The Greenback Is Born - NYTimes.com During the first two months of 1862 the finances of the federal government were in dire straits. The War Department could no longer pay the country's soldiers and sailors; generals hounded Washington for money. Government revenues, which came chiefly from the tariff, fell from an annual average of $60 million during the prewar years to $42 million once the war began. At the same time government spending, which typically had matched income, soared. By the summer of 1861 Salmon P. Chase, the secretary of the Treasury, needed $1 million a day to cover expenses; by the end of the year he needed twice that amount. The secretary's first recourse, in the spring of 1861, was to borrow from bankers at home and abroad. But foreign bankers spurned the beleaguered republic, while institutions in New York, Boston and Philadelphia subscribed only $100 million of the $150 million loan that Chase floated. In July 1861 Congress issued $50 million of unsecured Treasury notes, but their value fell when banks refused to accept the money at face value. Otherwise, the executive branch offered little guidance. Instead, leadership came from a small group of Congressional Republicans, including representatives Elbridge Spaulding and Thaddeus Stevens and Senator John Sherman of Ohio. They set forth a bold program: It began with printing $150 million of legal tender Treasury notes, which bankers and soldiers alike would receive in payment for their services. These bills would be supported by extensive taxes, including an income tax. Once those initiatives were in place, Congress would implement Secretary Chase's plan for a national banking system. Spaulding, Sherman, Stevens and others who worked with them had a broad vision of American growth, built on a vibrant national economy with a strong central government. They extolled a harmonious nation of free farmers and manufacturers, with special interests kept in check by national laws. And they emphasized the need for sacrifice in the common cause: Spaulding, for example, made clear that the next step - heavy taxation - must soon follow the emission of Treasury notes. "Direct taxation, excises, and internal duties are new features within the United States," he remarked. They will be heavy burdens on the people, but essential to sustain the circulation of demand Treasury notes. The tax-gatherer will be an unwelcome visitor to most people, but his face must soon be familiar. It would be worth it, they argued. Sherman explained how the new currency would benefit the nation, as well as allowing the government to pay its debts. "When you issue these $150,000,000 of currency," he said, "it will permeate all over this country; it will be the blood of the whole system . . . It will enable men to carry on their business and make their exchanges all over the country. Opposition soon emerged to the first component of the program: the issuance of legal tender paper money. Democrats in Congress denounced the measure, fearing that the legislation encouraged the emergence of big government. It would "subjugate the States and the people perpetually to the Federal Government," one Ohio Democrat complained. Still, Democrats and "Unionists" made up only a fourth of Congress, and so were in no position to block the legislation. More worrisome for Spaulding and Sherman was the influence of the Eastern banks, and the Republicans who spoke for these institutions. The influence of the bankers was particularly marked in the congressional delegations from New York, Massachusetts, Rhode Island, Vermont and Maine. The new legislation, financiers declared, violated the sanctity of contracts. They wanted the government to continue paying the interest on bonds in silver and gold - not paper. Financiers also denounced any initiative that might restrict the right of local banks to issue paper money, a common practice at the time. It was big source of their profits, after all: the big banks discounted these notes, taking a cut from every transaction. The major banks also issued their own currency, expanding their capacity to make loans. Civil War Timeline An unfolding history of the Civil War with photos and articles from the Times archive and ongoing commentary from Disunion contributors. Congressmen who defended the interests of the banks argued that the law was unconstitutional and would "ruin the business prosperity of the country," as one put it. Although the banking interest was beaten back in the House, financiers gained a partial victory in the Senate: The upper house accepted the legal tender clause, but insisted that interest on bonds be paid in gold. "A doleful sound came up from the caverns of bullion brokers, and from the saloons of the associated banks," reported Thaddeus Stevens. Their cashiers and agents were soon on the ground, and persuaded the Senate, with but little deliberation, to mangle and destroy what it had cost the House months to digest, consider and pass . . . It makes two classes of money - one for the banks and brokers and another for the people. When delegates from the two houses conferred, the Senate version prevailed. The bill that Lincoln signed on Feb. 25, 1862, issued $150 million in legal tender notes but provided that the interest on bonds would be paid in gold. The new bills, soon called "greenbacks" from the distinct color of their ink, were widely accepted. This measure, however, was but the first act of an economic drama that would continue during the war - and in the years that followed. In July 1862 the Income Tax Act became law, and in February 1863 Lincoln signed the National Banking Act. In 1866 punitive taxes finally forced local banks to withdraw their notes. So did Congress in early 1862 have the courage and will to adopt the needed legislation? Clearly, only in part. The lawmakers had addressed the issue and taken an important step forward. The battle to shape the nation's finances had been joined, not concluded. Sources: Heather Cox Richardson, "The Greatest Nation on Earth: Republican Economic Policies during the Civil War"; Leonard P. Curry, "Blueprint for Modern America: Nonmilitary Legislation of the First Civil War Congress"; Marc Egnal, "Clash of Extremes: The Economic Origins of the Civil War"; Congressional Globe. Marc Egnal is a professor of history at York University, Toronto, and author of "Clash of Extremes: The Economic Origins of the Civil War." See www.clashofextremes.com., which also presents citations for quoted material in this essay.