Monetary Power

views updated

MONETARY POWER

The monetary power of Congress flows from one express constitutional grant and a melange of others, cemented by the necessary and proper clause. The enumerated power deals with coin and has never been significant in American constitutional law. Congress's more important powers over the money supply—to charter banks and endow them with the right to issue circulating notes, to emit bills of credit, and to make government paper a legal tender—are only implied. From the administration of george washington to the age of franklin d. roosevelt, few questions were debated with more intensity than the nature and scope of Congress's implied powers over the currency. At no point, however, did the Supreme Court offer sustained resistance to the extension of Congress's authority. In mcculloch v. maryland (1819), the lodestar case on the monetary power, the marshall court upheld incorporation of a bank as an appropriate means for executing "the great powers, to lay and collect taxes; to borrow money; to regulate commerce; to declare and conduct a war; and to raise and support armies and navies." The hughes court invoked the same undifferentiated list of enumerated powers, reinforced by the necessary and proper clause, in the gold clause cases (1935), where the last potential limitation on Congress's monetary power was swept away.

Two factors account for the Court's acquiescence. The ambiguous legacy of the constitutional convention of 1787 was especially important. Monetary questions loomed large in the political history of the Confederation era, and some of the Founders, perhaps a majority, wanted to constitutionalize a settlement. They acted decisively to curtail state power. Article I, section 10, provides that "no state shall … coin money; emit bills of credit; [or] make anything but gold and silver coin a tender in payment of debts." But the Founders were more circumspect when dealing with the scope of national power. james madison's motion to vest Congress with a general power "to grant charters of incorporation" was not adopted because, as rufus king explained, the bank question might divide the states "into parties" and impede ratification. james wilson suggested that the power to incorporate a bank was implied anyway; but george mason, the only other delegate to speak on the matter, disagreed.

Conflicting conceptions of implied powers also materialized without being resolved in the much longer debate on Congress's authority to augment the money supply with government paper. The original draft of the Constitution, as reported to the convention by the Committee of Detail, empowered Congress "to borrow money and emit bills on the credit of the United States." When this section was reached in debate, gouverneur morris moved to strike out the emission clause; the motion was ultimately carried by a vote of nine states to two. Yet there was no meeting of minds on the implications of Morris's motion before the roll call. Wilson, Mason, and virtually everyone else who spoke assumed that striking out the emission power was equivalent to prohibiting congressional exercise of such a power. Morris said that "the monied interest will oppose the plan of government if paper emissions be not prohibited." But nathaniel gorham remarked that he was for "striking out, without inserting any prohibition." And that was precisely what happened. Gorham neither mentioned the concept of implied powers nor flatly stated that eliminating the power to emit was by no means equivalent to prohibiting it. His remarks nonetheless suggest that at least some of the Founders assumed, despite Morris's protestations to the contrary, that to vote for his motion was to leave the paper money question to be settled as problems arose.

The sequence of federal legislation on banking and the currency was the second factor that shaped the growth of Congress's monetary power in constitutional law. Once the Constitution had been ratified, Congress was required to assert implied powers either to incorporate a bank or to issue paper money. Sanctioned exercise of one power could be expected to provide at least a modicum of constitutional authority for assertion of the other. Yet the Founders' distrust of government paper was so intense that it was possible for a skillful statesman to obscure the close constitutional relationship between the powers to incorporate banks and emit paper money by treating the former as a conservative policy alternative to the latter. alexander hamilton was such a statesman.

In his Report on the National Bank (1790) Hamilton stressed the "material differences between a paper currency, issued by the mere authority of Government, and one issued by a Bank, Payable in coin." The proposed national bank, he said, would serve as a financial arm of the government and a ready lender to the Treasury; its capital stock, consisting primarily of public securities, would be monetized in the form of bank notes redeemable in specie, thereby multiplying the nation's active capital and stimulating trade. Paper money, in contrast, was just too "seducing and dangerous an expedient," for "there is almost a moral certainty of its becoming mischievous." Much of the constitutional theory he mustered later to justify Congress's power to incorporate a bank was equally applicable to its power to issue paper money. But it is unlikely that the congressmen who approved the bank of the united states act or President Washington, who signed the bill despite forceful constitutional arguments against it by thomas jefferson and others, would have sanctioned Hamilton's broad construction of the government's implied powers in order to facilitate emissions of paper money. In view of john marshall's language regarding the sanctity of contracts in ogden v. saunders (1827), it is equally significant the McCulloch involved national bank notes rather than depreciated government paper.

Between 1812 and 1815 there occurred another series of events with implications almost as great as McCulloch for the development of Congress's monetary power. The First Bank's charter expired in 1811; its successor was not created until 1816. When the War of 1812 began, then, the government had to finance its operations without the aid of a national banking system. On four separate occasions Congress followed President Madison's recommendation and authorized the emission of Treasury notes, fundable into government bonds and receivable for all duties and taxes owed to the government. Every piece of paper issued in 1812, 1813, and 1814 had a large denomination, carried a fixed term, and bore interest. But the 1815 issue was of bearer notes without interest, in denominations from three, five, and ten dollars upward, receivable in payments to the United States without time limit. Debate in Congress suggests that the notes were fully expected to circulate as currency. Nobody objected to them on constitutional grounds and all were retired soon after the war. Nevertheless, the 1815 Treasury notes provided what John Jay Knox later called "a fatal precedent."

