In 1860, the U.S. money supply consisted of $500 million in both currency and bank deposits. With the opening of Civil War, the public began to hoard gold in anticipation of inflation, and by the war’s end four years later, prices—including that of gold—had doubled.

To combat the hoarding and help finance the Civil War, in December 1861, President Abraham Lincoln suspended the redemption of bank notes for gold or silver at their mint prices, $20.67 and $1.29 per troy ounce, respectively. Thus, Americans could no longer demand gold or silver from banks in exchange for dollars, and the effect was to move the U.S. from a bimetallic gold and silver standard to a fiat currency. Fiat money derives its value from government declaration rather than from the value of a metal such as gold.

The supply of money was then increased in February 1862 by the 37th Congress through the Legal Tender Act. This law authorized the issuance of $150 million in U.S. notes—known as “greenbacks”—and the circulation of these greenbacks was increased to $400 million by war’s end. Also, Congress authorized the issuance of 3% Treasury notes, which were like savings bonds but could be used as either currency or bank reserves...

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