40. Money matters

Wars have stretched the Constitution, which usually shrank back—but not all the way—after the war ended. During wars the necessity of national survival imbues the necessary-and-proper clause with unusual elasticity.

The Civil War placed unprecedented demands on the finances of the federal government. The government responded with unprecedented measures, including the issue of paper currency and the imposition of a federal income tax. Both produced constitutional challenges.

The Constitution, in section 8 of Article II gives Congress the authority to “coin money.” It does not give Congress the authority to print money.

The omission was intentional. Americans knew about paper money, which had been vigorously debated during colonial times and been profligately issued during the Revolutionary War. In fact, in section 10 of Article II, the Constitution forbids the states from coining money and from making “any thing but gold and silver coin a tender in payment of debts.” The framers frowned on paper money. But they didn’t forbid it explicitly to the federal government.

Gold and silver were the coins of the realm until the Civil War. Paper notes existed, but they were bank notes, drawn against private banks. They weren’t legal tender—that is, no one was forced to accept them in payment of debts. The money market set their value. If a bank issued too many notes, they traded at a discount.

Things changed during the Civil War. The Union government spent more for guns and uniforms and the like than it collected in taxes. To cover the deficit it issued bonds, which was to say it borrowed money. When the deficit grew beyond what the bonds could cover, Congress in 1862 passed the Legal Tender Act, which authorized the printing of paper notes denominated in dollars, dubbed greenbacks for the ink. A statement on each note made its purpose plain: “This note is a legal tender for all debts public and private except duties on imports and interest on the public debt; and is receivable in payment of all loans made to the United States government.” The exception for duties was to keep gold coming into the treasury. The government could still pay interest on its debt in gold, though it could repay principal in paper.

To many people, especially merchants and creditors compelled to accept paper notes rather than gold, the Legal Tender Act seemed a blatant violation of the Constitution. They knew how the government during the Revolutionary War had printed more and more paper money, until the phrase “not worth a Continental” became a watchword for utter lack of value. They didn’t want to be on the losing side in this case.

The Supreme Court dodged challenges to the Legal Tender Act while the war continued, lest a ruling against the government doom the Union war effort. To its credit, Lincoln’s treasury department kept the printers in check. The greenbacks traded at a discount to gold dollars, but the discount was modest by historical standards.

The first test of the paper money came in 1870. In Hepburn v. Griswold, the Supreme Court declared the Legal Tender Act unconstitutional. Chief Justice Salmon Chase had been treasury secretary at the time the act was passed, yet the court ruled that the Article I authority to coin money didn’t extend to printing money, and that the law violated the due process clause of the Fifth Amendment by depriving holders of preexisting debts of property in those debts.

The decision produced a furor in financial markets. Were nearly a decade of contracts written under the Legal Tender Act to be invalidated?

A shift in the composition of the court allowed a reconsideration. In the following year, 1871, the court reversed itself, finding in the so-called Legal Tender Cases that the power to coin money did imply the power to print money, and that any affront to due process was incidental. A subsequent decision in 1884, Juilliard v. Greenman, confirmed the constitutionality of legal tender.

Another wartime financial measure fared less well. Amid the conflict Congress passed a series of laws that created a federal income tax. Nobody liked it, but most preferred it to losing the Union. After the Union was saved, the dislikes became more prominent, and Congress in the early 1870s consigned the income tax to oblivion.

Yet memory lingered, and in 1894 Congress approved a new income tax. The majority Democrats, influenced by the emerging Populist party, cut tariffs, which hit ordinary people, and replaced them with an income tax on the rich.

But the Supreme Court quickly negated the income tax. In 1895, in Pollock v. Farmers’ Loan, it declared the tax law in violation of section 2 of Article I, which requires that direct taxes—taxes levied on persons or property, as distinct from taxes on transactions or consumption, such as tariffs or sales taxes—be apportioned among the states according to population. The income tax was apportioned according to wealth.

The income-taxers had the last word, though. Progressives picked up the cause after the Populists faded, and in 1913 the country adopted the Sixteenth Amendment, which explicitly authorized a federal income tax. It soon became the largest source of federal revenue.