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Paper Money Introduced in the United States

Paper Money Introduced in the United States

Paper Money Introduced in the United States

It was on this day in 1862 that President Abraham Lincoln introduced paper currency in the United States as a way to pay bills and finance the Civil War without raising taxes. This Legal Tender Act permitted the government to print paper money that was not backed by an equal amount of gold and silver. Many bankers, congressmen and financial experts had little confidence in this plan and were concerned about the nation’s financial structure totally collapsing.

Nearly 65 years earlier, when Thomas Jefferson was the Vice President, he was in favor of a constitutional amendment to deny the federal government the power to borrow. Jefferson wrote that the federal government had no power, “of making paper money or anything else a legal tender.”

In 1861, there was a banking crisis due to a gold shortage combined with Southern victories during the war. This was causing the North to lose confidence in their ability to win the war. The fear of British intervention in the war caused hoarding of precious metals and gold reserves were being depleted. The government needed to obtain loans to pay for the war and to cover existing debts, and they needed to devise a new system.

So a bill was drafted by a New York congressman and member of the House Ways and Means Committee. This was to make paper currency, un-backed by gold or silver. The Confederate government had been printing money since the beginning of the year and now the Union had decided to also print money. These “Greenbacks” would serve as legal tender for all debts, public and private.

Many argued the constitutionality of paper money and the subject sparked many heated congressional debates, but in April the dollars began circulating to the tune of $300 million by 1863. The first actual income tax was also established in 1862 as an emergency measure to continue funding the war despite our government’s ability to print money as needed. Even though the war ended in 1865, the tax wasn’t repealed until 1872, but that is a story for another time.

It is interesting to point out that your paper currency, officially know as a Federal Reserve Note, is not redeemable in gold or silver, nor is this currency backed by anything. Hoarding this paper money will never be an issue. As of 1933, there is no value in and of the bill itself. It is only exchangeable, in a variety of denominations, for goods and services.

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3 Responses to Paper Money Introduced in the United States

  1. tommylee says:

    I guess buying loads of paper at the papermill will have at some point more value than loads of paper dollars. Interesting thought on an interesting article. Scary part is that the dollar is not interchangeable for gold.

  2. publisher_sa says:

    Well a percentage of paper money (actually it's more linen than paper) has always been backed by gold until the Nixon Shock in August of 1971 put an end to the convertibility option of the US dollar against gold. As a graduate student in economics in those days I remember our professor claim: 'another war needs to be financed'.
    And this exactly the reason why gold even at $1,106 per troy ounce today is far undervalued.

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