The constitution in Article I, section 10 reads "No state shall...coin money, emit bills of credit, make any thing but gold and silver a tender in payment of debts..."  This means that the only constitutionally valid forms of money are gold or silver coin.  This is called 'lawful money.'  U.S. paper money used to be redeemable in lawful money, but no more.  Our monetary system is based on unconstitutional forms of money.  At least, this is how a few conspiracy theorists see it.

The source of their confusion is easy to see and, in this case, easy to understand.  Simmons (1939) and Cross (1939) shed some light on the subject.  The phrase 'lawful money' had appeared repeatedly in the money and banking laws of the U.S. in the first half of this century, but had never been explicitly defined.  It first appeared on February 25, 1862 when Congress authorized the issue of greenbacks and declared them to be "lawful money and a legal tender" for all debts, public and private. ¹  This terminology may have been adopted to promote the acceptability of the currency, since the occasion was the first in which Congress attempted to make a paper money a legal tender. ³    At this point in time, then, the terms 'lawful money' and 'legal tender' had no distinct meaning.  They were they same thing.

During the Civil War era Congress gave several types of money the status 'lawful money.'  On March 17, 1862 Congress declared that Treasury notes (not the T-note debt instrument we know by that name today) were lawful money.  February 12, 1862 saw Congress make clearinghouse certificates a lawful money.  After the Civil War, on July 12, 1870, Congress placed the U.S. back on the gold standard and specified what types of money national banks could count to meet their legal reserve requirements.  "The terms 'lawful money' and 'lawful money of the United States," the Act read, "when applied to these banks shall be held and construed to mean gold or silver coin of the United States." ¹  So, by 1870 greenbacks, Treasury notes, clearinghouse certificates, and gold and silver coin were all 'lawful money.'  The annoying part, though, is that Congress never stated exactly what lawful money was supposed to be.  The only concrete conclusion that can be reached is that lawful money and legal tender were two separate things.  Lawful money was money that banks could count toward satisfying their reserve requirements.  Legal tender was any money that government would accept in payment of taxes.  Some money was lawful money, but not all lawful money was legal tender.  And vice versa.  Confused?

One last example of the confusion Congress created on the lawful money topic concerns Federal Reserve notes.  Prior to 1933-34, they were redeemable at any Federal Reserve bank "in gold or lawful money," and Federal Reserve banks were compelled to hold a 35% reserve "in gold or lawful money" behind their deposits.  Congress did not use the phrase "in gold or in other forms of lawful money."  It definitely set the terms in contrast to each other.  This leads one to conclude that Congress did not deem gold to be lawful money, which at the time would have been absurd. ¹

After 1933 all forms of U.S. money were conferred with legal tender status.  This set up a paradox for currency redeemability.  Federal Reserve notes and U.S. Notes, for example, were redeemable in "lawful money," but what was lawful money?  Because redeemability had ended, there was no longer any distinction between lawful money and legal tender.  Federal Reserve notes were therefore redeemable with other Federal Reserve notes, or with U.S. Notes, or with any other legal tender.

To illustrate how some people were confused by this, consider the following correspondence between the U.S. Treasury and citizen of Cleveland. ²

 

December 9, 1947

Honorable John W. Snyder
Sec. of the Treasury
Washington, D.C.

Dear Sir:

I am sending you herewith via registered mail one ten-dollar Federal Reserve note.  On this note is inscribed the following:

"This note is legal tender for all debts, public and private, and is redeemable in lawful money at the United States Treasury or at any Federal Reserve bank."

In accordance with this statement, will you send me $10.00 in lawful money?

Very truly yours,
A.F. Davis

December 11, 1947

Mr. A.F. Davis
12818 Colt Road
Cleveland 1, Ohio

Dear Mr. Davis,

Receipt is acknowledged of your letter of December 9th with enclosure of one ten dollar Federal Reserve note.

In compliance with your request, two five-dollar United States notes are transmitted herewith.

Very truly yours,
M.E. Slindee,
Acting Treasurer

December 23, 1947

Mr. M.E. Slindee
Acting Treasurer
Treasury Department
Fiscal Service
Washington 25, D.C.

Dear Sir:

Receipt is hereby acknowledged of two $5.00 United States notes, which we interpret from your letter to be considered lawful money.  Are we to infer from this that Federal Reserve notes are not lawful money?

I am enclosing one of the $5.00 notes which you sent me.  I note that it states on the face,
"The United States of America will pay to the bearer on demand five dollars."

I am hereby demanding five dollars.

Very truly yours,
A.F. Davis

*****

December 29, 1947

Mr. A.F. Davis
12818 Colt Road
Cleveland 1, Ohio

Dear Mr. Davis:

Receipt is acknowledged of your letter of December 23rd, transmitting one $5 United States note with a demand for payment of five dollars.

Your are advised that the term "lawful money" has not been defined in federal legislation.  It first came to use prior to 1933 when some United States currency was not legal tender but could be held by national banking institutions as lawful money reserves.  Since the act of May 12, 1933, as amended by the Joint Resolution of June 5, 1933, makes all coins and currency of the United States legal tender and the Joint Resolution of August 27, 1935, provides for the exchange of United States coin or currency for other types of such coin or currency, the term "lawful money" no longer has such special significance.

The $5 United States note received with your letter of December 23rd is returned herewith.

Very truly yours,
M.E. Slindee,
Acting Treasurer

*****

It is understandable how reasonable people can become confused when studying the history of the terms 'lawful money' and 'legal tender' in U.S. history.  The blame for this rests with Congress who never bothered to define lawful money when it first used the term.  However, the line of thinking that it is defined by the constitution as only gold or silver coin is incorrect.  The constitution makes no such definition.  Moreover, the restriction that States not make anything but gold or silver a legal tender does not apply to Congress, only to the States.  Congress may declare anything it wishes a legal tender.  And as the history above shows, it certainly has.

1. Cross, Ira B. (1938), "A note on lawful money," Journal of Political Economy, pp. 409-13.

2. Ritter, Lawrence (1961), Money and economic activity: Readings in money and banking, Boston: Houghton-Mifflin.

3. Simmons, Edward C. (1938), "The concept of lawful money," Journal of Political Economy, pp. 108-18.

[Return to Table of Contents]