Convenience Signer On Bank Account Chase Bank

Seigniorage, legal tender, and the demand notes of 1861.


Shortly after the onset of hostilities at
Fort Sumter
 fortification, built 1829–60, on a shoal at the entrance to the harbor of Charleston, S.C., and named for Gen. Thomas Sumter; scene of the opening engagement of the Civil War. Upon passing the Ordinance of Secession (Dec.
, the Lincoln
administration asked Congress to authorize the first large-scale issue
of federal paper currency. Officially labeled as
United States
 officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world’s third largest country in population and the fourth largest country in area.
they were popularly known as the Demand Notes of 1861. The
administration’s action is unremarkable. The extraordinary revenue
requirements of long and costly wars are often met, in part, by issuing
paper money. More surprising (and not widely recognized) is that this
initial issue of paper money carried provisions that largely prevented
it from yielding sustainable revenue (


These provisions were largely omitted for the successor currency to
the 1861 Notes (also known as United States Notes, but popularly as
Greenbacks). As a result, its seigniorage potential was greater
(although seigniorage was limited by other provisions). In modern
software jargon, the Greenbacks might be viewed as 1861 Notes version
2.0: a version better suited to sustain a flow of seigniorage. However,
the government was unable to replace the latter with the former very
quickly, resulting in an extended period during which two paper
currencies with different properties circulated side by side both with
each other and with
gold coin


This somewhat untidy situation provides an interesting (and
heretofore underexploited) experiment for economists. These alternative
monies circulated widely with market-determined exchange rates for a
substantial period during which the amounts of both paper currencies in
circulation greatly increased before the 1861 Notes were removed from
circulation. We have collected daily data on these exchange rates and
report them as differing gold premiums for the competing paper monies.
Below, these data are exploited to calculate the seigniorage cost of the
various provisions of the 1861 Notes and to provide evidence on
alternative theories of expectations formation during this period.

Our paper has three sections. The first presents a more extensive
discussion than has been previously available of the 1861 Notes. In the
second, a simple analytical framework is used to demonstrate and, where
possible, estimate the seigniorage costs of the provisions attached to
these notes. The third section analyzes the market relationship between
gold and the simultaneously circulating 1861 Notes and Greenbacks prior
to the (all but complete) retirement of the former in 1863. The paper
concludes with a summary.


The major focus of this paper is on the Demand Notes of 1861, the
first large-scale federal experiment with paper money. (1) We
concentrate on these notes for two reasons. First, little has been
written about them. Mitchell (1902), in his pioneering work on Civil War
finance, devotes only 7 pages to them while devoting 17 pages to

fractional currency

Coin or paper currency in a denomination less than a standard monetary unit.

Noun 1. fractional currency – paper currency in denominations less than the basic monetary unit
 and minor coins during the war. In addition, most of
his discussion concerns the period prior to suspension. More recently,
Calomiris (1988a, 1988b, 1992) makes reference to the 1861 Notes, but
only as a part of his discussion of Greenbacks. Second, the paradox of
issuing largely seigniorage-free paper money to help finance a war has
not been well recognized and, hence, largely


strange or unclear because the reason for it is not known

Adj. 1. unexplained – not explained; “accomplished by some unexplained process”
. This conflict
between means and ends is interesting in its own right and illuminates
some of what is puzzling in the sequence of monetary events over the
first half of the Civil War.

As a part of our discussion of the 1861 Notes, we challenge or
extend the existing literature in three ways. First, we demonstrate that
the conclusion of Studenski and Krooss (1963, 141, 144) that these notes
were only used by the government to pay salaries and, hence, in their
words, were a “pseudomoney” is mistaken. Examination of the
financial press of the day suggests that these notes were not only
popular but also circulated widely as money. A convincing claim can be
made that they were indeed a national currency. Second, we offer an
explanation for why the Greenbacks came into being that may be regarded
as an alternative or a supplement to that given by Hammond (1961, 1970).
Third, we present a simple model of the gold premium in terms of the
1861 Notes after the United States suspended the gold standard that
provides quantitative predictions and is at variance with Calomiris
(1988a, 1998b).

A. The Origins of the Notes

The incoming Lincoln administration not only faced the prospect of
imminent civil war but also inherited a precarious fiscal situation

adj. suc·cinct·er, suc·cinct·est
1. Characterized by clear, precise expression in few words; concise and terse:

 described by Bray Hammond as “the North’s empty
purse.” After 4 yr of budget deficits during the Buchanan
administration, in which the national debt rose from $28.7 to $64.8
million, the federal treasury was nearly empty. (2) From March through
June 1861, the final quarter of the 1861 fiscal year, revenue from
ordinary sources (primarily the tariff) amounted to about $5.8 million
against expenditures in excess of $23.5 million. (3)

To deal with this fiscal crisis, President Lincoln summoned
Congress to a special session beginning on July 4, 1861. The Congress
acted rapidly on Secretary of Treasury Salmon Chase’s financing
recommendations and, on July 17, passed the first of many bills to
finance the Civil War, authorizing the government to borrow $250
million. Of this sum, the Treasury could issue $50 million in
non-interest-bearing notes, payable on demand in gold, and in
denominations of at least $10 but less than $50. The act was amended on
August 5 to allow the Secretary to fix the denominations (which became
$5, $10, and $20) and to make them receivable for all public dues
customs duties

 on a par with coin. Thus, these notes were
equivalent to a warehouse receipt for a fixed weight of gold.

The 1861 Notes were, then, an emergency measure to
tr.v. fur·nished, fur·nish·ing, fur·nish·es
1. To equip with what is needed, especially to provide furniture for.


tr.v. de·plet·ed, de·plet·ing, de·pletes
To decrease the fullness of; use up or empty out.

[Latin d
 Treasury with currency until the loans authorized could be
floated to bridge the rapidly widening gap between expenditures and tax
receipts. (4) On February 12, 1862, when the Treasury encountered a
similar situation, Congress authorized an additional $10 million in
notes. The total authorized, $60 million, was a substantial addition to
the money stock. Exactly how substantial is unclear because precise
estimates of the coin and the notes of state-chartered banks circulating
in the Union have not been
agreed upon

. For example, the
Director of the

 (1861, 8) estimated that approximately $275 to $300 million in gold
coin (including
bank reserves

) was outstanding in October 1861, of which
$20 million was held in Confederate states. (5)

This appears to be a substantial underestimate of the amount held
in the Confederate states. Godfrey (1978, 64) shows that in the same
month, Southern banks alone held $24 million
in specie

 not counting coin
that either circulated or was hoarded in the South. Dewey (1909, 283)
states that on January 1, 1862, banks in the loyal states held some $87
million in coin. A somewhat lower figure of $76.4 million is given in
House of Representatives (U.S. Government 1862, 209). If we take
Secretary Chase’s (U.S. Treasury 1862, 13) estimate that $210
million in coin was in circulation in the loyal states (including that
held by banks) on November 1, 1861,

 from this the amount held
as bank reserves (about $90 million), and add to this his estimate of
the notes of state-chartered banks outstanding, $130 million (U.S.
Treasury 1862, 7), we arrive at a total of $250 million for circulating
money. (6)

The $34 million of 1861 Notes issued prior to suspension and the
$60 million authorized ($26 million of which were put into circulation
in the first quarter of 1862 as shown in Table 1) represented 14% and
24% increases in this measure of money. Secretary Chase stated that the
emission of these notes was “not with the desire of furnishing a
general currency, but for the purpose of making good the difference
between the amounts obtained by loans and the sums required by the
public service.” Nevertheless, they were the first large-scale
experience of the U.S. government in issuing paper money and they
enjoyed wide circulation.

Notes were payable on demand in gold at four Sub-Treasury offices:

New York City
 see New York, city.

New York City

City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S.
, Boston, Philadelphia, and St. Louis, and the Treasury


 in Cincinnati. (7) It was known early on that these notes
would not be issued to buy gold, although they were authorized for that
purpose. Rather, they were to be paid out to satisfy the immediate and
pressing claims on the Treasury, and there was no free gold in the
Treasury to serve as their backing. (8)

These notes presented formidable production problems. They were

tr.v. en·graved, en·grav·ing, en·graves
1. To carve, cut, or etch into a material:

 and printed by the American Bank Note Company with the date
August 10, 1861. Although this was the day that they were supposedly
first issued to the public, evidence suggests that they actually entered
circulation toward the end of August. (9) It was initially expected that
the Treasurer of the United States and the Register of the Treasury
would personally sign each note. This proved
1. Unwise to implement or maintain in practice:

 for the
millions of notes involved, and the plates were altered so that an army
of clerks hired for the purpose could sign “for” the two
officials. (10) Even an army takes time to move, however, and the last
of the initial $50 million issued left the signers on February 6, 1862,
just 6 days before Congress authorized an additional $10 million.

