What was the purpose of the Legal Tender Act?
1 Answer
To allow the US to print money not backed by gold or silver and to force creditors to accept the "greenbacks" at face value.
Explanation:
The cost of the Civil War on the North was tremendous (just how tremendous will be revealed shortly in the discussion below...).
Up to the Legal Tender Act of 1862, the government had to pay for things using gold or silver, or paper money that was backed by gold and silver (meaning that you could, quite literally, walk up to a bank and demand gold and/or silver in exchange for your paper money and the bank would give it to you).
As the war dragged on and expenses mounted, the US government needed some method to stay liquid (that is, be able to pay its debts). And so the Legal Tender Act came into being. The Act allowed the Treasury to print money, called "greenbacks", that were not backed by gold or silver, and forced creditors to accept them as money just as good as the other bills that were backed by precious metals (imagine receiving paper money at that time and knowing you couldn't trade in the paper to get gold! You'd certainly prefer to have the other kind of paper money and not this worthless greenback stuff!)
So how much money did the government print by the time the war ended in 1865? Roughly $500 million. Which is the equivalent of about $7 billion today. Yup - in 3 years they printed $500,000,000.
So how did the US government deal with this situation? They created the Income Tax (taxes on income had been imposed in the past to pay for wars and other expenses in the past but had been cancelled after the wars had been paid for. This time, it was made permanent.) and imposed other taxes as well.
Fun Fact - during the Civil War, the then Treasury Secretary, Salmon Chase, was an integral part of getting the Legal Tender Act passed so that he could continue to pay soldiers, pay for arms, uniforms and equipment, and that sort of thing. But in 1870, the Chief Justice of the Supreme Court wrote the majority opinion in a 4-3 decision that the Legal Tender Act violated the 5th amendment (which protects citizens from unlawful seizures of property without due cause). Salmon Chase was that Chief Justice.
Fun Fact #2 - on the same day that the decision was made against the legality of the Legal Tender Act, President Ulysses S. Grant (who had been the Commander in Chief of the Northern armies, and so direct benefactor of the Act because he could pay his soldiers and buy their equipment) filled two vacant positions on the Supreme Court. And in the very next session of the Court, it overturned the 4-3 loss in a 5-4 victory decision, writing that the Legal Tender Act was justifiable in a national emergency.
And in 1971, the US left the gold standard altogether.
https://en.wikipedia.org/wiki/Nixon_shock
http://www.politico.com/story/2014/02/this-day-in-politics-legal-tender-act-passed-feb-25-1862-103857
