Fiscal and monetary powers and the Supreme Court
Fiscal and monetary powers in the United States refer to the government's authority to manage national finances and currency, which are primarily vested in the federal government by the U.S. Constitution. This framework has been shaped by landmark Supreme Court cases that have addressed the boundaries of these powers and the roles of state governments. Historically, the establishment of national banks, such as the Bank of the United States, sparked significant debates about their constitutionality and the extent of federal control over currency issuance. Notably, cases like McCulloch v. Maryland (1819) affirmed the federal government's implied powers to create a national bank, while others, like Craig v. Missouri (1830), limited state authority in managing monetary practices.
The evolution of fiscal policy is also marked by the introduction of federal income taxes, which faced legal challenges until the Sixteenth Amendment was ratified in 1913, validating such taxation. The Supreme Court has consistently played a pivotal role in adjudicating disputes related to taxation and government spending, including cases that define the limits of state taxation on federal entities and the conditions under which federal funds can influence state policies. This intricate legal landscape illustrates the ongoing tension between federal and state powers in fiscal and monetary matters, underscoring the Supreme Court's critical role in interpreting the Constitution.
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Fiscal and monetary powers and the Supreme Court
Description: Taxation, government expenditures, and management of the public debt; creation and regulation of the money supply and banking system.
Significance: The Supreme Court’s monetary decisions have generally supported broad federal authority, particularly in crisis periods. Its fiscal decisions affected development of federal income tax and intergovernmental relations.
The U.S. Constitution bestowed extensive monetary powers on the new central government and restricted possible monetary actions by state governments. In 1792 Congress chartered the Bank of the United States, which operated branches in major cities. The bank’s constitutionality was much in dispute, and it closed in 1812 when its charter expired. Monetary disorder attending the War of 1812 led to the chartering of a second Bank of the United States in 1816, intended to aid in managing the government’s finances and also in forcing state banks to restrict their issue of bank notes. Maryland levied a punitive tax against the bank, which was challenged in the landmark Supreme Court case of McCulloch v. Maryland (1819). In his opinion for the Court, Chief Justice John Marshall stated that the creation of the bank was an acceptable exercise of implied powers, principally because of the bank’s usefulness in managing the government’s financial transactions, and therefore, the tax was invalid.
A severe business depression in 1819 led several states to experiment with methods of increasing the money supply. Missouri created paper near-money in the form of loan certificates that paid interest but were designed to circulate as currency. This practice was struck down by the Court as an unconstitutional issue of bills of credit in Craig v. Missouri (1830). Kentucky achieved the same result by creating the Bank of the Commonwealth of Kentucky, which could lend newly printed bank notes to residents. The Court refused to bar this action, holding that the bank was a separate entity from the state in Briscoe v. Bank of the Commonwealth of Kentucky (1837). State authority to create banks remained a major loophole in federal monetary authority for nearly another century.
Civil War
The financial predicament of the federal government during the Civil War (1861-1865) led to several major monetary developments. The government began in 1862 to issue legal tender paper currency (“greenbacks”) with no fixed parity to gold. The greenbacks depreciated relative to gold, and debtors claimed the right to use greenbacks to repay debts that had initially called for repayment in gold. In Hepburn v. Griswold (1870), the Court held that the legal tender provision could not apply to debts incurred before the greenbacks were created. However, this decision was reversed in Knox v. Lee (1871) and Parker v. Davis (1871), after President Ulysses S. Grant appointed two more justices. Therefore, greenbacks could be used to pay off any (private) debts, even those dating from before greenbacks were issued. In Juilliard v. Greenman (1884), the Court upheld the right of the government to maintain inconvertible legal tender paper money even in peacetime.
The National Banking Act of 1863 authorized the federal government to charter national banks, which were permitted to issue national banknotes, secured by deposit of government bonds. To induce banks to take national charters, Congress in 1865 levied a punitive tax on state-bank note issues. The tax was upheld as a legitimate act of federal monetary authority in Veazie Bank v. Fenno (1869). The tax did not wipe out state-chartered banks but obliged them to stick to deposit business rather than issuing bank notes.
Echoes of the greenback cases arose during the Great Depression. In 1933 Congress abolished the gold standard, required holders of gold coins to turn them in, and invalidated contracts calling for payment of debts in gold. The Court upheld the government’s action in Norman v. Baltimore and Ohio Railroad Co. (1935), stating that people “cannot remove their transactions from the reach of dominant constitutional power by making contracts about them.”
Fiscal Matters
The Constitution provided that “direct taxes shall be apportioned among the several states…according to their respective numbers.” An early federal tax on the ownership of carriages was held in Hylton v. United States (1796) not to be a direct tax and therefore exempt from the proportionality requirement.
The Civil War fiscal crisis led to the first federal income tax, enacted in 1862. It was removed in 1872 but revived in 1894. The Court repeatedly upheld the tax’s constitutionality, especially in Springer v. United States (1881). However, surprisingly in Pollock v. Farmers’ Loan and Trust Co.(1895), the Court held that the 1894 tax was a direct tax and therefore invalid. Political support for an income tax was sufficient in 1913 to bring adoption of the Sixteenth Amendment, which specifically allowed the tax. Income taxes on individuals and corporations have been a major fiscal factor ever since.
After McCulloch v. Maryland, numerous cases arose concerning the authority of one level of government to tax instrumentalities and operations of another. Many decisions of this “much litigated and often confused field” are reviewed in United States v. New Mexico (1982) and South Carolina v. Baker (1988). In the latter case, the Court concluded that “the States can never tax the United States directly but can tax any private parties with whom it does business,…as long as the tax does not discriminate.” After Weston v. Charleston (1829), states were prohibited from taxing interest incomes from federal government bonds, and federal statutes have exempted interest on state and local government bonds from the federal income tax.
Similarly the Court often upheld the use of federal tax and spending policies to influence state policy. In South Dakota v. Dole (1987), it upheld federal law withholding federal highway funds from states that did not prohibit purchase or public possession of alcohol by persons under twenty-one years of age. The Court frequently ruled on cases where taxation or government expenditures involved issues of discrimination or issues of church-state relations. In Bob Jones University v. United States (1983), it upheld withholding tax exemption from institutions practicing racial discrimination.
An important issue relating to federal expenditure policy was the Court’s position denying the authority of the president to refuse to spend funds authorized by Congress in the 1975 cases Train v. City of New York and Train v. Campaign Clean Water.
Bibliography
Cohen, William, and Jonathan D. Varat. Constitutional Law: Cases and Materials. Westbury, N.Y.: Foundation Press, 1997.
Dunne, Gerald T. Monetary Decisions of the Supreme Court. New Brunswick N.J.: Rutgers University Press, 1960.
Ratner, Sidney. American Taxation. New York: W. W. Norton, 1942.