Legal Tender Act of 1862

Legal Tender Act of 1862
Shorttitle	Legal Tender Act of 1862
Othershorttitles	First Legal Tender Act
Longtitle	An Act to authorize the Issue of United States Notes, and for the Redemption or Funding thereof, and for Funding the Floating Debt of the United States.
Enacted by	37th United States Congress
Effective	February 25, 1862
Cite public law	12 Stat. 345
Introducedin	House
Introducedby	Elbridge G. Spaulding (R–NY)
Committees	House Ways and Means
Passedbody1	House
Passeddate1	February 6, 1862
Passedvote1	93–59
Passedbody2	Senate
Passeddate2	February 13, 1862
Passedvote2	22–17
Amendments	Legal Tender Act of 1863
Scotus cases	Hepburn v. Griswold (1870), Knox v. Lee (1871), Juilliard v. Greenman (1884)

Legal Tender Act of 1862 was a pivotal piece of financial legislation passed by the 37th United States Congress and signed into law by President Abraham Lincoln on February 25, 1862. It authorized the issuance of United States Notes, commonly called "greenbacks," as legal tender for all debts, public and private, except for duties on imports and interest on the public debt. This act represented a fundamental shift in American monetary policy, creating the first national fiat money to help finance the escalating costs of the American Civil War.

Background and Context

At the outbreak of the American Civil War, the Treasury Department under Salmon P. Chase faced a dire financial crisis. Government revenues from tariffs and land sales plummeted, and the nation’s specie reserves were insufficient to fund the massive mobilization required by the Union war effort. Traditional methods of borrowing, such as issuing bonds, were proving slow and inadequate. The Confederate States of America had already begun issuing its own paper currency, and pressure mounted on the Congress to find a solution. Influential figures like Secretary Chase and Congressman Elbridge G. Spaulding, chairman of a subcommittee of the House Ways and Means Committee, argued that making treasury notes legal tender was a constitutional necessity to preserve the Union.

Provisions of the Act

The act authorized the issuance of $150 million in United States Notes, declared to be "lawful money and a legal tender." These notes were payable for all debts except for import duties, which had to be paid in specie to maintain international credit, and interest on the national debt, which was paid in coin to protect government creditors. The notes were not redeemable in gold or silver on demand, making them a true fiat money. The legislation also included provisions for funding the short-term "floating debt" of the government and established the framework for subsequent issues, which were later authorized by the Legal Tender Act of 1863 and a third act in 1864.

Impact on the Civil War

The immediate impact of the Legal Tender Act of 1862 was to provide the Lincoln administration with a vital and flexible financial instrument. It allowed the government to pay soldiers, purchase supplies from manufacturers like the Baldwin Locomotive Works, and fund the operations of the United States Navy and armies commanded by generals like Ulysses S. Grant and William Tecumseh Sherman. Alongside other wartime financial measures such as the Revenue Act of 1862 and the National Banking Act of 1863, the creation of greenbacks helped the Union avoid financial collapse and sustain its military campaigns against the Confederate States Army.

Legal Challenges

The constitutionality of the act was immediately contested. Opponents, often aligned with the Democratic Party and financial interests in the Northeastern United States, argued it violated the Contract Clause and exceeded the powers granted to Congress under the Commerce Clause. The Supreme Court of the United States first ruled against the law in the 1870 case Hepburn v. Griswold, declaring it unconstitutional for debts contracted before its passage. This decision was swiftly reversed in 1871 in the Legal Tender Cases, particularly Knox v. Lee, which affirmed the government's power to issue paper money as legal tender in times of emergency. The doctrine was solidified in Juilliard v. Greenman (1884).

Economic Consequences

The injection of fiat money into the economy led to significant inflation, with prices in the North rising roughly 80% during the war. The value of greenbacks fluctuated against gold, leading to the establishment of a active gold exchange and creating opportunities for speculators like Jay Gould. The policy also created a dual-currency system, with some transactions and contracts specifying payment in "coin." After the war, the Public Credit Act of 1869 pledged to redeem the notes in specie, a process finally achieved with the Resumption Act of 1875.

Legacy and Historical Significance

The Legal Tender Act of 1862 established a lasting precedent for federal management of the monetary system. It marked a decisive move away from a purely specie-based currency and expanded the interpretation of federal power under the Necessary and Proper Clause. The framework of a national fiat money it created paved the way for later monetary systems, including the Federal Reserve Note. Historians view it as a critical, if controversial, innovation that helped ensure Union victory in the American Civil War and fundamentally reshaped the economic relationship between the U.S. government and its citizens.

Category:1862 in American law