Legal Tender Acts
By the end of 1861 the Northern banking community was facing a crisis, the result of a gold shortage. A series of events casting doubt on the Unions ability to win the war--including Southern victories at First Bull Run and Ball's Bluff, and the possibility of British intervention on behalf of the Confederacy as result of the "Trent Affair"--had prompted panic buying of precious metals. Increased speculation and hoarding had depleted the gold reserves not only of the banks but also of the Federal Treasury. This situation complicated government efforts to obtain loans needed to pay the continuing cost of the war and to cover debts already incurred in the course of recruiting 600,000 volunteers to increase its armed force of 16,000 Regulars.
The signal that drastic action was needed came late in December, when New York banks, whose gold reserves had shrunk by almost a third during the previous 3 weeks, suspended payment of specie as backing for their notes. Banks in Boston and Philadelphia quickly followed suit; soon, throughout the North, debtors could make payments only by check or by Treasury or bank notes. Clearly the government needed to devise a new medium of exchange.
At the height of the crisis, Republican Congressman Elbridge C. Spaulding of New York, a member of the House Ways and Means Committee, proposed a solution. He drafted a bill making paper currency, payable on demand by the U.S. Treasury but unbacked by gold or silver, legal tender for all debts, public and private, except duties on imports and interest on the public debt. The constitutionality of fiat money was questionable, but Atty. Gen. Edward Bates upheld its legality, touching off intense congressional debate.
Wartime exigencies finally prompted the passage of a Legal Tender Act much like Spauldings. Abraham Lincoln signed it into law Feb. 1862, and "Greenbacks" began to circulate early in April. The first act authorized an issuance of $150 million in Treasury notes; acts of July 1862 and Mar. 1863 provided for additional issues totaling $300 million. In later months, especially when Union military fortunes sagged, the value of the greenback depreciated sharply but not enough to vitiate its value to the wartime economy of the North.
Source: "Historical Times Encyclopedia of the Civil War" Edited by Patricia L. Faust
This Page last updated 08/07/04
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