During the Civil War, strapped for cash, President Lincoln and Secretary of Treasury Salmon P. Chase did something daring and possibly unconstitutional. They issued $450 million in greenbacks (paper currency) with only a future promise to pay them off in gold after the war. The greenbacks were thus made legal tender and had to be accepted in payment of debts.
Today, such a story hardly sounds startling. In fact, most students to whom I tell this story wonder what the fuss was about. With so much current debt owed by the federal government, the greenbacks of the Civil War look small and harmless. But that isn’t what Americans of the 1860s thought, as they experienced the problems caused by an unstable currency. Inflation almost doubled because of the greenbacks, and U.S. credit abroad weakened. After the Civil War, we were faced with high (6 percent) interest payments on our national debt. Our national integrity was questioned. Would we cut our federal spending, run budget surpluses, and have the gold to redeem the greenbacks?
President Rutherford B. Hayes and the leadership in Congress, said yes, we would redeem the greenbacks. In fact, under President Hayes, the U.S. built up so much gold in the U.S. treasury that in 1879, when the official day arrived to begin paying gold for their paper currency, most Americans held on to the more-convenient-to-use greenbacks because they had confidence the U.S. would give them the gold whenever they wanted it. Through disciplined spending and budget surpluses, the U.S. established strong character, and the generation after the Civil War witnessed the rise of the U.S. as a world power.
Actions have consequences, and when we kept past promises and showed fiscal restraint in those days long ago, our nation grew in stature and respect. But with the current spending in Washington and lack of interest in cutting those expenditures, U.S. leadership and prestige around the world is being questioned as our federal debt deepens.