WEBVTT

NOTE 22. Greenbacks

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Greenbacks

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The Civil War led to an enormous ballooning of federal expenditures, which skyrocketed from $66 million in 1861 to $1.3 billion four years later.

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To pay for these swollen expenditures, the Treasury initially attempted, in the fall of 1861, to float a massive $150 million bond issue to be purchased by the nation's leading banks.

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However, Secretary of the Treasury Salmon P. Chase, a former Jacksonian, tried to require

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the banks to pay for the loan in specie that they did not have.

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This massive pressure on their specie, as well as an increased public demand for specie

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due to a well-deserved lack of confidence in the banks, brought about a general suspension

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of specie payments a few months later, at the end of December 1861.

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This suspension was followed swiftly by the Treasury itself, which suspended specie payments

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on its Treasury Notes.

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The US government quickly took advantage of being on an inconvertible fiat standard.

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In the Legal Tender Act of February 1862, Congress authorized the printing of $150 million

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in new, quote, United States notes, soon to be known as, quote, greenbacks, to pay for

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the growing war deficits.

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The greenbacks were made legal tender for all debts, public and private, except that

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The Treasury continued its legal obligation of paying the interest on its outstanding

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public debt in specie.

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The greenbacks were also made convertible at par into U.S. bonds, which remained a generally

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unused option for the public and was repealed a year later.

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In creating greenbacks in February, Congress resolved that this would be the first and

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last emergency issue.

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But printing money is a heady one, and a second $150 million issue was authorized in July,

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Greenbacks began to depreciate in terms of specie almost as soon as they were issued.

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In an attempt to drive up the price of government bonds, Secretary Chase eliminated the convertibility

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of greenbacks in July 1863, an act that simply drove their value down further.

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Chase and the Treasury officials, instead of acknowledging their own premier responsibility

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for the continued depreciation of the greenbacks, conveniently placed the blame on anonymous

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quote gold speculators.

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In March 1863, Chase began a determined campaign, which would last until he was driven from

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office to stop the depreciation by controlling, assaulting and eventually eliminating the

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gold market.

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In early March, he had Congress levy a stamp tax on gold sales and to forbid loans on a

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In late March 1864, Chase declared that importers would be allowed to deposit greenbacks at the Treasury and receive gold in return at a premium below the market.

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Importers could then use the gold to pay the customs duties.

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This was supposed to reduce greatly the necessity for importers to buy gold coin on the market and therefore to reduce the depreciation.

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The outcome, however, was that the greenback at 59 cents in gold when Chase began the experiment had fallen to 57 cents by mid-April.

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Chase was then forced to repeal his customs duty scheme.

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With the failure of this attempt to regulate the gold market, Chase promptly escalated his intervention.

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In mid-April, he sold the massive amount of 11 million dollars in gold in order to drive

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down the gold premium of greenbacks.

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But the impact was trifling, and the Treasury could not continue this policy indefinitely

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because it had to keep enough gold in its vaults to pay interest on its bonds.

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At the end of the month, the greenback was lower than ever, having sunk to below 56 cents

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in gold.

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Indefatigably, Chase tried yet again.

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In mid-May 1864, he sold foreign exchange in London at below market rates in order to

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drive down pounds in relation to dollars, and, more specifically, to replace some of

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the U.S. export demand for gold in England.

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But this, too, was a failure, and Chase ended this experiment before the end of the month.

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Finally, Secretary Chase decided to take off the gloves.

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He had failed to regulate the gold market.

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He would therefore end the depreciation of greenbacks by destroying the gold market completely.

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By mid-June, he had driven through Congress a truly despotic measure to prohibit under

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pain of severe penalties all futures contracts in gold, as well as all sales of gold by a

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broker outside his own office.

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The result was disaster.

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The gold market was in chaos, with wide ranges of prices due to the absence of an organized

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market.

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Businessmen clamored for repeal of the quote, gold bill, and worst of all, the object of

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the law, to lower the depreciation of the paper dollar had scarcely been achieved.

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Instead, public confidence in the greenback plummeted, and its depreciation in terms of

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gold got far worse.

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At the beginning of June, the greenback dollar was worth over 52 cents in gold.

