By Robert S. Getman

[Robert Getman is an attorney practicing  in New York City.]

In centuries past, when they feared that their subjects would not bear further taxation, emperors and kings resorted to clipping some of the precious metal from the edges of coins they issued, or, more slyly, to diluting the precious metal content of the coins' alloy.I Modern governments, more devious yet, have replaced royal coin-clipping and debasement with printing-press financing: rather than openly to impose unpopular taxes, they have blithely created increasing quantities of paper money and credit without regard for the resulting shrinkage of money's value. By "legal tender" laws that force citizens to accept freshly-printed paper money of continually watered-down value in payment for goods and services, our government raises revenues by stealth. And the complexity, indirectness, and relative invisibility of this taxation-by-inflation has made the government's spending activities unaccountable to the governed.

Such corruption of the currency is not new to America. The early years of the original colonies and of the nation witnessed several of the modern abuses, if in more primitive form.' The once popular expression, "not worth a Continental" reflected the widespread contempt for the paper dollar of the Continental Congress. The Founding Fathers reacted to these fiscal frauds by doing their utmost to insure that specie (gold and silver) would be the only constitutional legal tender. An examination of the general historical background and of the proceedings at the Constitutional Convention shows that the government's practice of issuing irredeemable paper as legal tender cannot be justified under the Constitution.

The Common Law Heritage

Money is property, A basic question that the law has always faced is: whose property-that of the government or that of the governed? Under the traditional legal precedents of the common law, this issue was framed in terms of the power of the sovereign. By the eighteenth century, the common law had progressed to the point at which it regarded money as private property whose debasement was beyond the rightful power of the sovereign. That was the view-of legal authorities such as Coke, Blackstone whose Commentaries were the source of the phrase in the U.S. Constitution delineating Congress' money powers-and John Locke, a politicoeconomic mentor of our Constitution's framers. At common law, the rights of the governed limited the sovereign's power over money (not vice versa); recognition of this limitation is essential to an understanding of what ultimately became Congress' constitutional monetary powers. For, as the Supreme Court has often observed, the Constitution "must be interpreted in the Fight of the common law ... and [can] not be understood without reference to the common law. 113

The Pre-Constitutional Period

English colonial policy was notably defective in its failure to supply the colonies with a sound currency. The consequent need for a currency was often satisfied by paper-"bills of credit" (similar to promissory notes) were issued as legal tender. When such issues consisted of irredeemable fiat currency, rather than of notes redeemable in specie, the currency usually depreciated. Frequently, the depreciation was so severe that " scaling legislation" had to be enacted to redefine the money's legal value in contracts. Nine colonies printed such paper bills, originally intended to be legal tender only as against their own governments. Ensuing depreciation of these bills generated a host of lawsuits when the bills were tendered in satisfaction of private obligations. One suit was appealed all the way to the Privy Council in England, where a leading jurist of the day, Lord Mansfield, confessed that he was "at a loss" to fix a just recovery and decreed that the depreciation should be borne equally by the parties involved.' Such monetary chaos eventually diminished somewhat when the English Parliament prohibited paper bills of credit from being declared legal tender.

American Independence under the Articles of Confederation, far from eliminating the monetary chaos, worsened it. The Continental Congress and the States used their powers to issue bills of credit as "the principal means of financing the War.... [Congress] used the authority up to the hilt, denouncing anyone who refused to take its continental dollar 'as enemy of the liberties of the United States,' and requested the States ... to make its paper a legal tender."'

At the Revolutionary War's end, Congress offered to redeem the "Continentals" at only one-fortieth of par, even though the twelfth Article of Confederation had solemnly pledged they would be paid in full. Few were redeemed, and most "quietly died in the hands of their possessors."' State issues scarcely fared better. George Washington's predicament was typical. General Washington, "had refused compensation for his Revolutionary [War] service, then [came] home to have his mortgages paid off in Virginia paper worth ten cents on the dollar."'

One commentator conservatively remarked: "[We] can sum up the preconstitutional monetary history of the United States as an experience which contained far more failures than successes and which wound up with hyperinflation. Trade was at a standstill."' James Madison was far less circumspect, excoriating pre-Constitutional paper money "as a pestilence which inflicted nothing but destruction."' Many other of the 'framers brought similar beliefs to the Constitutional Convention.

The Constitutional Convention

Monetary discord beset the Constitutional Convention even before it had begun: Rhode Island, a paper-money stronghold, "scented monetary reform in the air and refused to participate," " boycotting the entire Convention. The Convention's keynote speaker, Edmund Randolph, "inveighed against 'the havoc of paper money' in his indictment of the Articles of Confederation."'' Once the Convention was under way, proposals that the Federal government be given the power to coin money and to fix its value and that both the Federal and State governments be vested with authority to emit bills of credit triggered heated debate over the appropriate limits of governmental monetary power.

