Published On: Mon, Jul 25th, 2011

Celebrate the US Dollar’s Birthday

As we look around and see the dollar slide and gold ascend, it might be appropriate to note that 2011 represents the 150th birthday of the mighty American “GreenBack” and the crisis that spawned it.

In late 1861  the Union banking community was facing a crisis as a result of a growing gold shortage. A series of events had cast very real doubt on the nation’s  ability to win the Civil War as a result of Confederate victories at the First Battle of Bull Run and elsewhere, and the Federal Government struggled to pay its debts.   There the growing possibility that the British would intervene on behalf of the Confederacy as result of the “Trent Affair” had spurred panic buying of precious metals.

The gold reserves of both the banks and the Federal Treasury had been depleted as a result of speculation and hoarding, and the situation complicated government efforts to obtain loans needed to prosecute the war and pay the  debts incurred by recruiting 600,000 new volunteers.

By December it was clear that drastic action was needed when New York banks, whose gold reserves had shrunk by almost a third during just the previous 3 weeks, suspended payment of specie as backing for their notes. Banks in Boston and Philadelphia quickly followed, and soon,  debtors throughout the North could only make payments by check or by using Treasury or bank notes. It was clear that the government needed a new medium of exchange.

At the height of this crisis, New York Republican, Congressman Elbridge C. Spaulding, a member of the House Ways and Means Committee, proposed a solution. He drafted a bill which made paper currency legal tender for all debts, public and private, payable on demand by the U.S. Treasury but not backed by gold or silver. At the time, it was though that the constitutionality of this fiat money was considered questionable, but Attorney General Edward Bates insisted on it’s legality which set off an intense congressional debate.

Finally, the passage of a Legal Tender Act much like Spauldings was signed into law by President Lincoln in February 1862, and “Greenbacks” began to circulate early in April. The initial act authorized the issuance of $150 million in Treasury notes; acts of July 1862 and March 1863 allowed additional issues totaling $300 million. As Union military fortunes fell, the value of the greenback depreciated sharply but never enough to destroy its value to the wartime economy of the Union.

The history of the greenback eventually came full circle when President Richard Nixon abandoned the gold standard in 1971 by preventing foreign countries from trading gold for United States dollars.

About the Author

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We made the journey from hard left to serious right a long time ago, but still have a laissez faire attitude and a finely tuned sense of the ridiculous.

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