Originally called the National Legal Currency Act, the National Bank Act was signed into law on February 25, 1863. The Act created National Banks that could issue notes printed by the United States Treasury that would serve as currency, the famous Greenbacks. Precisely one year before the Congress had authorized the treasury to issue paper currency in an amount not to exceed 150 million dollars. Although the move to a fiat currency not backed in gold was widely unpopular around the country, the nickname of the notes, Greenbacks, coming from people complaining that the notes were backed only by the green ink used to print the backs of the notes, when the economic house did not fall in from the issuance of the Greenbacks in 1862, Congress placed no limits on the issuance of the currency in February of 1863.
The Union financed its war effort 88% through taxation and war bonds, with the Greenbacks taking up the slack. Five hundred million in Greenbacks were issued during the War and caused an unpleasant, though manageable, inflation of 180% during the War. This contrasted with the Confederacy that could finance only 46% of its war effort with taxes and bonds. The inflation caused by the issuance of Confederate currency, popularly known as Greybacks, was an astonishing 9000% during the War. The experience of the Union and Confederacy indicates that a fiat currency is always dependent on the innate strength of the economy of the nation issuing it, along with the question mark that always existed as to whether the Confederacy would win its independence. The experience of the Confederacy with its currency was strikingly similar to that of the United States with the Continental currency during the American Revolution, which became so worthless that it ceased to circulate as money in May 1781. Ironically both Continental and Confederate currency are precious today as a result of collectors.
The constitutionality of the issuance of Greenbacks was answered in the negative by the United States Supreme Court in 1870 in the case of Hepburn v. Griswold in a majority opinion written by Chief Justice Salmon P. Chase, who as Secretary of the Treasury had overseen the issuance of the Greenbacks. The question presented was whether a party who had made a contract prior to the Legal Tender Act of 1862 could be required to accept Greenbacks in payment of the debt incurred as a result of that contract. The Court found that the issuance of currency as legal tender not backed in gold constituted a violation of the Fifth Amendment:
Another provision, found in the fifth amendment, must be considered in this connection. We refer to that which ordains that private property shall not be taken for public use without compensation. This provision is kindred in spirit to that which forbids legislation impairing the obligation of contracts; but, unlike that, it is addressed directly and solely to the National government. It does not, in terms, prohibit legislation which appropriates the private property of one class of citizens to the use of another class; but if such property cannot be taken for the benefit of all, without compensation, it is difficult to understand how it can be so taken for the benefit of a part without violating the spirit of the prohibition.
But there is another provision in the same amendment, which, in our judgment, cannot have its full and intended effect unless construed as a direct prohibition of the legislation which we have been considering. It is that which declares that “no person shall be deprived of life, liberty, or property, without due process of law.”
It is not doubted that all the provisions of this amendment operate directly in limitation and restraint of the legislative powers conferred by the Constitution. The only question is, whether an act which compels all those who hold contracts for the payment of gold and silver money to accept in payment a currency of inferior value deprives such persons of property without due process of law.
It is quite clear, that whatever may be the operation of such an act, due process of law makes no part of it. Does it deprive any person of property? A very large proportion of the property of civilized men exists in the form of contracts. These contracts almost invariably stipulate for the payment of money. And we have already seen that contracts in the United States, prior to the act under consideration, for the payment of money, were contracts to pay the sums specified in gold and silver coin. And it is beyond doubt that the holders of these contracts were and are as fully entitled to the protection of this constitutional provision as the holders of any other description of property.
Chase explained the reason for his decision in a privated letter to Edward D. Mansfield:
You have seen the opinion of the Court on legal tender in payment of pre[existing] contracts. I knew it would not please paper money men: but I am sure it is right. The constitution does not permit robbery of citizens by citizens as an appropriate means of carrying on war. I thought I could so administer the Treasury as to protect the people against the worst evils of paper money; and I never meant that more than about five hundred millions should be in circulation. After I left the department the 300 millions of National Bank Currency was added to the 400 millions of Greenbacks, without any provision for retiring any part of the latter. Hence the great inflation, which prevented the return to payments in specie when Grant entered Richmond and still prevents [it]. A wise and bold adm[inistration] would have resumed [payment in gold] at that time any how.
President Grant was strongly opposed to this decision and appointed two new justices to the Court who promptly reversed Griswold in the companion cases of Knox v. Lee and Parker v. Davis.