What Are “State Legal Tender” Bills?

While the official motto of the Tenth Amendment Center is “Concordia res parvae crescunt” (Small things grow great by concord), one of our “unofficial” mottoes is “The Constitution. Every Issue, Every Time. No Exceptions, no Excuses.”

It’s a great standard to stick to. Here’s an example why.

Earlier this year, Dr. Gary North put up a short post on his “Tea Party Economist” blog, where he mentioned a topic that a number of people have asked me about:

“In a dozen states, there are bills to make gold legal tender… What is significant is this: there is enough interest in gold today to call forth such bills. It indicates a major shift in the fringes of public opinion. Such bills would have been unthinkable in 2007.”

He’s absolutely correct: thanks to a number of factors (the Crash of ’08, the Great Recession, the monetary policy-focused Presidential campaign of Rep. Ron Paul, etc.), more Americans than ever have had an “awakening” of sorts regarding gold and silver, and as a result, we’ve had several different types of “sound money” bills introduced in State legislatures across the country. What North is referring to in particular here is what are commonly called “State Legal Tender” bills. These bills have been introduced in a number of States around the country over the last few years. It’s a growing movement (see the main website here), and has already been successful in getting a law passed in Utah declaring gold and silver coins to be “legal tender” (and they were almost successful in Arizona, where both legislative houses passed a similar bill, only to have Gov. Jan Brewer veto it).

Now, before I get into any details, let me start off by making one thing perfectly clear: I like the fact that “State Legal Tender” bills (and gold and silver coin “Sales Tax Elimination” bills, discussed below) are being introduced and passed in the States. I agree with Dr. North that what’s significant is that “there is enough interest in gold today to call forth such bills,” which “indicates a major shift in the fringes of public opinion.” And I agree with a number of my friends who promote these kinds of bills, as being “incremental steps” towards “returning to sound money” in America. But there’s a few things I need to clear up.

I’ve been asked a number of times, “Hey, isn’t this ‘State Legal Tender’ thing the same thing that you’re trying to do, with the Constitutional Tender Act?” Well, no, in fact, it’s not what we’re trying to do, for a number of reasons — some of which North mentions, when he discusses why he doesn’t think these bills will lead anywhere right now. So let’s discuss some of these reasons, starting with his second reason first:

“…most of these bills will not become law this year.”

I’ll grant him that. But that’s not a reason for us to declare, as North does, that “nothing much will come of this.” A lot could “come of this” next year, or the year after or the year after that; it could depend on a lot of things, from grassroots activism in support of various bills, to a currency crisis and the complete devaluation of the dollar, either of which (or some event in between) could bring about passage of sound money-related bills in the States. Regardless, it’s unlikely that Constitutional Tender bills will become law this year, either, so I’m not disagreeing with North here. So let’s look at his third reason:

“…most voters don’t care. People use plastic or currency.”

This is true, too. But one of the goals of both State Legal Tender bills and the Constitutional Tender Act is to enable people to continue using what they’re used to using, only now what they use can be backed by real money (gold and silver). They could use debit cards based on gold or silver accounts, they could write checks based on such accounts, etc. (In fact, the Constitutional Tender Act requires State-chartered banks to create gold- and silver-based accounts.) Or, they could continue using Federal Reserve Notes currency in their everyday transactions, if they like.

So, let’s go back to North’s first reason:

“…the concept of legal tender is anti-free market. A state should not declare anything as legal tender. It should limit itself to declaring the proper currency for the payment of taxes.”

