The Greenback - 1860 to 1880 - The United States of America

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From the Archives : Originally published March 01st, 2009
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Category : History of Gold





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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