21. The Civil War

0:00The Civil War The Civil War exerted an even more fateful impact on the American monetary and banking system than had the War of 1812. It set the United States, for the first time except for 1814 to 1817, on an irredeemable fiat currency that lasted for two decades and led to reckless inflation of prices. This quote greenback currency set a momentous precedent for the post-1933 United States, and even more particularly for the post-1971 experiment in fiat money. Perhaps an even more important consequence of the Civil War was the permanent change wrought in the American banking system. The federal government in effect outlawed the issue of state banknotes and created a new quasi-centralized fractional reserve national banking system, which paved the way for the return of outright central banking in the Federal Reserve system.

0:53The Civil War, in short, ended the separation of the federal government from banking and brought the two institutions together in an increasingly close and permanent symbiosis. In that way, the Republican Party, which inherited the Whig admiration for paper money and governmental control and sponsorship of inflationary banking, was able to implant the soft money tradition and Permanently in the American System.