This article was originally printed in the latest issue of Numismatic News.
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As the year 1862 opened, matters were not going well for the Union government in Washington, D.C., and its monetary system. At the end of December 1861 the public had suddenly begun to hoard gold coins and the banks were forced to suspend specie payments; the United States Treasury followed suit the same day. This meant, for practical purposes, that the so-called Demand Notes ($5, $10, and $20) issued under the acts of July 17 and Aug. 5, 1861, were now fiat money and could not be exchanged for gold or silver.
However, and most importantly, these bills could still be used to pay customs duties, meaning that importers could use either gold or Demand Notes for this purpose. This had the desired effect of keeping the Demand Notes at close to par with gold coin. Once paid to the customs they were not re-issued, forcing importers to buy gold coin on the open market at ever-increasing premiums.
In late December 1861 the Army’s command notified the Treasury that there were serious difficulties in paying the soldiers their monthly stipends, small as they were. An unpaid military is a disaster waiting to happen so the Lincoln Administration asked Congress in January 1862 for authority to print and distribute another $10 million worth of Demand Notes. In due course the legislators agreed and the President signed the enrolled bill on Feb. 12, his birthday.
Prior to Dec. 30, 1861, when specie payments were suspended, the face side of the Demand Notes carried a notice to the effect that they could be used for any debt owed the government, which of course included customs fees. This particular face, which was similar on all three Demand Notes of 1861, is called ‘The First Obligation’ by modern collectors. It is presumed, however, that the $10 million worth of Demand Notes printed under the Act of Feb. 12, 1862, used the earlier plates, which were dated Aug. 10, 1861.
According to a later statement by the Treasury, the total value of the Demand Notes issued through the spring of 1862 was just over $60 million. Between July 1862 and June 1863 redemptions totaled $47.7 million and by the fall of 1864 more than 99 percent of the issue had been recorded as destroyed. No more than a few thousand notes of all three denominations escaped official burning and of these many were lost in fires and other disasters of time.
The $10 million of Feb. 12, 1862, proving inadequate, Congress discussed various solutions and over the course of the next few days produced a comprehensive bill incorporating fresh changes to the monetary system. The new legislation was signed into law by the President on Feb. 25, 1862.
Under the newly drafted regulations, the Treasury now had the authority to issue up to $150 million worth of “Legal Tender Notes,” which were similar in appearance (on the face) to the 1861 Demand Notes but minus the right to be used for the all-important customs duties. This was the first time the law recognized that we were now using fiat money, with virtually no backing, just the good faith and credit of the government.
Because there was confusion over the exact status and value of the 1861-dated Demand Notes, on March 17, 1862, the President signed a supplementary act which, in essence, verified that the Demand Notes could be used to pay customs duties even though a fiat currency in the marketplace. Perhaps a rumor had made the rounds indicating that the $10 million of Feb. 12, 1862, could somehow be distinguished from the notes printed in 1861.
Under the legislation of July 17, 1861, the Treasury had the right to call in the Demand Notes and the new law of Feb. 25 stated that, of the $150 million authorized, $50 million was allocated for this express purpose, an oddity since legislation had allowed for $60 million of the Demand Notes to be issued.
On July 11, 1862, the Feb. 25, 1862, act was amended to add another $150 million in Legal Tender Notes for Treasury use. In a significant change, however, the government was now authorized to print notes of less than $5 in value but with a maximum of $35 million in circulation at any one time. It was originally planned to issue $1, $2 and $3 notes but the last-named exists only as unadopted proofs. A further stipulation in the July 11 act was that notes of less than $1 could not be issued. Notes issued under the July 11, 1862, legislation were dated August 1862.
Part of the Feb. 25 law was taken up with combating the growing threat of counterfeiting. As early as the fall of 1861 it has been reported that counterfeits of Demand Notes had already appeared and such activities were a threat to the stability of the Union currency. The United States government secretly encouraged the counterfeiting of Confederate notes and it is possible that rebel sympathizers were busy with U.S. currency to balance the scales.
The notes dated Aug. 10, 1861, issued under the Acts of July 17 and Aug. 5, were all printed by the American Bank Note Company, judging from those seen to date. On the other hand the new Legal Tender bills of 1862, produced under the Feb. 25 act, were printed by both the American Bank Note Company and the National Bank Note Company.
With the implementation of the Feb. 25 law, the Union government once more seemed to have the monetary system under control. Silver coins still circulated and these were supplemented by the Legal Tender Notes. The old “7.3 – 20s” Interest Bearing Notes of 1861 did see occasional use in the marketplace or in payment of debts, but otherwise were rarely seen by the general public. In addition even the smallest of these notes at $50 was a considerable sum of money.
(The “7.3 – 20s” earned their name from the fact that each note earned 7.3 percent interest, payable every six months, and could be exchanged for 20-year government bonds.)
The continuing litany of Union military defeats, with few victories, meant that the Northern population grew increasingly nervous about the war. These fresh concerns came to a head at the end of June 1862 when the public suddenly began hoarding silver coins. For some odd reason the trime (three-cent silver) remained in daily use for a few more weeks and then it also disappeared.
