How exactly did the federal government “create” funds? It simply printed up pieces of paper and required its suppliers, creditors, and employees to take them in lieu of any other form of payment. These pieces of paper were the (in)famous greenbacks depicted in figure 12, so named for the distinctive green ink on the reverse side.17 Like the currency we have today, green-backs were fiat money— they were not backed by gold or silver but rather drew their value from the government saying they had value.18 The U.S.
government thus made a radical decision: to finance the war, it departed from the specie standard to which it had adhered since colonial days and to which its major trading partners still subscribed.19
Note two features of the greenback: the unusual signature of U.S. Trea-surer Francis E. Spinner and the portrait. Both deserve a short mention here.
Francis Spinner made history not only for his notorious signature but also for hiring the first female federal government employees. Although he en-dured merciless criticism for this act, he defended himself by saying that the women clerks were hardworking and efficient, and that they had excellent work habits and integrity. Best of all, many of them eventually could pro-duce near- perfect copies of his signature— essential, given the number of greenbacks going out the door. Spinner left unmentioned the fact that fe-males earned only half the pay of the male clerks.20
The face on the greenback is that of Salmon P. Chase, U.S. secretary of the Trea sury at the time. Although his visage is commanding, not every one held him in high esteem: as one scholar put it, “Mr. Chase is a man of
17State banknotes constituted the main form of paper currency after the demise of the Second Bank of the United States. State notes typically were blank on the reverse side. For discussion of the Second Bank, see Ralph Catterall, The Second Bank of the United States (Chicago, 1903).
18The value of fiat money implicitly comes from a government’s ability to tax its citizens. The magnitude of its value depends on the trust people have in the government and the degree to which the government relies on fiat money to fund operations.
19The United States was officially on a bimetallic standard from the beginning of the republic until silver was demonetized in 1900, but it was effectively on a gold standard from 1834 to 1971, except for the period 1862–79. Michael Bordo and David Wheelock,
“Monetary Policy,” in Car ter et al., Historical Statistics of the United States.
20Cindy Aron, Ladies and Gentlemen of the Civil Ser vice: Middle Class Workers in Victorian Amer i ca (New York, 1987), and Margery Davies, Woman’s Place Is at the Typewriter: Office Work and Office Workers, 1870–1930 (Philadelphia, 1982), discuss the contributions of Francis Spinner.
impressive appearance and of great capabilities other than financial.”21 Consistency was not among his capabilities. Chase enthusiastically sup-ported the greenback when he sat in charge at the Trea sury, but as chief justice of the Supreme Court, he flip- flopped, deciding in 1869 that Con-gress actually lacked the power to make paper money legal tender.22
Chief Justice Chase was responding to the Legal Tender Acts, which had provided the congressional approval necessary for this new form of money to be accepted by the general public. As figure 13 depicts, the vote on the First Legal Tender Act was largely, though not completely, along party lines.23 In the House, Demo crats were 250 times as likely to vote no as Republicans. The Senate was not quite as monolithic as it had been for the Morrill Tariff and the Revenue Act of 1861— Democrats were only eight times as likely to vote no as Republicans.
21Bray Hammond, “The North’s Empty Purse, 1861–62,” American Historical Review 67 (1961):1–18, quote on p. 9.
22Hepburn v. Griswold, 75 U.S. (8 Wall.) 603 (1869). Hepburn was soon reversed by the so- called Legal Tender Cases of Knox v. Lee and Parker v. Davis, 79 U.S. 457 (1871), and Juilliard v. Greenman, 110 U.S. 421 (1884). For discussion, see Kenneth Dam, “The Legal Tender Cases,” Supreme Court Review (1981):367–412.
23The dates of the three Legal Tender Acts are February 25, 1862; July 11, 1862; and March 3, 1863 (12 Statutes at Large 345, 532, and 709). The details of the First Legal Tender Act vote appear in the House Journal, Feb. 6, 1862, 37th Cong., 2d sess., pp. 278–79, and the Senate Journal, Feb. 13, 1862, 37th Cong., 2d sess., pp. 206–7, http:// memory . loc . gov / ammem / amlaw / lwcg . html.
Fig. 12. The (in)famous greenback. (National Numismatic Collection, National Museum of American History, Smithsonian Institution)
To Form a More Perfect (Financial) Union 43
Despite the new role of federal greenbacks in the monetary system, gold still mattered. Customs duties and, ironically, interest on government bonds had to be paid in gold.24 Legal tender was not legal for every thing.
24Wesley Mitchell, “Greenbacks and the Cost of the Civil War,” Journal of Po liti cal Economy 5 (1897):117–56; Wesley Mitchell, “The Value of ‘Greenbacks’ during the Civil War,” Journal of Po liti cal Economy 6 (1898):139–67.
