Paper Money Introduced in the United States
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 Even though the war ended in 1865, the tax wasn’t repealed until 1872, but that is a story for another time.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.