U.S. Legal Tender Act authorizes greenbacks
The Legal Tender Act of February 25, 1862 authorized the U.S. Treasury to issue $150 million in United States Notes — soon known as 'greenbacks' — that were legal tender for all debts public and private, except customs duties and interest on the national debt. They were not backed by gold or silver. It was the first federal fiat issuance in U.S. history, driven entirely by the fiscal demands of the Civil War. Greenbacks traded at a discount against gold — as low as 35 cents on the dollar in 1864 — and the discount became the political battleground of the next decade. The 'greenback question' dominated American politics from 1868 through 1879.
The Supreme Court initially ruled the Legal Tender Act unconstitutional (Hepburn v. Griswold, 1870) but reversed itself a year later (Knox v. Lee, 1871) after Grant appointed two new justices who voted with the new majority. The court-packing accusation that followed is one of the more awkward passages in Supreme Court history.
04 · Wartime Suspensions
In the 19th century, wars became the standard trigger for currency debasement. The U.S. Civil War introduced paper greenbacks; the Franco-Prussian War forced France off silver; the Russo-Japanese War pushed Russia off gold. The pattern was always the same: suspend metallic convertibility at the start of the war, over-issue paper during it, then fight a losing political battle over whether to return to the old standard. The United States returned to gold in 1879 — at great political cost. Argentina, Russia, and several European countries never fully returned. By 1914 the monetary system was held together by a gold standard that everyone knew was one war away from collapse.
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