Greenbacks
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.
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.
However, Secretary of the Treasury Salmon P. Chase, a former Jacksonian, tried to require
the banks to pay for the loan in specie that they did not have.
This massive pressure on their specie, as well as an increased public demand for specie
due to a well-deserved lack of confidence in the banks, brought about a general suspension
of specie payments a few months later, at the end of December 1861.
This suspension was followed swiftly by the Treasury itself, which suspended specie payments
on its Treasury Notes.
The US government quickly took advantage of being on an inconvertible fiat standard.
In the Legal Tender Act of February 1862, Congress authorized the printing of $150 million
in new, quote, United States notes, soon to be known as, quote, greenbacks, to pay for
the growing war deficits.
The greenbacks were made legal tender for all debts, public and private, except that
The Treasury continued its legal obligation of paying the interest on its outstanding
public debt in specie.
The greenbacks were also made convertible at par into U.S. bonds, which remained a generally
unused option for the public and was repealed a year later.
In creating greenbacks in February, Congress resolved that this would be the first and
last emergency issue.
But printing money is a heady one, and a second $150 million issue was authorized in July,
Greenbacks began to depreciate in terms of specie almost as soon as they were issued.
In an attempt to drive up the price of government bonds, Secretary Chase eliminated the convertibility
of greenbacks in July 1863, an act that simply drove their value down further.
Chase and the Treasury officials, instead of acknowledging their own premier responsibility
for the continued depreciation of the greenbacks, conveniently placed the blame on anonymous
quote gold speculators.
In March 1863, Chase began a determined campaign, which would last until he was driven from
office to stop the depreciation by controlling, assaulting and eventually eliminating the
gold market.
In early March, he had Congress levy a stamp tax on gold sales and to forbid loans on a
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.
Importers could then use the gold to pay the customs duties.
This was supposed to reduce greatly the necessity for importers to buy gold coin on the market and therefore to reduce the depreciation.
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.
Chase was then forced to repeal his customs duty scheme.
With the failure of this attempt to regulate the gold market, Chase promptly escalated his intervention.
In mid-April, he sold the massive amount of 11 million dollars in gold in order to drive
down the gold premium of greenbacks.
But the impact was trifling, and the Treasury could not continue this policy indefinitely
because it had to keep enough gold in its vaults to pay interest on its bonds.
At the end of the month, the greenback was lower than ever, having sunk to below 56 cents
in gold.
Indefatigably, Chase tried yet again.
In mid-May 1864, he sold foreign exchange in London at below market rates in order to
drive down pounds in relation to dollars, and, more specifically, to replace some of
the U.S. export demand for gold in England.
But this, too, was a failure, and Chase ended this experiment before the end of the month.
Finally, Secretary Chase decided to take off the gloves.
He had failed to regulate the gold market.
He would therefore end the depreciation of greenbacks by destroying the gold market completely.
By mid-June, he had driven through Congress a truly despotic measure to prohibit under
pain of severe penalties all futures contracts in gold, as well as all sales of gold by a
broker outside his own office.
The result was disaster.
The gold market was in chaos, with wide ranges of prices due to the absence of an organized
market.
Businessmen clamored for repeal of the quote, gold bill, and worst of all, the object of
the law, to lower the depreciation of the paper dollar had scarcely been achieved.
Instead, public confidence in the greenback plummeted, and its depreciation in terms of
gold got far worse.
At the beginning of June, the greenback dollar was worth over 52 cents in gold.
Apprehensions about the emerging gold bill drove the greenback down slightly to 51 cents
in mid-June.
Then, after the passage of the bill, the greenback plummeted, hitting 40 cents at the end of
the month.
The disastrous gold bill was hastily repealed at the end of June, and perhaps not coincidentally,
Secretary Chase was ousted from office at the same time.
The war against the speculators was over.
As soon as greenbacks depreciated to less than 97 cents in gold, fractional silver coins
became undervalued and so were exported to be exchanged for gold.
By July 1862, in consequence, no coin higher than the copper-nickel penny remained in circulation.
The US government then leaped in to fill the gap with small tickets, first issuing postage
Postage Stamps for the purpose, then bits of unglued paper, and finally, after the spring
of 1863, fractional paper notes.
A total of $28 million in postage currency and fractional notes had been issued by the
middle of 1864.
Even the nickel-copper pennies began to disappear from circulation as greenbacks depreciated
and the nickel-copper coins began to move toward being undervalued.
The expectation and finally the reality of undervaluation drove the coins into hoards
and then into exports. Postage and fractional notes did not help matters because their lowest
denominations were five cents and three cents respectively. The penny shortage was finally
alleviated when a debased and lighter weight penny was issued in the spring of 1864, consisting
of bronze instead of nickel and copper. As soon as the nation's banks and the treasury
itself suspended specie payments at the end of 1861, Gresham's law went into operation
and gold coin virtually disappeared from circulation, except for the government's interest payments
and importers' customs duties.
The swift issuance of legal tender greenbacks, which the government forced creditors to accept
at par, ensured the continued disappearance of gold from then on.
The fascinating exception was California.
There were very few banks during this period west of Nebraska, and in California the absence
of banks was ensured by the fact that note-issuing banks, at least, were prohibited by the California
Constitution of 1849. The California gold discoveries of the late 1840s ensured a plentiful
supply for coinage. Used to a currency of gold coin only, with no intrusion of banknotes,
California businessmen took steps to maintain gold circulation and avoid coarse payment
in greenbacks. At first, the merchants of San Francisco in November 1862 jointly agreed
to refrain from accepting or paying out greenbacks at any but the depreciated market value and
to keep gold as the monetary standard. Any firms that refuse to abide by the agreement
would be blacklisted and required to pay gold and cash for any goods which they might purchase
in the future. Voluntary efforts did not suffice to overthrow the federal power standing behind
legal tender, however, and so California merchants obtained the passage in California legislature
of a, quote, Specific Contracts Act at the end of April 1863.
