Treasury notes were interest-bearing treasury bonds that circulated as money in the pre–Civil War era in the United States. The notes were not legal tender but were accepted for payments owed the federal government, including tax obligations.
For the first two decades of its existence the new government of the United States steered clear of the issuance of government notes that circulated as money. The hyperinflation of the American Revolution remained a thought-provoking memory of the dangers of paper money, and Alexander Hamilton stood as a staunch opponent of Treasury issues of paper money.
By the War of 1812 Congress was in the hands of people without firsthand experience of the Revolutionary hyperinflation, and wartime demands for resources pressed hard on government officials. On 30 June 1812 Congress authorized the issuance of $5 million of treasury notes, redeemable within one year, and paying 5 2/5 percent interest. The following years saw authorizations for additional issues, $5 million in 1813, $18 million in 1814, and $8 million in 1815. The notes circulated as money and were acceptable in payment of federal government taxes.
The Constitution had strictly forbidden the states from declaring any money other than gold and silver to be legal tender and did not expressly give the federal government authority to declare any money legal tender. Most people at the time felt that the issuance of legal-tender paper money was at best against the spirit of the Constitution, and at worst unconstitutional. On 12 November 1814 Congress entertained a resolution that read as follows: “That the treasury notes which may be issued as aforesaid shall be a legal tender in all debts due or which hereafter may become due between citizens of the United States or between a citizen of the United States and a citizen of any foreign state or country” (Breckinridge, 1969).
Congress brushed aside the idea of declaring treasury notes legal tender in a decisive 95 to 45 vote. After the war the government retired the notes. By 1817 only 2 percent of the total issue remained in circulation.
The money panic of 1837 sent the government into a budgetary tailspin, and Congress again authorized the issuance of treasury notes. The notes were to be redeemable in one year, and pay interest no greater than 6 percent. Some of these notes paid as little as 0.1 percent interest per year. In 1838 Congress authorized the Treasury to reissue treasury notes that had been paid in for taxes or other government obligations, removing an important distinction between treasury notes and circulating paper money. Congress authorized similar issues in years leading up to and including the war with Mexico from 1846 to 1848. By 1850 the government had retired the treasury note issues, but in 1857 a budget crisis once again turned the government to treasury notes to meet a budget shortfall. These notes were earmarked for retirement until the budget crisis of the Civil War overtook budgetary policy. In 1862 the government began issuing legal-tender notes that were soon dubbed greenbacks.
The history of the treasury notes reveals how hesitant the federal government was to issue legal-tender paper money. Congress accepted without question that the issuance of treasury notes with the legal-tender function was beyond its power.
Breckinridge, S. P. 1969. Legal Tender.
Hepburn, A. Barton. 1924. A History of Currency of the United States.
Kagin, Donald H. 1984. Monetary Aspects of the Treasury Notes of the War of 1812. Journal of Economic History, 44, no. 1 (March): 69–88.
Myers, Margaret, G. 1970. A Financial History of the United States.