Currency: Civil War Developments

Currency

Currency: Revolutionary War and Confederation

Currency: The New Republic

Currency: The Federal Reserve System

Currency: New Deal and After

No formal government paper money was issued after 1787, although the Treasury notes issued during some business recessions temporarily performed that function. The outbreak of the Civil War in 1861 generated a huge increase in federal spending, and part of the resulting deficit was financed by issuing paper money. There were several different types, but the most nearly permanent were United States notes. In February, 1862, Congress authorized the issue of $150 million in legal-tender notes, soon named greenbacks for their distinctive design. More issues followed. 

Monetary expansion generated inflation, and by 1864 consumer prices in the North were 75 percent higher than they had been in 1860. The Confederacy relied even more heavily on paper money issues, which totaled more than a billion dollars and generated far worse inflation—prices in early 1865 were nearly a hundred times those of 1861. 

The war provided a basis for government efforts to reform banknote currency. In 1863, Congress authorized the creation of the National Banking system. A bank could obtain a federal charter that permitted it to issue national bank notes that were standardized in design (except for the name of the issuing bank) and secured by U.S. government bonds. In 1865, a punitive tax was imposed on note issues by non-national banks, and notes from these banks soon disappeared. Between federal paper money and national banknotes, the nation’s paper currency achieved very high quality—especially since the Secret Service effectively combated counterfeiting. 

At the end of the war, neither greenbacks nor national banknotes were convertible into specie at par. Political pressure to restore par convertibility was strong, but even greater was the pressure to avoid a deflationary monetary contraction. Market forces gradually brought down the price of gold, and par convertibility was achieved in 1879. Congress authorized new forms of paper money: silver certificates (1878—redeemable in silver coin) and gold certificates (1863, but important only after 1882—redeemable in gold coin). 

The economy continued to experience strong business cycles and periodic depressions, and there was pressure for monetary expansion to relieve depressions. During the 1890’s this pressure underlay the campaign for “free silver”—a proposal to allow unlimited coinage of silver into dollars at a ratio of sixteen to one with gold—a ratio that significantly overvalued silver and would have led to extensive coinage. The proposal was a major part of William Jennings Bryan’s presidential campaign in 1896. Bryan’s defeat and restoration of prosperity and rising prices put an end to the silver agitation. The Gold Standard Act of 1900 declared gold to be the country’s monetary standard and ordered that all other forms of money be maintained at parity with gold.