Image courtesy of The Museum of American Finance

Money has played a pivotal role in the course of history many times. The United States Government faced a financial and existential crisis in 1861 when the country began to fight a civil war with the Confederacy. In order to continue to finance the war effort, Congress authorized the issuing of Demand Notes and U.S. Notes which came to be known as greenbacks. In this blog we will talk about what they were and why they were important. 

The Civil War Crisis

In August of 1861, when it became clear the Civil War might continue for some time, Congress authorized the printing of $50 million in Demand Notes. This was because the government needed to raise funds to pay for the war, but it was difficult to borrow money through traditional means. They could not issue bonds because the government's creditworthiness was in doubt. There was also a shortage of gold and silver, which made it difficult to back a new currency with these metals.

Coin lovers know that collecting paper currency can also be enjoyable and rewarding. Currency is more fragile than metal coins are, of course, but they also preserve history. A period of time in American history that seems never to fully fade in the American imagination is the Civil War. During these four years American money changed because of the disruptions caused by the war. Some of this money is valuable, even very valuable. How much is Confederate currency worth?

The Story of Confederate Money

In 1861, when eleven southern states seceded from the Union, the Civil War began. The Confederacy was immediately confronted with several challenges. Its people were still trading in the coin of the enemy now invading them, and wars are very expensive. The economy of the South was agrarian. It had neither the infrastructure nor the manufacturing capacity of the North, and it still had to purchase military equipment and pay its bills. The Confederacy decided to print paper money as a fundraising strategy. 

Most Americans have lived their entire lives using the standard American currency we all recognize. They might be surprised to learn that in its earlier years the American money system was the opposite of standard. The genesis of our modern currency was the National Bank Act which President Lincoln signed into law in 1863. This created the United States National Banking System, a prototype of what we use today:

“The National Banking Act (ch. 58, 12 Stat. 665; February 25, 1863), originally known as the National Currency Act, and was passed in the Senate by a narrow 23–21 vote. The main goal of this act was to create a single national currency and to eradicate the problem of notes from multiple banks circulating all at once. The Act established national banks that could issue notes which were backed by the United States Treasury and printed by the government itself. The quantity of notes that a bank was allowed to issue was proportional to the bank's level of capital deposited with the Comptroller of the Currency at the Treasury. To further control the currency, the Act taxed notes issued by state and local banks, essentially pushing non-federally issued paper out of circulation.”

We’ve discussed before what a problem counterfeiting is in the coin world. In recent years counterfeit coins have proliferated in America so frequently, many of them imported from China via online sales, that the U.S. Mint has issued warnings. A few years ago, when the stock market was in freefall and real estate rapid lost value, collecting coins became not just a hobby but an investment for many people. The characteristics about coins that make them valuable - origin, condition, scarcity, and history - do not fluctuate much over time and, unlike bank accounts, coins are not hackable (although they can, of course, be stolen). Counterfeiting is a significant threat to collectors, however, and anyone involved with coins has an incentive to stop it.

In April the European Central Bank issued new €50 banknotes they designed to be far less vulnerable to counterfeiting. These orange-yellow bills were designed in consultation with Stanford neuroscientist David Eagleman to so that anyone - not just currency experts - would be able to spot a fake. The usual security measures are present, including watermarks, color-changing inks, threads, and microprinting, but instead of relying on high tech measures, the ECB took a new tack: focusing on face recognition. This is because the general populace doesn’t look at their money very carefully and the human brain isn’t designed to spot inconsistencies in objects that often decorate paper money.

In the twentieth century the dollar became the global reserve currency when in 1944 the world’s developed countries met at Bretton Woods, New Hampshire and pegged the exchange rate of all their currencies to the U.S. dollar. Prior to that, most countries were on the gold standard which meant that, upon demand, they would redeem their paper currency for gold and kept enough gold in reserves to do so.

Eventually the United States abandoned the gold standard, when Richard Nixon completely untethered the value of the dollar to gold, but by then the U.S. had the most robust economy of any country in the world, so it remained the dominant reserve currency. Is there a country in the world where you cannot exchange dollars for the local currency?

People who have grown up using a universal United States currency are often surprised to learn how diverse historical American coinage and currency is. Local and state banks issued their own money, backed by reserve currency, and did business for hundreds of years this way. It wasn’t until 1863 that President Lincoln signed the National Bank Act into law. This created the United States National Banking System, a prototype of what we use today:

“The National Banking Act (ch. 58, 12 Stat. 665; February 25, 1863), originally known as the National Currency Act, and was passed in the Senate by a narrow 23–21 vote. The main goal of this act was to create a single national currency and to eradicate the problem of notes from multiple banks circulating all at once. The Act established national banks that could issue notes which were backed by the United States Treasury and printed by the government itself. The quantity of notes that a bank was allowed to issue was proportional to the bank's level of capital deposited with the Comptroller of the Currency at the Treasury. To further control the currency, the Act taxed notes issued by state and local banks, essentially pushing non-federally issued paper out of circulation.”

“Buy the best you can afford” is a sound strategy for collectors of nearly any rarity, but is particularly important with US coins, ancient coins and US currency.   Also, as simple as it sounds, never forget that rarity is of critical importance to long-term value.

Since 2008, the coin market has done well compared to other financial markets.   However, the increase in value of common coins has been driven almost entirely by the increase in gold and silver values.   Common copper and nickel coins have languished or decreased in value while rare coins of high quality have skyrocketed in value.