B. Legal Tender Status

The legal tender status of the 1861 Notes was complex. Since they
were acceptable for all public dues including customs, they were,

, a full public legal tender. Since they could be exchanged at par
on demand for gold coin (itself a legal tender), one might conclude that
they were a
de facto

 legal tender for all private debts as well (a view
held by Secretary Chase). That this was not the case diminished their
acceptability to banks prior to suspension. Not being “lawful
money,” the Notes could not serve as bank reserves on a par with
coin. Hence, some banks refused to accept them on deposit or would only
accept them as special deposits to be repaid in the same form should
they be withdrawn. After suspension, banks were no longer obligated to
redeem their notes in “lawful money” and no longer objected to
receiving 1861 Notes on deposit. After the Greenbacks were introduced,
Congress, on March 17, 1862, declared them to be a full legal tender
all debts public and private

. However, the legal tender properties of
the 1861 Notes remained superior to those of the Greenbacks in one
important respect. The Greenbacks were a public legal tender for all
public debts and dues except for customs duties, which were a major
source of federal revenue. The 1861 Notes could be used for customs on a
par with coin and, as we show below, this had major implications for
both the market value and the seigniorage potential of the two classes
of United States Notes.

C. General Acceptability

Despite his claim that these notes were not intended to be a
general currency, Secretary Chase encouraged their use by having his
salary and that of other Treasury officials paid in them. They were also
used to pay troops in the Union army and to pay for supplies received
from military contractors. (11) In fact, the notes quickly became
genuinely popular as indicated by the following partial listing of
quotations gleaned from newspaper articles from the months immediately
after their introduction. And, contrary to the conclusion of Studenski
and Krooss (1963), they circulated widely throughout most of the Union.

The increasing inquiry for United States Demand notes is an
important feature of the financial situation. The Cashier of the
Sub-Treasury finds it impossible to keep any on hand

….Some of the applications [for notes] are from parties going
West [today’s mid-west] … and who find these notes the most
convenient shape to carry money in…. $20,000,000 of these demand notes
have gone West. (Herald September 14, 1861, 3).

At the West they are received with the greatest favor by all the
people and by all moneyed institutions in Cincinnati, Chicago, etc…..
At the North and East they are universally accepted among the people.
(Times September 27, 1861, 4).

There was a brisk inquiry for the United States notes, which are
rapidly entering into general circulation. All, or nearly all, the banks
receive them on deposit as money, and they will undoubtedly become the
circulating medium

 of the North in the course of a few months.
(Herald October 5, 1861, 8).

In the West, as in
New England
 name applied to the region comprising six states of the NE United States—Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, and Connecticut. The region is thought to have been so named by Capt.
, they are heartily welcomed. We
presume that we are not far wrong if we say that the commerce of the
West has during the past ten years paid a tax of five millions a year in
the shape of discounts and losses on its paper currency. (Herald October
14, 1861, 8).

Four-fifths of the currency at present in circulation here, in the
other Central and in the Western States, consists of United States
notes. Three fourths of the business which is giving employment to our
manufacturers and merchants grow out of the war, and is liquidated in
United States notes. (Herald February 5, 1862, 3)

The popularity of the United States Notes in every quarter of the
country and their paramount convenience for army and other Government
payments are already equal to the absorption of $60,000,000…. (Times
March 27, 1862, 2).

Most of them have found a home in the West, where they are
treasured as the best currency ever to
v. cir·cu·lat·ed, cir·cu·lat·ing, cir·cu·lates

1. To move in or flow through a circle or circuit:

 in that region, and
they will be kept there until they are worn out. (Herald April 7, 1862,
5). (12)

D. The Value of 1861 Notes after Suspension

On December 30, 1861, the Associated Banks of the Atlantic Cities
suspended convertibility of their notes for

 and most other banks
soon followed. Because all transactions with the federal government had
to be conducted in coin (or 1861 Notes), this forced a suspension of the
gold standard on December 31. Although suspension meant that the
government would no longer convert 1861 Notes into coin on demand, their
full public legal tender status continued. In particular, customs duties
(tariffs) could be paid either in coin or in 1861 Notes, even after
suspension (the government continued to service the national debt in
coin). (13) Below, we argue that this continuing legal tender provision
ensured that 1861 Notes remained incapable of generating sustained
seigniorage despite their

. Before presenting this
argument, we introduce the data upon which it is partially based.

Predictably, the values of a paper dollar and gold dollar diverged
after suspension. We are able to quantify this

 in the form of
daily observations on the 1861 Note price of a gold dollar. The data are
taken from the columns of the Times, Herald, and
Commercial Advertiser

 (1861, 1862, 1863). (14) In most cases, the price of 1861 Notes and the
price of gold were quoted in terms of one of the competing currencies
(particularly Greenbacks after they were introduced) then converted into
the exchange rate above. It was necessary to use particular care in
determining which numeraire was being used for the various quotes. A
detailed discussion of numeraire issues comprises our Appendix.

For dates after the gold market opened on January 13, 1862, the
underlying price observation is the mean of all prices recorded for
transactions on that day. A similar method was used for the price of
1861 Notes after they began trading on the stock exchange during August
1862. Observations prior to those respective dates are based on prices
(either a single figure or a range) at which transactions involving
private banking houses or brokers were reported. This method also
applies to observations from October 25 to November 15, 1862, when
trading in both assets on the exchange was suspended in an effort to
curb “excessive speculation.” An analogous Greenback price of
gold was also collected for the period after Greenbacks were introduced.
While we delay examination of this exchange rate until our discussion of
the Greenbacks below, a graph of both gold premiums appears as shown in
Figure 1.

E. The Disposition of the Notes

On February 25, 1862, President Lincoln signed the bill authorizing
the first issue of $150 million in Greenbacks. Of this sum, $60 million
were to replace the 1861 Notes as rapidly as practicable. However, since
the printing of Greenbacks did not begin until March 13 and they did not
begin to circulate until early April 1862, the Treasury continued to
issue 1861 Notes until the full $60 million authorized by law was
outstanding. (15) Thus, the costs of maintaining a full legal tender
currency not only continued but increased until the more limited legal
tender Greenbacks could be issued in sufficient numbers to replace them.
In fact, there was a substantial amount of 1861 Notes outstanding in
early 1863. However, the amount outstanding had been reduced to
$3,822,610 by June 30 (as shown in Table 1) and their market price
to be reported

. By June 1864, less than a million dollars of
these notes remained in circulation and a small amount remained
outstanding for many years. (16)

F. Greenbacks

On February 25 and July 11, 1862, and January 17 (March 3), 1863,
Congress authorized $150 million in United States Notes, popularly
termed Greenbacks. (17) They were a legal tender for all debts, public
and private, and receivable for all public dues except for import duties
that were payable in gold or 1861 Notes. With the customs receivability
provision omitted, the seigniorage potential of the Greenbacks in the
new flexible exchange rate regime was enhanced. Nevertheless, their
seigniorage potential was somewhat compromised before the first $150
million were issued. Their authorizing legislation contained two options
by which they could be converted into interest-bearing debt. First, they
were exchangeable at any time for 6%, 25-yr bonds whose interest was
payable in coin (this option proved unattractive and was withdrawn in
1863). Second, they could be left on deposit at the subtreasuries in
special certificates of deposit at 5% for a period of not less than 30
days provided that 10 days’ notice was given prior to withdrawal.
Initially, the amount that the Treasury could accept as certificates was
fixed at $25 million. As these accounts proved to be popular, the
ceiling was raised in several steps to $150 million. Concern, however,
was expressed about the adequacy of reserves against a sudden

the deposits. To address this, the second legal tender act directed the
Secretary to retain as reserves a sum of not less than $50 million.
Thus, of the first $300 million of Greenbacks issued, $50 million were
retained as reserves against the certificates of deposit.

G. Summary

The Demand Notes of 1861, the first large-scale federal experience
with paper money, were successful in the sense that some $60,000,000 of
them were put into circulation expanding the money supply by nearly 25%.
They were widely accepted by the public and, ultimately, the banks and
exchanged at par with coin and, prior to suspension, the notes of the
major banks (especially those of the associated banks of the Atlantic
cities). They were replaced eventually by Greenbacks. However, an
extended period passed during which the two paper currencies circulated
side by side with gold coin at market-determined exchange rates.

