A United States Note (known popularly in its day as a "greenback") is a fiat paper currency that was issued directly into circulation by the United States Department of the Treasury. These bills of credit were also known as Legal Tender Notes because of the inscription on each obverse face stating "This Note is a Legal Tender." They were among the first national United States currency, authorized by the Legal Tender Act of 1862 and began circulating during the American Civil War. After the death of Abraham Lincoln on 15 April 1865, additional "first charter period" (i.e. banks chartered between 1863 and 1882) National Bank Notes and Gold Certificates of 1865 were issued. The notes were issued until January 1971, after which they were entirely replaced by the Federal Reserve Notes which had circulated alongside them since 1914.
Despite the fact that in modern times the word "greenback" usually refers to any United States paper currency (all noted for their use of green ink on the reverse side of bills), the original origin of the term is from United States Notes, which were issued with green backs. The later Federal Reserve Notes and also gold certificates and silver certificates in the United States, were printed with distinctive green reverse sides to mimic the United States Note.
On a United States Note, the Treasury seal and the note's serial number are printed in red (as contrasting with Federal Reserve Notes, where it appears in green). United States Notes have been printed in the following denominations: $1, $2, $5, $10, $20, $50, $100, $500, $1000, $5000, and $10,000.
The Treasury Department issued these notes directly into circulation, and they are obligations of the United States Government. The issuance of United States Notes was subject to limitations established by Congress. In order to stimulate the economy, the Currency Acts of July 10 1862 and March 3 1863, and May 3 1878 (among other legislation) established a statutory limitation of $346,681,016 on the amount of United States Notes authorized to be outstanding and in circulation. This currency was not backed by any deposit in any bank or government reserve, in contrast to the gold certificates at the time. They also do not bear interest, unlike the appropriately titled Interest Bearing Notes of 1861 to 1865. While $346,681,016 was a significant figure in Civil War days, it is now a very small fraction of the total currency in circulation in the United States.
Both United States Notes and Federal Reserve Notes were parts of the national currency of the United States and both were legal tender. Both were used in circulation as money in the same way. However, the issuing authority for them came from different statutes. United States Notes (like the later Federal Reserve Notes) were fiat currency, in that they were never redeemable explicitly for any precious metal. The difference between a United States Note and a Federal Reserve Note was that a United States Note represented a "bill of credit" where the currency was transferred into circulation free of interest. Federal Reserve Notes are based on debt, and thus bear interest to bank with stockholders which serves as a lending intermediary between the Government and the citizenry.
The American economist S.G.Fisher once commented that 'the Greenbacks were the best currency that ever a Nation had.'
American U.S. Note greenbacks were first authorized by the Legal Tender Act of 1862 to pay for the American Civil War. They were issued directly by the U.S. Treasury but were subject to limitations established by Congress which approved three further issues on July 10, 1862, March 3, 1863, and May 3, 1878. Greenbacks were not backed by gold, or bank deposits, or government reserves and bore no interest.
During the American Civil War, banking interests did not want United States Notes to be a legal tender to pay the national debt, so the Senate depreciated the currency by putting in an exception clause, which allowed Government creditors to be paid in gold. Thaddeus Stevens, the Chairman of the House of Representatives Committee of Ways and Means which authored the original United States Notes bill to be a legal tender for all debts, denounced the Senate's amended exception clause, calling the new bill "mischievous" because it made United States Notes an intentionally depreciated currency for the masses, while the banks who loaned to the government got "sound money" in gold. However, it appeared necessary to allow the banks the exception clause, or else perhaps there would have been no other way to fund the civil war effort.
At the end of the Civil War, the Radical Republicans, led by Abraham Lincoln and his economic advisor Henry Charles Carey sought to make the Greenback System permanent. In March 1865 Carey published a series of letters to the Speaker of the House of Representatives entitled The Way to Outdo England Without Fighting Her in which he called for the two-pronged financial strategy for post-war reconstruction of raising the Bank Adequacy Ratio to 50% and issuing public credit in the form of Greenbacks. However, Lincoln was assassinated in the next month and the United States then began to move towards a gold standard and contract the supply of greenbacks.
U.S. notes were not immediately redeemable in gold. However, while the United States was on the gold standard, it was possible to redeem them for gold indirectly by exchanging them for a currency of a different obligation, for example a Gold Certificate. Whoever accepted the exchange was left with the less-trusted fiat currency. At the time United States Notes were issued, this was a serious concern, as the government sought to strike a balance between coin shortages and fiat currency. The greenback traded at a substantial discount from gold, which prompted Congress to pass the short-lived Anti-gold futures act of 1864 which was promptly repealed after it seemed to accelerate the decline of the greenback.
United States Notes were used before the creation of the modern Federal Reserve System as a way of moderately influencing the money supply by federal government fiat. For example, during the panic of 1907 president Theodore Roosevelt attempted to increase liquidity in the markets by authorizing the treasury to issue more greenbacks.
After the end of the gold standard in 1933, all types of issued currency (silver certificates, Federal Reserve Notes, and United States Notes) were redeemable only for silver. This ceased to be the case in 1963-4, during a time in which all U.S. currency (both coins and paper currency) was changed to fiat currency. At this point, the United States Note became obsolete and began to be removed from circulation. No more were issued after January 21, 1971.