Now, I agree with North, as far as he goes: Congress, for sure, has no Constitutionally-delegated, enumerated power to declare one particular form of money as “legal tender,” and as a conceptual matter, they really shouldn’t do that (which is why the Framers of the Constitution didn’t give them that power, even if the Supreme Court has pretended that they did). But there’s something that is left unsaid, which “strikes at the heart” of this matter: North is talking about the modern definition of “legal tender” here — that is, currency that the law declares may be offered in payment of a debt and that a creditor is supposed to accept. And, in fact, that’s what proponents of “State Legal Tender” bills are talking about, too: having the government make an official declaration that a form of money is acceptable for using as payment. They say that States can declare by law that gold and silver coins are “legal tender,” because the U.S. Constitution says in Article I, Section 10, “No State shall… make any Thing but gold and silver Coin a Tender in Payment of Debts”. Therefore, the reasoning goes, a State may make gold and silver coins “legal tender.”

They then go on to say that, like other forms of “legal tender,” no one has to accept legal tender as payment; “it simply designates it as acceptable currency. It is not uncommon for retailers to decline to accept U.S. paper dollars and coins, for example, as a matter of policy (such as a convenience store refusing to accept large denominations). No one is forced to tender or accept gold and silver legal tender coins.”

So, that’s all well and good — if a State passes a “State Legal Tender” law (as Utah did), no one (including the State itself) is required to use gold and silver coins; it only says they can use them. More specifically, it says they can use them at their actual value (the value of their gold or silver content), rather than at the “face value” that the U.S. Mint stamped on them. In addition, it removes the “sales taxes” in any “commodities exchange” of legal tender Federal Reserve Notes for legal tender gold or silver coins (that is, instead of treating such an exchange as “buying gold or silver coins,” it treats the exchange just like you would treat an exchange of legal tender $1 bills for a legal tender $20 bill).

(By the way, there are other States, like Texas and Louisiana, which have also passed gold & silver “Sales Tax Elimination” bills into law, eliminating the State taxation of “legal tender” exchanges as described. This is a “no-brainer” — of course you shouldn’t tax legal tender currency exchanges… but of course, the national government still does. Because the IRS considers “precious metals,” including legal tender gold and silver coins, to be “collectibles,” a special capital gains rate applies to any “profits” on their “sale.”)

So, what’s the problem with any of these State Legal Tender bills? Actually, there are several.

First, as I said earlier, all of these folks are using the modern definition of “legal tender” — when what we need to be using is whatever definition was used by the people who actually wrote the Constitution. Allow me to explain:

In Article I, Section 10, the national government has been given most of the responsibility regarding money in America: to coin it (notice it does not give Congress the power to “emit bills of credit”, the common parlance of “print fiat currency”, nor does it give Congress the power to bestow that power on any other entity); to regulate the value of (literally, “make regular” or “make consistent” – to make sure there is no deviance in the gold or silver specie content of) the money they have coined; to regulate (again, “make regular”) the value of foreign coins (which meant they could be used here, but they had to be of a specific amount of gold or silver content); to fix the Standard of Weights and Measures for circulating coins (grains, ounces, pounds, etc.); and to declare what the punishment should be for anyone who counterfeits what the U.S. Mint coins (which, by the way, was death — that’s how seriously they took the idea of making our money worth less).

Now remember, in reading the Constitution, we should always try to understand it as written, with the definitions it was meant to be understood by, and not by overlaying modern definitions or understandings upon it. (Can you imagine the international uproar if Congress were to “regulate the Value of foreign currency” today, according to today’s definitions? “Congress hereby declares that one German Mark can only buy 50¢ worth of goods!”) If we don’t like what the framers meant, then they gave us the means to change it: the Amendment process.

So, Article I, Section 8 declares specifically what Congress can do (Section 9 makes some specific declarations of what they can’t do); Section 10 declares specifically what the States cannot do. Included in there is that States can’t print fiat currency (“emit bills of credit”), that they can’t coin money, AND that they can’t “make any Thing but gold and silver Coin a Tender in Payment of Debts”. Now, that’s pretty clear: if a State owes money to anyone or anything, it can’t “make a tender” (offer to pay the debt) to those entities in anything but gold or silver coin; and if the State is owed money, the State can’t accept any tender made (any offer to pay that debt) unless it is made in gold or silver coin.