Below, we formalize our claim that this switch involved a
fundamental change in the seigniorage potential of United States Notes
and, therefore, the delay in replacing the 1861 Notes involved a
significant cost to the Treasury. The literature is silent on this
aspect of the Notes and its relationship to the subsequent switch to



Between their inception and the end of the gold standard on
December 31, 1861, the 1861 Notes were convertible at par into gold

This provision undoubtedly enhanced their acceptability, but
seriously hampered the generation of revenue, which was the
government’s purpose in issuing them. The notion that
convertibility limits a currency’s ability to generate seigniorage
is intuitive. However, we wish to supplement this intuition with a very
simple formal framework. Our purposes were to (a) analyze some specific
questions regarding a convertible currency concretely and (b) lay the
groundwork for similar analysis of the effect of the customs
receivability provision after suspension.

A. Convertible Notes and Seigniorage

Let money consist of gold coin, G, and paper money, M (in this
historical context, M includes bank notes). If the demand for money, L,
is fixed in terms of goods and P is an index of the paper money price of
goods, equilibrium requires that
 + G = L. Suppose P = 1 and M =
[M.sub.0] initially implying [M.sub.0] + G = L. Finally, suppose the
government issues paper currency at rate dN/dt = n for a period of time
At sufficient to add notes in the amount N (= n[DELTA]t) to M, then
stops (n = 0). As the government issues currency and expends it on
goods, the government’s collection of seigniorage is measured by N
the quantity of goods it purchases at initial prices. (18) M rises to
[M.sub.0] + N and equilibrium is restored as prices rise to 1 + [DELTA]P
= 1 + N/(L – G).

For a true
fiat currency

, the eventual rise in prices would
complete the process. However, it is only an intermediate outcome for a
convertible currency. For a convertible currency, the rate at which N
changes is given by dN/ dt = n – x, where n is the instantaneous rate of
note issue and x is the rate of redemption of notes for gold. After a
general inflation, a gold dollar would be worth P = 1 + p paper dollars
representing a “gold premium” of p = N/(L – G). Thus, starting
from parity of paper dollars and gold dollars, a 10% increase in the
amount of paper money leads to a 10% premium of the gold dollar compared
to the paper dollar. This gold premium gives money holders an incentive
to redeem their currency for gold. Acting on this incentive by
presenting paper dollars to the government for redemption causes the
paper currency in circulation to fall.

The response of note holders to such a gold premium could be

tr.v. for·mal·ized, for·mal·iz·ing, for·mal·iz·es
1. To give a definite form or shape to.

a. To make formal.

 by: x = [alpha]Np, where a is a parameter measuring the
percentage of notes outstanding redeemed per time period per unit gold
premium. Thus:

(1) dN / dt = n – [alpha]Np.

The one-time issue of currency in the amount N described in the
first paragraph of this section would correspond to a scenario in which
the government issues and spends currency at rate n over time period At
until N = n[DELTA]t is issued then reverts to n = 0. It is unnecessary
to specify the timing of the price adjustment to conclude that P will
eventually rise (P > 1). With p > 0, x is positive and dN/dt <
0. N falls until P returns to 1 and M returns to [M.sub.0] (N = 0).
Every dollar the government spends while n > 0 will eventually be
repurchased with gold coin obtained by borrowing, forgone spending, or
additional taxes. Thus, with a convertible currency, the government can
collect seigniorage temporarily but must return it eventually. The date
of eventual return of seigniorage moves
farther in

Of or relating to an option contract with an earlier expiration date than a contract that is currently owned or being considered.
 the future as [alpha]
falls and as P responds with a greater lag.

Although the above analysis of a one-time issue of notes
illustrates the fundamental seigniorage problem of the convertibility
provision, it fails as a characterization of the experience with 1861
Notes in two aspects. First, the amount of 1861 Notes outstanding
increased steadily throughout the period of convertibility and reached
its peak well into the period of inconvertibility. Hence, convertibility
did not last long enough for the predicted pattern of inflation,
redemption, and reduction in notes outstanding to be observed. Second,
the one-time issue examined above does not allow for the

 of redeemed notes, which would undoubtedly occur when the government
remained in need of revenue.

Thus, we examine a permanent issue of a convertible currency to (a)
illustrate how the seigniorage problems of convertibility might have
manifested themselves if convertibility had lasted longer and (b)
establish the basis for our subsequent comparison of convertibility to
the customs receivability provision of the 1861 Notes. Suppose the
government maintains the amount of notes outstanding at N by
continuously spending notes at rate [n.sup.*] as they are redeemed.
Setting dN/dt = 0 above and solving for n yields the steady-state rate
of note-financed spending:

(2) [n.sup.*] = [alpha]Np.

Assuming (a) no limit on n and (b) finite [alpha], convertibility
is not an insuperable obstacle to maintaining a given amount of notes
outstanding indefinitely. Although convertibility does not prevent the
government from accomplishing a permanent increase in paper money, the
initial collection of seigniorage tends to be gradually returned in the
process of recirculation. For each paper dollar, the government accepts
for conversion, it must return one gold dollar to the public and
(potentially) forego the goods that the gold dollar could buy. It can


To sell an asset at a price sufficient to recover the original outlay or to offset a previous loss.
 this loss of goods as it returns the paper dollar to circulation
by spending it, but only in the amount I/P= 1/(1 + p) < 1, since a
paper dollar buys 1/P goods. Thus, seigniorage is returned to the public
on every dollar of redemption/ recirculation. The rate of loss per unit
time is given by:

(3) Loss = [alpha][Np.sup.2]/(1 +p) (= [n.sup.*] – [n.sup.*]/P =
[[alpha]N(P – 1).sup.2]/P).

It would be asking too much of this highly simplified framework to
generate a realistic estimate of the drain on the Treasury caused by
maintaining a convertible paper currency in competition with circulating
gold (particularly with no guidance as to the value of [alpha]).
However, it indicates that maintaining a fixed amount of notes
outstanding sets up a system in which seigniorage is steadily returned
to note holders. It also delivers the prediction that this yearly cost
increases both with the size of the maintained note issue, N, and with
the public’s responsiveness to
 see foreign exchange.


Business operation involving the purchase of foreign currency, gold, financial securities, or commodities in one market and their almost simultaneous sale in another market, in order to profit from price
 opportunities, [alpha],
and that it accrues as long as convertibility is kept in place.

B. Suspension and the Seigniorage of 1861 Notes

The suspension of convertibility might be expected to fundamentally
alter the seigniorage potential of a paper currency. However, the
continuing provision that allowed tariffs to be paid by 1861 Notes on a
par with gold prevented the notes from generating significant
seigniorage. Our attempt to support this claim begins with Figure 1,
which displays the fact that 1861 Notes immediately sold at a discount
to gold upon suspension and continued to do so throughout 1862. Given
the alternative of discharging the same liability with gold coin or,
readily available, but less valuable, 1861 Notes, it is hard to
understand why savvy importers would ever pay tariffs in gold coin. From
this perspective, the surviving customs receivability provision can be
viewed as a form of indirect convertibility. After suspension, 1861
Notes could still be “redeemed” for more valuable gold coin at
par by using them to pay one’s tariff obligations. The significant
change from explicit convertibility was that the rate of
“redemption” was limited to the rate at which tariff
obligations accrued. On the other side of the ledger redemption was less
cumbersome than direct redemption since the Notes could be
“redeemed” in the normal course of tariff collection and did
not have to be transported to a subtreasury.

The framework used to analyze seigniorage under a convertible
currency can be adapted to this case as well. Assuming that all tariffs
are paid with 1861 Notes, the
differential equation

 summarizing the
evolution of N changes from Equation (2) to:

(4) dN/dt = n – T,

where T is the rate of tariff collection per time period. As was
the case under convertibility, the government can maintain N at a target
level by spending notes (in this case at rate [n.sup.*] = T) as they are
received in payment of tariffs. As in the previous case, the government
loses seigniorage in the process.

If the market value of a gold dollar is 1 + p paper dollars (p =
gold premium), the government loses p gold dollars (the equivalent of
p/(1 + p) paper dollars) for each paper dollar it accepts (and
in lieu of

 a gold dollar. Thus, the rate of loss (in gold
dollars) per time period is given by:

(5) Loss = Tp (= [n.sup.*]p).