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Apprehensions about the emerging gold bill drove the greenback down slightly to 51 cents

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in mid-June.

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Then, after the passage of the bill, the greenback plummeted, hitting 40 cents at the end of

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the month.

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The disastrous gold bill was hastily repealed at the end of June, and perhaps not coincidentally,

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Secretary Chase was ousted from office at the same time.

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The war against the speculators was over.

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As soon as greenbacks depreciated to less than 97 cents in gold, fractional silver coins

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became undervalued and so were exported to be exchanged for gold.

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By July 1862, in consequence, no coin higher than the copper-nickel penny remained in circulation.

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The US government then leaped in to fill the gap with small tickets, first issuing postage

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Postage Stamps for the purpose, then bits of unglued paper, and finally, after the spring

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of 1863, fractional paper notes.

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A total of $28 million in postage currency and fractional notes had been issued by the

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middle of 1864.

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Even the nickel-copper pennies began to disappear from circulation as greenbacks depreciated

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and the nickel-copper coins began to move toward being undervalued.

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The expectation and finally the reality of undervaluation drove the coins into hoards

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and then into exports. Postage and fractional notes did not help matters because their lowest

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denominations were five cents and three cents respectively. The penny shortage was finally

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alleviated when a debased and lighter weight penny was issued in the spring of 1864, consisting

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of bronze instead of nickel and copper. As soon as the nation's banks and the treasury

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itself suspended specie payments at the end of 1861, Gresham's law went into operation

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and gold coin virtually disappeared from circulation, except for the government's interest payments

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and importers' customs duties.

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The swift issuance of legal tender greenbacks, which the government forced creditors to accept

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at par, ensured the continued disappearance of gold from then on.

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The fascinating exception was California.

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There were very few banks during this period west of Nebraska, and in California the absence

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of banks was ensured by the fact that note-issuing banks, at least, were prohibited by the California

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Constitution of 1849. The California gold discoveries of the late 1840s ensured a plentiful

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supply for coinage. Used to a currency of gold coin only, with no intrusion of banknotes,

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California businessmen took steps to maintain gold circulation and avoid coarse payment

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in greenbacks. At first, the merchants of San Francisco in November 1862 jointly agreed

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to refrain from accepting or paying out greenbacks at any but the depreciated market value and

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to keep gold as the monetary standard. Any firms that refuse to abide by the agreement

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would be blacklisted and required to pay gold and cash for any goods which they might purchase

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in the future. Voluntary efforts did not suffice to overthrow the federal power standing behind

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legal tender, however, and so California merchants obtained the passage in California legislature

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of a, quote, Specific Contracts Act at the end of April 1863.

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The Specific Contracts Act provided that contracts for the payment of specific kinds of money

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would be enforceable in the courts.

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After passage of that law, California businessmen were able to protect themselves against tenders

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of greenbacks by inserting gold coin payment clauses in all their contracts.

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Would that the other states, and even the federal government, had done the same?

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Furthermore, the private banks of deposit in California refused to accept greenbacks

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on deposit, newspapers used their influence to warn citizens about the dangers of greenbacks,

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and the state government refused to accept greenbacks in payment of taxes.

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In that way, all the major institutions in California joined in refusing to accept or

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give their imprimatur to federal inconvertible paper.

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Judicial institutions also helped maintain the gold standard and repel the depreciated

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and the US paper.

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Not only did the California courts uphold the constitutionality of the specific contracts

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act, but the California Supreme Court ruled in 1862 that greenbacks could not be accepted

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in state or county taxes since the state constitution prohibited any acceptance of paper money for

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taxes.

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The state of Oregon was quick to follow California's lead.

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Oregon's constitution had also outlawed banks of issue and gold had for years been the exclusive

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currency.

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Two weeks after the agreement of the San Francisco merchants, the merchants of Salem, Oregon

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unanimously backed gold as the monetary standard and refused to accept greenbacks at par.

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Two months later, the leading merchants of Portland agreed to accept greenbacks only

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at rates current in San Francisco.

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The merchants in the rest of the state were quick to follow suit.

