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In spite of a constitutional bar to un-backed
paper money which existed at the time Abraham Lincoln was forced, in 1862, to issue the first tranche of what was eventually
$450,000,000 of "greenbacks" needed to finance the North's efforts
during the civil war.
The greenback was a credit note. Unlike
America's extant currency it conferred no right of redemption into gold. What
it did do was offer a promise that at some unspecified future date the issuer
- Lincoln's government - would honour them with conversion back into a truly
gold convertible currency. Clearly this was an unfunded promise based
on the outcome of the war, a fact which was not lost on the population.
When soldiers sent their greenbacks home they
were inferior to the sounder notes backed by gold, and a price differential
arose according to which type of money was being used. As fears of a
long and costly war peaked the credit of Lincoln's government diminished
until the differential reached 3:1, and even that flattered the greenback
because there were doubts about the gold backed currency itself, whose
redemption rights had been suspended to prevent its owners bleeding the
treasury dry as they hedged the military outcome with metal.
But - and here is a rarity - the greenback was
redeemed, some fifteen years later. This simple fact disproves the
popular belief that 'all paper currency systems eventually end in
disaster'. On the contrary, this particular one was something of a
success - especially for those who bought their government's integrity at a
deep discount.
We could conclude that the greenback was a
story to re-assert faith in paper money systems, but it would be
simplistic. A significant factor in the redemption was
corruption. At the time there was no such thing as insider dealing and
for those who knew that a redemption of doubtful
paper was likely the only respectable course of action was to buy some.
In fact one of the constitutional reasons for sound money in the first place
was to prevent a conflict arising where those with privileged knowledge could
benefit privately. It is beyond doubt that by the time of redemption a
substantial haul of deeply discounted paper had found its way to officials
and their private and commercial associates. Their money was made at
the collective expense of others who had held the paper while it was sinking.
"The greenbacks ceased to be legal tender
after a Supreme Court ruling struck them down as unconstitutional money. Who
was the man who led the Supreme Court to strike down the very financing tool
of the North's victory? It was the same man who ushered in its birth. For you
see by 1870 the Chief Justice of the Supreme Court was none other than former
Secretary of the Treasury, Salmon P. Chase."
In the end the greenback's successful
redemption was a mixed blessing. This experience of state borrowing
under duress was an important driver in encouraging the next political
generation to embark, in the 1930s, on the deficit financing which is the
cause of so much private prosperity and public debt today. In that
sense maybe the jury on the greenback case is still out.
Paul Sustain
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