Here is an excerpt from the article:
4. Supreme Court Decisions and Future Monetary Policy
But what, one might well ask, does all of this have to do with current and future monetary policy arrangements? My answer is that the Supreme Court arguments in favor of Greenback constitutionality relied to a substantial extent on a crucial confusion between monetary and fiscal policy. In particular, note that “the power to borrow money” is a fiscal, not a monetary, provision. Specifically, it gives Congress the right to borrow—to sell government debt to the public—an activity that does not necessarily entail any change in the outstanding stock of money. “Borrowing” and “lending” are terms that pertain to fiscal actions, not monetary actions; for when the Treasury sells or purchases bonds rather than raising or lowering taxes (in order to finance increased or decreased government expenditures) there is no necessary or implied change in the nation’s quantity (stock) of high-powered money—and no change in the private sector’s holdings when the borrowed funds are immediately spent on (e.g., military) supplies and wages, as was the case in 1862.
But the reasoning expounded by Supreme Court justices in two crucial cases did not recognize this distinction. Instead, they argued as if the quoted power (“to borrow
money”) would justify the issue of legal-tender fiat money. These cases were Knox v.
Lee (in 1870) and Julliard v. Greenman (in 1884). In addition, the arguments made by congressmen in 1861 in favor of the Greenback issue and by minority members of the
Supreme Court in the Hepburn v. Griswold case (Hepburn, p. 257), also involved this confusion. In sum, it is my argument that the failure to distinguish clearly between monetary and fiscal policy actions was a major contributing factor to the Supreme Court decisions that made possible the alteration of the U.S. monetary standard from a metallicmoney to a fiat-money system, a change of truly fundamental and momentous proportion.
Of course this change was not completed until much later, as convertibility of paper money into gold was maintained from 1879 until 1933 and some remaining elements of a metallic system until 1971, as is well known. But the legal tender cases were necessary preludes to the later steps in the process of de-metallization; without them, subsequent actions and judicial rulings could have been very different from those that actually transpired.
Thus the failure of legislators and justices to recognize the basic distinction between monetary and fiscal policy played a central role in the fundamental and momentous historical change, from metallic to fiat regimes, in U.S. monetary arrangements.
What is interesting is that this paper was written by a researcher at the Bank of Japan. You rarely see a central bank commission an article which questions the legality of fiat money.
Black Swan Insights