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The “Greenback Dollar,” which financed the Union Army during the Civil War, is the most probable reason the Confederacy lost that conflict. Southern states had always opposed paper fiat money and preferred money based on a gold standard. However, Confederate dollars based on gold were less available than the fiat paper greenbacks printed by northern banks with no precious metal requirement.
When Lincoln discovered that private banks and printers were charging exorbitant interest and printing rates for his paper greenback money, he ordered Treasury Secretary Salmon P. Chase to begin printing dollars at the treasury building itself. That operation is the only time the US Treasury Department printed false money with no gold or silver content.
Article 1, Section 8 of the Constitution authorizes Congress “to coin money, regulate the value thereof and of foreign coin.” Remember that the intent of the Constitution was to limit Federal government and empower the People and individual States. Therefore when Section 10 of Article 1 prohibits the States to “make any Thing but gold and silver Coin a Tender in Payment of Debts,” it applies especially to the Federal government and not at all to the people. Salmon P. Chase understood that and later, as Chief Justice of the Supreme Court, he ruled that his paper money operation was indeed unconstitutional. The Supreme Court was promptly reshuffled and Chase’s precedent was overturned the following year.
During the war Chase also printed circulars explaining the inflationary nature of paper money as the culprit for higher prices. Although greenbacks were never worth a dollar, following Union victories at Gettysburg and Vicksburg in 1863, greenbacks were valued at 82¢ per $1. After Sherman’s humiliating defeat at Kenesaw Mountain in June 1864, the greenback would only net 35¢. It is not by coincidence alone that the false promise of paper money is tied to the war.
In gold rich western states, local merchants mutually agreed not to accept greenbacks and remained on a gold standard in violation of the legal tender law. To the chagrin of the US Treasury some of the finest and most durable gold and silver coins were privately minted in Denver and San Francisco. Such mutual agreements to circumvent paper money are impossible today.
By the time of Lee’s surrender at Appomattox $450 million worth of greenbacks were outstanding. Congress resolved to retire that entire debt in 2 years. However, reconstruction and booming industry required immediate capital. Since fiat paper money had driven gold westward and overseas, Congress not only reneged on their resolve but also authorized additional issues of greenbacks.
Meanwhile, amazing things were happening in war torn Europe. Napolean Bonaparte became a hard money advocate. After his defeat at Waterloo, France saw the economic light and adopted a strict gold standard in 1830 to retard devastating inflation. It worked like a charm. One by one other European nations followed suit and by 1875 all of Europe was thriving on an economy disciplined by gold. Bottom line, neither banks nor governments could issue paper money above a small percentage of their gold assets. As a result, no European nation waged war against their neighbors from 1870 until the onset of World War I.
Following the Civil War, America became a world class economic player. Congressional representatives met with European nations who encouraged the US to also adopt a gold standard. Resistance was strong however by American farmers used to easy credit and free silver. William Jennings Bryan ran for President 3 times on the “silver” ticket and lost each time. McKinley defeated Bryan in 1900 and huge gold strikes were made in Australia, South Africa and the Klondike. Plus a cyanide process for extracting gold from ore boosted world stocks of gold which lowered its price and America adopted a strict gold standard in March of 1900.
The gold standard put America on an equal standing with the other nations of the world. Almost immediately she dominated them all. So quickly did the American economy grow that banking institutions could not keep pace and a money panic in 1907 convinced Congress that government should step in (as usual a worse decision could not have been made). However the problem with Article 1, Section 10 persisted. Congress had to create a non governmental entity to control the manufacture of American dollars. Enter J. P. Morgan, the Jekyll Island cabal and the Federal Reserve Act.