‘Legal tender’ may sound gentle, but upon you money rule harsh

These two lines of official bullying tell you that even in a raging inflation you have to accept Fed banknotes in repayment of debts, even though their value has trembled down nearly to zero.

So our “money” is phony, merely resembling the genuine article of generations ago. Money today is a figment of the imagination. Very well, but if all that is true, why doesn’t the system fall apart? Why do people work — and even kill — to obtain the funny money?

Because most of them don’t recognize it as phony, of course. (Did you?) The powerful and august institutions responsible for the counterfeit take their funny money seriously indeed. I speak, of course, of the banks and the government. And as for the system falling apart, it is — rapidly. The last word regarding the public’s acceptance of the funny money, however, is not human custom or ignorance, but the brute force of government. The funny money has to be accepted because it is “legal tender.”

Shall the grocer force you to buy a paper orange?

All governments establish an “official money,” or “money of account.” How could it be otherwise? How could the government calculate its revenues if some people paid their taxes with chickens and eggs, and other with lumber and nails, and still others with silver and gold? If the account books are to understandable, there must be a standardized “money of account.” You will recall that the founding fathers established that each state use gold and silver coins as money. Individuals, of course, could settle debts between themselves any way that was mutually agreeable, but debts owed to and by the state were to be settled with the official “legal tender,” gold and silver coin. But governments have always sought to make their IOUs acceptable as money by declaring them legal tender as well, for reasons not hard to see.

Let’s suppose that you want to buy some oranges. You go to the store and discover two bins. One is filled with plump, delicious oranges. The other contains pieces of paper, each labeled one orange. From which bin would you pick? The grocer, naturally, would prefer to sell you a “paper orange.” After all, they cost him nothing — he made them himself in the back room; and they present no problems of shipping or storage.

But the “paper oranges” just don’t sell. So the grocer does something very clever. He persuades his friends in the legislature to pass a law making his paper oranges a “legal tender for oranges;” thus, anyone paying for an orange in his store would be forced to accept a paper orange. Eventually, the grocer would do away with non-paper (real) oranges altogether.

Nonsense! Foolishness! Indeed, it is, but it is important to realize just why it is nonsense and foolishness.

Oranges are to be eaten. Gasoline is to be burned. Houses are to be lived in. But gold and silver coin is expected to perform no specific service unique to gold and silver. It is a medium of exchange. It passes from hand to hand, unchanged, in return for other goods or services. It doesn’t take long for the nature of the money to be forgotten. Gold, silver, copper, paper — what’s the difference? Such, it seems, is the attitude of most people today. But it was not always so.

How ‘legal tender’ law solves government’s problem

Governments have always had trouble with money, but when the money was gold and silver coin produced and owned by the people, the problems were worse. Politicians recognized the desirability of providing services for the people, but were naturally reluctant to take the people’s wealth from them to pay for it. The people were quite content to have the government look after them, but naturally didn’t want to pay for it.

The best of both worlds would be for the government to pay its way by issuing IOUs. Yes, that would work for a while, but when the IOUs were presented for payment, what then?

That problem could be prevented if (1) the IOUs were never presented for payment, or (2) the IOUs could pay for themselves. And both of these happy circumstances can be brought into being by simply declaring the government IOUs to be “legal tender.” Legal tender laws compel you to accept a promise in lieu of payment, while easing the blow by allowing you to spend the promise, or, to put it another way, the issuer of legal tender tells his victims, “Yes, this is counterfeit that I’m giving you for your work, but I’ve made arrangements for you to pass it without penalty.”

Fighting words, ‘and emit bills,’ fought in constitution

So there is no point in presenting the IOUs for payment. There’s nothing new about the idea.

During the Revolutionary War, the Continental Congress sought to pay its bills by the issuance of a paper currency called the continental. It was to be of the value of the Spanish milled dollar (that word again!) but of course, it wasn’t. The continentals were printed so fast and so often that by 1781 they had fallen in value to one mil as compared with the dollar of silver, and they were abandoned. The federal government in those days didn’t believe it had the authority to declare the continentals a legal tender, but urged the states to do so; and they did. There were penalties for refusing them. However, when it became obvious that there was an even greater penalty for accepting them, the legal tender laws were rescinded, and our language got a new expression: “not worth a continental.” Of course, those thousands of people who had given of their goods and services for continentals were hurt.

They had exchanged wealth for nothing. But for the issuers of the legal tender, the profit was 100 percent. Not a bad deal! And they didn’t forget it.

The founding fathers were well aware of this debacle when they met, six years later, to draw up the Constitution. The first draft of that document contained these words, “The legislature of the United States shall have the power to borrow money and emit bills on the credit of the United States.” The bills referred to, of course, were “paper money.” Don’t we call them “bills” even today? The words “and emit bills” were struck from the final version of the Constitution by a vote of nine states to two. Of the debate leading to that vote, James Madison wrote, “Striking out the words cut off the pretext for a paper currency, and particularly for making the bills a tender either for public or private debts.”

Oliver Ellsworth, the third chief justice, said, “This is a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which have been made are now fresh in the public mind, and have excited the disgust of all the respectable part of America.” He remembered the continentals!

James Wilson, agreeing, stated, “It will have a most salutary influence on the credit of the United States to remove the possibility of paper money.” George Reed of Delaware declared, “The words, if not struck out, would be as alarming as the mark of the beast in Revelations.” And New Hampshire delegate John Langdon added, “I had rather reject the whole plan than retain the three words ‘and emit bills.’” The historical record, therefore, leaves absolutely no room for doubt that the intention of the founding fathers was to prohibit a paper currency.

Congress IOUs not ‘legal tender’ (but Fed’s are)

Don’t be confused about this. The Constitution allows Congress to borrow money; and when money is borrowed, notes are issued. What is forbidden is for Congress to make those notes a “legal tender.” Anyone, after all, can borrow money and issue an IOU, or note. But when that note is a “legal tender,” payment of the note — should it be demanded — can be made with — another note!

The injustice of this was obvious to our founding fathers. With the stench of the continentals still in their noses, the founding fathers wanted to be sure that never again would any American be forced to accept a substitute for the actual money to which he was entitled. They so provided in the Constitution, to which all of our public officials, elected or not, swear adherence.

Wouldn’t it be wonderful if at least some of them took their oaths seriously?

What difference does it make what money is? Just this: Unless you know what it is, how do you know what you’ve worked for? And shouldn’t you know?


Dr. Paul Hein, a retired ophthalmologist who lives in Ballwin, Mo., has always had the keenest eye for the misdoings of our betters on a fundamental point of economics. That is, their printing of unbacked paper notes that pretend to be lawful, valuable dollars and which promise nothing except the ruin of the federal republic. Dr. Hein is the author of a favorite book about economics, All Work and No Pay; Life Saving Lessons in Modern Money, and was president of the Monetary Realist Society.  He is married and father of four children.