The Strange Origins of the US Dollar
The origins of the US Dollar, the world’s reserve currency and the most successful fiat currency in human history are strange.
To explain, they created the US Dollar as an emergency measure in wartime. Interestingly, you can describe the US Dollar as the most important consequence of the American Civil War.
In 1862, the Union had an enormous problem. The United States government had no means of financing the war or paying the Union Army.
Amazingly, when the Civil War began in 1861, the United States had no national currency. Instead, most Americans relied on banknotes issued by local or state banks or federal coins for most transactions.
The last national currency was banknotes, the Second Bank of the United States issued. The Second Bank of the United States was the nation’s Central Bank until the 1830s. President Andrew Jackson (D-Tennessee) killed the Second Bank of the United States by vetoing its charter and pulling federal deposits from the institution. After the Second Bank of the United States collapsed, there was no national currency.
How do you pay for the War?
Hence, in 1862, the Union had no means of paying its armies or suppliers. Obviously, the Union could not fight a war without soldiers, weapons, or ammunition.
US Secretary of the Treasury Salmon Chase (R-Ohio) and Congressional Republicans came up with an interesting solution. They proposed the Treasury Department print national banknotes.
Theoretically, recipients could cash the banknotes in at the Treasury for gold. Chase understood that most people, such as soldiers in the field, could never cash in the banknotes. Instead, the banknotes would circulate as cash to finance the war effort. Hence, the number of banknotes could exceed the amount of gold in the US Treasury. Thus, the Treasury could print the money to finance the war.
After a bruising political battle, Congress passed the Legal Tender Act on 25 February 1862. The Act authorized the treasury to print $150 million in paper money not backed by gold or silver. The Act revived the Union economy.*
The Legal Tender Act was the birth of the US dollar or the greenback. For the first time, the US government began printing money with no gold or silver backing. Most people accepted the Greenbacks, which had Salmon Chase’s picture on them.
By the end of the Civil War, the US Treasury had printed almost 500 million dollars’ worth of Greenbacks. Historians believe the Legal Tender Act laid the foundation for a permanent US currency.
The Treasury issued the banknotes because many Americans, including Chase, opposed a central bank. To explain, Midwesterners, such as Chase, feared a central bank could fall under the control of Wall Street financiers who could use it to dominate the national economy. Instead, politicians wanted a government-issued currency they could control.
The North’s Secret Weapon
The greenback became the North’s secret weapon in the Civil War. To explain, the Union could pay soldiers and suppliers with a sound currency. The Confederacy could not.
Powerful Union Armies, growing northern industry, the vast wheat fields of the Midwest, and the gold and silver mines of the West backed the greenback. In contrast, only cotton and the Confederate Armies backed Southern banknotes.
A big problem the Confederacy had was that the cotton could not leave the South. A growing Union blockade made it hard for Southerners to export cotton to the markets in Europe.
The European Market for cotton was vast. Europeans bought tens of millions of dollars’ worth of Erlanger cotton bonds. Theoretically, Southern cotton backed the Erlanger bonds. However, bondholders had to run the Union blockade and pick the cotton up from Confederate docks.*
In contrast, the South had no means of disrupting the flow of Union gold and wheat to Europe. Southern ships could raid Union commerce, but shippers could simply switch to British flagged ships. Any attack on a British ship would have brought the might of the Royal Navy down on the South.
King Cotton goes Bankrupt
Ironically, the Confederate cotton bond scheme could have worked had President Jefferson Davis listened to his treasury secretary, Christopher Gustuvus Memminger. In 1861, Memminger suggested the Confederacy ship enormous amounts of cotton to Europe and sell it for cash or borrow against it.*
Memminger’s plan could have worked in 1861 because there was no Union blockade. Instead, Davis thought he could force the British Empire to intervene in the war on the Confederate side.
Davis thought cutting off the cotton would lead to unemployment and political unrest that could force the Viscount Palmerston the British Prime Minister to intervene. Textiles were Britain’s primary industry in the 19th century.
However, supporting slavery was political suicide for any British politician. Thus, the Royal Navy never broke the blockade, and the Confederacy had no money.
Meminger’s scheme could have allowed the South to purchase enormous stockpiles of weapons and ammunition to sustain its war effort. Instead, the Confederate armies ran out of basic supplies. In fact, the pivotal Battle of Gettysburg broke out because barefoot Confederate soldiers were looking for a shoe factory to pillage. Confederate troops were searching for shoes when they blundered into Union cavalry, starting the battle.
Thus, Davis’s bungling and the greenback paved the way for the destruction of slavery and the Confederacy.
The Supreme Court almost destroys the Greenback
Ironically, the man who created the Greenback, Salmon Chase, almost destroyed his creation.
In an 1869 case called Hepburn v. Griswold, the US Supreme Court ruled Greenbacks were unconstitutional. Bizarrely, the author of Hepburn v. Griswold was Salmon Chase, whom President Abraham Lincoln (R-Illinois) appointed US Chief Justice in 1864.
Chase thought unsupported paper money was wrong and wanted it gone. To elaborate, Chase viewed paper money as a necessary evil and a temporary wartime measure.
One person Hepburn v. Griswold horrified was President Ulysses S. Grant (R-Illinois). Grant feared the United States could not finance war or a military without paper money. The president responded to the ruling by packing the Supreme Court with new justices who could overturn Chase’s ruling.
Grant’s court packing worked. In the Legal Tender Cases or Texas v. Wall, the Supreme Court ruled that the Legal Tender Act and paper money were constitutional. Texas v. Wall was one of the most important cases in US history because it authorized the printing of paper money and, ultimately, the creation of the US Federal Reserve System (a third Central Bank).
The Legal Tender Cases were the last act in creating the US dollar. By ruling that the US government could print money. The court laid the groundwork for the rise of the US dollar and the rise of a dollar-financed American empire.
Hence, an emergency measure taken to finance a desperate army set the stage for America’s massive economic growth and the emergence of the United States as a global superpower.
*See Ways and Means Lincoln and His Cabinet and the Financing of the Civil War by Roger Lowenstein page 100.
*See Ways and Means Lincoln and His Cabinet and the Financing of the Civil War by Roger Lowenstein Chapter Nine; Cotton for Cash.
*See Ways and Means Lincoln and His Cabinet and the Financing of the Civil War by Roger Lowenstein