America's Money Machine

Preface XIU
cash, lawful money, legal tender, and in recent times M l' M 2' etc. Today the
word money is commonly used to designate any form ofpurchasing power
-an error into which our discussion here may occasionally lapse. Money,
however, as we have noted, properly refers only to coinage, as do specie
and cash. The terms lawful money and legal tender arose after the establishment
of a mint in 1793. Before then foreign coins were common currency,
particularly the Spanish milled dollar, and the first U. S. dollars
were struck at the equivalent ofthe Spanish dollar. After the mint was set
up foreign gold and silver coins continued to circulate and were, until
1857, "legal tender" at various rates according to their precious metal
content; but they were not "lawful money," and only U. S. coinage was
the "money of account" for all public records. Until the Civil War only
coinage was legal tender, although from as early as 1812 the Treasury
from time to time issued interest-bearing bonds oflow denomination that
were receivable for government dues (limited legal tender); state bank
notes redeemable in "specie" or "cash" were also in general circulation
but without legal-tender quality. With the Civil War crisis bank notes
were turned in for cash in such quantity that toward the end of 1861 all
banks suspended convertibility. In 1862 Congress authorized the issue of
Treasury notes ("greenbacks"), which were declared legal tender for all
payments public and private except imports, and by a peculiar inconsistency
also "lawful money." They were inconvertible into coin but could
be exchanged for interest-bearing bonds.
In addition to the greenbacks, as a further means of war finance Congress
in 1863 authorized a national bank system by which federally chartered
banks could issue circulating notes redeemable in coin against the
deposit of U. S. Treasury bonds to the equivalent of 90 per cent of the
value of the notes. The notes were declared to "circulate the same as
money" but had limited legal tender; i.e., they were not receivable for
import dues, nor payable as interest on the public debt nor in redemption
of the "national currency" (greenbacks).
The legality of the legal-tender provisions was at first denied by the
Supreme Court but later upheld in a series of decisions in which the
Court practically abdicatedjurisdiction to Congress as a "political" question
in which it would not intervene. Thus Congress was established in
its right to issue·paper· currency without limit.
Other factors contributing to monetary confusion and leading to further
experiments in state management of money and credit were the
convenience, for large transactions, ofpaper currency over coinage, the
divergence in the gold-silver ratio, and the phenomenon noted by Adam