What Did the United States Treasury Create When the Legal Tender Act Was Passed in 1862?

Title: The Legal Tender Act of 1862: Revolutionizing the United States Treasury


The Legal Tender Act of 1862, also known as the Greenback Act, marked a significant turning point in the United States Treasury’s history. This landmark legislation, passed during the American Civil War, introduced a new form of currency known as “greenbacks.” This article aims to delve into the creation and implications of this act, highlighting its impact on the nation’s economy, society, and financial system.

I. The Legal Tender Act: A Brief Overview

The Legal Tender Act, signed into law by President Abraham Lincoln on February 25, 1862, authorized the issuance of paper currency as legal tender. The United States Treasury, under this act, was empowered to print and circulate greenbacks, which were not backed by gold or silver reserves.

II. Creation of Greenbacks: A New Form of Currency

The passage of the Legal Tender Act allowed the United States Treasury to issue greenbacks, which were essentially fiat money. Unlike previous forms of currency, greenbacks derived their value solely from the government’s decree and acceptance by the public. This move was primarily driven by the urgent need to finance the war effort and stabilize the economy during the Civil War.

III. Impact on the Economy and Society

1. Financing the War Effort: The Legal Tender Act provided the Union with a vital tool to finance the costly Civil War. By issuing greenbacks, the government could raise funds without relying solely on taxation or borrowing from banks. This enabled the Union to sustain its military operations and maintain its economic stability.

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2. Inflationary Pressures: The introduction of greenbacks led to a significant increase in the money supply, resulting in inflationary pressures. As the supply of currency expanded, the value of individual greenbacks decreased. This rise in inflation affected prices, wages, and the overall cost of living, leading to economic challenges for citizens.

3. Monetary Policy and Centralization: The Legal Tender Act played a crucial role in shaping the United States’ monetary policy and centralizing the nation’s financial system. The act set the stage for the establishment of the Federal Reserve System in 1913, which became responsible for managing the nation’s money supply and ensuring stability in the financial sector.

IV. Frequently Asked Questions (FAQs)

1. Could greenbacks be exchanged for gold or silver?
No, greenbacks were not convertible into gold or silver. Their value was derived solely from the government’s legal tender status and public acceptance.

2. How did the Legal Tender Act impact the Civil War?
The Legal Tender Act provided the Union government with the means to finance the war effort independently. It helped ensure a stable economy by allowing the government to print money to meet the escalating financial demands of the conflict.

3. How did the Legal Tender Act affect inflation?
The issuance of greenbacks increased the money supply, leading to inflationary pressures. As a result, prices rose, wages were affected, and the overall cost of living increased. However, these inflationary pressures were partially mitigated after the war’s end, as the government began retiring the greenbacks and transitioning back to a gold-backed currency system.

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4. Did the Legal Tender Act face any legal challenges?
Yes, the constitutionality of the Legal Tender Act was challenged in the Supreme Court case of Hepburn v. Griswold (1870). The Court upheld the act, establishing the constitutionality of fiat money and the government’s authority to issue legal tender.


The Legal Tender Act of 1862 transformed the United States Treasury’s operations and had far-reaching consequences for the nation’s economy, society, and financial system. By creating greenbacks as a form of fiat money, the act enabled the government to finance the Civil War and assert its monetary authority. Although the introduction of greenbacks brought about inflationary pressures, it laid the foundation for the modern central banking system in the United States. The Legal Tender Act stands as a testament to the government’s ability to adapt and create innovative solutions during times of crisis.