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I would note, following Allyn Young's account, that Chase was responsible for the creation of the National Bank System as a result of his actions as Secretary of Treasury. One of his first acts was to negotiate three $50 million loans with New York bankers. The loans were payable in gold. Once he had the loans he demanded payment in gold, thus, effectively, seizing most of the domestic gold supply. US banks were largely unable to now deal with foreign counter-parties who might demand payment in gold, so this gave control over foreign imports to the Federal Government, which held almost all of the gold.

But this also meant no more loans! So two issues of $150 million of legal tender currency were quickly authorized and a total of $400 million was issued before the Union Army was disbanded. The deal Chase negotiated with the banks allowed them to use this legal tender currency as reserves against which they could issue their own bank notes. The greenbacks did depreciate by about 50% against gold over the course of the war, but the Union had much stronger finances than did the Confederacy and could use gold to pay for vital supply imports, while the South had to rely on getting a shipment of cotton past the blockade to earn foreign currency.

This episode gave the US experience with a fiat currency and, effectively, created the National Bank System, which endured until the creation of the Federal Reserve, which became operational just after the outbreak of WWI. After the war there was pressure from the banks to reestablish the gold standard and the Treasury began retiring greenbacks, which proved highly deflationary. The retirement was stopped in 1873 and, instead, the Treasury accumulated enough specie to properly back the notes, after which there was no need to retire the remainder.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jan 20th, 2014 at 12:28:48 PM EST
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