There were endless debates, from prairie farmlands to the floor of Congress, about whether this paper was real money or just a smoke-and-mirrors scheme destined to end badly. In the United States that dispute, between the fear of paper and the advantages of national currency, would rage for more than a century, and it is even front and center in the Constitution.
During the Continental Congress, the founding fathers deliberately forbid the nascent federal government from issuing "bills of credit." Paper money, one delegate noted, was "as alarming as the Mark of the Beast." The federal government was, however, granted authority "to coin money, regulate the value thereof ... and fit the standard of weights and measure."
THE RISE AND FALL OF PAPER
But paper issued by the federal government would get its chance, thanks to the Civil War and its economic fallout. To foot the bill of the Union Army's campaign, the government had to issue $450 million in greenbacks (about $8.1 billion in 2011 dollars). They may have been un-constitutional, but they worked, making it possible to buy equipment and pay soldiers. War has a habit of quieting concerns about currency's backing.
The end of the war, however, brought with it inflation and renewed attention to the constitutionality of paper money. It was Salmon P. Chase who, first as the secretary of the Treasury Department, made the greenbacks possible. Then, as a Supreme Court justice less than a decade later, he made one of history's most famous flip-flops, ruling that currency notes were illegal. He made this determination despite the fact that the face printed on them was none other than his own.
A reshuffled Supreme Court--two new justices were appointed by President Ulysses Grant the same day of that initial verdict against paper money--would quickly reverse the ruling. Two subsequent decisions in what became known as the Legal Tender Cases sealed the deal: the Constitution may not explicitly grant the federal government power to issue bills of credit, but it had the implicit right to do so be- cause governing over a country, or at least this one, would be flat-out impossible without it.
Before the advent of a single circulating national currency, though, thousands of private banks issued their own notes, sometimes backed by bullion or coinage in a safe, but just as often backed by nothing at all. This was a monetary free-for-all, and--considering the greenback's universal acceptability now--it's strange to imagine how, less than 150 years ago, money in America was a smorgasbord. Countless varieties of paper money circulated throughout the land, most issued by unchartered "Wildcat" banks, and much of it of questionable authenticity and unstable value.
Even during that chaotic time, however, the paper's value always depended, at least in theory, on the idea that you could exchange it for a weight of gold or silver. The conviction that precious metals are value incarnate was still as strong as it had been 2,000 years prior. It was inconceivable that currency could have value without this link to metals-- that currency value might be fluid. That too would soon change, during what was the final stage in this metamorphosis from ancient money to the cash in your wallet.