This is a key point here: for the correct (in context) understanding of this phrase “to make something a tender in payment of debt,” see the original 1828 Webster’s Dictionary – “TENDER: In law, an offer, either of money to pay a debt, or of service to be performed, in order to save a penalty or forfeiture which would be incurred by non-payment or non-performance; as the tender of rent due, or of the amount of a note or bond with interest. To constitute a legal tender, such money must be offered as the law prescribes; the offer of bank notes is not a legal tender.”

So the Framers of the Constitution were being very clear here: No State is allowed to make or accept payments in anything but gold or silver coins. It doesn’t matter what the national government does with so-called “legal tender” laws; it’s not up to the national government to determine whether or not States can now disobey that direct prohibition, any more than it’s up to the federal government to determine whether or not States can now disobey the direct prohibition on passing an ex post facto Law or granting any Title of Nobility. The Constitution says the State CANNOT do it – so the State must simply obey the Constitution, NO MATTER WHAT the federal government says or does. It is the duty of every State, and it is the duty of every State’s elected officials, in keeping with their oath of office, to pass laws that conform to the explicit directives of the U.S. Constitution.

And this leads directly to what North doesn’t mention, but what I consider to be the biggest reason why States DO need to pass Constitutional Tender bills rather than State Legal Tender bills: all of the State Legal Tender bills specifically declare that the State can use either gold & silver coins OR they can use Federal Reserve Notes. But the U.S. Constitution specifically says that “No State shall… make any Thing but gold and silver Coin a Tender in Payment of Debts” — which means that any law that declares that a State can use Federal Reserve Notes (make them “a Tender in Payment of Debts”) is in direct violation of the U.S. Constitution. By passing such a law, they are making some other “Thing” an offer as payment — they are by law declaring that they will accept, and pay out, Federal Reserve Notes for any debts owed by or to them.

On the other hand, the Constitutional Tender Act takes Article I, Section 10 at “face value” — it unambiguously declares that the State may NOT make anything besides gold or silver a “tender in payment” (which means they cannot “make something else an offer as payment”) for any debts, which would include debts owed by and to the State. It sets up a process by which the State, which is currently in violation of the Constitution (because it accepts and pays out Federal Reserve Notes, which aren’t backed by gold, silver, or anything else), can move back to adherence to the Constitution’s actual “legal tender” provisions. And in doing so, it establishes de facto “competitive currencies” of real money vs. fiat money — and in a level-field playing environment in the free market, real money wins.

Which brings us to the other big reason that I believe States need to pass Constitutional Tender bills rather than State Legal Tender bills: the results. In other words, “What will happen if this or that bill is passed into law?” While no State has passed the Constitutional Tender Act yet (so we can’t know for sure), I discuss the likely outcome in much more detail in the paper I presented at the Mises Institute, “Ending the Federal Reserve From the Bottom Up: Re-Introducing Competitive Currency by State Adherence to Article I, Section 10″:

“Upon going into effect, the Constitutional Tender Act would introduce currency competition with Federal Reserve Notes, by outlawing their use in transactions with the State.  Ordinary citizens of the State, being required to pay their State taxes in gold and silver coins, would find it necessary to open bank accounts in those denominations.  Businesses operating within the State, being required to pay their State sales taxes and license fees in gold and silver coins, would need to do the same; and in order to acquire such coins, they would begin to offer their goods and services in “dual currency” denominations, where customers could choose to pay in Federal Reserve Notes (which would still be necessary to pay Federal fees and taxes) or gold and silver coins (including checks and debit cards based on bank accounts denominated in such coins).  Customers, having found the need to open such accounts in order to deal with the State, would be able to engage in commerce using those accounts.

