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Legal Tender Notes are among the first national U.S. currency authorized by the Legal Tender Act of 1862. They are called legal tender simply because of the inscription on the obverse that states, “This note is a legal tender at its face value for the depts. Public and private.” They have their distinctive red seal vs. a green one and were issued directly into circulation by the United States Department of the Treasury.
Sometimes known as United States notes, they were the longest running of all American Paper Money, being issued for more than a century from 1862 until 1966.
Denominations include $1 all the way to $10,000 notes
History
During 1861, the opening year of the American Civil War, the expenses incurred by the Union Government far outstripped its limited revenues from taxation, and borrowing was the main vehicle for financing the war. The Act of July 17, 1861 authorized Secretary of the Treasury Salmon P. Chase to raise money via the issuance of $50,000,000 in Treasury Notes payable on demand. These Demand Notes were paid out to creditors directly and used to meet the payroll of soldiers in the field. While issued within the legal framework of Treasury Note Debt, the Demand Notes were intended to circulate as currency and were of the same size as and, in appearance, closely resembled banknotes. In December 1861, economic conditions deteriorated and a suspension of specie payment led the government to cease redeeming the Demand Notes in coin.
The Legal Tender Acts
The beginning of 1862 found the Union's expenses mounting, and the government had no way to continue paying for the war. U.S. Demand Notes—which were used, among other things, to pay Union soldiers were unredeemable, and the value of the notes began to deteriorate. In January President Lincoln sent for Edmund Dick Taylor, he suggested the issuance of treasury notes bearing no interest and printed on the best banking paper.
Congressman and Buffalo banker Elbridge G. Spaulding prepared a bill, based on the Free Banking Law of New York, that eventually became the National Banking Act of 1863. Recognizing, however, that his proposal would take many months to pass Congress, in early February Spaulding introduced another bill to permit the U.S. Treasury to issue $150 million in notes as legal tender, which caused tremendous controversy in Congress because the Constitution had been interpreted as to not grant the government any power to issue paper currency. Spaulding argued before the House; "The bill before us is a war measure, a measure of necessity, and not of choice," "These are extraordinary times, and extraordinary measures must be resorted to in order to save our Government, and preserve our nationality." Spaulding justified the action as a "necessary means of carrying into execution the powers granted in the Constitution 'to raise and support armies,' and 'to provide and maintain a navy.”
Despite strong opposition, on February 25, 1862, President Lincoln signed the First Legal Tender Act into law, authorizing the issuance of United States Notes as a legal tender—the paper currency soon to be known as "greenbacks." Initially, it was limited to $150,000,000 total face value between the new Legal Tender Notes and the existing Demand Notes. The Act also called for the new notes to be used to replace the Demand Notes as soon as possible.
The Demand Notes had been issued in denominations of $5, $10, and $20. These were replaced by United States Notes nearly identical in appearance on the obverse. In addition, notes of entirely new design were introduced in denominations of $50, $100, $500 and $1000. The Demand Notes' printed promise of payment "On Demand" was removed and the statement "This Note is a Legal Tender" was added.
Legal tender status guaranteed that creditors would have to accept the notes even though they weren’t backed by gold, bank deposits, or government reserves. However, the First Legal Tender Act did not make the notes an unlimited legal tender as they could not be used by merchants to pay customs duties on imports and could not be used by the government to pay interest on its bonds. The Act did provide that the notes be receivable by the government for short term deposits at 5% interest, and for the purchase of 6% interest 20-year bonds at par.
The rationale for these terms was that the Union government would preserve its credit-worthiness by supporting the value of its bonds by paying their interest in gold.
Early in the war, customs duties were a large part of government tax revenue and by making these payable in gold, the government would generate the coin necessary to make the interest payments on the bonds. Lastly, by making the bonds available for purchase at par in United States Notes, the value of the latter would be supported as well.
The limitations to the legal tender status were quite controversial. Thaddeus Stevens, the Chairman of the House of Representatives Committee of Ways and Means, which had authored an earlier version of the Legal Tender Act that would have made United States Notes a legal tender for all debts, denounced the exceptions, calling the new bill "mischievous" because it made United States Notes an intentionally depreciated currency for the masses, while the banks who loaned to the government got "sound money" in gold. This controversy would continue until the removal of the exceptions in 1933.
In the First Legal Tender Act, Congress limited the Treasury's emission of United States Notes to $150,000,000; however, by 1863, the Second Legal Tender Act, a Joint Resolution of Congress, and the Third Legal Tender Act had expanded the limit to $450,000,000, the option to exchange the notes for United States bonds at par had been revoked, and notes of $1 and $2 denominations had been introduced as the appearance of fiat currency had driven even silver coinage out of circulation.
The largest amount of greenbacks outstanding at any one time was calculated as $447,300,203.10. The Union's reliance on expanding the circulation of greenbacks eventually ended with the removal of Interest Bearing and Compound Interest Treasury Notes, and the passage of the National Banking Act. However, the end of the war found the greenbacks trading for only roughly half of their nominal value in gold.
Post Civil War
At the end of the Civil War, some economists, such as Henry Charles Carey, argued for building on the precedent of non-debt-based fiat money and making the greenback system permanent. Secretary of the Treasury McCulloch argued that the Legal Tender Acts had been war measures, and that the United States should soon reverse them and return to the gold standard. The House of Representatives voted overwhelmingly to endorse the Secretary's view. With an eventual return to gold convertibility in mind, the Funding Act of April 12, 1866 was passed, authorizing McCulloch to retire $10 million of the Greenbacks within six months and up to $4 million per month thereafter. This he proceeded to do until only $356,000,000 were outstanding in February 1868. By this point, the wartime economic boom was over, the crop harvest was poor, and a panic in Great Britain caused a recession and a sharp drop in prices in the United States. The contraction of the money supply was blamed for the deflationary effects, and led debtors to successfully agitate for a halt to the notes' retirement.