This rate of loss can be estimated from observed values for T and
p. During the first postsuspension quarter ending on March 31, 1862,
revenue from tariffs was $15 million (shown in the second column of
figures in Table 1). The average of all daily values for the gold
premium, p, for those 3 months was 2.61% (shown in the next column of
the same table). Thus, the tariff provision cost the Treasury
approximately .026 ($15 million) = $392,000 in the first quarter of
1862. Calculations for the remaining quarters of 1862 (also shown in
Table 1) result in estimated losses of $493,000, $1,581,000, and
$515,000: a total of approximately $3 million for the calendar year. To
provide some perspective, using linear interpolations for the point
values of N in Table 1, one can arrive at a rough estimate of average
notes outstanding of approximately $45 million for all 1862. The
seigniorage loss from the receivability provision expressed as a
fraction of the average amount of notes outstanding is approximately
6.7% per year (=$3 million per year/$45 million). This is quite close to
the yield on interest-bearing government debt (as measured by the
“6’s of 1861”). In Section III, we provide a theoretical
argument suggesting that this correspondence between the rate of debt
service on interest-bearing debt and the rate of Treasury losses on
paper currency is not
1. Occurring as or resulting from coincidence.

2. Happening or existing at the same time.

. Here, we limit ourselves to pointing
out that this is a substantial
carrying cost

 for maintaining a currency

 purpose was the generation of revenue for the Treasury.

C. Why Were These Provisions Attached to the 1861 Notes?

A paper currency issued with the stated purpose of generating
revenue accompanied by provisions largely negating its ability to do so
on a sustained basis presents the observer with a paradox. One
interpretation of the fact that these provisions were removed from the
successor Greenbacks is that Congress and/or the Treasury regarded them
as mistakes in retrospect. While a detailed rendering of the economic
and political discussion leading up to the various decisions is beyond
the scope of our paper, we sketch three alternative (and overlapping)
hypotheses regarding the decision to attach, then remove, these

First, the provisions attached to paper money in a gold coin
environment must be devised with the need to make the currency
attractive to the public and the countervailing need to maximize its
revenue-generating potential. Policymakers were forced to make a
judgment on the trade-off between these needs in designing the
provisions of the 1861 Notes. Perhaps, in the light of experience and a
changed environment, these provisions were later judged to have erred on
the side of the former and were adjusted toward the latter in the case
of Greenbacks. As the discussion of Greenbacks below indicates, some of
the provisions applied to the Greenbacks were also designed to address
the need for acceptability at the expense of revenue. This suggests that
choosing the optimal place on the trade-off remained a vexing issue
throughout the war.

Second, the political figures of the day may not have understood
the seigniorage consequences of provisions like the acceptability of
1861 Notes for tariffs but arrived at a better understanding after
noticing the Treasury’s subsequent distress. The federal government
had no experience with the intricacies of paper currency and the
economic theories of the day had their limitations. The following long
quote from Senator Fessenden regarding the legal tender provisions of
the Greenbacks may serve to illustrate how
tr.v. per·plexed, per·plex·ing, per·plex·es
1. To confuse or trouble with uncertainty or doubt. See Synonyms at puzzle.

2. To make confusedly intricate; complicate.
 the task seemed to
the political leaders of the time.

Nobody knows much upon the question of finance, not even those who
are most familiar with it; for sir, I declare today that, in the whole
number of learned financial men that I have consulted, I never found any
two of them who agree, and therefore, it is hardly worthwhile for us to

 v. 1) in civil lawsuits and petitions, the filing of any document (pleading) including complaints, petitions, declarations, motions, and memoranda of points and authorities.
 any very remarkable degree of ignorance when nobody is competent
to instruct us; and yet such is the fact. I can state to you,

, that on one day I was advised very strongly by a leading
financial man, at all events to oppose this legal-tender clause; he
exclaimed against it with all the bitterness in the world. On the very
same day I received a note from a friend of his, telling me that we
could not get along without it. I showed it to him, and he expressed his
utter surprise. He went home, and next day telegraphed me that he had
changed his mind and now thought it was absolutely necessary; and his
friend who wrote me again that he had changed his, and they were two of
the most eminent financial men in the country. (Bayley 1881, 80-81).

Third, political leaders may have realized that these provisions
would force the Treasury to eventually return any initial seigniorage
but decided that outcome was acceptable because (a) the provisions were
necessary to ensure the acceptability of the currency, which would raise
urgently needed funds that could not be immediately acquired in any
other way and (b) the war was initially expected to be short. (20) Under
this hypothesis, seigniorage-limiting provisions were subsequently
omitted from the Greenbacks as the true length and cost of the war were
better appreciated by that time. Although these hypotheses may be viewed
as reinforcing, rather than
mutually exclusive

, we tend to give greatest
weight to the third. In particular, the fact that the Lincoln
administration asked for little in the way of initial tax increases and
called upon the states to furnish only 75,000 in
 , military organization composed of citizens enrolled and trained for service in times of national emergency. Its ranks may be filled either by enlistment or conscription.
 suggests that
it hoped for a relatively quick resolution of the conflict.

It is interesting to note that the bill authorizing the Greenbacks
that originated in, and was passed by, the House of Representatives
provided that they should be receivable for taxes, debts, and demands of
all kinds due to the United States. That is, the Greenbacks would retain
the customs receivability provision of the 1861 Notes but would be a
private legal tender as well. The Senate amended the bill by requiring
that duties on imports should continue to be paid in coin. It was this
version of the bill that became law. The House/Senate
n. pl. in·con·sis·ten·cies
1. The state or quality of being inconsistent.

2. Something inconsistent:
be consistent with the hypothesis that policymakers were grappling with
the proper choice along the acceptability/seigniorage trade-off or that
there was confusion about the seigniorage implications of provisions
aimed at making paper money more acceptable to the public.

It is a further puzzle that other research has not noticed the
heavy cost to the Treasury of maintaining the 1861 Notes and has, for
the most part, not listed a change in the seigniorage flow as a primary
motivation for the switch from 1861 Notes to Greenbacks. For example,
this motivation is not mentioned by Hammond (1961, 1970). Instead, he
emphasizes a motivation originating within the banking community. The
1861 Notes presented the bankers with a dilemma. Not being a private
legal tender, they could not legally be used by the banks as reserves.
If the banks were to accept them on deposit, there was no guarantee that
they could pass them along to customers. Thus, the banks might be
burdened with an

 asset from which they derived no income. On
the other hand, not to accept the federal government’s money in a
time of national emergency would make them appear unpatriotic.

According to

1. As stated or indicated by; on the authority of:

2. In keeping with:

 this interpretation, the crucial innovation was that
the Greenbacks were a full private legal tender, while the 1861 Notes
were not. The fact that 1861 Notes were a full public legal tender,
while the Greenbacks were not, is not presented as crucial.


In this section, we attempt to evaluate alternative hypotheses
regarding the determinants of the market exchange rate between gold and
the competing paper currencies in light of the environment that existed
between the end of 1861 and the (nearly completed) retirement of the
1861 Notes in mid-1863. There are two questions that may be asked in
this regard. First, why did one “dollar” circulate at a
discount to another dollar? Second, why did this discount fluctuate the
way it did?

Since both 1861 Notes and gold could be used to discharge tariff
obligations and Greenbacks could not, one would expect Greenbacks to
trade at a discount to both. Returning again to Figure l, note that the
data for the Greenbacks begin in April 1862, shortly after they began to
circulate and exhibit a positive gold premium from the outset. The
additional discount of Greenbacks to 1861 Notes was very small in the
beginning but rose to more than 40% as the amount of Greenbacks
continued to rise and the 1861 Notes (after several months at their peak
circulation) fell as they were withdrawn from circulation. The fact that
1861 Notes exhibited a positive gold premium requires a more detailed

A. Accounting for the Gold Premium of the 1861 Notes.

While a systematic daily time series on the gold premium of 1861
Notes has not been developed until now, earlier researchers mention the
premium for selected days. Mitchell had little to say about the gold
premium merely observing that because the 1861 Notes were a good
substitute for gold in paying customs, anything that drove the price of
gold also drove their price. Calomiris’ (1988a, 210,

explanation is directly to the point. In his words: “Because demand
note supply was less than the sum of future tariff payments, the parity
of gold and demand notes in payment of duties created a market parity
between the two through arbitrage. The discounting of demand notes
probably reflects the possibility of future change in tariff
parity.” In a later paper (Calomiris 1988b, 113), the conditional
is dropped and the discount is said to reflect: “… the risk …
that tariff receivability would be
v. dis·con·tin·ued, dis·con·tin·u·ing, dis·con·tin·ues
1. To stop doing or providing (something); end or abandon:
.” The public’s
expectations of

 are influenced by fiscal news and “war

intr. & tr.v. sum·ma·rized, sum·ma·riz·ing, sum·ma·riz·es
To make a summary or make a summary of.

 this approach: since the present value of future
tariff liabilities exceeded the supply of 1861 Notes, the Notes should
have traded at a par with gold. That gold traded at a premium implies
that there was a positive perceived probability that their receivability
on a par with coin for customs would be altered. Variations in this
perceived probability caused the fluctuations in the gold premium. This
approach has a number of weaknesses.

