Becraft on the Constitutionality & legality of FRNs (Federal Reserve Notes)

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Subject:	Constitutionality & legality of FRNs
Date:	Tue, 21 Aug 2012 09:10:36 -0500
From:	Larry Becraft

The legal status of the Federal Reserve Note (“FRN”) is an extremely important matter about which you have commented.  Let me summarize an alternative position.

During the War of Northern Aggression, Congress enacted several laws making US Notes a legal tender, an idea originating with Treasury Secretary Chase. He was elevated to Supreme Court Chief Justice a few years later, a move I think was designed to insure an ultimately favorable decision regarding legal tender. Predictably, a legal tender case did arrive at the Supremes, and the decision in that case was written by Chase, but he held his own act unconstitutional.  

The Court was then packed with “friends of paper money” and a decision was made to rehear the legal tender issue.  In the Legal Tender Cases (Knox v. Lee), these acts were declared constitutional, and in a few cases thereafter, the constitutional foundation for legal tender was finally located: it resided in the constitutional power of Congress to borrow. Hence, legal tender pieces of paper must legally be debts of Uncle Sam.

The issuance of debt by Uncle Sam is also governed by the Constitution: no money may be drawn from the Treasury except that authorized by law. This provision means that all federal debt must be authorized by an act of Congress. Periodically, Congress is required to raise the debt ceiling, and this simply demonstrates the operation of this constitutional provision: every cent of outstanding debt must be supported by an act of Congress. Congress cannot delegate this power to any other entity, especially a private corporation.

The problem with FRNs is that while they are statutorily identified as debt obligations of Uncle Sam, there is no act of Congress authorizing any amount of this type of federal debt to be issued. Uncle Sam has no liability for the payment of these bank notes because there is no act of Congress authorizing the first cent of these debts to be issued. Consequently and as a matter of law, FRNs are not legally debts of the United States, an essential condition precedent for them to be legal tender.

But, let’s ignore for the moment this huge constitutional problem. Suppose this power of authorizing federal debt has been delegated to all Fed Reserve Banks, and they can issue endless quantities of federal debt in the form of bank notes, which incidentally they do not have to pay. It is sheer lunacy to contend that private banks may issue ANY federal debt, and certainly the delegation of such power is unconstitutional.

Compare FRNs against 2 of my favorite but under-appreciated decisions of the Supremes: Thorington and Marigold. Here is my discussion of Thorington from my website:

One of the first cases rendered by the U.S. Supreme Court wherein the confederate currency was an issue was Thorington v. Smith, 75 U.S. (8 Wall.) 1 (1869). Here, the Supreme Court reasoned that the Confederacy was a de facto government imposed by irresistible force and that, while it existed, citizens of the Confederacy of necessity had to obey its civil authority. Insofar as Confederate notes were concerned, the Court described them as follows:

"As contracts in themselves, except in the contingency of successful revolution, these notes were nullities; for, except in that event, there could be no payer. They bore, indeed, this character upon their face, for they were made payable only 'after the ratification of a treaty of peace between the Confederate States and the United States of America.' While the war lasted, however, they had a certain contingent value, and were used as money in nearly all the business transactions of many millions of people. They must be regarded, therefore, as a currency imposed on the community by irresistable force," 8 Wall., at 11.

"Considered in themselves, and in the light of subsequent events, these notes had no real value, but they were made current as dollars by irresistable force. They were the only measure of value which the people had, and their use was a matter of almost absolute necessity. And this use gave them a sort of value, insignificant and precarious enough it is true, but always having a sufficiently definite relation to gold and silver, the universal measure of value, so that it was always easy to ascertain how much gold and silver was the real equivalent of a sum expressed in this currency," 8 Wall., at 13.

Are not FRNs, being fiat and unpayable, worse than Confederate currency? But consider what Marigold, a counterfeiting case, holds:

United States v. Marigold, 50 U.S. (9 How.) 560, 567-68 (1850):

"They appertain rather to the execution of an important trust invested by the Constitution, and to the obligation to fulfill that trust on the part of the government, namely, the trust and the duty of creating and maintaining a uniform and pure metallic standard of value throughout the Union. The power of coining money and of regulating its value was delegated to Congress by the Constitution for the very purpose, as assigned by the framers of that instrument, of creating and preserving the uniformity and purity of such standard of value * * *

"If the medium which the government was authorized to create and establish could immediately be expelled, and substituted by one it had neither created, estimated, nor authorized ­­ one possessing no intrinsic value ­­ then the power conferred by the Constitution would be useless ­­ wholly fruitless of every end it was designed to accomplish. Whatever functions Congress are, by the Constitution, authorized to perform, they are, when the public good requires it, bound to perform; and on this principle, having emitted a circulating medium, a standard of value indispensable for the purposes of the community, and for the action of the government itself, they are accordingly authorized and bound in duty to prevent its debasement and expulsion, and the destruction of the general confidence and convenience, by the influx and substitution of a spurious coin in lieu of the constitutional currency."

In short, FRNs are  unconstitutional and illegal. 

Larry