History Snippet – Legal Tender Act

On Feb. 25, 1862, the U.S. Congress passed the Legal Tender Act, authorizing the use of paper notes to pay the government’s bills. This ended the long-standing policy of using only gold or silver in transactions. It allowed the government to finance the enormously costly Civil War.

The Legal Tender Act allowed the government to print $150 million in paper money that was not backed by a similar amount of gold and silver. Many bankers and financial experts predicted doom for the economy, as they believed there would be little confidence in the scheme.

1862 greenbacks (Legal Tender Notes) at first traded for 97 cents on the dollar but gained/lost value depending on fortunes of the Union army. The value of Legal Tender Greenbacks swung wildly and were traded anywhere from 85 to 33 cents on the gold dollar. Thus, the government came up with United States Notes backed only by treasury securities, and compelled the people to accept the new notes at a discount; prices rose except for those who had gold and/or silver coins.