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Debasing Our Currency
When the federal government gets in to a financial bind it does what many governments have historically done, it prints more paper money. This was the Continental Congress’ answer to a financial crunch in the 18th century, and it is still the most popular “economic fix” on Capital Hill today.
Many experts claim that the U.S. Demand notes of 1861 were the first “circulating” paper currency issued by the U.S. Government. This is true as far as it goes if you take into consideration that from that time to the present the Federal Government has issued some form of paper currency. There were some small issues before 1861 such as the Continental Congress’ Continental dollars. Other issues were very sporadic or were with interest, which was more like investment paper than general circulating paper money.
The ante-bellum period just before the Civil War was the great age of state-regulated bank note issues. From the 1790s down to the opening battles of the Civil War, paper notes of state-regulated banks and corporations supplemented the various coins minted by the general government. This non-federal” paper money formed the bulk of the circulating money of the time period.
On the eve of the Civil War, the country’s circulating paper currency consisted of around $200 million of the various state bank paper notes issued by 1,600 different banks Bank specie amounted to an estimated $87 million. These state backed paper notes were backed up by about 43 percent coinage. Some banks issues were over-extended while many Eastern bank’s paper reserves had little or no outstanding circulation.
The redemption of some state notes was not a certainty. As such most state notes were discounted by brokers in the major cities. The discounts depended on the perceived reputation of the state-regulated bank in question. Bank note reporters and financial columns carried notices of these discounts.
Generally the discount was rather low, a percentage or two. Distant banks or ones perceived to be unreliable had discounts of up to 7 or 8 percent. For banks that were under stress the discounts could be between 20 and 40 percent. During bank panics, the discount could reach 70 to 90 percent with few takers at that point.
When the Southern States seceded from the Union and opened fire on Fort Sumter in April 1861, the Federal government found itself in a financial mess. The Federal government’s normal sources of income were grossly insufficient to cover the costs of the war effort.
Initially the Federal government financed its war effort with loans from Eastern bankers. It wasn’t long before the Federal government had exhausted this source of money. By July 1, 1861 the public debt of the U.S. was $90 million. The Federal government decided that paper currency was the answer to finance its war effort. However, tax collections were quite insufficient to make up the shortfall in money needed.
Congress responded with the Acts of July 17, and August 5, 1861, that provided authorization for $50 million in 6 percent 20-year bonds, nearly $140 million in 7.30 percent Treasury Notes, and $50 million in non-interest bearing paper money payable in gold on demand.
These paper notes were our country’s first greenbacks, AKA the Demand Notes of 1861. The July Act authorized notes of $10-$50 denominations. The second Act authorized notes down to $5, but only the denominations of $5, $10, $30 were issued. The original authorization of Demand Notes was eventually raised to $60 million by the Act of February 12, 1862.
Due to the lack of printing presses, the Federal government had to turn to the American Bank Note Company to print its Treasury paper. The greenbacks were so-named because of the use of the ABNCo’s anti-photographic “counterfeit-proof” green ink patented by Dr. Thomas Sterry Hunt on June 30, 1857.
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