No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
Article 1, Section 10, Clause 1
1: No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
What if a state, laboring under a significant budget deficit, decided to repudiate its general obligation bonds? What if that state, further, enacted an increase in the income tax, retroactive to the beginning of the year? Would Article I, Section 10, clause 1 permit such actions?
The first part of that clause, along with clause 3 of the section, restricts the states to only a very limited capacity at international law, and states may exercise even that residue only with permission of Congress. The Articles of Confederation restricted these powers already, as the exercise of them by the states would undermine national sovereignty. The new Constitution simply tightened them and made them more concise, in recognition of the fact that these restrictions were an integral part of the establishment of a stronger Union.
The second part of that clause, dealing with money, bills of credit, and gold and silver as legal tender, addressed the pestilence of paper money issued by the states. Many of the Framers saw this as a particular problem that contributed to the insecurity of property in various states and the economic turbulence that, in turn, produced political turbulence and threatened the republican experiment. It had been the practice even of colonial assemblies to fund the costs of military campaigns by quasi-confiscatory practices of issuing bills of credit (paper money on the credit of the colony) to merchants and suppliers of war materiel. After the war, those bills of credit rapidly depreciated, as the colonists declined to vote the taxes necessary to pay them. Once the bills reached a sufficiently low level, they could be taxed out of existence relatively painlessly.
It was hardly surprising, then, that the states (and the Continental Congress) would resort to that same hoary practice on declaring independence. By war’s end, Congress had issued $226 million in bills of credit, for which it had received $45 million in goods and services, as Americans increasingly took into account this species of public finance fraud. However, the paper currency itself had depreciated essentially to nothing, a massive (and conscious) expropriation of private property by inflation, engineered by a body that lacked the formal constitutional powers to do so. “Not worth a Continental” was not a metaphor. Benjamin Franklin defended this confiscatory practice as an equitable form of taxation as these bills were held more by the upper-middle and upper segments of society than by the poor. John Adams dismissed critics of the devaluation with a curt, “The public has its rights as well as individuals.” In the end, Congress never redeemed the paper currency.
If the Congress was bad, in some ways the states were worse. Not only were there problems with the emission of bills of credit (though that was less significant than for Congress), but with other, broader confiscatory and debt cancellation laws. To the extent that such laws injured the interests of Loyalists and British creditors, they violated the peace treaty with Great Britain and threatened to reignite the war. To the extent they hit their own citizens, the states were flirting with class warfare. At best, even in the absence of a specter of violence, state politics circled around the vortex of the depreciated bills, as holders, speculators, and debtors (who were not always different persons) jockeyed for political and economic advantage. This contributed to the instability of state politics and prevented establishing a basis for long-term social peace and material prosperity.
Historians, including conservatives such as Forrest McDonald, indict this period after independence for making Americans less secure in their property rights than they had been under King George. To an increasing number of Americans, especially younger figures such as Hamilton and Madison who were not as tied to the “revolutionary spirit,” the reason was that “governments were now committing unprecedented excesses, even though–or precisely because–governments now derived their powers from compacts amongst the people.” The period was a vivid illustration that democratic self-rule does not, without more, set a society on the path to the security of property and long-term well-being. Even more alarming was the fact that those same state governments were acting under constitutions that nominally protected individuals’ liberty and property from just such majoritarian muggings.
It is no wonder then, that many of those who gathered at the convention in Philadelphia, viewed the levelling tendencies of such fiscal and redistributionist laws with consternation and as evidence of the irresponsibility of popular majorities. There was no opposition to the portions of Article I, Section 10, that negated the states’ abilities to coin money, issue paper currency, or make anything but gold and silver legal tender. Some delegates wanted that prohibition extended to Congress, but the majority demurred. The need for paper money during emergencies, combined with the Madisonian faith that a more effective balance between debtor and creditor interests would produce better political checks against excesses at the national level than within the states, gave the majority pause about tying the hands of Congress.
In hindsight, both sides can claim vindication. Certainly, the issuance of fiat money during the Civil War helped the Union’s war effort. On the other hand, the flood of trillions of dollars sloshing around today during peacetime can easily become a tsunami that destroys the economic well-being of large numbers of Americans. And, contrary to Franklin, devaluation and inflation typically hit the lower and middle classes more than it does the wealthy. Inflation is a brutally regressive tax.
One tool of the Framers was to ban retrospective laws. The first was the prohibition on ex post facto laws, one that also applied to the national government under Article I, Section 9. Apparently many of the Convention (including Madison) thought that ex post facto laws covered all retrospective laws. This produced a moment that demonstrates that the Framers were ordinary humans, finding their way through the constitutional fog, not infallible divine creators. The day after the vote, John Dickinson sheepishly announced that he had looked up “ex post facto” in Blackstone and found (correctly) that this only prohibited retroactive criminal laws.
Similarly, bills of attainder (legislative decrees of punishment of individuals used expansively during the English Civil War, but not unknown even in the newly-independent states) were prohibited for the states and the national government, primarily because of their retroactive application to acts already committed. Bills of attainder and ex post facto laws were viewed as such outrageous infringements of liberty that they were denounced as contrary to the protections of the social contract and the very nature of a republican government of free men.
But that still left the issue of retrospective civil laws. The contract clause of Article I apparently was the vehicle to deal with the vexatious laws that, in tandem with the paper currency policies, cancelled debts or otherwise interfered with existing contracts. Although the origin of the clause is obscure, it is similar to one found in the Northwest Ordinance of 1787, passed by the Confederation Congress. The author at the Convention probably was Hamilton, who, after his personal experience with Pennsylvania’s capricious revocation of the charter of the Bank of North America, also saw the potential of the clause to protect banks and other corporations from state harassment.
The contracts clause was an early vehicle for the Supreme Court to promote the rule of law and the stability of rights in property. Chief Justice Marshall, in particular, read the clause broadly to protect individual rights in contracts. Indeed, his interpretation went so far as to prevent the states from interfering with the obligations of contracts even prospectively, a view that was probably beyond that envisioned by the Framers and which led to Marshall’s only dissent in a constitutional case in 34 years on the Court.
Much has changed since then. Today, the Supreme Court has reinterpreted the categorical language of the clause to prohibit only laws “unreasonably” impairing the obligation of contracts. This has effectively eviscerated the clause’s protections against most state laws that interfere with purely private contractual relations, even those that are retrospective. States, and the federal government (to which the contracts clause does not apply directly), are relatively free to force creditors to revise terms of existing debt instruments, such as mortgages) when debtor interests gain enough political traction.
Neither of our hypothetical state laws would be unconstitutional under the ex post facto clause, as they do not deal with crimes. There being no “contract,” the only limitation on the retroactive tax increase would be vague notions of “notice” to the taxpayers under the due process clause of the 14th Amendment. The repudiation of state bonds would be a closer case, and states well may run into difficulties under the contracts clause if they were to try to repudiate their bonds (or to curtail vested public employee pensions).
An expert on constitutional law, Prof. Joerg W. Knipprath has been interviewed by print and broadcast media on a number of related topics ranging from recent U.S. Supreme Court decisions to presidential succession. He has written opinion pieces and articles on business and securities law as well as constitutional issues, and has focused his more recent research on the effect of judicial review on the evolution of constitutional law. He has also spoken on business law and contemporary constitutional issues before professional and community forums. Read more from Professor Knipprath at: http://www.tokenconservative.com/ .