First, the notion that the supply of notes fell short of the
present value of expected future tariff obligations seems to be based on
 adj. 1) in error, wrong. 2) not according to established law, particularly in a legal decision or court ruling.
 premise. The present value versus fixed supply analysis is
based on the notion that the 1861 Notes could not be reissued once they
were returned in payment of the tariff. This is stated most dearly in
Calomiris (1992) where he contends that the laws authorizing the
creation of Greenbacks were novel in three respects. The one relevant to
this discussion is that, unlike earlier Treasury issues (the Treasury
Notes of 1814 and the 1861 Notes), the Treasury had authority to
v. re·is·sued, re·is·su·ing, re·is·sues
To issue again, especially to make available again.

To come forth again.

 any Greenback it received.

His basis for this conclusion is not clear. It also seems to be
contradicted by the data. During the first quarter of 1862, the amount
of 1861 Notes outstanding increased to the full $60 million authorized
by Congress for the first time. However, the treasury collected $15
million in tariffs over the same period,
That can be presumed or taken for granted; reasonable as a supposition:
 most in the form of
1861 Notes. This would be impossible if 1861 Notes received for tariffs
could not be put back into circulation. Likewise, Bayley’s (1881,
154) data show virtually no redemptions prior to July 1862. (21)

Second, the notion of a significant and fluctuating perceived
probability of changes in the customs receivability provision seems
questionable. There is an odd silence in the newspapers and in the
Congressional debates of the day that revocation was ever considered,
seriously or otherwise, as a policy option. There is no mention of or
speculation on such a policy shift in the newspapers. Congress had at
least three opportunities (February 25 and July 11, 1862, and March 3,
1863) when it authorized Greenbacks to
 v. to annul or cancel an act, particularly a statement, document, or promise, as if it no longer existed.
 the customs receivability
privilege from the 1861 Notes and it did not do so. Not only did it not
do so but also on March 17, 1862, Congress declared the notes to be a
full private and public legal tender. If revocation were seriously
considered, that would have been the time to make their public legal
tender status on a par with Greenbacks, but Congress did not do so. (22)

Moreover, during the period the gold premium on the 1861 Notes
reached a peak (August to September 1862 as shown in Figure 1)
indicating, according to Calomiris, that the public strongly anticipated
revocation, the Treasury was actively withdrawing them from circulation
in accordance with the Greenback legislation. Between June 30 and
September 30, 1862, nearly half the 1861 Notes were withdrawn from
circulation by means of the same tariff provision, which was supposed to
be in jeopardy.

Third, the present value versus fixed supply comparison seems
beside the point, even if 1861 Notes could not be reissued once received
for tariffs. A premium should be expected in any case for a much simpler
reason: 1861 Notes could only be indirectly “converted” into
gold via tariff payment over time, not instantaneously. A simple thought
experiment illustrates the implications of this fact. Suppose an
importer anticipates tariff payments at the rate of $1 per day for the
indefinite future, which can be paid either with gold coin or with
Notes. Furthermore, suppose the importer holds $182 in Notes and some
gold coin and the real interest rate, r, is 6% per year. What discount
relative to gold would induce the importer to hold one more dollar in
Notes? A logical answer is 3%.

The logic behind this claim is that the extra note can be converted
into gold at par, but only after waiting 6 months during which the
previous $182 are exhausted in paying the tariff. If the discount on
notes is greater than 3%, the importer can purchase the note and
discharge the tariff obligation 183 days hence at par with gold, thus
earning an above average rate of return over this period. If the initial
holding of notes were $364, an extra note could not be indirectly
converted into gold until a year had passed. In that case, the incentive
would be to sell notes if the discount/premium was at any level less
than 6% until note holdings were low enough to make it unprofitable to
sell more.

If we extend this reasoning to the economy as a whole, and assume a
well-functioning gold/note market, the equilibrium note discount/gold
premium should equal rNIT, where N is the level of notes outstanding and
T is the rate of tariff collection. At that discount/premium, those with
above average note/tariff ratios should be selling notes to those with
below average ratios, thus equalizing those ratios across money holders
and achieving market equilibrium. This instantaneous equilibrium should
apply regardless of whether the government retires notes as they are
paid for tariffs or recirculates them.

Based on this theory, the gold premium for 1861 Notes should have
been positive even if no possibility of revoking the customs
receivability provision was foreseen. In addition, the premium should
increase as the amount of 1861 Notes outstanding increases (as it did
prior to March 1862) and decrease as they are withdrawn from circulation
(as began to occur after July of the same year). Using this formula and
the data in the first two columns of Table 1, one can obtain crude
calculations of the gold premium on the 1861 Notes predicted by this
theory. We are limited by the length of the period for which we have
observations on the gold premium, p (January 1862 through May 1863), and
frequency of observations on N (quarterly only). This leaves us only six
dates from this period for which the outstanding number of 1861 Notes is
known beginning with December 31, 1862, and ending with March 31, 1863.

For each date, we take the outstanding notes N and calculate the
number of days it would take going forward from that date for the entire
stock to be exhausted by customs payments (dividing the quarterly values
for T evenly between each of the days in a given quarter). This provides
the operational value for N/T (in days) as shown in Table 1. Again
taking the 6’s of 1861 as representative of the real interest rate,
the value r = .06 is used to arrive at the predicted premium, rN/T, also
shown in Table 1. Finally, a corresponding value for the actual gold
premium is calculated by taking the average of seven daily quotes
centered on the date in question. (23)

There is some correspondence between these crude predictions and
the actual values. The predicted and actual values correspond closely
for the beginning and end points and both tend to be higher in the
middle of the sample. (24) However, the fluctuations in the two series
are only loosely related (simple correlation = .49). (25) In particular,
this model is unable to account for the low actual premium on March 31,
1862, and the high actual premium on December 31 of the same year. In
addition, even if higher frequency observations on N were available, it
is unlikely that they would exhibit sufficient high-frequency
fluctuations to mimic the volatility of the daily observations on p (our
values of T and r are smooth by construction).

The rough correspondence between the fluctuations of the predicted
and actual premiums notwithstanding, the fact that the magnitudes
roughly match is
a. Tending to suggest; evocative:

 because this theory generates an interesting
steady-state result regarding the seigniorage costs of the customs
receivability provision. As shown in the Greenbacks section above, the
Treasury loses pT per period (where T is the rate of tariff collection)
by accepting Notes with discount p at a par with gold. Expressed as a
percentage of the maintained amount of notes outstanding, N, the cost is
given by pT/N. According to this “waiting time” theory, p

T/N Total Nitrogen
 = (rN/T) T/N = r. Thus, equilibrium in the gold/note market leads to a
premium that compensates note holders for the time they need to wait, on
average, to “redeem” their notes at par at the going interest
rate. A premium of this magnitude causes the Treasury to lose revenue at
the same rate on each dollar of notes outstanding as it loses on each
dollar of interest bearing debt outstanding. Unless the notes supply
some transactions services that allow the premium to be lower (doubtful
when cheaper Greenback dollars could be used instead), notes are as
costly as bonds. In this regard, the revenue incentive to replace 1861
Notes with Greenbacks was considerable.

B. Accounting for the Gold Premium of the Greenbacks

While our primary purpose was to attempt to understand the level
and fluctuations of the gold premium on 1861 Notes, our results suggest
a modest contribution to the discussion of the determinants of the gold
premium of the Greenbacks, at least for the period during which the
competing currencies overlapped.

A controversial, but

, literature has grown up over the
cause of the Greenback’s gold premium and of the inflation process
in general. In the quantity theory approach, typified by Friedman and
Schwartz (1963), Friedman (1992), and Lerner (1956), the commodity
inflation during the Civil War was primarily money driven. In the Cagan
(1956) adaptation of this model, expectations of inflation can become an
important variable driving changes in the velocity of money and the
subsequent price path taken by commodities. Commodity price changes can,
in turn, influence the market price of gold and the exchange rate in a
flexible regime.

In a series of innovative papers, Calomiris (1988a, 1988b, 1988c)
has challenged this view. He shares the conclusion of Mitchell (1903,
188) that “… fluctuations in the premium on gold were so much
more rapid and violent than changes in the volume of the circulating
medium …” as to

 the “expected inflation”
theory and that this premium is determined by the expectations of the
public as to the date of and rate at which the government will
ultimately restore gold convertibility to its currency (this might be

tr.v. dubbed, dub·bing, dubs
1. To tap lightly on the shoulder by way of conferring knighthood.