Fig. 13. First Legal Tender Act vote by party. (Source: http:// memory . loc . gov / ammem / amlaw / lwcg . html)
Not too surprisingly, ordinary citizens started hoarding gold, as figure 14 exhibits. By July 1, 1862, no coin larger than one cent remained in circula-tion. This only exacerbated the need for alternative currency and for fed-eral control over financial markets. Although Congress made stamps acceptable as a form of payment, this approval created such a headache for the postal ser vice that Postmaster General Montgomery Blair refused to is-sue additional stamps to be used as currency.25
Consequently, Congress took another bold step: it created a set of na-tional banks, which could issue nana-tional banknotes. These notes were backed primarily by Trea sury securities— that is, federal debt. To gain even more control over financial markets, Congress taxed state banknotes out of existence.26 These mea sures thus formed a market for federal bonds while at the same time making the issuance of state banknotes too expen-sive to continue. Figure 15 shows what happened to the number of and
25Wesley Mitchell, “The Circulating Medium during the Civil War,” Journal of Po liti cal Economy 10 (1902):537–74.
26Act of July 13, 1866, upheld in Veazie Bank v. Fenno, 75 U.S. 533 (1869).
Fig . 14 . Percentage of specie held by the public, 1859–65 (biannually). (Source: HSUS, Series Cj29, 33)
To Form a More Perfect (Financial) Union 45
assets held by state and national banks between 1850 and 1895. During the Civil War and for about a de cade thereafter, national banks dominated the financial arena.
Another way to visualize what happened during the war is to look at the composition of the money supply. As figure 16 depicts, the proportions of specie and state banknotes plummeted, whereas the proportions of green-backs and federal debt skyrocketed.
Fig. 15. Number of and assets in state and national banks, 1850–95. (Source: HSUS, Series Cj149–50, 212–13)
Fig. 16. Proportion of money supply by type, 1859–66. (Source: HSUS, Series Cj29, 34–37, 41)
Fig. 17. National banknotes. (Source: Office of the Comptroller of the Trea sury, Bureau of Print
ing and Engraving)
Fig. 17. (Continued)
Although the United States now had a national currency (at least in the North), it was by no means the uniform set of bills we have today. Figure 17 shows a few examples of national banknotes: the prominent feature is not the phrase “national currency” but rather the name of the bank of issuance.
The United States continued to have a number of diff er ent sorts of banknotes— although they were federal rather than state issued. This cre-ated its own set of prob lems, because to redeem them the holder had to take them back to the original bank of issuance.27 Once issued, then, the notes circulated until they became so tattered and filthy that people considered them a public health hazard.28 The original- issuance rule also meant diffi-culties in returning to the gold standard after the war, but that is history for another day.
Congress was not as eager to institute national banking as it had been to do other things to fund the Union war effort (fig. 18). In fact, the National Bank Act barely squeaked by in the Senate, where the vote was 22–21. Demo-crats were sixty- one times as likely to vote no as Republicans in the House;
this figure was only nine in the Senate.29
As vari ous graphs in this chapter have shown, tariffs and taxes were quite polarizing by po liti cal party. But the parties were closer together—
particularly in the Senate— when it came to experiments with fiat money and national banks. It was not clear to politicians of the day that the coun-try needed national banking, and some modern scholars agree. The New York Clearing house and the Suffolk Bank of Boston had done a decent low- cost job of evaluating state banknotes and lubricating financial transac-tions before the war.30
So why duplicate the banking system? Primarily because the national banks provided a ready outlet for the burgeoning government debt. The
27George Selgin and Lawrence White, “Monetary Reform and the Redemption of National Bank Notes, 1863–1913,” Business History Review 68 (1994):205–43.
28Ibid., p. 209.
29House Journal, Feb. 20, 1863, 37th Cong., 3d sess., pp. 442–43; Senate Journal, Feb. 12, 1863, 37th Cong., 3d sess., pp. 240–41, http:// memory . loc . gov / ammem / amlaw / lwcg . html.
30For discussion, see Hammond, Sovereignty and an Empty Purse, pp. 136–37; Charles Calomiris and Charles Kahn, “The Efficiency of Self- Regulated Payments Systems:
Learning from the Suffolk System,” Journal of Money, Credit and Banking 28 (1996):766–97;
Arthur Rolnick and Warren Weber, “New Evidence on the Free Banking Era,” American Economic Review 73 (1983):1080–91; and Gary Gorton, “Clearing houses and the Origin of Central Banking in the United States,” Journal of Economic History 45 (1985):277–83.
To Form a More Perfect (Financial) Union 49
federal government needed a willing buyer for federal bonds, and the na-tional banks provided it.
The sheer amount of debt gave people— and politicians— pause. Figure 19 shows the steep increase in real ($1860) per capita federal debt from the beginning of the republic. Part of the reluctance to sanction national bank-ing stemmed from worries over the mountbank-ing obligations incurred by the federal government. The same fear colored the debate over greenbacks.
Fig. 18. National Bank Act vote by party. (Source: http:// memory . loc . gov / ammem / amlaw / lwcg . html)
Because virtually every one expected that the departure from the gold stan-dard was a temporary war time mea sure, greenbacks constituted a form of government borrowing as well.