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Historical Error #17: The Civil War's Greenbacks Were a Pure Fiat Currency Unconnected to Gold's Price.

Gary North
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Ellen Brown repeats a favorite myth of the Greenbackers: there was no connection between the Greenbacks and gold. The Greenbacks were pure fiat money, she says.

The Greenback system undergirded Lincoln's program of domestic development by providing a much-needed national paper money supply. After Jackson had closed the central bank, the only paper money in circulation were the banknotes issued privately by individual state banks; and they were basically just private promises to pay later in hard currency (gold or silver). The Greenbacks, on the other hand, were currency. They were "legal tender" in themselves, money that did not have to be repaid later but was "as good as gold" in trade. Like metal coins, the Greenbacks were permanent money that could continue to circulate in their own right. [Web of Debt, p. 87]

Three professional economic historians -- one at Yale, two at Princeton -- traced gold's price in greenbacks during the war. Here is what they found, which they reported in 1993.

During the first year of the Civil War, 1861, the Union's financial condition deteriorated, and in December the Treasury issued a very bleak report on the budgetary situation. In the face of such news, bankers concluded that investors would lose confidence in bank notes and that banks would soon experience a massive outflow of gold. On December 30, the banks suspended the convertibility of their notes into gold (Dewey [1939, pp.182-3]). The government almost immediately followed suit, suspending the right to convert Treasury notes into specie. Soon thereafter, in February 1862, Congress passed the first of the Legal Tender Acts. These acts authorized the government to issue an inconvertible currency popularly called "Greenbacks." Did people believe that the government would eventually redeem Greenbacks for gold? As Unger [1964, p.16] noted, "Little had been said on the subject of redemption when Congress debated the Legal Tender" issue. However, all the available evidence indicates that the public believed that at some future date, convertibility would be reinstated, and all Greenbacks would be redeemed in gold.

So, the North's public believed that the Greenbacks would be redeemed at par value with gold after the War ended. This faith was rewarded. In 1879, the gold standard was re-established at the pre-War price of gold. A person could buy gold with his Greenbacks at the government-guaranteed price.

So, to speak of the Greenbacks as a pure fiat money is a serious mistake. Ellen Brown makes this mistake.

For my reply to her response, click here:

http://www.garynorth.com/public/7187.cfm

For a detailed critique of Ellen Brown's economics, go here:

http://www.garynorth.com/public/department141.cfm


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