Friday, March 21, 2008

The History of Greenback

Robalini's Note: As the subprime crisis has brought the Federal Reserve back into the spotlight, now would be a good time to learn about Greenback, the monetary system I've long been in favor of...

United States Note
From Wikipedia, the free encyclopedia

A United States Note is a fiat paper currency that was issued directly into circulation by the United States Department of the Treasury. These bills of credit were also known as Legal Tender Notes because of the inscription on each obverse face stating "This Note is a Legal Tender." They were among the first national United States currency, authorized by the Legal Tender Act of 1862 and began circulating during the American Civil War. After the death of Abraham Lincoln on 15 April 1865, additional "first charter period" (i.e. banks chartered between 1863 and 1882) National Bank Notes and Gold Certificates of 1865 were issued.

On a United States Note, the Treasury seal and the note's serial number are printed in red. United States Notes were printed in the following denominations: $1, $2, $5, $10, $20, $50, $100, $500, $1000, $5000, and $10,000.

The Treasury Department issued these notes directly into circulation, and they are obligations of the United States Government. The issuance of United States Notes is subject to limitations established by Congress. In order to stimulate the economy, the Acts of July 10, 1862 and March 3, 1863 (among other legislation) established a statutory limitation of $300 million on the amount of United States Notes authorized to be outstanding and in circulation. This currency was not backed by any deposit in any bank or government reserve, in contrast to the Gold Certificates at the time. They also do not bear interest, unlike the appropriately titled Interest Bearing Notes of 1861 to 1865. While $300 million was a significant figure in Civil War days, it is now a very small fraction of the total currency in circulation in the United States.

Despite the fact that in modern times the word "Greenback" usually refers to any United States currency, the origin of the term rests solely in these Government-issued United States Notes that have since given way to private bank-issued currency, or Federal Reserve Notes, in the United States.

The primary difference between the United States Note and the Federal Reserve Note is that a United States Note is created by the government directly as a bill of credit, and thus there is no interest for the Government to pay for the creation of that dollar. A Federal Reserve Note, on the other hand, is bank currency, and the U.S. has to pay interest on the treasury bonds that it gives the Federal Reserve System in exchange for the right to produce a like quantity of Federal Reserve Notes. This, in turn, increases the tax burden on the people. Abraham Lincoln advocated the use of United States Notes because they avoid the usury and debt multiplication aspects of debt-based currencies, and thus save the Government immense sums of interest. Thomas Jefferson also believed that the issuing power of money should rest with the US Treasury, and not the private banks. He noted in the debate over The Re-charter of the Bank Bill (1809) that, "[...]the issuing power should be taken from the banks and restored to the people to whom it properly belongs."

Other influential Americans who have advocated a government-issued currency include President Andrew Jackson, inventor Thomas Edison, inventor Peter Cooper, and American economists Henry C. Carey, Edward Kellogg, and Nobel-prize winner Milton Friedman. William Jennings Bryan is remembered as saying in his 1896 Cross of Gold speech "When we have restored the money of the Constitution, all other reform will be possible, but until this is done there is no other reform that can be accomplished."

Both United States Notes and Federal Reserve Notes are parts of the national currency of the United States and both are legal tender. They circulate as money in the same way. However, the issuing authority for them comes from different statutes. United States Notes (like the later Federal Reserve Notes) were fiat currency, in that they were never redeemable explicitly for any precious metal. During the Civil War, the banking interests did not want these notes to be a legal tender to pay the national debt, so the Senate depreciated the currency by putting an exception clause in, which allowed Government creditors to be paid in gold. Thaddeus Stevens, the Chairman of the House of Representatives Committee of Ways and Means which authored the original United States Notes bill to be a legal tender for all debts, viciously denounced the Senate's amended exception clause, 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. However, it appeared necessary to allow the banks the exception clause or perhaps there would have been no other way to fund the Civil War effort.

The notes were not immediately redeemable in gold. However, while the United States was on the gold standard, it was possible to redeem them for gold indirectly by exchanging them for a currency of a different obligation, for example a Gold Certificate. Whoever accepted the exchange was left with the less-trusted fiat currency. At the time United States Notes were issued, this was a serious concern, as the government sought to strike a balance between coin shortages and fiat currency. The greenback traded at a substantial discount from gold, which prompted Congress to pass the short-lived Anti-gold futures act of 1864 which was promptly repealed after it seemed to accelerate the decline of the greenback.

At the close of the Civil War, the Radical Republicans, led by Abraham Lincoln and his economic advisor Henry Charles Carey, sought to make the Greenback system permanent. In March of 1865 Carey published a series of letters to the Speaker of the House of Representatives Schuyler Colfax entitled "The Way to Outdo England Without Fighting Her". Carey called for the reserve requirements of the Nationally chartered banks to be raised to 50%, while emitting more Greenbacks to help with reconstruction. However, Lincoln was assassinated in the next month and the United States then began to move towards a gold standard and contract the supply of Greenbacks.

After the abandonment of the gold standard in 1933, all types of issued currency (silver certificates, Federal Reserve notes, and United States Notes) were redeemable only for silver. This ceased to be the case in 1963, during a time in which all U.S. currency was becoming fiat currency. At this point, the United States Notes became obsolete, and no more were issued after about 1966. Because they circulate interest-free, up to the statutory maximum of $300 million in "circulation", a series of $100 bills was printed in 1966, and comically moved from one Federal Reserve Bank to another every few weeks. These $100 notes, depending on condition, may be of significant numismatic value.

The act was repealed in 1970, and none has been placed into circulation since January 21, 1971. As is the case with all issue of the U.S. from 1861 onward, any United States Note is legal tender at its face value and may have a numismatic premium to collectors.

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