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How has the greenback shaped today’s banking?

By Louis Holding-Parsons on September 18, 2019

5 (100%) 1 vote[s]

When you work in or are interested in Finance you will come across terms which are generic but in themselves don’t mean anything. Greenback is such an example! What exactly is it? Ask most people in the street and they will associate it with the US dollar. Rightly so, but its provenance is interesting both in general terms but also in the world we find ourselves today.

Front is black… back is green

During the American civil war, President Lincoln was running out of money to fund fighting the South so turned to US banks. These US banks were willing to lend but only using a prohibitive rate of interest (as high as 36%!). Lincoln who had a strong moral belief in what is right and wrong, refused to agree to such extortionate rates. He came up with the idea of creating his own currency, backed by the credibility of the Union government. This currency was printed in black ink on the front and green on the back, so creating the name Greenback.

Scandalous bankers

The greenback was not as popular as goldAlthough his fundamental aim was to pay for the war, Lincoln was outraged by the power these bank’s wielded and wanted to create a national currency of his own. These banks eventually conspired to destroy the value of the greenback as it was not backed by anything such as gold. In much the same way as banks today have been accused of scandalous behaviour such as PPI or manipulating the Libor rate in different currencies, banks seemingly had no limits as to the power they exerted for their own benefit.

What can we learn from the greenback?

Printing money without it being backed by any asset is called Fiat money. Fiat comes from Latin and means ‘let it be done’. Although creating money out of thin air has become 21st century fashion, think quantative easing or crypto currencies, the greenback was backed by the Union government. Indeed theoretically, many currencies today are Fiat currencies as they are not backed by hard currency. The UK famously sold a great chunk of its gold 2 decades ago at a level which was seen as too cheap. Some have argued that the UK lacks enough gold to underpin Sterling. Intriguingly the central banks of countries such as Russia, China and India have been strong buyers of gold in recent years.

Are crypto currencies the new greenback?

The confidence in the greenback was shortlivedThere are many in today’s world who feel that central banks and governments have too much power. One way to break from government and central bank monetary policies  is to invent a currency which traditional powers do not control. This is one of the reasons crypto currencies have become popular. Lincoln created to greenback as a measure against the banks who controlled the market, crypto currency is seen as beyond control by institutions.

As with crypto currencies today, between its heyday in 1862 and 1878, the greenback’s value was volatile. This was mainly attributable to Lincoln’s success or lack in the battlefield, but also as people wondered whether it a currency to be trusted over gold or silver. There is a similar question mark over cyrpto today – is it here to stay and worth backing?

What was the greenback’s  credit profile?

The greenback was seen as high risk on inceptionAll retail Forex traders should be knowledgeable about risk management. Yet the greenback was at the time an un-trusted currency. One of the arguments put forward by the banks who wanted to charge extortionate rates, was they were not sure the Union government would be here at the end of the war to repay the loans. Let’s not forget that the confederate army was far more successful at the start of the civil war than Lincoln’s Union army. When looking at a new currency or indeed trade, one should also consider what is the risk that it could go completely wrong…

Conclusion:

Although Forex trading may feel like a stagnant market in terms of evolution, every so often a major change does happen. The greenback took away the power from the high street banks and gave it to the government. It was the forerunner of the US dollar which is the dominant currency in today’s world. When issued it was not backed by any asset which was controversial at the time. It made Gold as protection all the more important. Today currencies backed by the promise of government is taken as granted – how the world has evolved!

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Louis Holding-Parsons

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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Louis Holding-Parsons

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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