Five-minute digest
Veazie Bank v. Fenno
Summary
Before the Civil War the paper money of the United States consisted chiefly of notes issued by hundreds of state-chartered banks, of uneven credit and value. During the war Congress created a national currency: United States notes issued by the Treasury, and notes of new national banks chartered under the National Bank Acts of 1863 and 1864. To drive the state notes out of circulation, Congress in 1865 and 1866 imposed a tax of ten percent on any state-bank notes paid out by a bank after mid-1866. The Veazie Bank of Bangor, chartered by Maine in 1848, paid the tax and then challenged it in a suit against Fenno, the federal revenue collector. The judges of the federal circuit court in Maine divided and certified questions to the Supreme Court. The bank pressed two arguments. First, the levy was a direct tax, which the Constitution requires to be apportioned among the states by population, and this one was not. Second, it struck at a franchise the state had lawfully granted, and its very size showed an intent to destroy the state banks, an object outside federal power. The government answered that the tax was an ordinary duty on contracts or property and that Congress could protect the currency it had created. On 13 December 1869 the Court upheld the tax, six to two, in an opinion by Chief Justice Chase. Reviewing the Constitutional Convention, the 1796 carriage-tax case Hylton v. United States and the practice of Congress since 1798, Chase concluded that direct taxes had been understood to mean only capitation taxes and taxes on land, so a tax on bank notes was an excise or duty that need not be apportioned. The tax fell not on the bank's franchise but on the notes issued under it. To the charge that it was excessive, Chase replied that the courts cannot limit the legislature's acknowledged powers; the remedy for a burdensome tax lies with the voters. He added that Congress, having undertaken to provide a uniform national currency, may restrain the circulation of notes not issued under its authority. Justice Nelson, joined by Justice Davis, dissented: the power to charter banks was reserved to the states, and a federal tax on that power, plainly intended to destroy it, invaded state sovereignty much as a state tax on federal bonds would invade federal authority. The library text gives Chase's opinion and Nelson's dissent in full, without the reporter's headnotes. Chase's narrow definition of direct taxes was later limited by Pollock v. Farmers' Loan & Trust Co. (1895). The ten percent tax remained in force, and state-bank notes largely disappeared, leaving national bank notes and greenbacks as the country's paper currency.
Top Lessons
What is a direct tax?
The Constitution requires direct taxes to be apportioned among the states by population but never defines them. Chase answers the question by consulting the Convention debates, an early decision and seventy years of congressional practice, a model of interpreting an uncertain term by history and usage.
Taxing to regulate
The ten percent tax raised little revenue; its purpose was to remove state notes from circulation. Chase upholds it both as a duty on property and as a means of securing the national currency, while Nelson regards a tax designed to destroy as no tax at all but an attack on reserved state power.
Who checks the taxing power?
Chase holds that judges cannot limit an acknowledged power because it is exercised heavily; the check is the ballot. Nelson, drawing on McCulloch's warning about the power to tax, argues that the federal system itself protects each government's essential functions from the other's taxation.
A uniform national currency
Chase describes a currency for the entire country made up of coin, United States notes and national bank notes, and holds that Congress may protect it from competing issues. The opinion marks a shift from a patchwork of local paper to a national monetary system.
Verified Quotes
“There was, then, no National currency except coin; there was no general regulation of any other by National legislation; and no National taxation was imposed in any form on the State bank circulation.”
“It may be rightly affirmed, therefore, that in the practical construction of the Constitution by Congress, direct taxes have been limited to taxes on land and appurtenances, and taxes on polls, or capitation taxes.”
Frequently cited
“The power to tax may be exercised oppressively upon persons, but the responsibility of the legislature is not to the courts, but to the people by whom its members are elected.”
“Without this power, indeed, its attempts to secure a sound and uniform currency for the country must be futile.”
“It is, simply, a mode by which the powers or faculties of the States, to incorporate banks, are subjected to taxation, and, which, if maintainable, may annihilate those powers.”
“It is sufficient to add, that the burden of the tax, while it has encouraged these banks, has proved fatal to those of the States; and, if we are at liberty to judge of the purpose of an act, from the consequences that have followed, it is not, perhaps, going too far to say, that these consequences were intended.”
Medical Lens
The case turns on bank notes, the meaning of direct taxation and the reserved powers of the states; nothing in it touches health or medicine.