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An income tax was also instituted in 1861 the

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the war, beginning with the Morrill Tariff of 1861. An income tax was also instituted in 1861, the country’s first. On the eve of the Civil War, the federal government did not issue banknotes, and the currency of the country was issued and managed solely by private banks. However, the need for funding at the out- break of hostilities in 1861 led the federal government to issue large quantities of U.S. notes, informally known as greenbacks , although this was in clear violation of the Constitution’s prohibition against “bills of credit.” The excess greenbacks and existing banknotes soon re- turned to the issuers in trade for gold, which would have put an end Money in America 49
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to this form of finance. Instead, the government and then the banks suspended convertibility on December 30, 1861, and the dollar became a floating currency. Issuance of greenbacks continued. The dollar headed lower until, in 1865, it momentarily sank to a nadir of $57.052 per ounce, or nearly a 3:1 devaluation. Commodity prices soared. The Confederate government pursued a similar strategy, but more aggressively, devaluing Confederate notes by a factor of around 28:1. In December 1865, recognizing the sorry state of the monetary system, Congress passed a resolution to contract the existing supply of greenbacks, and the postwar monetary deflation began. This process proved to be painfully recessionary, however, and in 1868 Congress passed another act to halt the contraction of greenbacks, with the idea that a gradual deflation would be enacted as the econ- omy slowly grew into the existing money supply. The act essentially fixed the base money supply at $656 million, and this inflexibility in the face of seasonal liquidity needs, combined with general economic weakness caused by the deflation, resulted in the Panic of 1873. In January 1875, Congress passed the Resumption Act, which would finally return the dollar to its prewar parity and reestablish its convertibility into specie. The dollar was further deflated, with con- tinuing recessionary effects, and redeemability in specie was indeed resumed in 1879 at the prewar parity of $20.67 per ounce. After 18 years of floating up and down, the dollar was again on the gold standard, and it remained on the gold standard, in one form or another, until 1971. The wartime income tax was reduced in 1867, after the end of hostilities, and abolished in 1872. In 1880, with taxes lowered and the dollar finally repegged to gold after a long deflation, the United States was once again lined up in growth mode. By 1894, the United States, which had long been a dominant agricultural power, had also become the world’s leading manufacturer. Officially, the United States was still on a bimetallic standard, with debts payable in either silver or gold. Beginning in the 1870s, silver GOLD: THE ONCE AND FUTURE MONEY 50
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was abandoned in favor of gold around the world—in Germany in 1871, in the Scandinavian countries in 1873, and by the Latin Mon- etary Union in 1874—and the value of silver relative to gold dropped sharply beginning in 1872. In 1873, this was recognized in the United States, and an act was passed to end the coinage of silver at the mint. In 1792 the official ratio of silver to gold was set at 15:1, and in 1871 the market ratio was about 15.40:1. By 1900 the market ratio
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