REPRINT PERMISSION
The Color of Money
by Clifford F. Thies
Ready for "Pinkbacks,"
that is, for Federal Reserve notes with a pink hue?
Yes, the Federal Reserve is continuing to experiment with
new, more difficult-to-counterfeit paper money. First it was BIG
FACES (along with the introduction of a variety of other counterfeit-proof
characteristics into our Federal Reserve notes). Next, maybe, it will
be color.
Indeed, for those of you who travel around the world, you
probably already know that U.S. paper money is distinctive in being, well,
boring. All the same size and not very much color. Gray on the
front, except for the seal and the serial number, which are in green,
along with green on the back. Because of the green-colored
back, U.S. paper money, a long time ago, came to be known as
"greenbacks."
In contrast to U.S. paper money, most foreign paper money
comes in multiple colors and in sizes that get bigger along with the
denomination. At least the new BIG FACES give our paper money a
comical quality.
But from where, you might ask, did the U.S. style of paper
money come?
Prior to the U.S. Civil War (or, as they call it here
in Winchester, Virginia, the War of Northern Aggression), the U.S.
government was hardly involved in printing paper money. But
then, during the war, both sides, the Union and the Confederacy, got into
printing paper money big-time.
The North adopted a distinctive design for its paper
money, which I show for the $1 note:
On the front, the note refers to its authority (an act of
Congress, the constitutionality of which was in some doubt), and says that
the United States (meaning the government of the United States) will pay
to the bearer one dollar.
But wasn’t this note itself a dollar?
Although the legal tender quality of this and other
greenbacks mucked up the distinction, a dollar was then defined as a
measure of gold or of silver. (In practice, because the U.S.
government overvalued silver at the time, a dollar was a measure of
gold.) Therefore, this note was not itself a dollar, but supposedly
could be turned in to the U.S. Treasury in exchange for an actual
dollar.
I should also point out that, because of the suspension of
convertibility, it was only after resumption, in 1879 (on the basis,
effectively, of a gold standard), that the bearer could actually obtain
gold--that is, an actual dollar--for the note.
It is on the back where the legal tender quality of this
and other greenbacks is asserted: "This note is legal tender for all
debts public and private except duties on imports and interest on the
public debt and is receivable in payment of all loans made to the United
States."
Thus, these notes were not backed by either gold or
silver, but only by green ink (and an act of Congress of dubious
constitutionality). Accordingly, they became known as
greenbacks.
The Union could have avoided the constitutional morass and
the injustice to creditors involved in making a paper money into a legal
tender and still have met the financial exigencies of the war (presuming
that the Union had to prosecute the war in the manner that it did) if it
had issued non-legal tender Treasury notes. But unfortunately for our
country’s subsequent monetary history, the Congress acceded to the
administration’s request for issuing legal tender paper money, and the
Supreme Court subsequently upheld the act as constitutional, reversing an
initial decision to the contrary.
While I am obviously not a fan of greenbacks, they did
serve the country well in certain ways. First, they were very
difficult to counterfeit, compared with the notes that had been issued by
hundreds of private banks prior to the Civil War. You can see the
high-quality printing (i.e., "engraving") and the use of multiple colors
on the obverse.
That there was high-quality printing on the reverse (from
which the moniker greenback is derived) was another breakthrough in
technology designed to thwart counterfeiting.
Second, they were standardized and thus easy to
recognize, and they could easily circulate throughout the
country.
Following the war, the government decided to resume
convertibility through a policy known as "Grow to Gold." Instead of
retiring enough of the greenbacks to quickly bring their market value in
line with their stated value (in terms of gold), the government decided to
leave the mass of greenbacks in circulation, but not increase their
quantity, so that eventually the growth of the economy, and gradual
deflation, would bring the market value of the greenbacks into alignment
with their stated value.
To be sure, as the notes issued during earlier times wore
out, they were replaced by newly printed notes. Hence, I display a
couple of U.S. Treasury notes issued in 1880. With these notes,
the legal tender quality of the note is printed on the front, in small
letters, within the top margin.
These notes also assert that the United States will pay to
the bearer ten dollars or twenty dollars, depending on which. The
difference was that that, following resumption in 1879, you actually could
exchange the note for gold.
The U.S. Treasury notes of 1928 launched the general
design that most people in the world immediately recognize as U.S. paper
money (prior to the Federal Reserve’s recent introduction of BIG FACE
money).
In the 1928 series, the legal tender quality of the money
was printed over the seal, and the right of convertibility was printed
under the portrait.
The 1963 series of U.S. Treasury notes differed from the
1928 series in a few trivial ways (such as the placement of the seal), and
in a subtle but potentially very important way. Notice that the note
no longer says, under the portrait or anyplace else, that the United
States will pay to the bearer two dollars.
The note was no longer convertible because in 1933, in
order to deal with the Great Depression, ownership of gold was prohibited
to U.S. citizens (other than in forms such as jewelry and collectible
coins).
Effectively, then, the piece of paper was itself two
dollars.
To be sure, foreigners could still demand gold for the
note, and maintaining foreign convertibility would, generally, limit the
amount of domestic inflation. But even this impediment to inflation
was ended in 1971 when Richard "We are all Keynesians now" Nixon closed
the gold window even to foreigners.
Gold and Silver Certificates
While legal tender greenbacks are an affront to the
original meaning of the Constitution and open the door for rampant
inflation, during the late 19th century, the U.S. Treasury
issued certain forms of paper money that served the country well in terms
of being difficult to counterfeit. These were gold and silver
certificates, easily identified by their gold and blue
seals. Insofar as paper money is, in certain transactions, more
convenient to use than coins, this was useful.
One thing I like about the "fine print" of the gold
certificates and the first two of the silver certificates is that they
promise the bearer One Hundred Dollars In Gold Coin, or One Silver
Dollar. It is therefore clear that the purpose of this paper
money was merely to reduce the cost of using gold or silver coins in
transactions, not to increase the money supply.
In contrast, the $1 silver certificate of 1957 promises
the bearer only One Dollar In Silver. When the government announced
that it would stop paying out silver on these certificates, and many
people queued up to get their silver, many of them were given, not silver
dollars, but little bags of silver dust.
Back in the days when (full-bodied) gold and silver coins
circulated freely, bankers, merchants, and government officials were
concerned with the "wear and tear" on coins in circulation, and the risk
and cost of transporting coins over distances.
Gold coins, even when gold was used in alloy form with a
small amount of silver, were quite susceptible to wear and
tear. Silver coins, excepting for the purpose of making change, were
inconvenient because of their weight. Except during times of bank
panic, the public was very happy to use private-bank-issued notes (just as
today, the public is very happy to use checking accounts, credit and debit
cards, and electronic money).
The problem with bank-issued paper money back in the old
days, or with government-issued paper money nowadays, is only to a small
extent counterfeiting; that is, people outside the bank printing
more and more money. To a much larger extent, the problem with paper
money always has been the people inside the bank, whether a private
bank or a central bank, printing more and more money.
The real issue is not the color on the back of
the money, but money’s real backing.
August 26, 2002
Clifford F. Thies is a professor of economics and finance at Shenandoah University in Winchester, Virginia. Send him MAIL. See also his Mises.org Articles Archive.
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