The Specific Contracts Act provided that contracts for the payment of specific kinds of money
would be enforceable in the courts.
After passage of that law, California businessmen were able to protect themselves against tenders
of greenbacks by inserting gold coin payment clauses in all their contracts.
Would that the other states, and even the federal government, had done the same?
Furthermore, the private banks of deposit in California refused to accept greenbacks
on deposit, newspapers used their influence to warn citizens about the dangers of greenbacks,
and the state government refused to accept greenbacks in payment of taxes.
In that way, all the major institutions in California joined in refusing to accept or
give their imprimatur to federal inconvertible paper.
Judicial institutions also helped maintain the gold standard and repel the depreciated
and the US paper.
Not only did the California courts uphold the constitutionality of the specific contracts
act, but the California Supreme Court ruled in 1862 that greenbacks could not be accepted
in state or county taxes since the state constitution prohibited any acceptance of paper money for
taxes.
The state of Oregon was quick to follow California's lead.
Oregon's constitution had also outlawed banks of issue and gold had for years been the exclusive
currency.
Two weeks after the agreement of the San Francisco merchants, the merchants of Salem, Oregon
unanimously backed gold as the monetary standard and refused to accept greenbacks at par.
Two months later, the leading merchants of Portland agreed to accept greenbacks only
at rates current in San Francisco.
The merchants in the rest of the state were quick to follow suit.
The Portland merchants issued a circular warning of a blacklist of all customers who
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.
Oregon, too, refused to accept greenbacks and taxes and strengthened the law in 1864 by requiring that,
and Paid-in-Gold and Silver Coin of the United States and Not Otherwise."
In the same year, the Oregon Supreme Court followed California in ruling that greenbacks
could not constitutionally be received in payment of taxes.
The banking story during the Civil War is greatly complicated by the advent of the national
banking system in the latter part of the war.
But it is clear that the state banks, being able to suspend specie and to pyramid money
on top of the federal greenbacks profited greatly by being able to expand during this period.
Thus, total state bank notes and deposits were $510 million in 1860, and by 1863 rose to $743 million,
an increase in state bank demand liabilities in those three years of 15.2% per year.
It is no wonder then that contrary to older historical opinion, many state banks were enthusiastic about the greenbacks,
Greenbacks, which provided them with legal tender that could function as a reserve base
upon which they could expand. As Hammond puts it, quote, instead of being curbed, as some
people suppose later, the powers of the banks were augmented by the legal tender issues.
As the issues increased, the deposits of the banks would increase, end quote. Indeed,
Senator Sherman, Republican, Ohio, noted that the state banks favored greenbacks, and the
The principal author of the greenback legislation, Representative Elbridge G. Spalding, Republican,
New York, the chairman of the House Ways and Means subcommittee that introduced the bill,
was himself a Buffalo banker.
The total money supply of the country, including gold coin, state banknotes, subsidiary silver
and U.S. currency, including fractional and greenbacks, amounted to $745.4 million in
1860.
By 1863, the money supply had skyrocketed to $1.435 billion, an increase of 92.5% in
three years, or 30.8% per annum.
By the end of the war, the money supply, which now included national banknotes and deposits,
totaled $1.773 billion, an increase in two years of 23.6% or 11.8% per year.
For the entire war, the money supply rose from $45.4 million to $1.773 billion, an
increase of 137.9% or 27.69% per annum.
The response to this severe monetary inflation was a massive inflation of prices.
It is no wonder that the greenbacks, depreciating rapidly in terms of gold, depreciated in terms
of goods as well.
prices rose from 100 in 1860 to 210.9 at the end of the war, a rise of 110.9% or 22.2%
per year.
The Republican administration argued that its issue of greenbacks was required by stern
wartime quote, necessity.
The spuriousness of this argument is seen by the fact that greenbacks were virtually
not issued after the middle of 1863.
There were three alternatives to the issue of legal tender fiat money.
1.
The government could have issued paper money but not made it legal tender.
It would have depreciated even more rapidly.
At any rate, they would have had quasi-legal tender status by being receivable in federal
dues and taxes.
2.
It could have increased taxes to pay for the work expenditures.
3.
It could have issued bonds and other securities and sold the debt to banks and non-bank institutions.
In fact, the government employed both the latter alternatives and after 1863 stopped issuing
greenbacks and relied on them exclusively, especially a rise in the public debt.
The accumulated deficit piled up during the war was $2.614 billion, of which the printing
of greenbacks only financed $431.7 million.
Of the federal deficits during the war, greenbacks financed 22.8% in fiscal 1862, 48.5% in 1862,
18.5% in 1863, 6.3% in 1864, and none in 1865.
This is particularly striking if we consider that the peak deficit came in 1865, totaling
$963.8 million.
All the rest was financed by increased debt.
Taxes also increased greatly, revenues rising from $52 million in 1862 to $333.7 million
in 1865. Tax revenues as a percentage of the budget rose from a minuscule 10.7% in fiscal
1862 to over 26% in 1864 and 1865. It is clear then that the argument of quote
necessity in the printing of greenbacks was specious and indeed the greenback advocates
conceded that it was perfectly possible to issue public debt provided that the administration
was willing to see the prices of its bonds rise and its interest payments rise considerably.
At least for most of the war, they were not willing to take their chances in the competitive
bond market.