On this day in US history, the United States issued its first official paper bills, in denominations of $5, $10, $20, $50, $100, $500, and $1,000 notes.
The Legal Tender Act, the law authorizing the use of paper notes to pay government bills, was passed by Congress on February 25, 1862. This ended the long-standing policy of using only gold and silver in transactions, and it allowed the government to finance the enormously costly Civil War (even after the gold and silver reserves were depleted). The Confederate government had been printing paper money since the beginning of the war, but the Legal Tender Act allowed the US to print $150 million in paper money not backed by gold and silver.
Congressman and Buffalo banker Elbridge G. Spaulding was responsible for the bill. “The bill before us,” he argued before the house, “is a war measure, a measure of necessity, and not of choice. These are extraordinary times, and extraordinary measures must be resorted to in order to save our Government and preserve our nationality.” The new notes were designed to replace the demand notes issued at the beginning of the war and intended mostly as payment for the Union army. The new notes featured the statement “This Note is a Legal Tender” rather than the printed promise of payment “On Demand.”
Many bankers and economic experts predicted doom for the economy. They felt there would be little public confidence in the scheme. There were also misgivings in Congress. Many legislators worried about a total collapse of America’s financial infrastructure. However, the paper notes, called “greenbacks” for the color of the paper, worked far better than expected. The government was able to pay its bills, and, by increasing the money in circulation, the wheels of Northern commerce were greased. Greenbacks were legal tender, meaning creditors must accept them at face value. However, they were not made an unlimited legal tender, as they could not be used by merchants to pay customs duties on imports nor used by the government to pay interest on bonds.
The limitations of the legal tender status were pretty controversial. The Chairman of the House of Representatives Committee of Ways and Means, Thaddeus Stevens, who authored an earlier version of the Legal Tender Act that would have made US Notes legal tender for all debts, denounced the exceptions, calling the new bill “mischievous” because it made US Notes an intentionally depreciated currency for the masses, while banks who loaned money to the government got “sound money” in gold. This controversy would continue until the exceptions were removed in 1933.
By the end of the war, nearly half a billion dollars in greenbacks had been issued. The Legal Tender Act laid the foundation for the creation of a permanent currency in the decades after the Civil War.