10.26.2012

A Brief History of Money in America - Part VI

A while back, I wrote about a pending academic research project I was embarking upon with Jeremiah Newhall, a good friend of the site. Below you will find a draft version of an abridged section of the paper where we cover the history of money in the US. Part of the reason I am posting this is to solicit feedback, so please feel free to submit your thoughts in the comments section below. As this is a draft, please bear with us on the poorly formatted citations (and/or lack thereof) and the first-draft wordsmithing.

As these notes lacked legal tender status, and in an environment of great uncertainty, it perhaps shouldn’t be surprising that these notes were often redeemed for coinage nearly as soon as they were issued. As a result, the government ran low on coin. Reacting to this situation in a way that was beginning to resemble a cat and mouse game, the government issued notes that were redeemable, but did not retain the ‘on demand’ feature of their predecessors. The government still promised to accept them and pay out coins, but at its convenience, meaning that the bearer of the note had to wait to redeem it when the federal government chose to do so. These issuances were discussed at length in the Veazie decision:

     On the 31st of December, 1861, the State banks suspended specie payment. Until this time the expenses of the war had been paid in coin, or in the demand notes just referred to; and, for some time afterwards, they continued to be paid in these notes, which, if not redeemed in coin, were received as coin in the payment of duties. (emph. added)

However, the situation became predictably untenable as people doubted the ability of the government to continue to redeem notes, and perhaps the future of the government itself. The Bank at this point went a step further than many, including the Founders, had ever anticipated which was described in Veazie:

     Subsequently, on the 25th of February, 1862, a new policy became necessary in consequence of the suspension and of the condition of the country, and was adopted…The act now passed authorized the issue of bills for circulation under the name of United States notes, made payable to bearer, but not expressed to be payable on demand, to the amount of $150,000,000; and this amount was increased by subsequent acts to $450,000,000, of which $50,000,000 were to be held in reserve, and only to be issued for a special purpose, and under special directions as to their withdrawal from circulation.

The ‘bills’ described above were the soon-to-become notorious Greenbacks[1]. People doubted both the government’s intentions and its ability to cover either the previously issued notes or these new Greenback bills, with actual coins.  Compounding this was the fact that the government had to compete with local and state banks which had continued to issue paper, and which did have coins on hand (and as a result were therefore more trusted). Because greenbacks were not able to compete with free bank notes in the absence of other stimuli, Congress enacted two critical changes.

First, it levied a tax on other bank notes. The tax, at a 10% rate, impacted any note issued which was intended to be circulated as money. The practical goal was to tax competing currencies out of existence due to simple supply and demand forces. The theory was that if all circulating notes, federal and local, were redeemable for the same exact US-issued base currency, and those issued by entities other than the federal government cost 10% more, they would fail. This tactic succeeded in large part.

Additionally, and despite taxing the competition out of existence, the federal government still had problems on its hands as the cost of the war increased and as redemptions continued to occur at a rapid pace. Therefore, it declared the Greenback itself to be “legal tender.”[2]These notes, until after the close of the war, were always convertible into, or receivable at par for bonds payable in coin, and bearing coin interest, at a rate not less than five per cent., and the acts by which they were authorized, declared them to be lawful money and a legal tender.”[3] (emph. added)  This action led directly to the so-called ‘Legal Tender Cases’ discussed at length below.

 


[1] Named thusly due to the green ink which was used on the obverse side.
[2] This notion is peculiar once it is run through a minor logical exercise. 1. Greenbacks are promises by the government to pay U.S. coins, and 2. U.S. coins are legal tender, meaning they are legal currency that must be accepted in payment of all debts, so after the federal action, 3. Greenbacks were both promises to pay legal tender, and they were themselves legal tender. In sum, greenbacks become ‘worth’ the same amount as the coins the government promises in exchange for them, or, in essence, paper coins.
[3] Veazie

Jeremiah Newhall is a graduate of The George Washington University Law School and currently serves as a law clerk in Chicago. He can be reached via the miracle of email. Joshua Sturtevant is also a GW Law grad, and currently serves as an in-house legal fellow at a renewable energy financing and development firm.

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