2. To honor with a new title or description.

 the “eventual convertibility” theory). These
expectations, in turn, are importantly influenced by “news,”
especially “war news.” Mitchell goes through a catalogue of
financial, political, diplomatic, and battle news to explain nearly
every movement in the gold premium during the war much as current news
commentators today explain each daily change in the average of stock
prices. (26)

A weak point of this model is that it is based on, to use
Calomiris’ phrase, a “vague promise of future
convertibility” (Calomiris 1991, 80). When the Greenbacks were
first issued, several members of Congress expressed positive sentiments
regarding eventual convertibility. It was not, however, the official
view of the government.

In none of the three bills authorizing emissions of Greenbacks did
Congress set a date at which

 of specie payments would occur
or set a postresumption exchange rate. It was not until 1875, 10 yr
after the war was over, that Congress declared that on January 1, 1879,
specie payments would be resumed at the
Existing or occurring before a war.


relating to the period before a war, esp. before World War I or II

Adj. 1.

Nevertheless, this “vague promise” is the driving force
of the “eventual convertibility” model, and war news is held
to be the primary force explaining the expectations of individuals
regarding the date and rate at which the Greenbacks would be made
convertible into coin. (27) Major Union defeats, signaling a prolonged
war with higher fiscal costs, are said to give rise to expectations that
push the date of convertibility into the more distant future and,
perhaps, lead to a lower gold conversion rate. This raises the current
gold premium and
vice versa

 for a significant Union victory.

Subsequent research on this theory is inconclusive. All studies use
the period of the Civil War, but the vagaries of the data affect the
actual sample periods. McCandless (1996), using the gold price of both
the Union and the Confederate dollar, supports the war news hypothesis.
Williard, Guinnane, and Rosen (1996), using structural break analysis to
distinguish “turning points” in the data from mere
“blips,” offer more conditional support. Several of their
major break or turning points are not the same as McCandless’ and
some are unrelated to any news, battle or otherwise, and others occur at
insignificant battles.

Weidenmier’s (2002) support is more limited in the sense that
he finds that significant Union victories or defeats are not always
   also sym·met·ric
Of or exhibiting symmetry.

sym·metri·cal·ly adv.

Adv. 1.
 in the exchange rate of Confederate currency for
gold (McCandless argues that they should be). (28) In fact, Weidenmier
finds instances when after a battle, both currencies move in the same
direction. Burdekin and Langdana (1993) find that the gold price of the
Confederate dollar responded more to war events than financial policy
shifts. The former, they argue, are more likely to affect redemption
than the former. Smith and Smith (1997) employ an exchange rate regime
switching model that enables them to cumulate the effect of battle news
on the dollar/sterling exchange rate and conclude that forces other than
war news must have dominated the movement in the exchange rate as their
calculations suggest that during the war, “the net effect of news
was a fall in the price of gold, whereas the price actually rose by more
than 30 percent during the war.” (29) Finally, Pecquet, Davis, and
Kanago (2004), using Confederate dollar/Southern bank note exchange
rates, provide evidence in support of war news in that “Northern
victories typically led to an appreciation of bank notes against the
Confederate dollar, while Southern victories caused bank notes to

 v. in accounting, to reduce the value of an asset each year theoretically on the basis that the assets (such as equipment, vehicles or structures) will eventually become obsolete, worn out and of little value. (See: depreciation)

It is possible to link the fluctuating premiums in Figure 1 to war
news during 1862. In particular, the largest premiums for the 1861 Notes
occurred in July and later in early September when the amount of 1861
Notes outstanding was at or near its maximum and battlefield news was

tr.v. dis·qui·et·ed, dis·qui·et·ing, dis·qui·ets
To deprive of peace or rest; trouble.

Absence of peace or rest; anxiety.

adj. Archaic
Uneasy; restless.
. On April 2, a large Union army under McClellan began an
advance on Richmond that ended in disaster. Through superior

1. The rank, office, or tenure of a general.

2. Leadership or skill in the conduct of a war.

3. Skillful management or leadership.

Noun 1.
, Lee forced McClellan to abandon this second effort to take
Richmond in July. On July 22, the gold premium on 1861 Notes reached a
maximum of 10.2%. By August 14, McClellan began the withdrawal of
federal troops from Virginia and their embarkation back north. Soon
another federal army, led by Pope, was routed at Second Manassas on
August 29-30. Lee quickly followed up these developments with his first
invasion of the North.

He led a large Confederate army across the Potomac and, on
September 7, captured
Frederick, Maryland

, some 30 miles north of
Washington, DC. For the first time in the war, a large Confederate army
threatened the federal capital from north of the Potomac. From its high
on July 22, the gold premium on the 1861 Notes declined. During August
8-31, it ranged between 6% and 7%. It began to rise on September 1,
reaching a second high of 9.3% on September 3, and remained in excess of
8.5% through September 11. By this time, the public appeared to realize
that the size of Lee’s army had been overestimated and that the
army was unlikely to attack either Baltimore or Philadelphia. The
premium had fallen between 5% and 6% by the onset of Antietam on
September 15. Once Lee withdrew, the premium dropped even more, ranging
between 3.5% and 4% on September 19 and 20. There are, of course, no
analogous observations for the second Confederate invasion of the North
in June 1863 that ended at Gettysburg.

As many others have noted, bad news was associated with greater
gold premiums and good news was associated with smaller ones. But what
is the mechanism? One implication is that Calomiris’ theory of war
news, which emphasizes fluctuations in expectations regarding the date
of “eventual convertibility” cannot be applied to the gold
premium of the 1861 Notes. By September, these notes were already being
withdrawn and would never be convertible (except by the
“indirect” mechanism that was already taking them out of
circulation). Yet, the fluctuations in the gold premium of the 1861
Notes mimics the fluctuations of the gold premium of the Greenbacks in
the same figure suggesting a common mechanism. This could be seen as
indirect evidence against the eventual convertibility explanation of
Greenback fluctuations as well.

However, if these fluctuations cannot be explained by changes in
the expected date of a return to convertibility, what is the explanation
for the comovement of war news and two gold premiums? In this regard, it
is worth noting that since the 1970s, the United States has used
flexible exchange rates and the gold price of the dollar in this regime
has fluctuated frequently and widely, often in response to world
turmoil. Yet, no one today argues that this reflects some market
consensus that the United States may some day restore a fixed gold value
to the dollar. Rather, gold is recognized as a vehicle for capital
flight to safety and liquidity.

It is plausible that when major cities seem threatened with
invasion and their

 anticipate possible flight (as they did
in July to September of 1862), an increase in the demand for gold coin
occurs. At least we offer this simple explanation that fits the facts of
this limited period.


The first months of the Civil War yielded much experimentation with
the unfamiliar
1. Appropriate to a purpose.

a. Serving to promote one’s interest:

 of paper money. In particular, the federal
government issued notes with a number of provisions that limited their
eventual usefulness as a source of revenue. In

 fashion, these
provisions were removed and/ or the notes were replaced by notes to
which these provisions did not apply.

We have attempted to
v. il·lu·mi·nat·ed, il·lu·mi·nat·ing, il·lu·mi·nates
1. To provide or brighten with light.

2. To decorate or hang with lights.

 this underexamined experiment
involving the “1861 Notes.” In particular, we emphasize the
theoretical and empirical evidence that their seigniorage-limiting
provisions were important in the decision to replace them with the
seigniorage-friendly Greenbacks, a fact that seems to have been
overlooked or, at least, underemphasized by previous research.

