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Greenbacks and Good Faith

By February 24, 2013Newsletters

With 12 Oscar nominations, “Lincoln” is slated to be a big winner when awards are handed out during tonight’s 85th Academy Awards. The film highlights Abraham Lincoln’s efforts to get the 13th Amendment passed in 1865. Interestingly, Lincoln was also active in freeing up the movement of commerce and on February 25, 1863 (150 years ago, this month) the Senate narrowly passed the National Currency Act. The act allowed the Federal Government to legally issue and print money to compete with the state chartered banks for the first time ever. This federalization was required to exchange goods and services more efficiently and minimize the confusion in the marketplace caused by the various state and other banks that printed their own currency. In 1863 there were 66 nationally charted banks and 1,466 state chartered banks. By 1865 there were 1294 federally charted banks and 349 state chartered. [1]

It was this act that established the national currency we know today as dollars. During the inception of the bill, the new paper securities created by the government were derogatorily referred to as “greenbacks,” as it was believed the paper was only worth the value of the green ink that was used to print backs of the tender. Indeed, the bills were only backed by the government’s promise of “good faith” to redeem their value; a value that was dependent on public confidence in the government as well as the ability of the government to distribute coins and pieces in exchange for the bills in the future.

Government promise and “good faith” continues to be the primary backing to our currency at this critical time when federal deficits, sequesters, money supply, gridlock and interest rates are again taking center stage in our national dialogue. We believe that the combination of a slowly growing economy and the global questioning of the U.S. government’s ability to address issues will result in a rise in interest rates. Look for external pressure from international purchasers of U.S. debt and internal pressure from┬áthe Fed to result in gradually rising rates over the next two years, starting this summer. Lock in now.

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