Over time, as residents of the State use both Federal Reserve Notes and silver and gold coins, the fact that the coins hold their value more than Federal Reserve Notes do will lead to a “reverse Gresham’s Law” effect,  where good money (gold and silver coins) will drive out bad money (Federal Reserve Notes).  As this happens, a cascade of events can begin to occur, including the flow of real wealth toward the State’s treasury, an influx of banking business from outside of the State (as citizens residing in other States carry out their desire to bank with sound money), and an eventual outcry against the use of Federal Reserve Notes for any transactions.  At that point, the Federal Reserve system will have become unwanted and irrelevant, and can be easily abolished by the people’s elected Representatives in Washington, D.C.”

And what about State Legal Tender laws? What results would they bring? Well, we have a real-world example to look at there: Utah. In 2011, the Governor signed H.B 317, the “Utah Legal Tender Act,” which declared that U.S. Mint-issued gold and silver coins were “legal tender” in Utah, and monetary exchanges of these coins could no longer be taxed by the State. It allowed banks to set up gold- and silver-based accounts; it allowed people to pay their taxes and fees in gold and silver coins; and it allowed the State to pay its debts in gold and silver as well.

But it didn’t require any of those things — most of which the Constitution clearly states are required. It simply allowed them — and then noted that “A person may not compel any other person to tender or accept gold and silver coin that is issued by the federal government.” Apparently, that includes any “person” who works as a tax collector in Utah, as one man found out who tried to pay his taxes in “legal tender” silver coins:

Carlton Bowen is frustrated.The Orem man says all he wants to do is pay his property tax, but the Utah County treasurer says no. The reason: Bowen wants to pay his taxes in silver.

“When is Utah going to accept its own legal tender?” Bowen asked.

Earlier this year, the Utah Legislature passed groundbreaking legislation, stating that gold and silver coins can be used as legal tender in Utah… The practical impact of the Legislature’s move has been minimal… the Utah County and state treasurers have rejected Bowen’s payment.

“In my mind there’s still no practical way of making this happen,” said Richard Ellis, the Utah State Treasurer. He said the state simply isn’t equipped to accept, authenticate and store gold and silver, and doesn’t see it becoming a reality in the near future.

So, the Utah Treasurer won’t accept payment in “legal tender” gold or silver coins, even though Utah passed a “State Legal Tender” law. And why not?

Ellis, the treasurer, says gold and silver transactions present enormous risks to the state that have to be addressed before he’s comfortable with the idea. How would the state determine the value of a coin? What’s the exchange rate? How do the state or counties secure the precious metals?

“There are a lot of things that put the treasurer in the middle of it, but I’m not anxious to necessarily be in that role,” Ellis said… “Nobody’s fleshed out all these details, and they want to have as little regulation and oversight as possible,” Ellis said. “I haven’t tried to make preparations to [accept payments] because there’s just not a practical way of making this work.”

So, what are the practical results of passing a State Legal Tender law? Apparently… nothing. In the one case where such a bill has become law, the result has been (a) the State still won’t use gold or silver coins, (b) bank accounts still can’t be set up using gold or silver coins, and — most importantly — (c) the State is still violating Article I, Section 10 of the U.S. Constitution, by making some other “Thing” besides gold and silver coin a “Tender in Payment of Debts”.

I’m sorry. I just don’t see those “results” as being beneficial in any way.

Again, let me reiterate that I like the fact that State Legal Tender bills (and gold & silver Sales Tax Elimination bills) are being introduced and passed in the States. I agree with Dr. North that what’s significant is that “there is enough interest in gold today to call forth such bills,” which “indicates a major shift in the fringes of public opinion.” And I agree with a number of my friends who promote these kinds of bills, as being “incremental steps” towards “returning to sound money” in America.

What I have a problem with is when these bills, in attempting to return States to obedience to the U.S. Constitution, end up violating the very same Constitution — in fact, the very same Clause that they’re supposedly based on. That’s why we’re so strongly encouraging States to pass the Constitutional Tender Act — a bill template that can be introduced in every State legislature in the nation, setting up clear and methodical systems to return each of them to adherence to the United States Constitution’s actual legal tender provisions.

Which, in turn, will “Nullify the Fed” in the long run, which is itself unconstitutional. Not a bad deal.

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