Legal Tender in USA

It has been said that the USA Federal government does not have the power to make anything legal tender for payment of debts, and it is noted that the States are not allowed to make anything except silver and gold coin legal tender for payment of debts.

On the face of it this would seem to make the question of legal tender for payment of money debts up to the States to determine, within the confines of making only silver and gold coins legal tender.

However, when it comes to coinage, the USA Federal government has the power to coin money, regulate the value thereof, and of foreign coin, and the States are prohibited from both coining money, and issuing 'bills of credit' (a term that meant paper money at that time).

The power to coin money regulate the value thereof, and the to regulate the value of foreign coin, is the power to determine their legal value. Their market value cannot be regulated, since market values apply when the coins are not tendered to discharge debt but offered in exchange for something else (i.e. for a new market exchange rather than the settlement of an existing unsettled trade). But for coins to have a legal value is to make them a legal tender for that amount -- isn't it?

So it would seem that the USA Federal government can set up a Mint, and regulate its operations and the denominations, fineness, mass and impression, and then also regulate its legal value, and also the legal value of foreign coins, which, under Federal law could be argued would be legal tender in all the States in the union and all federal jurisdictions/territories. On the other hand it could also be argued that the Federal government can coin and regulate its own and foreign coins' legal values, and the States could pick and choose which or up to what limit those coins, if any, would be legal tender in their respective jurisdictions.

Which of these views would seem to be most reasonable and accurate?

Another question is the ability of the States to make private domestic gold and silver coins legal tender. I can't see any constitutional provision that would enable the Federal government to prohibit private domestic coinage (other than by States), or the States from making them legal tender, even at the expense of Federal and Federally recognised (i.e. value regulated) foreign coins.

Further along this line of reasoning, a State could launch a parallel currency with a different name/unit of account, e.g. Francs, Grams, Pounds or Dinars, and make particular domestic privately minted coins legal tender for their face values up to limited or unlimited values of the unit of account, enabling people to choose between Federal/Foreign and Domestic/Private coins and units of account.

Even further along this line, States could find ways to disfavour Federal/Foreign coinage, such as by making its parallel currency a cheaper way to discharge debts denominated in the Federal unit of account (not a good idea due to the extent of distortion it would involve, but it could indeed disfavour Federal/Foreign coins).

Banks in the State (and out of State) could also issue bank notes that were payable in the State (and therefore under that State's legal tender laws), so that paper money as well as coins could be available, but obviously these bank notes constitutionally cannot be made legal tender.

So, it seems to me that any State in the Union can revive and launch a new gold standard.

 The power to coin money regulate the value thereof, and the to regulate the value of foreign coin, is the power to determine their legal value. Their market value cannot be regulated, since market values apply when the coins are not tendered to discharge debt but offered in exchange for something else (i.e. for a new market exchange rather than the settlement of an existing unsettled trade). But for coins to have a legal value is to make them a legal tender for that amount -- isn't it?

 Not quite right. The power to regulate the value of the coinage meant the power to set the rates of exchange between different types of money. So they could print a paper twenty dollar bill and say it's worth an ounce of gold. Or they could say a one ounce silver piece is worth 1/16th of a one ounce gold piece. But that's not the same as saying noone can refuse to accept paper dollars, which is what legal tender does.

 

 

DBratton, you seem to be be 'not quite right', too but also on the right track.

The power seems to be the power to set the relative legal values of the different coins it mints, and the foreign coins. This extends to silver and gold coins, and probably copper ones too, but can't reasonably extend to non-coins, e.g. bank notes.

It could plausibly be argued that a State could not make the federal and foreign coins have a different legal value from that regulated by federal congress, but it seems difficult to refute the idea that a State could make any particular, or all, federal and foreign coins, not legal tender whatsoever, or up to some per debt limit. For example it was common in the 19th century under the composite legal tender system for silver and copper coinage to be considered purely subsidiary currency for making change, and legal tender for only limited amounts per payment, with the gold coins being the only unlimited legal tender.

The main question is whether it is legally feasibly for a State to establish its own gold standard, in parallel to the federal coinage, and if so, which States a) allow private coin minting and b) might be persuaded to establish such a gold standard.

It would also be interesting to see what legal tender laws various States have or had on their books. 

Hi, when you say "legal value" of coin do you mean face value?  Or something more abstract? 

No, a legal value of a coin means something different from the face value of the coin, but for obvious reasons, the two are frequently the same value.

The legal value should be defined to mean that value of debt that the coin can discharge by tendering it in payment. For the coin to legally discharge the debt, or part of the debt, it must be a legal tender for that debt, so, by implication, a coin that is never a legal tender cannot have a legal value.

Normally the legal value of a coin is shown on the face of the coin as its face value, but this is not always the case. For example a Victorian gold Soveriegn coin does not have any face value, but has a legal value of one pound. Another example of where the legal value isn't shown on its face would be foreign coin in the USA -- the Congress can give foreign coins legal value in the United States of America, in United States of America Dollars, even though the coin's face value is in pesos, rupees or pounds etc.

The commercial or economic value of a coin can obviously be more or less than its legal value. For example, suppose under a composite legal tender system there were two coins: the one shilling coin, containing 20g of fine silver, and the one pound coin, containing 8g of fine gold. If the one shilling coin is legal tender for 0.05 pounds, but up to a limit of one pound per payment, and the one pound coin is legal tender for 1 pound, with no limit, and the value of gold is 54 times that of silver. In this case the economic value of the silver coins will be about 8% less than their legal value, and debtors will use silver coins for up to 1 pound per payment. This will increase the price of low value goods by about 8% and high value goods by about 0.08 pounds.