After the silver coins left the marketplace, the work of the two operating mints, Philadelphia and San Francisco, sharply diverged. At the California Mint matters proceeded as before with enough silver coinage being made to satisfy local demands while gold minting remained strong due to deposits by area mines and miners.
Philadelphia was in quite another league. The coinage of silver showed a precipitous drop as few people wished to pay gold, which was required, to obtain minor silver coins that did not circulate anyway. Gold, mostly double eagles, continued to be struck, though in diminished quantities. Many of the $20 pieces were exported to Europe to pay for military supplies ordered by the Union government.
Proof coins were another matter entirely. Prior to 1862 the collector could purchase entire sets or just individual pieces, a rather handy arrangement if one collected, say, $3 gold pieces or half dollars. For reasons that are not entirely clear, Mint Director James Pollock at the beginning of 1862 changed the rules by requiring that complete silver or gold sets be purchased; even the lowly cent had to be obtained in the silver set, which cost $3 but which had a face value of $1.91. The buyer had to pay in silver or gold, whichever was appropriate in the circumstances. It is not clear if Demand Notes were accepted for the proof sets but one suspects that they were.
It is worth noting that the Treasury had made a strong effort to keep silver coins in daily use. Dimes and half dimes in particular were coined heavily during the first six months of 1862 but in retrospect they were being poured into a seemingly bottomless pit. The hoarding of silver coins no doubt had actually started in December 1861, when specie payments had been suspended, and then had slowly gathered momentum until the sudden exceptional demand came in late June 1862.
In July 1862 it was assumed by Treasury officials that this sudden hoarding was only temporary and the coins would again be used in the marketplace once the war began to show better results for the Union. However, much of the silver coin had not been retained by the public but rather sold to bullion dealers, who promptly shipped large quantities to other countries, especially Canada and Central America. The coins went into local circulation in these countries although many of them also went into private hoards where the political makeup of the country was unstable.
The removal of silver coins meant fresh problems for the Treasury. Except for the lowly copper-nickel cent there were no coins in circulation in the United States east of the Rocky Mountains; west of those same mountains the San Francisco Mint held sway in an area where paper money was banned by popular demand. From 1861 to 1865 California and surrounding areas were well supplied with gold and silver coins.
The complete removal of silver coins from the marketplace caught Treasury officials, and Secretary Salmon P. Chase especially, completely off guard. As with the similar crisis of the early 1960s, there was little in the way of contingency plans to deal with a very serious monetary problem. The war then raging on many fronts occupied everyone’s mind but the Treasury had an obligation for contingency planning and in this case there was little or none.
With a sudden need for small change, the Treasury abruptly decided to use postage stamps in lieu of the silver coins so recently hoarded. On July 14, 1862, Secretary Chase asked Congress to consider two different plans in dealing with the crisis, neither of which addressed the problem all that well.
The first suggestion dealt with reducing the amount of pure metal in the minor silver coinage. While on the surface this seemed reasonable, in practical terms it was not. The coins had been hoarded in part because the value of the paper money, now universally called “Greenbacks” from the color of the ink used on the reverse, had fallen in value compared to gold and silver. No one knew how far the paper money would fall so a reduction in weight for the minor silver coins might have to be repeated. It would have caused considerable confusion.
The other suggestion was almost as bad. Chase thought that postage stamps could be used a small change. In his book Fractional Money, Neil Carothers calls the plan “grotesque,” which is as good a description as any. Carothers went on to note that, “It is at first glance difficult to believe that a responsible finance minister would propose the circulation of tiny squares of glue-coated paper as a national currency.”
Actually the idea had already occurred to many people during the first week of July and there were several methods tried by the public, including pasting stamps to sheets of paper. In most cases, however, the stamps were simply passed hand to hand until they literally fell apart or became stuck to one another and no longer usable.
In a related development, on July 16 Congress had passed a law that stipulated relatively harsh penalties for the reuse of canceled stamps. Apparently, due to the need for stamps as small change, unscrupulous individuals were soaking stamps off envelopes and removing the cancellation marks whenever possible. Congress thought that a prison sentence up to three years or a fine up to $1,000, depending upon the severity of the offense, was a reasonable response.
Because there seemed to be nothing else to do, Congress quickly accepted the postage stamp suggestion and passed a poorly written bill on to the President, who signed it into law on July 17, 1862. Once the law became widely known, there was a sudden demand for postage stamps by the public. Normal daily sales of stamps at the post offices in New York City, for example, were around $3,000 but immediately after the law was passed the amounts skyrocketed; the total for the 18th and 19th of July, for example, was $26,000.
Part of the problem with the new law was that Postmaster General Montgomery Blair had been virtually ignored when the bill was being drawn up and passed. He retaliated for this slight by ordering local post offices to restrict sales to regular customers only and in normal amounts.
One of the more ingenious temporary solutions to the problem of stamps falling apart in use was patented by John Gault. He developed a small round frame with a mica window to protect the stamp. Merchants then put advertising on the back (metal) side and the “encased postage stamps” circulated among the public. It worked, and Gault had several competitors, but the idea was relatively expensive and only a short-term fix. These appear to have been issued through the late fall of 1862 and perhaps even into 1863.