In the early 1870s, Treasury Secretaries George S. Boutwell and William Adams Richardson maintained that, though Congress had mandated $356,000,000 as the minimum Greenback circulation, the old Civil War statutes still authorized a maximum of $400,000,000[ - and thus they had at their discretion a "reserve" of $44,000,000. While the Senate Finance Committee under John Sherman disagreed, being of the opinion that the $356,000,000 was a maximum as well as a minimum, no legislation was passed to assert the Committee's opinion. Starting in 1872, Boutwell and Richardson used the "reserve" to counteract seasonal demands for currency, and eventually expanded the circulation of the Greenbacks to $382,000,000 in response to the Panic of 1873.
In June 1874, Congress officially capped the Greenback circulation at $382,000,000, and in January 1875, passed the Specie Payment Resumption Act, which authorized a contraction in the circulation of Greenbacks towards a revised limit of $300,000,000, and required the government to redeem them for gold, on demand, after the first of January 1879. As a result, the currency strengthened and by April 1876, the notes were on par with silver coins which then began to re-emerge into circulation. On May 31, 1878, the contraction in the circulation was halted at $322,681,016, a level that would be maintained for almost 100 years afterwards. The Treasury held in reserve $156,039,431 in gold to back these notes
While $322,681,016 was a significant figure at the time, it is now a very small fraction of the total currency in circulation in the United States. The year 1879 found Sherman, now Secretary of the Treasury, in possession of sufficient specie to redeem notes as requested, but as this brought the value of the greenbacks into parity with gold for the first time since the Specie Suspension of December 1861, the public voluntarily accepted the greenbacks as part of the circulating medium.
While the United States Notes had been used as a form of debt issuance during the Civil War, afterwards they were used as a way of moderately influencing the money supply by the federal government - such as through the actions of Boutwell and Richardson. During the Panic of 1907, President Theodore Roosevelt attempted to increase liquidity in the markets by authorizing the Treasury to issue more Greenbacks, but the Aldrich-Vreeland Act provided for the needed flexibility in the National Bank Note supply instead. Eventually, the "need" for an elastic currency was addressed with the Federal Reserve Notes authorized by the Federal Reserve Act, and pressure to alter the circulating quantity of United States Notes subsided.
Soon after private ownership of gold was banned in 1933, all of the remaining types of circulating currency, silver certificates, Federal Reserve Notes, and United States Notes, were redeemable by individuals only for silver. Eventually, even silver redemption stopped in 1965-68, during a time in which all U.S. currency, coins included, was changed to fiat currency.
At this point for the general public, there was little to distinguish United States Notes from Federal Reserve Notes. As a result, the public circulation of United States Notes, which was then mainly in the form of $5 bills, was replaced with $5 Federal Reserve Notes, and the stock of United States Notes was mostly converted into $100 bills, which spent most of their time in bank vaults. No more United States Notes were put into circulation after January 21, 1971. In September 1994 the Riegle Improvement Act released the Treasury from its long-standing obligation to keep the notes in circulation and finally, in 1996, the Treasury announced that its stock of $100 United States Notes had been destroyed.
Comparison to Federal Reserve Notes
Both United States Notes and Federal Reserve Notes are parts of the national currency of the United States, and both have been legal tender since the gold recall of 1933. Both have been used in circulation as money in the same way. However, the issuing authority for them came from different statutes. United States Notes were created as fiat currency, in that the government has never categorically guaranteed to redeem them for precious metal - even though at times, such as after the specie resumption of 1879, federal officials were authorized to do so if requested.
The difference between a United States Note and a Federal Reserve Note is that a United States Note represented a "bill of credit" and was inserted by the Treasury directly into circulation free of interest. Federal Reserve Notes are backed by debt purchased by the Federal Reserve, and thus generate seigniorage for the Federal Reserve System, which serves as a lending intermediary between the Treasury and the public.
Characteristics
Like all U.S. currency, United States Notes were produced in a large sized format until 1929, at which point the notes' sizes were reduced to the small-size format of the present day.
The original large-sized Civil War issues were dated 1862 and 1863, and issued in denominations of $1, $2, $5, $10, $20, $50, $100, $500 and $1000.
The United States Notes were dramatically redesigned for the Series of 1869, the so-called Rainbow Notes. The notes were again redesigned in the Series of 1874, 1875 and 1878. The Series of 1878 included, for the first and last time, notes of $5,000 and $10,000 denominations. The final across-the-board redesign of the large-sized notes was the Series of 1880. Individual denominations were redesigned in 1901, 1907, 1917 and 1923.
The $1 series of 1928 was released mainly in Puerto Rico years after the notes were printed but were taken out of circulation.
On small-sized United States Notes, the U.S. Treasury Seal and the serial numbers are printed in red instead of the normal green of Federal Reserve Notes.
By the time the small-size format was adopted, the Federal Reserve System was already in place and there was limited need for United States Notes. They were mainly issued in $2 and $5 denominations in the Series years of 1928, 1953, and 1963. There was a limited issue of $1 notes in the Series of 1928, and an issue of $100 notes in the Series year of 1966, mainly to satisfy legacy legal requirements of maintaining the mandated quantity in circulation.