United States Note
A United States Note, also known as a Legal Tender Note, is a type of paper money that was issued from 1862 to 1971 in the United States. Having been current for 109 years, they were issued for longer than any other form of U.S. paper money other than the currently issued Federal Reserve Note. They were known popularly as "greenbacks", a name inherited from the earlier greenbacks, the Demand Notes, that they replaced in 1862. Often termed Legal Tender Notes, they were named United States Notes by the First Legal Tender Act, which authorized them as a form of fiat currency. During the early 1860s the so-called second obligation on the reverse of the notes stated:
By the 1930s, this obligation would eventually be shortened to:
They were originally issued directly into circulation by the U.S. Treasury to pay expenses incurred by the Union during the American Civil War. During the next century, the legislation governing these notes was modified many times and numerous versions were issued by the Treasury.
United States Notes that were issued in the large-size format, before 1929, differ dramatically in appearance when compared to modern American currency, but those issued in the small-size format, starting 1929, are very similar to contemporary Federal Reserve Notes of the same denominations with the distinction of having red U.S. Treasury Seals and serial numbers in place of green ones. Also, while a variety of denominations were issued as United States Notes during the large-size era, only the $1, $2, $5, and $100 denominations were ever issued as small-size notes.
Existing United States Notes are still fully usable and are considered legal tender. However, as no United States Notes have been issued since January 1971, all issues have all but disappeared from circulation, and command higher prices than face value as items of numismatic interest.
History
The Legal Tender Acts
The beginning of 1862 found the Union's expenses increasing, and the government was having trouble funding the escalating war. U.S. Demand Notes—which were used, among other things, to pay Union soldiers—were unredeemable, and the value of the notes began to deteriorate. Congressman and Buffalo banker Elbridge G. Spaulding prepared a bill, based on the Free Banking Law of New York, that eventually became the National Banking Act of 1863.Recognizing, however, that his proposal would take many months to pass Congress, during early February Spaulding introduced another bill to permit the U.S. Treasury to issue million in notes as legal tender. This caused tremendous controversy in Congress, as hitherto the Constitution had been interpreted as not granting the government the power to issue a paper currency. "The bill before us is a war measure, a measure of necessity, and not of choice," Spaulding argued before the House, adding, "These are extraordinary times, and extraordinary measures must be resorted to in order to save our Government, and preserve our nationality." Spaulding justified the action as a "necessary means of carrying into execution the powers granted in the Constitution 'to raise and support armies', and 'to provide and maintain a navy. Despite strong opposition, President Abraham Lincoln signed the First Legal Tender Act, enacted February 25, 1862, into law, authorizing the issuance of United States Notes as a legal tender—the paper currency soon to be known as "greenbacks".
Initially, the emission was limited to total face value between the new Legal Tender Notes and the existing Demand Notes. The Act also intended for the new notes to be used to replace the Demand Notes as soon as practical. The Demand Notes had been issued in denominations of $5, $10, and $20, and these were replaced by United States Notes nearly identical in appearance on the obverse. In addition, notes of entirely new design were introduced in denominations of $50, $100, $500 and. The Demand Notes' printed promise of payment "On Demand" was removed and the statement "This Note is a Legal Tender" was added.
Legal tender status guaranteed that creditors would have to accept the notes despite the fact that they were not backed by gold, bank deposits, or government reserves, and had no interest. However, the First Legal Tender Act did not make the notes an unlimited legal tender as they could not be used by merchants to pay customs duties on imports and could not be used by the government to pay interest on its bonds. The Act did provide that the notes be receivable by the government for short term deposits at 5% interest, and for the purchase of 6% interest 20-year bonds at par. The rationale for these terms was that the Union government would preserve its credit-worthiness by supporting the value of its bonds by paying their interest in gold. Early in the war, customs duties were a large part of government tax revenue and by making these payable in gold, the government would generate the coin necessary to make the interest payments on the bonds. Lastly, by making the bonds available for purchase at par in United States Notes, the value of the latter would be confirmed as well. The limitations of the legal tender status were quite controversial. Thaddeus Stevens, the Chairman of the House of Representatives Committee of Ways and Means, which had authored an earlier version of the Legal Tender Act that would have made United States Notes a legal tender for all debts, denounced the exceptions, calling the new bill "mischievous" because it made United States Notes an intentionally depreciated currency for the masses, while the banks who loaned to the government got "sound money" in gold. This controversy would continue until the removal of the exceptions during 1933.
