Legal Tender Act authorizes greenbacks
On February 25, 1862, Congress passed the first Legal Tender Act, authorizing $150 million in 'United States Notes' — the first federal paper currency in American history. Treasury Secretary Salmon Chase had argued for the bill in the face of an empty Treasury and a Civil War whose outlays were running at $1.5 million per day. The notes were called 'greenbacks' for the color of their reverse side. They were not redeemable in gold or silver; they were legal tender by federal law alone. Total greenback issuance grew to roughly $450 million by 1864. The currency persisted as fiat money for fourteen years before the United States resumed specie payments in 1879.
The greenbacks were challenged in court as unconstitutional and the Supreme Court initially struck them down (Hepburn v. Griswold, 1870), then reversed itself one year later (Knox v. Lee and Parker v. Davis, 1871) after President Grant appointed two new justices. The Legal Tender Cases established that federal paper money was constitutionally valid — a precedent that has not been seriously challenged in the 150+ years since.
02 · Greenbacks & the Fed
Before 1862 the United States had no federal currency. State-chartered banks issued their own notes; over 7,000 different note designs circulated by the Civil War. The war forced the federal government to create a national currency for the first time, and the panics of the late 19th century forced it to create a central bank to backstop that currency. Two laws passed in 1862 and 1863, and the Federal Reserve Act of 1913, are the institutional foundation that the SEC, the FDIC, and every later regulator was built on top of.
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