Regal Assets Analytics

Monday, March 4, 2024

    Greenbacks Fiat Paper Money

    Under the fiscal pressures produced by the Civil War, the U.S. government issued Treasury notes as well as some convertible into gold and silver. But the government soon found it hard to maintain convertibility. Banks also suspended convertibility.

    In 1862, therefore, the government issued for the first time notes that were not convertible either on demand or at a specific future date, and that were declared legal tender. Known as “greenbacks,” these notes were legal tender for everything but customs duties, which had to be paid in gold or silver.

    The government made no specific promise to convert such notes to gold or silver.

    Hence, it abandoned the gold standard. Holders of greenbacks could obtain gold or silver in the marketplace, but one dollar in greenbacks could no longer buy 23.22 grains of gold because the government no longer stood ready to maintain the dollar at its mint price.

    Greenbacks were issued in such large quantities that the United States experienced a substantial inflation during the course of the war. Just as occurred in the decades before, fractional silver currency disappeared because it was worth more in foreign trade than its face value.

    There were private issues of paper fractional currency, but these were subsequently outlawed. The government issued postage stamps for fractional currency, and subsequently fractional currency of its own.

    After the war was over, Congress determined to return to the metallic standard at the same parity that existed before the war. To do this, the market exchange rate of greenbacks for gold had to be brought back to its old level.

    This was accomplished by slowly removing the greenbacks from circulation. This was an off-and-on effort, with notes removed, held steady, and even returned to circulation. In 1875, it was decided to reduce their number to $300 million. In 1878, however, their number was frozen at about $347 million, where it remained for a century.

    Parity between the greenback and gold dollars was achieved in 1879, returning the United States to a metallic standard. The government stood ready to pay its debts in gold, accept greenbacks for customs, and to redeem greenbacks on demand for gold.

    Greenbacks were perfect substitutes for gold coins. The government had returned to a gold standard; but two important changes had taken place with respect to paper money: (1) the government now was an issuer of paper money redeemable on demand and (2) the paper money was legal tender.


    In The News

    Related Articles