The Public Credit Act of 1869 in the USA states that bondholders who purchased bonds to help finance the

Civil War A civil war or intrastate war is a war between organized groups within the same state (or country). The aim of one side may be to take control of the country or a region, to achieve independence for a region, or to change government polici ...

(1861 – 1865) would be paid back in gold. The act was signed on March 18, 1869, and was mainly supported by the

Republican Party Republican Party is a name used by many political parties around the world, though the term most commonly refers to the United States' Republican Party. Republican Party may also refer to: Africa * Republican Party (Liberia) *Republican Party ...

, notably

Senator A senate is a deliberative assembly, often the upper house or chamber of a bicameral legislature. The name comes from the ancient Roman Senate (Latin: ''Senatus''), so-called as an assembly of the senior (Latin: ''senex'' meaning "the el ...

John Sherman John Sherman (May 10, 1823October 22, 1900) was an American politician from Ohio throughout the Civil War and into the late nineteenth century. A member of the Republican Party, he served in both houses of the U.S. Congress. He also served as ...

Background

Prior to the

, the U.S. operated on a

gold standard A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from th ...

in practice.

Bank notes A banknote—also called a bill (North American English), paper money, or simply a note—is a type of negotiable promissory note, made by a bank or other licensed authority, payable to the bearer on demand. Banknotes were originally issued ...

were

legal tender Legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered ("tendered") in ...

issued by state banks which could be exchanged for an amount of gold at any bank. Both gold and

bank notes A banknote—also called a bill (North American English), paper money, or simply a note—is a type of negotiable promissory note, made by a bank or other licensed authority, payable to the bearer on demand. Banknotes were originally issued ...

circulated as

mediums of exchange In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency. The origin of "mediums of exchange" in human societies is ass ...

. On February 25, 1862, the U.S. passed the

First Legal Tender Act Legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered ("tendered") in pa ...

to help finance the

. The act changed the economy to a fiduciary standard based on a

fiat currency Fiat money (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was some ...

called

United States Notes A United States Note, also known as a Legal Tender Note, is a type of paper money that was issued from 1862 to 1971 in the U.S. Having been current for 109 years, they were issued for longer than any other form of U.S. paper money. They were k ...

, or more popularly, greenbacks. Unlike

, greenbacks were not backed by any metallic standard and functioned as a "loan without interest."Mitchell, Wesley Clair. ''A History of the Greenbacks''. Chicago: The University of Chicago press, 1903. p. 404. Greenbacks were issued as an immediate, short-term relief for the country's growing demand for currency. The issuance of greenbacks and the sale of government bonds to finance the war were led by the

Secretary of the Treasury The United States secretary of the treasury is the head of the United States Department of the Treasury, and is the chief financial officer of the federal government of the United States. The secretary of the treasury serves as the principal a ...

at the time,

Salmon P. Chase Salmon Portland Chase (January 13, 1808May 7, 1873) was an American politician and jurist who served as the sixth chief justice of the United States. He also served as the 23rd governor of Ohio, represented Ohio in the United States Senate, a ...

.Geisst, Charles R. ''Wall Street: a History''. New York: Oxford University Press, 1997. Until 1879, gold, bank notes, and greenbacks were used as mediums of exchange and had free floating exchange rates. After the Civil War, there was debate over whether to keep the greenback standard or to revert to the

. During the Civil War, the nation experienced a strong period of

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

. The

price level The general price level is a hypothetical measure of overall prices for some set of goods and services (the consumer basket), in an economy or monetary union during a given interval (generally one day), normalized relative to some base set ...

in the U.S. almost doubled between 1861 and 1865, with harmful implications on the exchange rate.

Inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

increased the exchange rate with

England England is a country that is part of the United Kingdom. It shares land borders with Wales to its west and Scotland to its north. The Irish Sea lies northwest and the Celtic Sea to the southwest. It is separated from continental Europe ...

, making the price of British pounds more expensive. There was concern that if the pre-war gold standard was put in place during this inflationary period, people would cash out their U.S. currency for gold to buy British goods. The flow of gold out of the country would slow the economy and lead to

unemployment Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refe ...

.Walton, Gary M, and Hugh Rockoff. History of the American Economy. 11th ed. Mason, Ohio: Thomson/South-Western, 2010. Some Republicans pushed for a gold standard early on. They believed that creditors who supported the war should be paid back in gold, the way they were expected to be paid back. The Republicans also believed that the government should not be in charge of managing currency and that the gold standard did not allow government to intervene in the economy. It was thought by all that the gold standard would also be a good move from an international perspective, since the U.S. would appear stable, and its system would be compatible with its major trading partner, England, who also operated on a gold standard.

Consequences

Over time, the

and

exchange rate In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of t ...

began to fall.

Congress A congress is a formal meeting of the representatives of different countries, constituent states, organizations, trade unions, political parties, or other groups. The term originated in Late Middle English to denote an encounter (meeting of ...

decided on a severe monetary contraction to lower the

so they could reinstate the

during the

Contraction Act of 1866 The Contraction Act of 1866 was an act passed by Congress of the United States on April 12, 1866. It was intended to lower the price level so they could reinstate the gold standard. History In 1862, Abraham Lincoln created the Greenbacks, a cur ...

before easing the policy in 1868. The passing of the Public Credit Act of 1869 was the first definitive piece of legislation that moved the U.S. toward reinstating a gold standard. However, the act included no explicit dates, people, or actions intended to pay back the bondholders in gold. The U.S. did not officially operate on the gold standard again until the

Resumption Act The Specie Payment Resumption Act of January 14, 1875 was a law in the United States that restored the nation to the gold standard through the redemption of previously-unbacked United States Notes and reversed inflationary government policies promot ...

of 1875.

References

Ulysses S. Grant Interpretive Outline by Frank Scaturro of the Grant Monument Association
*Act to Strengthen The Public Credit – March 18, 1869. History Central, 2000. http://www.historycentral.com/documents/Publiccredit.html March 13, 2011 *Friedman, Milton, and Anna J. Schwartz. ''A Monetary History of the United States, 1867 – 1960''. National Bureau of Economic Research. Princeton, N.J.: Princeton University Press, 1963. *Kindahl, James K. "Economic Factors in Specie Resumption the United States, 1865-79." ''The Journal of Political Economy'' Vol. 69, No. 1 (Feb., 1961), pp. 30–48 *Smith, Gregor W. and R. Todd Smith. "Greenback-Gold Returns and Expectations of Resumption, 1862-1879." ''The Journal of Economic History'' Vol. 57, No. 3 (Sep., 1997), pp. 697–717 *Walton, Gary M, and Hugh Rockoff. ''History of the American Economy''. 11th ed. Mason, Ohio: Thomson/South-Western, 2010. {{Federal Reserve System 1869 in American law United States federal currency legislation

Background

Consequences

See also

References