California Defies the Union: The War on Greenbacks

In December 1861, following several military defeats, the Union Army was stalled outside of Washington D.C. while Confederate forces under General Joseph E. Johnston maintained their positions in northern Virginia.

On December 9, the Union’s problems increased when Secretary of the Treasury Salmon Chase submitted to Congress his report on the finances of the United States.

Case Bust

Secretary of the Treasury Salmon Chase

The report revealed that Chase had grossly underestimated the cost of the first year of the war. In July 1861, he had estimated that the war would cost $320 million. He now projected that the first year alone would cost $530 million.

Not only had he underestimated costs, he had also overestimated revenues by $25 million. Chase now reported to Congress that the country would need another $214 million in revenue to continue the war effort up to July 1, 1862. Chase’s report also revealed that the treasury was empty and there was no comprehensive plan yet in place to furnish the needed revenue.

In early January 1862, President Abraham Lincoln lamented to General Montgomery C. Meigs,


President Abraham Lincoln

“General, what shall I do? The people are impatient: Chase has no money and he tells me he can raise no more; the General of the Army has typhoid fever. The bottom is out of the tub. What shall I do?”[1]

Some in Congress, however, were already working on a plan to alleviate the revenue difficulties.

On January 7, 1862, Representative and former banker, Elbridge Spaulding introduced the Legal Tender Bill in the House of Representatives.

The bill called for the printing of $100 million in non-interest bearing treasury notes later known as Greenbacks. These notes were backed only by the credit of the United States government. In essence, they were a fiat currency, un-backed by gold or silver bullion. The notes were also mandated as a legal tender for all debts public and private within the United States. This meant that the notes, by law, had to be accepted as payment for debts by everyone within the country.

The revolutionary nature of the bill generated quite a bit of controversy during the congressional debate. Along with the question of the bill’s constitutionality, the economic effects of the bill were also debated.


Senator Jacob Collamer

Senator Jacob Collamer from Vermont pointed out the disastrous nature the United States’ last experiment with a fiat currency,

“…From 1775, from the first issue of notes, to 1779 they ran down – I have seen the scales of deterioration, the different values of different times-until they stood at fourteen hundred to one, and in 1780 they stopped utterly, died in the hands of the persons who possessed them, and no attempt to redeem them at all.”[2]

Senator Collamer was correct. The original Continental dollar had in fact depreciated to zero value.

In the House debate, Representative George Pendleton from Ohio described the classic side effects of a fiat currency. He stated,


Representative George Pendleton

“It requires no prophet to tell what will be their history. The currency will be expanded; prices will be inflated; fixed values will depreciate; income will be diminished; the savings of the poor will vanish… everything of fixed value, will lose their value; everything of changeable value will be appreciated; the necessaries of life will rise in value; the Government will pay twofold – for everything that it goes into the market to buy; gold and silver will be driven out of the country.”[3]

Despite the opposition, the bill eventually passed Congress and was signed into law by President Lincoln on February 25, 1862. The final version of the bill authorized the issuing of $150 million of greenbacks. Another $150 million of greenbacks were authorized on July 11, 1862 and another $150 million were authorized on March 3, 1863.

Indeed, history tells us that greenbacks did depreciate and the consequences Pendleton spoke of did take place. From 1860– 1865, prices rose approximately 75%. [4] Evidence also indicates that the real purchasing power of wages declined about 20%.[5]

Pendleton’s prediction that gold and silver would be driven out of the country partially came true. Once greenbacks made their appearance, Gresham’s Law took effect, and gold and silver coins were driven out of circulation.

However, there was one section of the country where gold was not driven out: California. Because of the gold discoveries of the 1840s, California had a plentiful supply of bullion for coinage.

1849_moffat_five_dollars_obvIndeed in antebellum California, numerous different sources of gold coins had been accepted as money. One of the most notable of the private mints was Moffat & Company. Additionally, the Assay Office of the State of California produced gold ingots that circulated as coinage. In 1854, the San Francisco Mint opened and began converting miners’ gold into coins. Gold coinage was part of Californians way of life.

Private bank notes, on the other hand, were scarce in California. This was due to several factors. First, there were not many banks west of Nebraska. Second, the California constitution of 1849 prohibited banks from issuing notes. California historian William Fankhauser observes,

“Thus persuaded that the issuance of bank-notes was one of the leading causes of the collapse of 1837 and inspired by the thought that the gold supply in California would be perpetual they readily approved the provision that … no such association (bank) shall make, issue, or put into circulation any bill, check, ticket, certificate, promissory note or other paper or the paper of any bank to circulate as money.”[6]

For Californians who had become accustomed to gold or silver coin as money, the introduction of greenbacks was not a welcome sight. Fankhauser adds,

“Everywhere the use of the legal-tender notes was opposed on simple business grounds.” [7]

There were several reasons for the aversion to greenbacks. Businessmen were especially opposed to them because of their nature to depreciate. Under the legal tender law, it would be possible for one to compel his creditor to accept greenbacks even though they were worth considerably less than the expected amount in gold.

