SEIGNIORAGE, LEGAL TENDER, AND THE DEMAND NOTES OF 1861

Authors

  • WILLIAM A. BOMBERGER,

    1. Bomberger: Associate Professor, Department of Economics, University of Florida, Gainesville, FL 32611. Phone 1-353-392-0135, Fax 1-352-392-7860, E-mail bill.bomberger@cba.ufl.edu
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  • GAIL E. MAKINEN

    1. Makinen: Adjunct Professor, Georgetown Public Policy Institute, Georgetown University, The Car Barn, 3520 Prospect Street, NW, Washington, DC 20007. Phone 1-703-525-7170, Fax 202-687-5544, E-mail g.makinen@hotmail.com
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    • *

      We gratefully acknowledge the very helpful comments of two anonymous referees as well those of Tom Woodward, Bob Anderson, Marc Labonte, Kurt Schuler, Ted Murphy, and Richard Doty. The technical assistance provided by Mike Kolakowski is also gratefully appreciated.


Abstract

In the summer of 1861, the United States embarked on its first widespread use of paper money: the Demand Notes of 1861. Although their convertibility into gold ended at the end of that year, they remained acceptable for tariff payment at a par with gold coin while they were gradually replaced with paper money that did not share this provision, the Greenbacks. We present daily observations of exchange rates between the Notes, Greenbacks, and gold for the extended period during which they simultaneously circulated. These exchange rates substantiate our revisionist notion that the Notes were replaced because the tariff provision prevented them from generating sufficient seigniorage for wartime needs. (JEL E42, N12, N22)

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