A preliminary draft of the Constitution, paraphrasing the Articles of Confederation, would have given Congress the power: "To borrow money and emit bills on the credit of the United States."" (At that time, "bills of credit" was synonymous with paper money.) An excerpt from James Madison's notes reveals that "Mr. Govr. Morris moved to strike out'and emit bills on the credit of the U. States'-If the United States had credit such bills would be unnecessary; if they had not, unjust& useless."',' James Madison suggested, in response, that it would suffice to prohibit making such bills legal tender, which would have removed the element of coercion.

Some of the delegates expressed concern that withdrawal from Congress of the power to issue paper money could be harmful to the nation in times of peril. According to Madison, Colonel Mason "Though he had a mortal hatred to paper money, yet as he could not foresee all emergences, he was unwilling to tie the hands of the Legislature. Edmund Randolph expressed similar reservations.

But the great majority of the delegates thought that paper money itself was a peril and expressed vehement opposition to legal tender paper:

Mr. Elseworth thought this a favorable moment to shut and bar the door agains t paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America.... Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good....

Mr. Butler remarked that paper was a legal tender in no Country in Europe. He was urgent for disarming the Government of such a power....

Mr. Read, thought the words, if not struck out, would be as alarming as the mark of the Beast of Revelations.

Mr. Langdon had rather reject the whole [Constitution] than retain the three words ("and emit bills"). I I

The phrase "and emit bills" finally was struck from the document because the overwhelming majority of the framers were unalterably opposed to paper legal tender. As one delegate later somewhat bitterly reemphasized the framers' intent:

A majority of the convention, being wise beyond every event, and being willing to risque any political evil rather than admit the idea of a paper emission, in any possible case, refused to trust this authority ... and they erased that clause from the system.' I

The overwhelming majority's antipathy to non-metallic legal tender was further manifested by the Convention's stafice on State monetary powers. When the Convention considered the list of powers to be forbidden to the States, it was pointed out that no clause absolu ' tely prohibited the States from issuing paper money. Madison's notes show that:

Mr. Wilson and Mr. Sherman moved to insert, after the words 'coin money' the words "nor emit bills of credit, nor make anything but gold and silver a tender in payment of debts," [thus] making these prohibitions absolute. . . . Mr. Sherman thought this a favorable crisis for crushing paper money."

Because of the majority's fear of both paper-money agitators and paper money itself, the motion to ban bills carried (8-2) and the motion to ban any legal tender but gold and silver carried unanimously. Luther Martin, an ardent advocate of paper money, confirmed that "the Convention was so smitten with the paper money dread, that they insisted that the prohibition should be absolute.""

Although the Federal government was not expressly prohibited from issuing legal tender paper, as were the State governments, such an express prohibition would have been superfluous. At that time, the States had powers and constitutions predating the United States Constitution; the Federal charter granted the States no new powers, but merely imposed limitations upon pre-existing powers. The Federal government, on the other hand, derived all of its powers from the Constitution. Under the American system, government was to have no powers other than those expressly granted it. And the power to make paper into legal tender was neither expressed in nor could it be inferred from the Congress' enumerated monetary powers: Article 1, section 8 of the Constitution gave Congress the power "to coin Money, regulate the Value thereof, and of foreign Coin . . ."

As Daniel Webster observed:

Most unquestionably there is no legal tender, and there can be no legal tender in this country, under the authority of this government or any other, but gold and silver-either the coinage of our own mints or of foreign coins, at rates regulated by Congress. This is a constitutional principle perfectly plain, and of the very highest importance. The States are expressly prohibited from making anything but gold and silver a tender in payment of debts, and, although no such express prohibition is applied to Congress, yet, as Congress has no power granted to it in this respect but to coin money, and to regulate the value of foreign coins, it clearly has no power to substitute paper, or anything else, for coin as a tender in payment of debts and in discharge of contracts. 111

Oliver Wendell Holmes, concurring with Webster's view, observed that the term "coin" must be taken literally:

The power to "coin money" means to strike off metallic medals (coin), and to make those medals legal tender (money); the Constitution says expressly that Congress shall have power to make metallic legal tender, how can it be taken to say by implication that Congres& shall have power to make paper money legal tender?10

Nor could the power to "regulate9 ' the value of money be construed to have given Congress the power to create legal tender paper. Congress was to coin money and to regulate the value thereof-only the relative values of coined money were to be regulated. This construction of the power to regulate comports with that used by Adam Smith, a major economic guide of the framers, who understood the term "regulate" to mean the power to fix ratios of value between various types of coin .21 Moreover, the parallel grant of power to regulate the value of foreign coin, contained within the clause-conferring the power over domestic coin, bolsters this construction of the word "regulate." Clearly, Congress could not regulate the kind of money that foreign governments might issue, but could establish only the ratio of value between foreign and domestic coinage.

