The origin of the U.S. dollar as legal tender and its link to Depression
Today’s Daily Angle comes from Wikinvest Wire member Edward Harrison of CreditWritedowns.com. You can read the full article on Edward’s blog.
Flash Player 9 or higher is required to view the chart Click here to download Flash Player nowI have been very interested in the concept of legal tender of late because of the revelation this summer that the State of California was issuing I.O.U.’s to honour its debts instead of paying in U.S. Dollars, which are legal tender and I.O.U.’s from the U.S. government (see posts here and here). What I found most interesting about the California case was how the I.O.U.’s allowed a state experiencing a depression and prohibited from printing money to settle debts. Given the similarities between California and Ireland, I felt this could be a model for that state (see post here).
The question was: how can a government without the levers of the money printing press use money as an escape-hatch in a depressionary environment? So to answer that question, I wanted to look at the origins of legal tender laws in the U.S.. When the United States was established, the U.S. Constitution outlined the basic framework through which government – both state and federal – could act on behalf of America’s citizens. Nowhere in the U.S. Constitution was legal tender mentioned, and this is a bone of contention still amongst those who see the Federal Reserve as an illegitimate institution. Below, I want to outline a brief (and hopefully non-ideological) history of how the greenback became legal tender in the United States. I have some related comments at the end on Depressions and their lasting consequences on politics and history.
The Constitution
The Constitution mentions the word money in three sections (8, 9 and 10) of Article 1. Below are the individual citations as they pertain to Congress acting on behalf of the federal government:
Section. 8. The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
To borrow Money on the credit of the United States; To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;
Section 9 is no longer applicable, but here it is.
Section. 9. The Migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the Year one thousand eight hundred and eight, but a Tax or duty may be imposed on such Importation, not exceeding ten dollars for each Person.
No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.
In Article 1, Section 10 of the Constitution, the authorities regarding money and taxation for individual states are outlined. It states:
Section. 10. No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it’s inspection Laws; and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.
No State shall, without the Consent of Congress, lay any Duty of Tonnage, keep Troops, or Ships of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.
You have probably noticed that nowhere in here was the term ‘legal tender’ used. Why? The intention was to allow anyone to issue coins and notes backed by gold or silver. In fact, foreign coins backed by gold and silver were accepted in the U.S. because 80 percent of money in circulation in the U.S. pre-1800 was foreign.
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