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The Portland merchants issued a circular warning of a blacklist of all customers who

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Oregon Deposit Banks also refused to accept greenbacks, and the Oregon Legislature followed California a year and a half later in passing a specific performance law.

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Oregon, too, refused to accept greenbacks and taxes and strengthened the law in 1864 by requiring that,

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and Paid-in-Gold and Silver Coin of the United States and Not Otherwise."

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In the same year, the Oregon Supreme Court followed California in ruling that greenbacks

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could not constitutionally be received in payment of taxes.

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The banking story during the Civil War is greatly complicated by the advent of the national

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banking system in the latter part of the war.

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But it is clear that the state banks, being able to suspend specie and to pyramid money

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on top of the federal greenbacks profited greatly by being able to expand during this period.

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Thus, total state bank notes and deposits were $510 million in 1860, and by 1863 rose to $743 million,

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an increase in state bank demand liabilities in those three years of 15.2% per year.

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It is no wonder then that contrary to older historical opinion, many state banks were enthusiastic about the greenbacks,

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Greenbacks, which provided them with legal tender that could function as a reserve base

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upon which they could expand. As Hammond puts it, quote, instead of being curbed, as some

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people suppose later, the powers of the banks were augmented by the legal tender issues.

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As the issues increased, the deposits of the banks would increase, end quote. Indeed,

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Senator Sherman, Republican, Ohio, noted that the state banks favored greenbacks, and the

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The principal author of the greenback legislation, Representative Elbridge G. Spalding, Republican,

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New York, the chairman of the House Ways and Means subcommittee that introduced the bill,

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was himself a Buffalo banker.

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The total money supply of the country, including gold coin, state banknotes, subsidiary silver

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and U.S. currency, including fractional and greenbacks, amounted to $745.4 million in

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1860.

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By 1863, the money supply had skyrocketed to $1.435 billion, an increase of 92.5% in

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three years, or 30.8% per annum.

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By the end of the war, the money supply, which now included national banknotes and deposits,

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totaled $1.773 billion, an increase in two years of 23.6% or 11.8% per year.

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For the entire war, the money supply rose from $45.4 million to $1.773 billion, an

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increase of 137.9% or 27.69% per annum.

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The response to this severe monetary inflation was a massive inflation of prices.

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It is no wonder that the greenbacks, depreciating rapidly in terms of gold, depreciated in terms

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of goods as well.

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prices rose from 100 in 1860 to 210.9 at the end of the war, a rise of 110.9% or 22.2%

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per year.

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The Republican administration argued that its issue of greenbacks was required by stern

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wartime quote, necessity.

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The spuriousness of this argument is seen by the fact that greenbacks were virtually

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not issued after the middle of 1863.

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There were three alternatives to the issue of legal tender fiat money.

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1.

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The government could have issued paper money but not made it legal tender.

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It would have depreciated even more rapidly.

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At any rate, they would have had quasi-legal tender status by being receivable in federal

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dues and taxes.

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2.

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It could have increased taxes to pay for the work expenditures.

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3.

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It could have issued bonds and other securities and sold the debt to banks and non-bank institutions.

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In fact, the government employed both the latter alternatives and after 1863 stopped issuing

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greenbacks and relied on them exclusively, especially a rise in the public debt.

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The accumulated deficit piled up during the war was $2.614 billion, of which the printing

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of greenbacks only financed $431.7 million.

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Of the federal deficits during the war, greenbacks financed 22.8% in fiscal 1862, 48.5% in 1862,

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18.5% in 1863, 6.3% in 1864, and none in 1865.

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This is particularly striking if we consider that the peak deficit came in 1865, totaling

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$963.8 million.

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All the rest was financed by increased debt.

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Taxes also increased greatly, revenues rising from $52 million in 1862 to $333.7 million

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in 1865. Tax revenues as a percentage of the budget rose from a minuscule 10.7% in fiscal

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1862 to over 26% in 1864 and 1865. It is clear then that the argument of quote

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necessity in the printing of greenbacks was specious and indeed the greenback advocates

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conceded that it was perfectly possible to issue public debt provided that the administration

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was willing to see the prices of its bonds rise and its interest payments rise considerably.

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At least for most of the war, they were not willing to take their chances in the competitive

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bond market.