In addition, we have constructed a time series of daily market
values for these notes that we report and make available for other
researchers. These observations are also used to (a) estimate the
(significant) seigniorage cost of one of these provisions, (b) evaluate
a simple theory of the factors that determined the value of these notes,
and (c) offer some evidence on existing theories of the factors that
determined the value of their successors, the Greenbacks.

doi: 10.1111/j.1465-7295.2008.00205.x


The Sources and Puzzles in the Data

The data are subject to a numeraire question. Prior to suspension,
prices on financial markets were quoted in terms of “current funds
in New York City,” which meant the notes of the Associated Banks.
These notes exchanged at par for the gold dollar and the 1861 Note
dollar. In the days immediately following suspension, the quoted dollar
price of gold rose. But which dollar? There is clear evidence that gold
was at a premium in terms of the notes of the Associated Banks. For
example, from the Times (December 31, 1861, 3): “The quotation for
Gold over current funds to-day is variously quoted from 100 1/2 to 101
1/2%.” But did the dollar price of gold rise in terms of 1861
Notes? The answer would appear to be yes, especially after a gold market
opened in New York City on January 13, 1862. Evidence comes from several
sources. On January 9, the Times (4) reported: “The United States
Treasury Notes are generally received and paid out at Bank, as the
standard of current funds.” The same edition carried the price
quotation for gold and silver coins from Thompson and Brothers, a major
dealer in currency and publisher of a bank note directory, who
specifically state for the first time that U.S. currency is the standard
for its price quotes (the quotations carried in the Times’ February
13 edition from the same firm are expressed in terms of “United
States Demand Notes”). On January 14, the same paper reported (3):
” … United States Treasury Demand Notes pass current at
par.” The Herald (January 13, 1862, 5) reported: “… the
obligations of the same government, bearing no interest…. Are current
everywhere as money–that is to say at par” and (Herald February
14, 1862, 3) “When we say that gold is worth 104 1/4, we mean that
Treasury notes have declined 4 1/4% below par.” Thus, the 1861
Notes began to depreciate relative to gold on the day of suspension.

This raises an interesting puzzle about the data. Since 1861 Notes
could continue to be used after suspension to pay customs, one might
have expected that they would have appreciated relative to bank notes.
This does not happen to be the case, at least during the first 4 or 5
months after suspension. The lack of a premium can be deduced indirectly
from the fact that papers of the day drew special attention to instances
when the 1861 Notes did not trade at par. On February 13, the Herald (3)
reported that “banks are refusing to receive demand notes on
deposit and they are selling on the street at 1/4-5116 discount,”
and the Times (February 28, 1862, 2) commented that, on February 26 and
27, the days immediately following President Lincoln’s signing the
bill authorizing the first $150 million in Greenbacks, 1861 Notes were
at a premium relative to “the bank currency of the City,”
reported to be 118% to 1/4%. On March 2, the Times reported (8):
“The United States notes are no longer held up at Bank for a
premium and their return to the ordinary channel of currency is rapidly
restoring ease to the money market.” The March 29 Commercial
Advertiser (3) reported on
special circumstances
 n. in criminal cases, particularly homicides, actions of the accused or the situation under which the crime was committed for which state statutes allow or require imposition of a more severe punishment.
 related to the need for
customs duties that sent the notes to a premium of from 1/4% to 112%.

Finally, the data suggest that for several months after the
Greenbacks were introduced, they also passed at par for the 1861 Notes.
We found a quote from the May 15 edition of the Herald (2): “The
old backs, which are extremely rare, are scattered throughout the
country. They are worth 518 to 3/4 premium.” This suggests that not
only was the customs use of these notes finally reflected in a premium
over Greenbacks but also the Greenback dollar had become the numeraire.


Bayley, R. A. The National Loans of the United States from July 4,
1776, to June 30, 1880. 2nd ed.
New York
 Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of
: Burt Franklin, 1881.

Bomberger, W., and G. Makinen. “Indexation, Inflationary
Finance, and

: The 1945-1946 Hungarian Experience.”
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, U.S. Department of Commerce. Historical
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–. “Greenback Resumption and Silver Risk: The Economics and
Politics of Monetary Regime Change in the United States,
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, 1988b, 86-132.

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History of the United States

. New York:
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 , city (1990 pop. 1,110,549), seat of San Diego co., S Calif., on San Diego Bay; inc. 1850. San Diego includes the unincorporated communities of La Jolla and Spring Valley. Coronado is across the bay.
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(1.) The notes of the first and second banks of the United States
were not government issues. The U.S. Treasury did issue several small


 notes during the War of 1812, which may have functioned as
money. Some bore interest, others did not. All were receivable for all
payments due to the United States at par with coin, although they were
not convertible into specie at par. Some may have circulated as money
and have had monetary implications. Those most likely to have circulated
as money, being of very small denominations, aggregated to $3.4 million
out of a total public debt of nearly $119 million (by September 1815).
See Kagin (1984) and Calomiris (1991, 71). In addition, the Treasury
issued a limited amount of small denomination interest-bearing notes in
both 1837 and 1845 that may have circulated as hand-to-hand currency.
Unlike money, these notes had a limited life, that is, they were payable
after 1 yr. While the United States maintained a
1. Consisting of two metals, often bonded together and having different rates of thermal expansion.

2. Of, based on, or using the principles of bimetallism.
the existing mint ratio

 silver and, as a result, full-bodied
silver coins did not circulate. The gold coin that circulated was a full
legal tender.

(2.) Data are from Studenski and Krooss (1963, 125).

(3.) Data taken from Report of the Secretary of the Treasury,
December 1861, 30-32. The fiscal year at this time ran from July 1 to
June 30.

(4.) While the notes were an emergency measure, their production
time was long. During August to September, some $15.3 million were
issued followed by $18.5 million during October to December. Secretary
Chase quickly negotiated a loan of $150 million with the banks, which
furnished an initial payment of $5 million before the 1861 Notes entered
circulation. In addition, Chase was given authority to pay to willing
contractors the 6% Treasury notes of 1861. These notes, like the 1861
Notes, were “customs privileged.” During July to September,
some $26.9 million were issued. However, the gap between federal
expenditures and revenue grew rapidly as events disproved the

 Psychology Dereitic thought that a thing or event should have a specified outcome
 of July that all would be over by Christmas.

(5.) The Historical Statistics of the United States for 1861 lists
gold coin outstanding at $266,400,000 and subsidiary silver at
$16,000,000 for a total of $282,400,000 (
Bureau of Census

, U.S.
Department of Commerce [September 1975, 995]).

(6.) Estimates of deposits exist for the banks in the states loyal
to the Union. Unfortunately, both demand and saving deposits are
combined into one figure. Using data from Dewey (1909, 283) and
Secretary Chase’s estimate of the amount of bank notes in
circulation, $130 million, total deposits in January 1862 would be about
$330 million.

(7.) New York Herald August 18, 1861, 3. Unless otherwise
specified, all quotations are from New York newspapers. Thus, the words
“New York” will be deleted from the references below.

(8.) The Times opined: “The suggestion that these Notes are to
be represented, at all times, by a corresponding amount of specie
actually on hand … and that the Secretary will only employ them to the
extent that Specie is first exchanged for them is simply a mistake. The
whole purpose of this Circulation is the mutual one of facilitating the


 of the Government and the accommodation and convenience of
the public” (Times July 15, 1861, 3). All the quotations reproduced
in this study are exactly as they appear in the newspapers even if the
capitalization and
 [Lat.,=point], the use of special signs in writing to clarify how words are used; the term also refers to the signs themselves. In every language, besides the sounds of the words that are strung together there are other features, such as tone, accent, and
 do not correspond with current usage and

(9.) On August 19, it was reported that the notes would be ready
before the end of the “present week” (Times August 19, 1861,
8). On August 28, it was reported that the American Bank Note Company
was sending notes to Washington at the rate of $300,000 per day (Times
August 28, 1861, 8).

(10.) Hand-signed circulating notes were not uncommon. All the
millions of notes issued by the Confederacy during the Civil War and
most National Bank Notes did not used engraved signatures. We thank
Richard Doty, curator of the money museum at the

 research and education center, at Washington, D.C.; founded 1846 under terms of the will of James Smithson of London, who in 1829 bequeathed his fortune to the United States to create an establishment for the “increase and diffusion of
, for this information. The first $20 million of the 1861
Notes delivered by the American Bank Note Company consisted of 2.8
million bills.

(11.) As early as September 5, a Times headline read,
“Treasury Notes to be Used in Paying Soldiers” (1).

(12.) This may be an
tr.v. o·ver·stat·ed, o·ver·stat·ing, o·ver·states
To state in exaggerated terms. See Synonyms at exaggerate.

. According to Moses (1892),
Gilbert (1907), and Lester (1939), 1861 Notes and Greenbacks did not
circulate in California and Oregon, where gold remained the major
circulating medium during the Civil War.

(13.) The government also needed coin to make payments of less than
$5 (the smallest denomination of the 1861 Notes). Secretary Chase
requested that $25 million of the second issue of Greenbacks be in
smaller denominations, stating: “Payments to public creditors, as
especially to soldiers, now require large amounts of coin to satisfy


 demands less than five dollars.” (Hunt’s
Merchants” Magazine and Commercial Review July 1862, 71). An
earlier report of the Sub-Treasury reads “New York office sent to
Washington today $500,000 in small Gold Coin to make change in payments
to the
army of the Potomac

” (Times November 7, 1861, 3).