Knox's was a shrewd observation. The Madison administration's Treasury notes were indistinguishable from the bills of credit which Gouverneur Morris and others thought they had prohibited at the Constitutional Convention. In defense of his motion to strike the emission clause, Morris had emphasized that "a responsible minister" could meet emergencies without resort to bills of credit. The remaining power "to borrow money," he had explained, would enable the Treasury to issue "notes"—a term which he understood to mean interest-bearing, fixed-term paper in contradistinction to "bills" which he defined as interest-free paper issued by the government in payment of its obligations. The Treasury notes emitted by the Madison administration were clearly of the latter variety. Moreover, the receivability of those notes for all public debts undermined Madison's own constitutional understanding of 1787. He had suggested that the Convention ought to retain the emission power while expressly prohibiting the power to make government paper a legal tender.

As he noted in his journal, however, Madison had "acquiesce[d]" in the Convention's decision once 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 and proper; and would only cut off the pretext for a paper currency and particularly for making the bills a tender either for public or private debts." At Philadelphia, moreover, only Madison had emphasized the legal tender question. And as the bullionists on the Court learned during the post-Civil War legal tender cases, it was extremely difficult to deny Congress the legal tender power once its power to emit bills of credit had been conceded and McCulloch had established its discretion in the choice of appropriate means.

Yet the distrust of money-supply decisions made by legislation retained such great vitality during the nineteenth century that an attempt was made to proscribe irredeemable government paper on constitutional grounds. It came in Hepburn v. Griswold (1870). Speaking for a 4–3 majority, Chief Justice salmon p. chase declared that the legal tender legislation he had recommended during his tenure as abraham lincoln's secretary of the treasury was invalid insofar as it impaired the value of preexisting private debts. Chase began by reiterating Marshall's McCullochcommentary on implied powers and "the painful duty of this tribunal" with regard to laws inconsistent with the "letter and spirit" of the Constitution. He admitted that Congress had an "undisputed power" to emit bills of credit; in veazie bank v. fenno (1869) he had said that Congress might even levy prohibitive taxes on the notes of state-chartered banks in order "to provide a currency for the whole country." But the legal tender power was distinguishable. It was not necessary, though perhaps convenient, for Congress to impart legal tender qualities to its paper in order to guarantee circulation. And legislation that impaired contracts was not only contrary to the "spirit" of the Constitution as Marshall and others had understood it but also deprived creditors of property without due process or just compensation.

The narrow construction of Congress's authority expounded in Hepburn did not endure. samuel miller, dissenting along with noah swayne and david davis, had claimed that the majority's reliance on the "spirit" of the Constitution substituted "an undefined code of ethics for the Constitution." In their view, McCulloch had established that "where there is a choice of means, the selection is for Congress, not the Court." william strong and joseph bradley, whom ulysses s. grant nominated to the Court on the very day Hepburn was decided, agreed with the Hepburn dissenters and voted to overrule Chase's previous majority in Knox v. Lee (1871). Bradley stated in a concurring opinion that once the power to emit bills of credit had been conceded, "the incidental power of giving such bills the quality of legal tender follows almost as a matter of course." Strong's opinion for the Court responded forcefully to the " taking " claims advanced in Hepburn. An 1834 act passed pursuant to Congress's power "to coin money and regulate the value thereof," he pointed out, had established a new regulation of the weight and value of gold coins. Creditors had sustained consequential injuries as a result, for antecedent debts had become "solvable with six per cent less gold than was required to pay them before." But it had never been imagined that Congress had taken property without due process of law. Congress's implied monetary powers, Strong concluded, were as plenary as its enumerated monetary power: "Contracts must be understood as made in reference to the possible exercise of the rightful authority of the government, and no obligation of contract can extend to the defeat of legitimate governmental authority."

Two other Chase Court decisions, Bronson v. Rodes (1869) and Trebilock v. Wilson (1872), reflected the law's continuing favor for freedom in private contract despite Strong's sweeping language regarding the plenary nature of Congress's monetary power. There the Court held that agreements specifically requiring payment in gold and silver coin could not be satisfied by tenders of irredeemable government paper. Coin was still a legal tender under federal law, the Court explained; because the Legal Tender Acts did not expressly prohibit parties from drafting contracts requiring payment in specie, it remained "the appropriate function of courts … to enforce contracts according to the lawful intent and understanding of the parties." Creditors found Bronson and Trebilock particularly reassuring in the Populist era. Although the Civil War greenbacks became redeemable at par in 1879, apprehensions of currency devaluation by "free coinage" of silver prompted virtually all draftsmen of long-term debt obligations to specify repayment in gold coin of a given weight and fineness. But the monetary crisis of 1933 led not only to another, apparently final abandonment of the gold standard and a substantial depreciation of the currency but also to a joint resolution of Congress that proclaimed gold clauses in private contracts to be "against public policy" and void. Eight years later, edward s. corwin remarked that "no such drastic legislation from the point of view of property rights had ever before been enacted by the Congress."

The Court nonetheless sustained the resolution by a 5–4 margin in the gold clause cases (1935). In Bronson and Trebilock, Chief Justice charles evans hughes explained for the majority, the Court had mandated the enforcement of contracts containing gold clauses at a time when Congress had not prohibited such agreements. Now Congress had acted; "parties cannot remove theirs transactions from the reach of dominant constitutional power by making contracts about them." james mcreynolds filed a discursive dissent in which he claimed, among other things, that the Constitution "is gone." In one respect his argument had some merit. Many of the Founders, perhaps a majority, had assumed that adoption of Gouverneur Morris's motion to strike the power to emit bills of credit precluded all government paper designed to circulate as money. Yet contracts were enforceable in government paper and only government paper after 1933. From another perspective, however, McReynolds's claim was simply perverse. The constitutional text does not forbid Congress to issue paper money, and American constitutional law not only sets limitations on what government does but also legitimizes government's authority to act affirmatively in the face of changing public interests. It was no accident that when Marshall emphasized the importance of remembering that "it is a constitution we are expounding," he did so in the leading case involving Congress's monetary power.

Charles W. Mc Curdy
(1986)