SwBratcher's Posts

In the spring of 1863, California created a law that allowed any business contract to identify the kind of money or currency to be used in the fulfillment of the contract. If the contract required payment in gold, for example, then only a gold payment fulfilled the contract. In the other states, greenbacks could be a substitute for gold or silver payments.

The Legal Tender Act allowed the US Treasury to print paper money that was backed only by the good faith of the US government. The first printing of this fiat currency, in early 1862, yielded 25.5 million[2] pieces of currency. These became known as "greenbacks" due to the green ink used on the back of the bill. Of the 36 states, 35 recognized the greenbacks as money, equal with gold and silver; only California made a distinction.[3]

By the time McCulloch was appointed treasury secretary, just 37 months after the Legal Tender Act, greenbacks were worth less than half of their original value.[4] California's hesitancy to use these demand notes as an equal exchange for gold was proving wise.

It wasn't that California didn't recognize greenbacks as money. The California law simply allowed a contract to name the form of money to be used. For example, if an 1864 contract required the payment of $1,000 in gold in 1865, a payment in greenbacks would not be the same value as a payment in gold. (The party delivering the paper money would be paying the debt at a deep discount.) So the California Supreme Court upheld that a contract stating "$1000 in gold" required the delivery of gold. The contract could have just as easily read "$1,000 in greenbacks" and thus required greenbacks. Few California contracts were being written for payment in fiat currency.