On this day in 1862, the U.S. Congress passes the Legal Tender Act, authorizing the use of paper notes to pay the government's bills. This ended the long-standing policy of using only gold or silver in transactions, and it allowed the government to finance the enormously costly Civil War long after its gold and silver reserves were depleted.

Soon after the war began, the federal government began to run low on specie [metal]. Several proposals involving the use of bonds were suggested. Finally, Congress began printing money, which the Confederate government had been doing since the beginning of the war. The Legal Tender Act allowed the government to print $150 million in paper money that was not backed by a similar amount of gold and silver. Many bankers and financial experts predicted doom for the economy, as they believed there would be little confidence in the scheme. There were also misgivings in Congress, as many legislators worried about a complete collapse of the nation's financial infrastructure.

The paper notes, called greenbacks, worked much better than expected. The government was able to pay its bills and, by increasing the money in circulation, the wheels of Northern commerce were greased. The greenbacks were legal tender, which meant that creditors had to accept them at face value. In 1862, Congress also passed an income tax and steep excise taxes, both of which cooled the inflationary pressures created by the greenbacks.

Another legal tender act passed in 1863, and by war's end nearly a half-billion dollars in greenbacks had been issued. The Legal Tender Act laid the foundation for the creation of a permanent currency in the decades after the Civil War.

source: http://www.history.com/this-day-in-h...der-act-passed

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Unlike private and state banknotes, United States Notes were printed on both sides. The reverse side was printed in green ink, and they were thus dubbed "greenbacks." They were also called "legal tenders." Fiat money. Paper currency not backed by gold or silver. The value of the notes was based on faith in the government. Been this way 153 years to the day.