By the First Legal Tender Act, Congress limited the Treasury's emission of United States Notes to ; however, by 1863, the Second Legal Tender Act, enacted July 11, 1862, a Joint Resolution of Congress, and the Third Legal Tender Act, enacted March 3, 1863, had expanded the limit to, the option to exchange the notes for United States bonds at par had been revoked, and notes of $1 and $2 denominations had been introduced as the appearance of pure 'fiat currency' had per Gresham's law driven even silver coinage out of circulation. The greenback began to trade at a substantial discount from gold, which prompted Congress to pass the short-lived Anti-Gold Futures Act of 1864, which was soon repealed after it seemed to accelerate the decrease of greenback value.
The largest amount of greenbacks outstanding at any one time was calculated as. The Union's reliance on expanding the circulation of greenbacks eventually ended with the emission of Interest Bearing and Compound Interest Treasury Notes, and the passage of the National Banking Act. However, the end of the war found the greenbacks trading for only about half of their nominal value in gold. The Secret Service was founded on July 5, 1865, to minimize counterfeiting, which accounted for up to half of the currency.
Post Civil War
At the end of the American Civil War, some economists, such as Henry Charles Carey, argued for building on the precedent of non-interest-based fiat money and making the greenback system permanent. However, Secretary of the Treasury McCulloch argued that the Legal Tender Acts had been war measures, and that the United States should soon reverse them and return to the gold standard. The House of Representatives voted overwhelmingly to endorse the Secretary's argument. With an eventual return to gold convertibility in mind, the Funding Act of April 12, 1866 was passed, authorizing McCulloch to retire million of the Greenbacks within six months and up to million per month thereafter. This he proceeded to do until only were outstanding during February 1868. By this time, the wartime economic prosperity was ended, the crop harvest was poor, and a financial panic in Great Britain caused a recession and a sharp decrease of prices in the United States. The contraction of the money supply was blamed for the deflationary effects, and caused debtors to agitate successfully for a halt to the notes' retirement.During the early 1870s, Treasury Secretaries George S. Boutwell and William Adams Richardson maintained that, though Congress had mandated as the minimum Greenback circulation, the old Civil War statutes still authorized a maximum of —and thus they had at their discretion a "reserve" of. While the Senate Finance Committee under John Sherman disagreed, being of the opinion that the was a maximum as well as a minimum, no legislation was passed to assert the committee's opinion. Starting in 1872, Boutwell and Richardson used the "reserve" to counteract seasonal demands for currency, and eventually expanded the circulation of the Greenbacks to in response to the Panic of 1873.
In June 1874, Congress established a maximum for Greenback circulation of, and in January 1875, approved the Specie Payment Resumption Act, which authorized a reduction of the circulation of Greenbacks towards a revised limit of, and required the government to redeem them for gold, on demand, after January 1, 1879. As a result, the currency strengthened and by April 1876, the notes were on par with silver coins which then began to re-emerge into circulation. On May 31, 1878, the contraction in the circulation was halted at —a level which would be maintained for almost 100 years afterwards. While was a significant figure at the time, it is now a very small fraction of the total currency in circulation in the United States. The year 1879 found Sherman, now Secretary of the Treasury, in possession of sufficient specie to redeem notes as requested, but as this brought the value of the greenbacks into parity with gold for the first time since the Specie Suspension of December 1861, the public voluntarily accepted the greenbacks as part of the circulating medium.
While the United States Notes had been used as a form of debt issuance during the Civil War, afterwards they were used as a way of moderately influencing the money supply by the federal government—such as through the actions of Boutwell and Richardson. During the Panic of 1907, President Theodore Roosevelt attempted to increase liquidity in the markets by authorizing the Treasury to issue more Greenbacks, but the Aldrich–Vreeland Act provided for the needed flexibility by the National Bank Note supply instead. Eventually, the perceived need for an elastic currency was addressed with the Federal Reserve Notes authorized by the Federal Reserve Act of 1913, and attempts to alter the circulating quantity of United States Notes ended.