Farmers were also opposed to greenbacks because of the possible disruption in foreign exchange rates. Others said it was impossible to gauge the greenbacks’ value since communications with the East were not firmly established.

Further, the introduction of greenbacks into California raised an important question regarding taxes. A California law passed in 1861 required all taxes to be paid in the legal coin of the United States or in foreign coin at a value fixed by Congress. However, the federal government now declared greenbacks a legal tender for all debts public and private (emphasis mine). Would the state of California now allow the depreciated greenbacks to be used in payment of state taxes?

The answer came swiftly. The tax collector of the city and county of San Francisco refused to accept the legal tender notes.

The issue was brought before the Supreme Court of California. In July 1862, the court ruled that the actions of the tax collector were constitutional under the laws of California, and United States legal-tender notes could not be accepted for payment of state and county taxes.

The California court’s argument rested on the premise that taxes were not a debt founded upon a contract but a charge upon persons or property to raise money for public purposes. Therefore, U.S. greenbacks were not authorized to pay California taxes.

It appears that in the minds of the judges of the California State Supreme Court, the laws of California overruled the legal tender law of the Congress of the United States.

As greenbacks continued to depreciate, merchants became more aggressive in their attempts to prevent their use. On November 8, 1862, in order to stem the use of greenbacks and maintain a gold coin standard, businessmen in San Francisco,

“… Agreed not to receive or pay out any legal tender notes at any but the market value, gold being adhered to as the standard.”[8]

Businesses that refused to enter into the agreement or adhere to it had their names placed in a black book and were required in future business transactions to pay cash for goods. Cash meant gold or silver coin.

The agreement did not last, prompting San Francisco businessmen to appeal to the state legislature for help. The state legislature on April 27, 1863 passed the “Specific Contract Bill” by an overwhelming margin.

Murray Rothbard described the new act,

“The specific contracts act provided that contracts for the payment of specific kinds of money would be enforceable in the courts.” [9]

This meant that if a merchant made a contract with a buyer to purchase goods, and that contract stated that the goods were to be paid in gold, then the goods would have to be paid in gold not greenbacks.

Attempts were made by supporters of greenbacks to have the State Supreme Court find the specific contract act unconstitutional. The court, however, ruled that the act was “not incompatible with the act of Congress or with public policy.”

During the next session of the legislature, a bill to repeal the specific contract act was introduced. As the bill was under consideration, members of the legislature sent the following message to the United States Secretary of the Treasury Salmon Chase,

“Is California’s gold policy against national policy? Repeal proposed. Your opinion is important. Answer.” [10]

On February 8, 1864, Secretary Chase replied,

“I am clearly of the opinion that the California gold law is against national policy and shall be much gratified to see California declare herself in favor of one country for the whole people, by its repeal.” [11]

Despite Chase’s objection, the Senate defeated the attempt to overturn the specific contract act 24-16. No vote was taken in the assembly. Several more attempts were made to overturn the act, they all failed.

Wesley Clair Mitchell commented on the future history of greenbacks within the state of California,

“This became the general practice and consequently the people of California maintained a large circulation of specie during all seventeen years that the rest of the United States were using paper money. Greenbacks were not prevented from circulation, but when they were passed it was usually at their gold, not at their nominal value.” [12]

On January 14, 1875, the United States government passed The Specie Payment Resumption Act. This act restored the nation to the gold standard and provided for the redemption of greenbacks for gold on or after January 1, 1879.

Ultimately, the federal government was never able to force California to accept greenbacks as legal tender. California won the battle against the Union’s fiat currency.


[1] Don E. and Virginia Fehrenbacher, editors, The Recollected Words of Abraham Lincoln, p. 328.

[2] Congressional Globe (37/2) p. 768.

[3] C.G. (37/2) p. 551.

[4] Roger L. Ransom, Economics of the Civil War

[5] Roger L. Ransom, Economics of the Civil War

[6] William C.Fankhauser, A Financial History of California: Public Revenues, Volume 3, Issue 2. p. 118

[7] Fankhauser, p. 220.

[8] Wesley Clair Mitchell, History of the Greenbacks, p. 143.

[9] Murray N. Rothbard, History of Money and Banking, p. 128.

[10] Fankhauser, p. 222.

[11] Fankhauser, p. 222.

[12] Mitchell, p. 144.



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