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Paper Money: In 1862 the U. S. Treasury needed money quickly to finance the Civil War. There were three possibilities: taxation, borrowing, and printing paper money. New tax laws could not be passed and made effective quickly enough to raise the money that was immediately needed; the second choice, borrowing, would be too costly, because the government's credit was so weak that it would have to pay interest rates of over 10% to bond buyers.
The printing of paper money appeared to be the only practical choice, so in February 1862, Congress authorized an issue of $150 million of U. S. notes. These notes were also known as "legal tenders" and were popularly called "greenbacks" because they were printed in green ink, in contrast to the backs of gold certificates, which were printed in yellow.
The greenbacks were the first paper money issued by the U. S. government. They were fiat money, since their only backing was the government's promise to pay. But they were legal tender for all debts, public and private, except interest on the public debt and customs duties.
GRESHAM'S LAW, gresh'amz, in economics, is usually stated as "bad money drives out good." The law stems from the fact that money has a value both as money and as a commodity in the open market. The former value is set arbitrarily by law and is relatively fixed; the latter is determined by supply and demand and varies from time to time, "Good money" has a higher value as a commodity than as money and will disappear from circulation.
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