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The Greenback Question

As one means of financing the cost of fighting the Civil War, the federal (Union) government in 1862 began printing Legal Tender notes. This currency was not backed by specie (gold or silver) and exerted an inflationary impact on the Northern economy. By war’s end about $450 million was in circulation. The value of the greenbacks, which were printed with green ink on one side, fluctuated with the war's progress. In early 1864, when Union prospects were dim, the greenback dollar held a value of under 40 cents; by the end of the war in 1865, it was around 67 cents. The original intention was for the greenbacks to hold the same value as regular gold-backed notes, but that result never occurred. Pressure from business interests and creditors in the postwar period led to an effort to retire the greenbacks. These forces did not want to receive payments in cheap money and opposed any government policy that would lead to inflation. By 1867, the wartime economic boom was over. Farmers and debtors, feeling an economic pinch, began agitation to halt the notes' retirement. It was in their interest to foster inflation, which would make it easier for them to pay off their debts. A compromise was reached in which $356 million worth of greenbacks would remain in circulation. Neither side was fully pleased with this result. The Panic of 1873 struck in the fall and was followed by the worst depression in American history up to that time. The monetary issue was revived and was argued heatedly by both sides. President Grant was originally sympathetic to the farmers' plight, but he eventually caved in to the wishes of his wealthy friends and vetoed a measure that would have expanded the currency. The conservatives scored an important victory in the passage of the Specie Resumption Act of 1875. This measure provided that on January 1, 1879, all greenbacks would be redeemable at full face value. Debtor groups immediately began working for the law's repeal, a movement that developed into the National Greenback Party. The general population, was well as the Congress, was nearly equally divided on monetary issues. Therefore, in 1878 a compromise was worked out which provided that:

  • The Resumption Act would not be repealed (as many farmers had wanted)
  • The currency supply would be slightly increased through the issuance of additional specie-backed currency
  • A limited coinage of silver dollars would be allowed through the Bland-Allison Act (1878), a small inflationary gesture to the debtor interests.
The government sharply increased its gold reserves in the event of a mass run on the banks to redeem the greenbacks. However, January 1, 1879, came and went. The public had gained full confidence in the currency. The greenback issue was dead, but attention turned toward another economic panacea—the free and unlimited coinage of silver.