7/7/10 - greenbacks

In today's excerpt - the birth of the "greenback," the national paper money created as a means of helping to pay for the unprecedented cost —$3.4 billion in 1865 dollars or $50 billion today—of the U.S. Civil War:

"To support the war effort, Union leaders also resorted to a device utilized liberally during the Revolution: the printing press. Before the outbreak of the Civil War, federally issued money consisted of gold, silver, and copper coins. ... [Founding Father Alexander] Hamilton had been clear in warning that 'the stamping of paper is an operation so much easier than the laying of taxes that a government in the practice of such paper emissions would rarely fail in any such emergency to indulge itself too far'. His fear, of course, was that the overzealous printing of money would lead to inflation, whereas notes issued by an independent, nationally chartered bank, backed by gold, would be a credible national currency.

"But there was no central bank in 1861. ... To make matters worse, the banking system was in chaos. In the years immediately before the Civil War, roughly sixteen hundred state-chartered banks dotted the American landscape, each issuing its own notes. Roughly seven thousand varieties of banknotes were in circulation. Some were issued by legitimate state-chartered banks, but many were of dubious quality or simply counterfeit. ...

"Because the notes of state-chartered banks were generally accepted only in the state of the issuing bank, the government had difficulty in procuring goods and services for the military, just as it did during the War of 1812. ... The Union government 'needed to establish a currency [that would be] uniformly acceptable.' "In December 1861, the Ways and Means Subcommittee ... drafted a bill to create a new currency that ... would not be redeemable on demand for specie [gold]. [Treasury Secretary Salmon] Chase, who believed the financial system should be rooted in gold, registered his profound objections. Like Hamilton, he favored a currency consisting of notes issued by nationally chartered banks that were backed by government bonds, which were in turn backed by gold.

"The idea immediately drew fire on the House floor. The horrible precedent of the 'Continentals' [which almost became worthless during the Revolutionary War] was frequently cited. Congressman George Pendleton of Ohio ... warned, 'If this bill is passed, prices will be inflated ... incomes will depreciate; the savings of the poor will vanish; the hoardings of the widow will melt away; bonds, mortgages, and notes—everything of fixed value—will lose their value.' Chase threatened to resign if the legislation was enacted. ... Opponents also argued that the Constitution gave Congress the power only to 'coin money' and 'regulate the value thereof'—not to print money. The collapse in value of the Continentals had been much on the minds of the framers when this provision was written.

"On February 3, 1862, desperate for cash, Chase changed his tune. 'Immediate action is of great importance,' the secretary informed Congress; 'The Treasury is nearly empty.' ... "

[Many legislators] considered legal tender "of doubtful constitutionality' and admitted that it 'shocks all my notions of political, moral and national honor,' [but] reconciled [themselves] to it because 'to leave the government without resources in such a crisis is not to be thought of.'

"Late in February, Congress passed the Legal Tender Act, authorizing an initial issue of $150 million of the new federal currency. ... The new 'legal tender' was printed with green ink on one side, and the notes were quickly nicknamed 'greenbacks.' (Confederate currency, printed with blue-gray ink, was known as 'blue backs.') Chase, who was planning to challenge Lincoln for the Republican presidential nomination in 1864, had his portrait featured on the widely circulated one-dollar bill.

"Despite supporting the printing of greenbacks and having his picture placed on them, Chase later had second thoughts. After failing to dislodge Lincoln as the Republican nominee, and then being fired by him, Chase was appointed by the president to be chief justice of the United States. ... In 1870, Chase wrote the Court's majority opinion striking down the Legal Tender Act, holding that it was a violation of the Fifth Amendment's prohibition against taking property without due process because it forced Americans to accept greenbacks in repayment of private debts that originally had been contracted to be settled in gold. This decision was reversed in 1871, after President Ulysses S. Grant deliberately appointed two justices who disagreed with the 1870 decision.

"The $450 million worth of greenbacks that were issued covered nearly 15 percent of the cost of the war. ... As Hamilton had predicted, overly enthusiastic use of the federal printing press proved to be a significant contributor to inflation ... and prices rose by nearly 25 percent annually. This hit workers and soldiers on fixed salaries especially hard, contributing to social unrest. The Confederacy fared much worse. Its economy was devastated by a 9,000 percent inflation rate, caused primarily by far greater resort to the printing press due to a weak tax base and an inability to raise outside funds."


Robert D. Hormats


The Price of Liberty: Paying for America's Wars from the Revolution to the War on Terror


Times Books, Henry Holt and Company, LLC


Copyright 2007 by Robert D. Hormats


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