The Civil War had an immense influence on the subsequent history of banking and currency in the United States. The federal government issued paper currency, or bills of credit, and reentered banking.
War leads to government expansion, increased spending, inflation and borrowing. This is due to the huge demands on the resources of the country to provide the means and material to conduct military operations. It is a disruptive event to the economy because wars destroy resources but do not produce any to offset the loss in wealth. This leads to inflation. Given any quantity of money, it will be quickly exhausted as the government and the military demand it to wage war. That leads to borrowing. Either way, wars are hugely expensive endeavors for any government.
In the early stages of the war, the Treasury enforced rigid conformity to the Independent Treasury System, accepting only money in payment for Government bonds. But, when expenditures began rapidly outpacing receipts of gold from bond sales, the.
Treasury issued demand notes to pay for its purchases. The notes, for all practical purposes, were paper currency. Nevertheless, the Secretary of the Treasury considered the demand notes only a partial breach of the rules of the Independent Treasury System since the Treasury maintained a policy of exchanging the notes for gold on demand.
The demand notes (more precisely, the huge increase in Government expenditures financed through demand notes without an offsetting increase in taxes) generated inflation that seriously aggravated the Treasury's already monumental problem. Inflation pushed the market price of gold above its official price.
With that, gold was withdrawn from the nation's banks to prevent it from being redeemed at the lower official price. Gold also went overseas since imports became much cheaper given the inflated prices in the United States resulting from increased government spending using demand notes. Gold either left the country or went into private hoards and was not seen in circulation.
Only eight months after the war began, rapid gold outflows forced banks and the Treasury to stop redeeming notes in money (i.e. gold and silver).
Treasury officials and congressmen responsible for raising money faced a dilemma. Almost everyone involved disliked paper currency, but the need for money was extreme. Since they did not want to raise taxes (or reduce military spending), Congress began issuing United States notes. pay for written papers This paper currency, later called greenbacks, was the first legal-tender currency ever issued by the U. S. government.
As opponents of the plan had expected, another promise of only one issue was promptly broken. By 1865, Congress had authorized $450 million in greenbacks. Depreciation began and the value of $100 of greenbacks quickly sank to $75 in gold and eventually to $35. During this period, the term inflation was first used.