(14.) By using three newspapers, we were able to detect any
printing errors.

(15.) The first $4 million in Greenbacks, all in $1,000
denominations, were received by the New York Sub-Treasury on April 5
(Herald April 6, 1862, 5).

(16.) On June 30, 1897, the Treasury listed $54,347 as unredeemed.
(The total is odd given that the minimum denomination of these notes was
$5. Similar oddities occur with respect to the sums outstanding in Table

(17.) With the introduction of the Greenbacks, two classes of
United States Notes existed and circulated. They were the same size and
color, were issued in denominations of $5, $10, and $20 (Greenbacks also
came in larger denominations as well as in $1 and $2 denominations), and
had nearly identical faces. However, Greenback Notes bore the Treasury
seal, did not bear the words “payable on demand,” and bore the
date February 25 (the day they were signed into law) rather than August
10. The reverse side of the two notes was distinctly different. As to
the name “Greenback,” Friedberg (1978, 11) claims that it
originated with the 1861 Notes. Although this is true, it should be
qualified. Only the Herald (beginning in early June 1862) referred to
them as “Greenback Treasury notes” or “Greenback demand
notes.” Neither the Times nor the Commercial Advertiser used that
term. In both papers, they were referred to as “United States
Demand Notes,” “U.S. Treasury notes,” “old demand
notes” (or demand Treasury notes), “notes of the Custom house
issue” (or custom house issue or custom notes or custom house
demand notes), “U.S. Treasury notes of circulation,”
“U.S. Notes of the July issue,” and so forth, while the notes
now commonly known as Greenbacks were called by the financial press of
the day, including the Herald, “legal tender notes” or
“Legal tender demand notes.”

(18.) Definitions of seigniorage are not uniform in the literature.
Buiter (2007) examines the relationship between three related concepts.
The use of AN/P is consistent with his use of the term. A competing
concept is the yearly interest saving that occurs when an amount, N, of
fiat currency displaces an equal amount of interest-bearing debt in
private portfolios. Buiter labels this “central bank revenue,”
although, in the context of the period, it might be better described as
“treasury interest reduction.” As we go through our examples
of alternative provisions and their effect on seigniorage, the reader
will see that the results are robust to variations in the definition.

(19.) There are ample historical examples of political leaders more
experienced with paper money who devised seigniorage limiting monetary
provisions with unexpected and disastrous results. Bomberger and Makinen
(1980, 1983) report that during the Hungarian hyperinflation of
1945-1946, the government introduced indexed deposits and indexed
currency, whose effects were to return the seigniorage from money
creation to the public resulting in the highest rate of hyperinflation
ever recorded.

(20.) Secretary Chase clearly understood the seigniorage aspects of
using money as a means of finance. In his Annual Report dated December
9, 1861, he explains the concept on pages 2, 11, and 12 without using
the word itself.

(21.) There is more compelling evidence that the 1861 Notes were
reissued. Like the Greenbacks, they were eligible for the special 5%
certificates of deposit. In the pressing financial situation that
prevailed in early 1862, the Treasury began to accept them for deposit.
By the end of March 1862, before the Greenbacks began to circulate,
nearly $18.5 million had been exchanged for certificates. These Notes
were promptly spent by the Treasury. They were not borrowed to
v. with·held , with·hold·ing, with·holds
1. To keep in check; restrain.

2. To refrain from giving, granting, or permitting. See Synonyms at keep.

 them from circulation.

(22.) The only discussion we could find in the newspapers related
to this subject was the speculation that Secretary Chase would call the
notes and fund them in long-term debt so as to force the payment of
customs duties in gold (Times June 9, 1862, 3).

(23.) For December 31, 1861, the first seven daily quotes in the
following January were used.

(24.) The negative value for the actual premium reported for March
31, 1863, may seem puzzling. We were able to find 19 daily price
quotations during March 1863, 8 during April, and 5 during May ending on
May 16. March 5 is an
 /out·li·er/ () an observation so distant from the central mass of the data that it noticeably influences results.


an extremely high or low value lying beyond the range of the bulk of the data.
 in that the 1861 Notes appear to be at a
6.5% premium relative to gold. This occurs because the price of gold
fell sharply during the course of that day. The price for the notes was
recorded during the morning board, while the gold sales were heavily
concentrated during the afternoon boards during which the price break
magnified generating the apparent premium on the notes. A much smaller
but similarly generated negative gold premium for April 4 generates the
p = -.009 for March 31, 1863.

(25.) The respective means (and standard deviations) of rT/N and p
are .030 (.018) and .024 (.019) with a simple correlation of .49.

(26.) It is interesting to note that from Mitchell’s data, one
can conclude that the market accorded nearly the same importance to the
resignation of an assistant treasurer of the United States in New York
City as it did to the

See also Murder.


Fanatical Moslem sect that smoked hashish and murdered Crusaders (11th—12th centuries). [Islamic Hist.: Brewer Note-Book, 52]


conspirator and assassin of Julius Caesar. [Br.
 of President Lincoln (the Greenback
price of gold rose 0.8% for the resignation as opposed to 1.1% rise for
the assassination).

(27.) Calomiris’ (1988a) view is also influenced by the
behavior of the Continental during the Revolutionary War (and
America’s colonial experience prior to the war). For some 2 yr,
1781-1783, after the last Continental was issued, they continued to
depreciate in terms of gold. Obviously, he contends, something other
than emissions of money was driving their continued depreciation.

(28.) An advantage of Weidenmier’s work is that it is based on
high-frequency price quotes for the Confederate dollar collected from
Southern newspapers. McCandless’ data were lower frequency and
taken “from a newspaper

 pasted onto a blank page of the
Virginia State Library’s copy of the History of the Confederate
Treasury by Ernest Ashton Smith” (source of data unknown).

(29.) While not directly relevant to the Greenback/gold exchange
rate, Burdekin and Weidenmier (2001) cleverly exploit data from the
eastern and western portions of the Confederacy to argue that a major
currency reform carried out in 1864 provides support for the quantity
theory view that Confederate inflation was primarily a monetary
phenomenon as suggested by Lerner (1956).


GAIL Glide Angle Indicator Light

* We gratefully acknowledge the very helpful comments of two
anonymous referees as well those of Tom Woodward,
Bob Anderson

, Marc
Labonte, Kurt Schuler, Ted Murphy, and Richard Dory. The technical
assistance provided by Mike Kolakowski is also gratefully appreciated.

Bomberger: Associate Professor, Department of Economics,
of Florida

, Gainesville, FL 32611. Phone 1-353-392-0135, Fax
1-352-392-7860, E-mail

Makinen: Adjunct Professor,
Georgetown Public Policy Institute


Georgetown University
 in the Georgetown section of Washington, D.C.; Jesuit; coeducational; founded 1789 by John Carroll, chartered 1815, inc. 1844. Its law and medical schools are noteworthy, and its archives are especially rich in letters and manuscripts by and
, The Car Barn, 3520 Prospect Street, NW,
Washington, DC 20007. Phone 1-703-525-7170, Fax 202-687-5544, E-mail

Amount of 1861 Notes Outstanding and Tariff Receipts

                             Notes     Tariff    Average    Quarterly
                       Outstanding    Receipts   Premium        Loss

Date                       (N)          (T)        (P)        (PT)

September 30, 1861         15.6         7.2
November 30, 1861          21.2
December 31, 1861          34.1         8.3
March 31, 1862             60.0         15.0      0.026       0.392
June 30, 1862              60.0         18.9      0.026       0.493
September 30, 1862         32.3         23.0      0.069       1.581
December 31, 1862          16.2         13.4      0.039       0.520
March 31, 1863             5.4          15.4      0.014       0.215
June 30, 1863              3.8          17.2      0.000       0.002
September 30, 1863         2.6          22.6
December 31, 1863          1.6          27.4
March 31, 1864             1.2
June 30, 1864              0.9

                       Waiting   Predicted   Actual
                       Period     Premium    Premium

Date                    (NIT)     (rNIT)       (P)

September 30, 1861
November 30, 1861
December 31, 1861        182       0.030      0.029
March 31, 1862           302       0.047      0.016
June 30, 1862            318       0.052      0.042
September 30, 1862       201       0.032      0.026
December 31, 1862        94        0.016      0.042
March 31, 1863           29        0.005     -0.009
June 30, 1863
September 30, 1863
December 31, 1863
March 31, 1864
June 30, 1864

Notes: Notes outstanding, tariff receipts, and quarterly loss i
Tariff receipts during the quarter ending on the date in questi
1861, 62, 63, 64. Source: Bayley (1881, 153-54).