White, Selgin, Why Private Banks and Not Central Banks Should...

If state bank notes weren't really so bad, why were they taxed out of existence? To finance the Civil War, the Congress first empowered the Union's Treasury Department to issue over $400 million worth of U.S. Notes or "greenbacks." Congress then went on to establish a new system of federally chartered banks, which were authorized to issue another $300 million of National Bank notes provided they purchased federal bonds as backing. The Treasury realized that all this new currency threatened to cause a substantial increase in prices, but was unwilling to deny itself the fiscal advantages that the new currency would provide. Instead of issuing fewer greenbacks or further limiting the stock of National Bank notes, it made the state banks into scapegoats, forcing them to retire all $200 million of their notes, including some of the best currency the nation had ever known.⁵

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