In 1862, the American Civil War began to affect currency in the United States. As the finances of the Union government deteriorated, U.S. banks suspended the convertibility of their notes into gold, and the government suspended the right to convert U.S. Treasury notes (government-issued paper money) into gold. Shortly afterwards, the U.S. Congress authorized the government to issue non-convertible legal tender currency, which became popularly known as "greenbacks.” While little was said officially regarding the future convertibility of greenbacks into gold, it was widely assumed that convertibility would be restored when the war was won (Willard et al. 1995). Trading in the greenback vis-à-vis gold commenced in mid-January 1862 in New York and continued with only one short interruption until the United States returned to the gold standard on 1 January 1879.
(United States, $1, 1862
Known as the "greenback” and produced during the Civil War, this was part of a note issue that re-established a government (paper) currency in the United States.)
Almost from the start of trading, the greenback depreciated relative to gold and against other currencies, including the Canadian dollar, which remained on the gold standard. The weakness in the greenback undoubtedly reflected the rapid expansion of the U.S. note issue from $150 million in early 1862 to $450 million by March 1863. Fluctuations in its value also reflected the military and political fortunes of the Union government and, hence, the expected likelihood that the government would eventually be able to redeem the greenbacks in gold. The greenback tended to strengthen on news of Union victories, such as the Battle of Gettysburg in 1863, and weakened on Union reversals. It reached its nadir during the summer of 1864, when the Union government, in a move against speculators, temporarily shut down gold trading for two weeks in late June, followed in early July by Confederate advances towards Baltimore and Washington and raiding operations in Pennsylvania.54 Based on available information, the U.S. greenback fell from close to parity against the Canadian dollar in early 1862 to less than 36 Canadian cents (or Can$1=US$2.78) on Monday, 11 July 1864 (Chart 1). This represents the all-time peak for the Canadian dollar in terms of its U.S. counterpart.
The greenback subsequently began to recover, almost doubling in value by the end of the Civil War in April 1865. After the war, it continued to strengthen, albeit at a slower pace, as the government retired a significant amount of greenbacks during the 1866–68 period. Deflation after the Civil War enabled the United States to return to the gold standard on 1 January 1879, with the greenback convertible into gold at the old pre-war rate of 23.22 grains of gold. Once again, the Canadian dollar traded at par with its U.S. counterpart. This exchange rate held until the outbreak of World War I.
Canadian Dollar in Terms of the U.S. Dollar
Monthly averages (1861–79)
*11 July 1864: Can$1=US$2.78
1. April 1861: Outbreak of U.S. Civil War
2. January 1862: U.S. suspends gold convertibility.
3. June, July 1864: Closure of Gold Room, Confederate army
4. April 1865: U.S. Civil War ends.
5. January 1879: U.S. returns to gold standard.