It did not take all that long to realize that the idea of stamps being used as small change simply would not work. One section of the law said that the Treasury would redeem stamps no longer fit for use and this provision proved a nightmare for everyone involved. At first the Post Office refused to carry out the law but under public pressure had to do so in limited circumstances. In reality the Treasury was supposed to redeem the worn-out stamps but it had no means of doing so despite what the law required.
The Treasury then hit upon the idea of printing stamps in a different form. For example a 25-cent stamp would be much larger than normal and the design motif would be five stamps of five cents each. It was an innovative solution except for one thing: the law did not authorize any such innovation, a point which seems to have been lost in the scramble to provide currency for the public. Secretary Chase should have gone back to Congress for an emergency bill to cover this plan but did not.
The new idea amounted to issuing greenbacks in fractional amounts of a dollar, a clear violation of the law. The latest authorization (July 11, 1862) for paper currency had specifically banned notes of less than $1. Despite this inconvenient fact, Chase ordered that every effort be made to print these “postage notes” as quickly as possible. To speed up the process, there would be no signatures and no serial numbers, an open invitation to mass counterfeiting but perhaps unavoidable under the circumstances.
In order to provide a semblance of adhering to the law of July 17 as well as speed up the whole process, the Secretary ordered the printing contractor, American Bank Note Company of New York, to use depictions of actual stamps in preparing the plates. The 25-cent note, as indicated above, showed five overlapping five-cent stamps. The 10-cent issue, on the other hand, had only the single 10-cent stamp. Denominations ranged from five to 50 cents for this first emission of fractional paper money.
On Aug. 21 the initial disbursement of Postage Currency was made, for use by troops in the field. Printing was slow at first but by early in September 1862 public distribution had begun; by Oct. 1 the rather inadequate sum of $800,000 worth had been printed but this gathered momentum as the weeks passed. By the first week of January 1863 more than $100,000 per day was being issued.
The first notes carried the stamp affiliation almost to the extreme. The printed sheets of Postage Currency were perforated just like sheets of stamps and tore off just the same, except that the new issues were much larger than ordinary stamps. It was not long before there were complaints about the difficulty of tearing a note off cleanly so the Treasury changed the format by dropping the perforations and using a straight edge as on regular paper currency.
One of the stipulations of the July 17, 1862, act creating stamp money was that no private person or business was permitted to issue fractional notes of any kind. The law was widely ignored, however, despite a possible jail sentence of up to six months. There was too much public demand for currency of any kind, so federal officials just looked the other way.
As if the problems with the silver coinage and stamp money were not enough, during the summer of 1862 the public began to hoard even the lowly copper-nickel cents. Considering that the intrinsic value of these pieces, even with the relatively expensive nickel contained, was less than a half cent, this hoarding was baffling to contemporaries.
Some idea of the lack of urgency in the coinage of late 1861 and early 1862 may be judged from the following figures for cents on hand for distribution by the Philadelphia Mint at a given point in time. 1861 – Aug. 31: 420,505; Oct. 31: 92,290; 1862 – Jan. 31: 737,935; April 30: 940,379; Aug. 31st: 368 pieces. The reserves had collapsed.
In May and June 1862 the cent coinage was sharply increased to meet the expanded demand, but it was too little and too late. As late as July 3, 1862, the Mint presses were still keeping up with the demand, if only on a daily basis with no reserves. An order from a bank received on that day prompted a Mint reply to the effect that the coins would be shipped in “a day or two.”
Within a few days of the above there had been a drastic change in the situation. An order received on July 20 for $50 worth of cents (5,000 pieces, a common order for the times) was not shipped from the Mint until Sept. 12, nearly eight weeks later. Although not realized at the time, the abrupt change of July 1862 and increased hoarding was to signal the death knell for the copper-nickel cent. From this point until June 1864 the Mint was unable to fulfill cent orders on a timely basis.
The cent coinage of the last six months of 1862 was about triple that of the first half. From 7 million the total climbed to about 21 million pieces, nearly one million pieces per week. Mint Director James Pollock was sparing no resources to fill the orders but it was a losing effort.
By the latter months of 1862, Pollock was sufficiently alarmed about the state of the coinage in circulation – there was precious little of that except for the lowly cent coins – to write Treasury Secretary Salmon P. Chase on Dec. 1. Pollock was concerned about the future of the cent coinage as there were increasing difficulties in obtaining sufficient supplies of nickel; there was no problem with the copper, however.
During the fall of 1862 the first private cent tokens began to appear as merchants needed something by which to make change for the fractional notes tendered for purchases. At first these tokens carried purely patriotic themes on both sides but as the need for such pieces intensified merchants placed their advertising on one side. By the end of 1862 these Civil War Tokens, as they are known to modern-day collectors, were becoming a staple in the marketplace.
In 1862 the monetary system of the United States underwent profound change. Even more changes would come in 1863 as marketplace pressures continued to increase.
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