And indeed Roosevelt reassured fellow Americans one week later, in his March 12 Fireside Chat that our money would not be fiat.
Remarkably, the Federal Reserve notes that were promises to pay gold on demand defaulted, and the broken promises to pay money became the money. It is astonishing that something so prima facie dishonest could have become legitimatized and that people continue to use dishonored promises to pay money as if they are money. The explanation, of course, is that legal tender laws compel them to do so.
Only by eliminating legal tender will Americans be able to use real money – gold and/or silver coins – as the medium of exchange, especially for promises of future payment like annuities, pensions, savings, etc.
Without gold and/or silver coins-as-money, as recent events have painfully shown, millions will lose their pensions and savings to the process of inexorable depreciation. According to government records, the legal tender irredeemable paper-ticket-electronic “dollar,” which bears no relationship to the dollar mentioned in our Constitution, has lost more than 95% of its purchasing power since the Federal Reserve was formed.
Given the massive ongoing fiscal deficits in the U.S., as well as all over the planet, the unending depreciation of legal tender irredeemable paper-ticket-electronic money is assured. Jeffrey Garten, former dean of the Yale Business School, author, and former high official in the Clinton Administration, recently wrote in the Financial Times about this dilemma:
“Washington will therefore have little choice but to take the time-honoured course for big-time debtors: print more dollars, devalue the currency and service debt in ever cheaper greenbacks. In other words, the U.S. will have to camouflage a slow-motion default because politically it is the easiest way out.”
As we see it, eliminating legal tender would protect ordinary people by giving them a secure way to save for old age and infirmities. Promises of future payment denominated in gold and/or silver coins would give them something to count on.
Another helpful reform would be to eliminate capital gains and sales taxes on gold and silver coins, mindful that, according to Article I Section 10 of our Constitution, they are the only medium authorized for use as money.
For example, our government now produces one-ounce gold coins called Gold Eagles. If one’s savings are in these coins, why should one have to pay a capital gains tax when they are exchanged for depreciating legal tender irredeemable paper-ticket-electronic dollars?
In other words, as the government continues to depreciate dollars, why shouldn’t ordinary people be able to protect themselves from losing their savings and promises of future payment?
Herbert London is the president of the Hudson Institute. Lawrence Parks is executive director of the Foundation for the Advancement of Monetary Education.
