Legal Tender Cases
The Legal Tender Cases were a series of United States Supreme Court cases in the latter part of the nineteenth century that affirmed the constitutionality of paper money. In the 1870 case of Hepburn v. Griswold, the Court had held that legal tender in the form of paper money violated the United States Constitution. The Legal Tender Cases reversed Hepburn, beginning with Knox v. Lee and Parker v. Davis in 1871, and then Juilliard v. Greenman in 1884.
Legal Tender Act of 1862 and ensuing litigation 
The Legal Tender Cases primarily involved the constitutionality of the Legal Tender Act of 1862, 12 Stat. 345, enacted during the American Civil War. This act authorized issuance of paper money, United States Notes, to finance the war without raising taxes. The paper money depreciated in terms of gold and became the subject of controversy, particularly because debts contracted earlier could be paid in this cheaper currency.
In Hepburn, Chief Justice Salmon P. Chase held for a 4-3 majority of the Court that the Act was an unconstitutional violation of the Fifth Amendment. Ironically, Chief Justice Chase had played a role in formulating the Legal Tender Act of 1862, in his previous position as Secretary of the Treasury. On the same day that Hepburn was decided, President Ulysses Grant nominated two new justices to the Court, Joseph Bradley and William Strong, although Grant later denied that he had known about the decision in Hepburn when the nominations were made. Bradley and Strong subsequently voted to reverse the Hepburn decision, in Knox v. Lee and Parker v. Davis, by votes of 5-4. The constitutionality of the Act was more broadly upheld thirteen years later in Juilliard v. Greenman.
Background about constitutionality of paper money 
Article I, Section 10 of the Constitution explicitly forbids the states from issuing "bills of credit" (paper or "fiat" money) or making anything but gold and silver coin legal "tender", whereas there are no corresponding explicit prohibitions against the federal government, nor any explicit authorization. The Tenth Amendment refers to reserved powers that only the states can exercise, as well as powers not delegated that continue to reside in the people. "Concurrent powers" also exist, which may be exercised by either the states or the federal government, such as the power to repel invasions, and arguably including power to make legal tender (e.g. in federal territories or elsewhere). Article I, Section 8 of the Constitution specifically gives Congress power to "borrow money" and also power to "coin money and regulate the value" of both U.S. and foreign coins, and regulate interstate commerce, but does not explicitly and unambiguously grant Congress the power to print paper money or make it legal tender.
The federal government first issued paper money in 1861 in order to fund the Civil War. Before that, all US paper money was bank issued. For example, paper notes were issued by the First Bank of the United States, which was a private corporation chartered by the federal government. Congress had also authorized paper money (e.g. Continentals) even before the Constitution was adopted. The Continental was issued by both the individual states and the Continental Congress under the Articles of Confederation. Those Articles specifically allowed the issuance of legal tender paper money, at the time called "bills of credit."
Original intent and original meaning 
Originalists like Robert Bork have objected to enforcing the intentions of those framers who may have believed that paper money should be prohibited: "Scholarship suggests that the Framers intended to prohibit paper money. Any judge who thought today he would go back to the original intent really ought to be accompanied by a guardian rather than be sitting on a bench." According to law professor Michael Stokes Paulson, "Among the most common canards in critiques of originalism is that, under the original meaning of the Constitution, the issuance of paper money as legal tender would be unconstitutional, sending our economy into disarray."
Regarding paper money, Nathaniel Gorham explained at the Constitutional Convention that he "was for striking out" an explicit power of Congress to issue paper money, but Gorham was also against "inserting any prohibition." That is what ultimately happened at the Convention: language explicitly giving the federal government power to issue legal tender paper money was removed on a vote of 9-2, but an option allowing the issuance together with a prohibition against making it legal tender was not acted upon. Article I, Section 8 of the Constitution gives Congress power to "borrow money on the credit of the United States," and therefore Gorham envisioned that "The power [e.g. to emit promissory paper], as far as it will be necessary or safe, is involved in that of borrowing." The power to emit paper money (e.g. bank notes) has been justified by invoking the Necessary and Proper Clause in combination with the other enumerated powers which include the power to borrow money. The power to "issue bills of credit" (paper money) is explicitly mentioned in the Constitution as a prohibition on the States, and could therefore be interpreted as a power so momentous that it would have to be conferred explicitly on the federal government rather than inferred from the Necessary and Proper Clause, although it is not entirely clear whether or not the framers intended such an interpretation, nor did the Supreme Court adopt such an interpretation in the Legal Tender Cases or subsequently.
