1/29/08 - greenbacks

In today's excerpt - the United States finds it cannot handle the logistics of procurement for its Civil War, much less finance this war without printing its own money—quickly nicknamed 'greenbacks':

"There was no central bank in 1861. The Second Bank of the United States had been shut down by President Andrew Jackson. No national currency existed, and gold, silver and copper were scarce, so only a limited number of coins could be minted. The existing supply of money was grossly inadequate to provide the enormous amount of funds the wartime government required.

"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. Notes issued by banks that had been closed for years or were in default, as well as those bearing the names of fictional banks, were all part of the bewildering currency melange of the 1850s. Even notes of legitimate banks tended to lose a significant portion of their value when they were presented at a great distance from issuing banks. The banking system was haphazard and virtually unregulated.

"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. Taxes paid in notes issued by a bank in one state generally could not be used to purchase supplies in another state. ... [So a bill was introduced for] a new [United States] currency ... [whose] value would  be drawn solely frpm a federal requirement that it be accepted for all private, and most government, transactions [but] not be redeemable fon demand for specie. ... The idea immediately drew fire on the House floor. The horrible precedent of the Continentals [during the Revolutionary War] was frequently cited, [with one congressman saying], 'the wit of man has never discovered a means by which paper currency can be kept at par value, except by its speedy, cheap certain convertibility into gold and silver.' [But] desperate for cash ... late in February [1862], Congress passed the Legal Tender Act. ...

"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.') ... The $450 million worth of greenbacks that were issued covered nearly 15 percent of the cost of the war ... and prices rose by nearly 25 percent annually. ... 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."


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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