 

 

Another question is the ability of the States to make private domestic gold and silver coins legal tender. I can't see any constitutional provision that would enable the Federal government to prohibit private domestic coinage (other than by States), or the States from making them legal tender, even at the expense of Federal and Federally recognised (i.e. value regulated) foreign coins.

 

The U.S Mint and the Justice Department have a different opinion on the matter. A quote from a press release on the Mint website:

However, under the Constitution (Article I, section 8, clause 5), Congress has the exclusive power to coin money of the United States and to regulate its value. The United States Mint is the only entity in the United States with the lawful authority to mint and issue legal tender United States coins.

 

This was a year ago so things might have changed in the mean time.

Most of the powers granted to Congress by the constitution amount to legislation/tax imposition powers, rather than powers to produce a good or service.

The exceptions are:

1. 'To coin money'
   
2. 'To establish post offices and post roads'
   
3. 'To raise and support armies'
   
4. 'To provide and maintain a navy'

The case of post offices and post roads seems most comparable to that of coining money, since it does not relate to war and defence. Does the power of congress to establish post offices and roads provide it with exclusive power to establish post offices and post roads? In this case the states are not prohibited from establishing post offices and roads, but in the case of coining money they are.

So, on what basis can the grant of a power to produce a good or service to the federal government, without the grant of a power to regulate the production of that good or service by others, imply a restriction on others producing that good or service?

On what basis can the grant of a power to produce a good or service, and the prohibition on the states from doing likewise, without the grant of a power to regulate the production of that good or service by others, imply exclusivity for the federal government as against  the people?

"On what basis can..." "Basis? We don't need no stinkin' basis!" I hope that isn't terribly before your time. :)

The power seems to be the power to set the relative legal values of the different coins it mints, and the foreign coins. This extends to silver and gold coins, and probably copper ones too, but can't reasonably extend to non-coins, e.g. bank notes.

The colonies had been printing and issuing paper money of their own for many decades. It is inconceivable that the authors of the constitution intended that the power to coin money should exclude paper money. The first national bank was founded during the Articles of Confederation period and its failure was blamed by some on the lack of a strong central government and was one of the justifications for the constitution. I'm not saying the power to print and issue paper money was a good thing. But the power is clearly there and was intended.

 

 

 

 

 

 

  "On what basis can..." "Basis? We don't need no stinkin' basis!" I hope that isn't terribly before your time. :)

 All your basis are belong to us!

 

 

How's that?  They used the words "to coin money".  The verb "coin" means "to stamp metal", which doesn't leave much room for issuing paper (except in form of "warehouse receipts").

To 'coin money' cannot mean to 'issue bank notes' or other securities. Coinage and the activity of coining, back at that time, meant taking precious and semi-precious metal ingots, and manufacturing them into standardised discs of particular mass and fineness, and with an impression on it. In 1792 Congress passed an Act to establish a mint, and regulated its operations such as acceptance and assay of metal ingots, the design and acquisition of dies, coin specifications to be produced, and production of coin, and the payment of the mint's expenses. It was not until a long time later that it tried to get involved in chartering banks as a way of getting involved in the issue of bank notes, and when it did so, it was not without controversy concerning its constitutionality. Furthermore, the language of the day had terms for the issue of money notes: 'bills of credit' which States were prohibited from issuing, but the Federal Government was not.

It seems that the Federal Government appears to have no power to invest money in enterprises or to organise, sponsor or form corporations or enterprises to carry on any form of business or activity, other than in pursuance of its powers to coin money, establish post offices and post roads, constitute inferior tribunals, raise and support armies, or provide and maintain a navy.

The power to borrow money is a separate power, and since a bank note is simply a promissory note issued by a banker payable to bearer on demand, I can't see any constitutional impediment to the United States borrowing money under similar instruments (i.e. promissory notes issued by the United States of America Federal Government, payable to bearer on demand). The constitution does not state that the United States of America Federal Government can only borrow money under the form of government bonds, so it seems free to borrow money under any kind of financial instrument, including promissory notes payable to bearer on demand.

The States are prohibited from issuing 'bills of credit' (i.e. paper money), but they are not prohibited from borrowing money. Thus, by way of contrast, the power to borrow money without restriction of the form is the power to issue 'bills of credit', and any other form of financial obligation.

However, there is no power for the United States of America Federal Government to regulate the value of its securities, or to make them legal tender for money debts.

Regarding the first national bank of the United States, I've never heard of this under the time of the Articles of Confederation -- do you care to elaborate on this bank and its history and characteristics?

I thought that United States currency was legal tender for all debts.Some businesses or government agencies say that they will not only accept checks.

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Josie Scott

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During the Revolution the individual states and even the national government did print their own fiat currency.  It was also during this war that the value of that fiat currency got so bad Washington once remarked that "a cart load of money will scarcely buy a cart load of provisions."  When the Constitution was created the Framers felt that they should put an end to fiat money in the United States because of what they saw it doing to the country during the war.  The provision in the Constitution allowing the federal government to "coin money" and "regulate its value thereof" was nearly universally understood to mean gold and silver coin.  To "regulate the value thereof" was used by the Congress to set the value of a gold coin and a silver coin in relation to the gold coin.  It was not a free market value but an artificial one created by the state.  For instance gold would be legally set at one price but the market price would be significantly higher whereas silver was limited to say 1/16th an ounce of gold.  But when the price of silver got to be too high and gold too low gold stopped being used as currency.  This is what ultimately caused the various financial panics during the entire time we were on the gold standard.

The restriction on the states was so that they could not start printing "Bills of Credit" or unbacked fiat currency like the continentals used during the War.  For the longest time, I couldn't give you the dates off hand, private banks and even state banks did issue currency, usually gold and silver coins.  But because of the constitutional provision that only gold and silver could be used for debts fiat currency was difficult to come by until the Second Bank of the United States was created.