James Madison's notes, from the Constitutional Convention in 1787, include a footnote where he says that the Constitution would not allow the federal government to use paper as currency or legal tender, though there is no indication whether or not the contents of his footnote were uttered aloud at the Convention. Thereafter, during the ratification debates, the Federalist Papers #44 (assumed to be authored by Madison) said that prohibiting states from emitting "bills of credit must give pleasure to every citizen, in proportion to his love of justice and his knowledge of the true springs of public prosperity." He further stated that the issuance of paper money by the states had resulted in "an accumulation of guilt, which can be expiated no otherwise than by a voluntary sacrifice of the power which has been the instrument of it."
How legal tender is issued in the U.S. today 
Paper money is a form of currency that is physically printed by the Bureau of Engraving and Printing, under authority of the Federal Reserve System. The Bureau of Engraving and Printing is part of the U.S. Treasury Department, whereas the Federal Reserve is not. In contrast to paper money, coins are physically produced by the U.S. Mint, within and under authority of the U.S. Treasury. The Federal Reserve System can authorize as much paper money as it sees fit, but the U.S. Treasury is restricted by law to a certain maximum amount of coinage in circulation.
The Federal Reserve System can increase the money supply by creating money to purchase U.S. Government securities on the open market. Article I, Section 8 of the Constitution explicitly contemplates U.S. Government "securities."
Those "open market operations" involve the buying and selling of U.S. government securities, including federal agency securities and also (as happened, for instance, in response to the recent economic turmoil) mortgage-backed securities. Federal agency securities have been issued by the federal government to finance deficit spending.
The Federal Reserve System can also increase the money supply by allowing banks to issue more loans, which is accomplished by reducing the reserve requirement ratio. This regulation of banks is pursuant to the Commerce Clause. Conversely, the Federal Reserve System can reduce the money supply by selling securities or by increasing the reserve requirement ratio.
See also 
- Commodity money
- Demand note
- Fiat money
- List of United States Supreme Court cases, volume 79
- United States note
- Knox v. Lee, 79 U.S. 457 (1871).
- Juilliard v. Greenman, 110 U.S. 421 (1884).
- Act of Congress, Statutes at Large, Volume 12, 37th Congress, Session II, Chapter 33, pp. 345–348 (1862-02-25). This Act authorized issuance of $150,000,000 in United States Notes, commonly referred to as greenbacks, plus $500,000,000 in interest-bearing bonds.
- Newcomer, Philip. The Illegality of Legal Tender, The Freeman: Ideas on Liberty, December 1986, Vol. 36 No. 12.
- Legal Tender cases, The Columbia Encyclopedia, Sixth Edition. 2001-05.
- Pusey, Merlo. Matter of Delicacy: The Court Copes With Disability, Supreme Court Historical Society 1979 Yearbook.
- Friedberg, Arthur and Friedberg, Ira. Paper Money of the United States: A Complete Illustrated Guide With Valuations: "From the first year of Federal paper money, 1861, to the present...."
- Federal Reserve Bank of San Francisco, Fun Facts About Money. Retrieved 2007-02-24.
- The Articles of Confederation stated: "The United States in Congress assembled shall have authority ...to borrow money, or emit bills on the credit of the United States"
- Hearings Before Senate Committee on the Judiciary, 100th Congress, 1st Session, Nomination of Robert H. Bork to be Associate Justice of the Supreme Court of the United States (1987).
- Paulsen, Michael Stokes. "How to Interpret the Constitution (and How Not To)," 115 Yale Law Journal 2037, 2061 n. 46 (2006).
- The Debates in the Federal Convention of 1787, ed. Madison, James (1787-08-16). Retrieved 2007-02-24. One delegate at the Constitutional Convention went so far as to say that an express power to emit paper money would be "as alarming as the mark of the Beast in Revelation".
- Siegan, Bernard.. The Supreme Court's Constitution, (1987), page 36: “The central government would be able to emit promissory paper ‘as it will be necessary or safe’ pursuant to the borrowing power.”
- Siegan, Bernard. The Supreme Court's Constitution, (1987), page 27: “Because the power was not banned, Congress could print paper money and designate it legal tender under its necessary and proper power (article I, section 8, clause 18) once the required relationship to an enumerated power had been established."
- The Debates in the Federal Convention of 1787, ed. Madison, James (1787-08-16). Retrieved 2007-02-24. The full text of Madison's footnote is as follows: "This vote in the affirmative by Virga. was occasioned by the acquiescence of Mr. Madison who became satisfied that striking out the words would not disable the Govt. from the use of public notes as far as they could be safe & proper; & would only cut off the pretext for a paper currency, and particularly for making the bills a tender either for public or private debts."
- Madison, James. Federalist #44 (January 25, 1788).
- Monetary Policy Basics, Federal Reserve Education
|Wikisource has the text of the 1920 Encyclopedia Americana article Legal-Tender Cases.|
- Legal Tender Acts
- "Paper Money and the Original Understanding of the Coinage Clause" by Robert Natelson, Harvard Journal of Law and Public Policy (2008).