Salmon Chase served as President Lincoln’s first Treasury secretary. He directed the federal government’s efforts to finance the Civil War, which involved dramatic changes in federal bond issuance, taxation, commercial banking, and the U.S. currency. These efforts stemmed, in part, from the need to finance the war. These efforts also stemmed from reforms that had been proposed by Northern and Western politicians during the decades before the Civil War, but whose passage had been blocked by Southern senators and representatives.
In spring 1861, when Chase took over Treasury, the top priority was paying for military mobilization. Under his watch, the North enacted the first-ever federal income tax, primarily affecting the wealthy, followed by the Internal Revenue Act of 1862, which created the Internal Revenue Service and imposed a levy on luxury items. About a fifth of the Union’s war revenue came through taxes, a far higher percentage than in the South. Chase also vastly expanded the issuance of debt early. With the help of financier Jay Cooke, the North rolled out a successful series of war bonds that were marketed to the middle class. Ultimately, the North covered 65 percent of its total war costs through bond issuance.
Chase also pushed to create a national currency and banking system. In 1862, Treasury issued a currency, known as greenbacks, which were not backed by silver or gold but were accepted for payments on taxes. Chase was personally opposed to this move but supported it due to the urgent need to finance the war.
Chase also oversaw the establishment of a national banking system, set up through a series of laws passed in 1863 and 1864. The legislation provided for nationally chartered banks, which could issue a currency known as a national bank note, denominated in dollars, backed by US government bonds held as collateral. This policy created a currency with a standard value throughout the United States and expanded demand for US government bonds.
Chase went on to serve as chief justice on the Supreme Court, a seat he held until his death in 1873. In 1870, he joined the court’s majority in a decision ruling that Congress’ authorization of greenbacks as legal tender was unconstitutional; a year later, the Court, with two new justices, reversed itself and ruled the federal government was justified in issuing greenbacks during wartime. As for the notes themselves, most stayed in circulation in the immediate years following the war, as Congress voted against proposals to withdraw them from circulation.
Written by the Federal Reserve Bank of Richmond. See disclaimer.