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A United States Note, also known as a Legal Tender Note, is a type of United States paper money that was issued from 1862 to 1971. Having been current for over 100 years, they were issued for longer than any other form of United States paper money. They were known popularly as "greenbacks" in their day, a name inherited from the Demand Notes which they replaced in 1862. They were called United States Notes by the First Legal Tender Act, which authorized them as a form of fiat currency, but because their value derives from their legally mandated status as legal tender they bear the inscription "This Note is a Legal Tender" and are usually called Legal Tender Notes. They were originally issued directly into circulation by the Treasury to pay expenses incurred by the Union during the American Civil War. Over the next century, the legislation governing these notes was modified many times and numerous emissions were undertaken by the Treasury.

United States Notes that were issued in the large-size format prior to 1929 are very different in appearance from modern American currency, but those issued in the small-size format starting in 1929 are very similar to the current Federal Reserve Notes with a marked distinction of having a red Treasury seal in place of a green one. Issuance of United States Notes ended in January 1971, as they no longer served any purpose not fulfilled by Federal Reserve Notes. However, existing United States Notes are still valid currency in the United States today, though they are rarely seen in circulation.During 1861, the opening year of the American Civil War, the expenses incurred by the Union Goverment far outstripped its limited revenues from taxation, and borrowing was the main vehicle for financing the war. The Act of July 17, 1861 authorized Secretary of the Treasury Chase to raise money via the issuance of $50,000,000 of Treasury Notes payable on demand. These Demand Notes were paid out to creditors directly and used to meet the payroll of soldiers in the field. While issued within the legal framework of Treasury Note Debt, the Demand Notes were intended to circulate as currency and were of the same size, and in appearance closely resembled banknotes. In December 1861 economic conditions deteriorated and a suspension of specie payment led the government to cease redeeming the Demand Notes in coin.

The beginning of 1862 found the Union unable to redeem its Demand Notes, which it was using to pay its soldiers, and the value of the notes began to deteriorate. This immediate threat spurred Congress to action. Previously, the Constitution had been interpreted as not granting the government the power to issue a paper currency, but on February 25, 1862 President Lincoln signed the First Legal Tender Act which authorized the issuance of United States Notes as a Legal Tender. Initially, the emission was limited to $150,000,000 total face value between the new Legal Tender Notes and the existing Demand Notes. The Act also called for the new notes to be used to replace the Demand Notes as soon as practical. The Demand Notes had been issued in denominations of $5, $10 and $20 and these were replaced by United States Notes nearly identical in appearance on the obverse. In addition, notes of entirely new design were introduced in denominations of $50, $100, $500 and $1000. The Demand Notes' printed promise of payment "On Demand" was removed and the statement "This Note is a Legal Tender" was added.

Legal tender status guaranteed that creditors would have to accept the notes despite the fact that they were not backed by gold, bank deposits, or government reserves and bore no interest. However, the First Legal Tender Act did not make the notes an unlimited legal tender as they could not be used by merchants to pay imports on customs duties and could not be used by the government to pay interest on its bonds. The Act did provide, though, that the notes be receivable by the government for short term deposits at 5% interest, and for the purchase of 6% interest 20-year bonds at par. That rationale for these terms was that the Union government would preserve its credit-worthiness by supporting the value of its bonds by paying their interest in gold. Early in the war customs duties were a large part of government tax revenue and by making these payable in gold, the government would generate the coin necessary to make the interest payments on the bonds. Lastly, by making the bonds available for purchase at par in United States Notes the value of the latter would be supported as well. The limitations to the legal tender status were quite controversial. 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 exceptions, 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. This controversy would continue until the removal of the exceptions in 1933.

While the First Legal Tender Act limited the emission of United States Notes to $150,000,000, the printing of fiat currency is a heady wine and by 1863 the Second and Third Legal Tender Acts had expanded the limit to $450,000,000, the option to exchange the notes for United States bonds at par had been revoked, and notes of $1 and $2 denominations had been introduced as the appearance of fiat currency had driven even silver coinage out of circulation. 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.

The Union's reliance on expanding the circulation of greenbacks eventually ended with the emission of Interest Bearing and Compound Interest Treasury Notes and the passage of the National Banking Act. However, the end of the war found the greenbacks trading for only roughly half of their nominal value in gold.

Post Civil War

At the end of the Civil War some, such as Henry Charles Carey, argued for building on the precedent of fiat money and making the greenback system permanent. However Secretary of the Treasury McCulloch argued that the Legal Tender Acts had been war measures and that the United States should soon reverse them and return to the gold standard. The House of Representatives voted overwhelmingly to endorse the Secretary's view.With an eventual return to gold convertibility in mind, a gradual contraction of the greenback circulation commenced until only $356,000,000 were outstanding at the end of 1867. By this point the wartime economic boom was over and the deflationary effects of contracting the money supply led debtors to successfully agitate for a halt to the notes' retirement.

Circulation of the notes was authorized to increase in and around the Panic of 1873 to a level of $382,000,000. The Specie Payment Resumption Act of 1875 authorized a contraction in the circulation of greenbacks to $300,0000,000 and required the government to redeem them for gold, on demand, after the first of January 1879. As a result the currency strengthened and by April 1876 the notes were on par with silver coins which then began to re-emerge into circulation. On May 31, 1878 the contraction in the circulation was halted at $346,681,016 - a level which would be maintained for almost 100 years afterwards. While $346,681,016 was a significant figure at the time, it is now a very small fraction of the total currency in circulation in the United States. The year 1879 found Secretary of the Treasury Sherman in possession of sufficient specie to redeem notes as requested, but as this brought the value of the greenbacks into parity with gold for the first time since the Specie Suspension of December 1861, the public voluntarily accepted the greenbacks as part of the circulating medium.

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 private ownership of gold was banned 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 put into circulation after January 21, 1971.

Comparison to Federal Reserve Notes

Both United States Notes and Federal Reserve Notes are parts of the national currency of the United States and both have been legal tender since the gold recall of 1933. Both have been used in circulation as money in the same way. However, the issuing authority for them came from different statutes. United States Notes were created as fiat currency, in that the government has never categorically guaranteed to redeem them for precious metal - even though at times, such as after the specie resumption of 1879, federal officials were authorized to do so if requested. The difference between a United States Note and a Federal Reserve Note is 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 purchased by the Federal Reserve, and thus generate seigniorage for the Federal Reserve System which serves as a lending intermediary between the Treasury and the public.