Most importantly, a constitutional clause cannot be read rationally while ignoring its purpose. As one Chief Justice of the Supreme Court wrote, "the power of coining money and regulating its value was delegated to the Congress by the Constitution for the very purpose, as assigned by the framers of that instrument, of creating and preserving the uniformity of such a standard of value."" And gold coinage was indispensable to that goal; as another Justice declared: "The whole [of the Constitution's monetary provisions] was intended to exclude everything from use, as a circulating medium, except gold and silver ... that the dollar may represent property and not the shadow of it.""

The Constitution's framers had grasped the common law's teachings that money is private property and is not to be debased by the government. And the ravages wrought by Revolutionary War paper money had painfully reminded them of the urgent need for a sound monetary system. Consequently, the framers forged a clear constitutional mandate for a metallic money, of gold and silver.

Tragically, even a constitutional mandate can be flouted. And this one was. The enormous cost of the Civil War occasioned unprecedented coercive measures by the government: to meet the war's cost in lives, the government forced men into the army with the first draft law; to meet the cost in money, the government levied the first direct Federal tax on their incomes and imposed an indirect tax through the depreciation of the

'greenbacks, " the Republic's first paper legal tender. After the war, these greenbacks were eventually redeemed for gold, despite repeated agitation for paper money.

The gold standard, though progressively undercut during the later nineteenth and early twentieth centuries, survived up until the first term of Franklin Roosevelt. His "New Deal," in a whirlwind of poorly considered 46emergency" measures, outlawed private ownership of gold, abolished the legal right to "peg" contracts to gold's value, and devalued the dollar. Not until Congress passed two Acts in the 1970's did Americans regain their right to own gold and to base contracts upon its value. These statutes are the first, halting steps to regain the sound-money legacy of the Founding Fathers. But, as Henry Hazlitt observed:

the gold standard is not an isolated gadget, but an integral part of a system of free enterprise and limited government, of good faith and law, of promise-keeping and the sanctity of contract. It is this system-and the confidence to which it gave rise-that has been destroyed. It is this system that must be slowly and painfully rebuilt."'


This article is an adaptation of the first part of "The Right to Use Gold Clauses in Contracts," by Robert S. Getman, Brooklyn Law Review (Winter, 1976); used by permission.

'See, Eder, "The Gold Clause Cases in the Light of History," Georgetown Law Journal, vol. 23 (1935). See, A. Hepburn, A History of Currency in the United States (1924); and, Folwell, "Evolution in Paper Money in the United States," Minnesota Law Review, vol. 8 (1924). 'United States v. Wong Kim Ark (1898), United States Reports, vol. 169, p. 654. See also, Baldwin v. New York (1970), United States Reports, vol. 399, p. 124. 413earing v. Parker (1760), Pennsylvania Reports, vol. 4, p. 23. 'G. Dunne, Monetary Decisions of the Supreme Court (1960), p. 7. 'Legal Tender Cases (1871), United States Reports, vol. 79, p. 622. 'Dunne, op. cit., p. 11. 'Ibid., p. 10. 'The Federalist, No. 44. "Dunne, op. cit., p. 11. I "'Documents Illustrative of the Formation of the Union of American States," H. R. Doc. No. 398, 69th Cong., Ist Sess. (1927), p. 115. "Cited in James Madison, Notes ofDebates in the Federal Convention of 1787, ed. by Koch (1969), p. 389. "Ibid., pp. 470-71. 141bid. I 'Ibid., p. 47 1. 1 'Folwell, op. cit., pp. 563-64. "Madison, op. cit., p. 541. ' 'Folwell, op. cit., pp. 563-64. "Legal Tender Cases, op. cit., p. 659. 2*Quoted in C. Fairman, History of the Supreme Court of the United States 1864-88 (197 1), vol. 6, p. 715 & n. 118. 11 Adam Smith, The Wealth of Nations, ch. 5; cf. The Federalist, No. 42. "United States v. Marigold (1850), United States Reports, vol. 50, p. 5 67. " C raig v. M issouri (18 30), Un ited States Reports, vol. 7, pp. 442-43. "Henry Hazlitt, "Twenty-Three-Cent Dollar, What Four Decades of Inflation Have Wrought," Barron's, Oct. 6, 1975, p. 7.