From Coins to Greenbacks: The Story of U.S. Paper Money

In the early days of the United States, coins were the primary form of money, with gold and silver serving as the foundation of the economy. The U.S. Mint, established in 1792, began producing official coins, including gold Eagles, silver Dollars, and copper Cents. These coins were valued based on their metal content, making them widely trusted. However, carrying and trading large amounts of gold and silver coins was inconvenient, and as the economy grew, the need for a more practical form of money became clear. Banks began issuing paper banknotes in the early 1800s, but these were not standardized and often varied in reliability. The transition toward government-issued paper money gained momentum during the Civil War, when the federal government introduced Greenbacks in 1862 to fund the war effort.

Before the U.S. Issued Its Own Paper Money

Before the U.S. government started printing its own paper money, people used a mix of foreign coins, barter, and locally issued currency to buy goods and pay debts. Spanish silver dollars were the most commonly used coins, but British pounds, Dutch guilders, and French livres also circulated. Some American colonies printed their own paper money to make trade easier, but because there were no rules about how much could be printed, inflation was a big problem.

During the Revolutionary War (1775-1783), the Continental Congress tried to solve this by issuing Continental Currency in 1775 to help fund the war. The idea was that people would trust the money and use it like gold or silver. But since it wasn’t backed by anything valuable and too much was printed, its value quickly dropped. By the war’s end, Continentals were almost worthless, leading to the famous phrase “not worth a Continental.” Because of this failure, many Americans distrusted paper money for decades.

Giving Congress the Power to Control Money

When the U.S. Constitution was adopted in 1789, Congress had the exclusive right to coin money and regulate its value (Article I, Section 8). However, it did not give the federal government the power to print paper money. Many of the Founding Fathers feared that printing money without gold or silver to back it up would lead to the same disaster as Continental Currency.

Instead, for many years, the U.S. mainly relied on gold and silver coins and paper banknotes issued by private banks. The First Bank of the United States (1791-1811) and later the Second Bank of the United States (1816-1836) helped provide stability by issuing banknotes backed by gold and silver. However, when the Second Bank was shut down in 1836, the U.S. entered a period known as “free banking.” Thousands of state-chartered banks began issuing their own banknotes, and since there were no national standards, people never knew which banknotes they could trust. Some were as good as gold, while others were utterly worthless.

The First Official U.S. Paper Money (1861)

The first official U.S. government-issued paper money came during the Civil War. By 1861, the Union was desperate for money to fund the war. The government had been borrowing money and collecting taxes, but it wasn’t enough. Congress had to devise a new way to pay for soldiers, weapons, and supplies—so they decided to print paper money.

On July 17, 1861, Congress passed a law allowing the Treasury to print $60 million in Demand Notes, the first official U.S. paper money since the days of Continental Currency. These notes were printed in $5, $10, and $20 denominations and could be exchanged for gold or silver coins on demand. They started circulating in August 1861, just months after the Civil War began.

CAPTION:

But there was a problem: people rushed to exchange their Demand Notes for gold and silver, draining the government’s reserves. To fix this, Congress passed the Legal Tender Act of 1862, which introduced United States Notes, also known as “Greenbacks” because of their green ink. Unlike Demand Notes, Greenbacks were not backed by gold or silver; instead, the government declared them as legal tender, meaning they had to be accepted for all debts (except tariffs and interest on government bonds). The first Greenbacks were issued on March 10, 1862, and by the end of the war, nearly $450 million worth of them had been printed.

Why the Change?

The government didn’t issue paper money just for fun—it did it because there was no other choice. The Civil War was incredibly expensive, and the usual ways of raising money—taxes and borrowing—weren’t enough. Greenbacks allowed the government to pay for the war without having an equal amount of gold or silver in reserve.

There was also another problem: the country had no uniform currency system. Before the war, thousands of different banknotes from state-chartered banks were circulated, each with different values and levels of trust. Greenbacks provided a single national currency that everyone could use.

Of course, not everyone liked the idea. Some people worried that paper money without gold or silver backing would cause massive inflation and ruin the economy. Others thought it was necessary to keep the country financially stable. Eventually, in 1879, the government made Greenbacks redeemable for gold again, restoring confidence in paper money.

How U.S. Paper Money Changed Over Time

After the Civil War, the government worked to improve and regulate paper money. The National Banking Act of 1863 and 1864 created a system where nationally chartered banks could issue standardized banknotes backed by U.S. government bonds. This helped phase out unreliable state banknotes and created a more uniform currency system.

By the late 1800s, the U.S. moved toward the gold standard, meaning paper money could be exchanged for a fixed amount of gold. This system lasted until the Great Depression, when President Franklin D. Roosevelt ended the public’s ability to exchange dollars for gold in 1933. Then, in 1971, President Richard Nixon removed the U.S. from the gold standard, making the dollar a fiat currency—meaning its value comes from government regulation rather than a physical commodity like gold.

Today, U.S. paper money consists of Federal Reserve Notes, issued by the Federal Reserve System, which was created in 1913 to oversee the money supply and regulate the banking system. Even though the way money works has changed dramatically since 1861, the idea behind Greenbacks—using paper money to keep the economy moving—remains just as important today as it was during the Civil War.