Happy birthday, money! The cash in your pocket – or the modern equivalent of the first United States (U.S.) paper dollars – is 155 years old today.
The U.S. had some form of currency since its creation. But in the 19th century, the relatively new (and divided) country ran into a big problem: wars cost money. To pay for the cost of the U.S. Civil War, the federal government passed the Legal Tender Act on February 25, 1862. It read, in part:
That the Secretary of the Treasury is hereby authorized to issue, on the credit of the United States, one hundred and fifty millions of dollars of United States notes, not bearing interest, payable to bearer, at the Treasury of the United States, and of Denominations, such denominations as he may deem expedient, not less than five dollars each.
The purpose of the Act, generally, was to authorize the use of paper notes – not gold or silver – to pay the government’s bills (the Confederate government had been doing this since the Civil War broke out). The government was, essentially, issuing paper notes, or cash, as credit backed by the government’s good name.
Initially, the government printed $150 million in these new paper notes, nicknamed greenbacks. These paper notes were really only worth what the government said they were worth on the face of the bill. As for the actual face of the new bills? The very first dollar bill was graced by a picture of Salmon P. Chase, then Secretary of the Treasury.
Eight years later, a divided U.S. Supreme Court ruled that Congress did not have the power to create paper notes as legal tender. In Hepburn v. Griswold, 75 U.S. 8 Wall. 603 603 (1869), (admit it, you, too, are picturing Katherine Hepburn debating Chevy Chase as “Sparky” Griswold), the Supreme Court ruled that the creation of the new greenbacks violated the Fifth Amendment. In the case, Mrs. Hepburn had issued a promissory note promising to pay $11,250 to Mr. Griswold by February 20, 1862. Five days later after the note was due, the government started printing money.
Hepburn did not pay back her debt on time. She eventually offered Griswold $12,720, representing principal plus interest, in greenbacks. He refused to accept it, arguing that contracts for the payment of money, made before 1862, should be paid in coins (gold or silver). The court agreed that it should be paid in coins and found that the issuance of paper notes was a deprivation of property without due process of law, writing:
We are obliged to conclude that an act making mere promises to pay dollars a legal tender in payment of debts previously contracted, is not a means appropriate, plainly adapted, really calculated to carry into effect any express power vested in Congress, that such an act is inconsistent with the spirit of the Constitution, and that it is prohibited by the Constitution.
The Supreme Court’s opinion in Hepburn v. Griswold was announced on February 7, 1870. The same day, then President Grant announced the nominations of Justice Strong and Justice Bradley to Supreme Court which could have been a coincidence. Or maybe not. Hepburn v. Griswold was reversed in two subsequent decisions, Knox v. Lee and Parker v. Davis (May 1, 1871), with the new court, finding that “Whatever power there is over the currency is vested in Congress.” The related controversy over those judicial nominations never quite died out: it is considered by some as one of the first efforts to “pack the court” to achieve a particular result (though that charge has been hotly debated by historians over time).
Of course, the irony of the issuance of the greenbacks is that it was intended to raise money so that Congress didn’t have to raise taxes. It didn’t work. The same year as greenbacks were authorized, Congress also passed the Revenue Act of 1862, signed into law by President Lincoln. The Act imposed, in addition to a number of tariffs (like those on beer and booze), the nation’s first graduated income tax.
Under the new graduated income tax system, the first $600 of income was exempt ($14,644 in today’s money). A 3% tax was imposed on incomes between $600 and $10,000 ($244,069 in today’s money) and a 5% percent tax was imposed on incomes over that amount. If you’re thinking that predates our modern income tax system, which kicked off in 1913, you’re right. The tax expired in 1866, was briefly resurrected in 1894 and eventually declared unconstitutional, sending Congress back to the drawing board.
(For a quick primer on progressive tax systems, click here.)
While the tax system created under the Revenue Act of 1862 faded away, it did have at least one lasting impact: the establishment of the office of the Commissioner of Internal Revenue. That office – now called the Commission of the Internal Revenue Service – is responsible for overseeing collections of tax paid in – you guessed it – legal tender, including coins and currency.
