The History of Money in America – An Essay
Money in America
When George Washington was sworn into office, one of his first obstacles was to establish a new money supply. As one may recall, during the previous government, the Articles of Confederation, many states printed their own currency, thus impeding trade between colonies and separating the nation. The new Secretary of the Treasury, Alexander Hamilton, was asked to design the new money, which he based on the most plentiful coin in circulation, the Spanish peso.
Many years before the American Revolution, the Spanish were mining silver in Mexico. They melted the silver into bullion or minted it into coins for shipment to Spain. Oftentimes, the Spanish ships were stopped in the West Indies and were victims of Caribbean pirates who spent their stolen money in America’s southern colonies. This led to the triangular trade where the colonies were importers of slaves and exporters of rum. Nevertheless, the peso was considered the foundation for the American dollar.
Pesos were known as pieces of eight, because they were divided into eight sub-parts known as bits. They also resembled the Austrian taler so they were nicknamed talers, which bore a resemblance to dollars. This term became so popular that Franklin and Hamilton decided to make the dollar the basic monetary unit. Rather than divide the dollar into eighths, they decided to divide it into tenths, which was easier to understand.
In the 1780’s there were only four banks in existence in the United States. Each bank was allowed to issue its own money during the colonial period, and the Constitution did not prohibit this practice. Therefore, banks began to grow.
By 1811 the country had approximately 100 banks, but only one was a state bank, a bank that receives its charter to operate from a state government. That bank was the Bank of the United States and was privately owned and operated. However, the Bank of the United States was much larger than any of the state banks and had a federal rather than a state charter. The Bank collected fees and made payments on behalf of the federal government. State banks issued their own currency by printing their notes at local printing shops. People who wanted loans borrowed these notes and paid them back with interest. Because the federal government did not print money until after the Civil War, most of the money supply was paper currency printed by these state banks.
While most of these state banks printed only the amount of currency that they could back with their gold and silver, others overprinted their currencies. But even when banks were honest, there were still problems with the currency. First, each bank issued its own type of currency. Thus in time there were hundreds of different kinds of notes in circulation in any given city. Secondly, because a bank could print more money whenever it wanted, the temptation to overprint always existed.
During and after the Civil War, there was a shift in the types of currencies used in the United States. When the Civil War began, the North needed to raise money to finance the war. Congress tried to borrow money by selling bonds, but bond sales did not raise enough money, so Congress decided to print money.
In 1861 Congress authorized the printing of $60 million of notes called demand notes that were each signed by hand. Although these notes had no gold or silver backing, they were declared legal tender. Because both sides of the notes were printed with green ink to distinguish them from the state notes, the new notes were called greenbacks. Greenbacks were of course used mostly in the North, but more money was soon needed.
In 1862 Congress passed the Legal Tender Act, which gave the national government the right to print $150 million of United States notes that had no gold or silver backing. As the war progressed and the amount of greenbacks in circulation grew, people began to fear that the currency might become worthless. They began to avoid the greenback, and the government was forced to find another way to finance the war.
The National Currency Act of 1863, later amended and renamed the National Banking Act, was enacted by Congress to establish a national banking system and a uniform national currency. It created the National Banking System (NBS), which was to consist of financially sound and rigorously inspected private banks. These banks received their charters from the national government and were known as national banks. The government hoped that this control over the banking system would restore the public’s confidence. Each bank would issue National Bank notes, which were to be uniform in appearance, and backed by U.S. government bonds. If a group wanted to establish a national bank, it had to first purchase government bonds as part of the requirement to get the national charter. The bonds were then put on deposit with the United States Treasury as backing against the currency. Initially, many of the state chartered banks refused to join the system, claiming that it was easier for them to have money printed at a local printer than to buy bonds, secure a charter, and then exchange the bonds for national currency.
In 1865, the federal government tried to force state banks into the National Banking System by placing a 10% tax on all privately issued bank notes. This tactic worked, for the state banks were unable to afford the tax and they subsequently withdrew their notes from circulation.
A few years before, the government issued gold certificates- paper currency backed by gold on deposit with the Untied States Treasury. Initially these yellowbacks were printed in large denominations for banks to use in settling differences with each other at the end of the business day. But by 1882, the government began printing gold certificates in $20 denominations for the public’s general use.
In 1886 the federal government issued the silver certificate. It was modeled after the gold certificate and was backed by silver coins placed on deposit with the Treasury. Silver certificates were printed as part of a program to support the silver prices for the miners out West. The Bland-Allison Act of 1878 required the federal government to purchase large amounts of silver and then mint the ore into silver dollars. Yet these silver dollars proved to be too bulky and inconvenient to use, so the Bland-Allison Act was amended in 1886 to provide for the printing of silver certificates. Under the revision, the government agreed to buy silver and hold it in reserve against the silver certificates.
In 1890, the federal government printed the final type of currency before the banking overhaul of 1913. The currency came in the form of Treasury coin notes, which were currency that was redeemable in both gold and silver. The law was repealed in 1893, and further issues of Treasury coin notes were ended.
In 1900 Congress passed the Gold Standard Act which backed the dollar with gold. It did not affect the type of currency people used for people continued to use gold certificates, silver certificates, United States notes, National Bank notes, and Treasury coin notes.
Tthere were disadvantages to this system. In a growing economy, there must be a growing money supply, and thus a growing gold stock to back it. If new gold supplies cannot be found, the growth of the money supply eventually begins to slow and perhaps stop, hence restricting economic growth. Another disadvantage is that people may decide to convert their currency into gold, thereby draining the government of its gold reserves.
Despite its disadvantages, the gold standards remained in force until the Depression years of the 1930’s. By that time, many banks had failed and many people could not find jobs. Because people felt more secure by holding gold rather than paper currency, they began to cash in their dollars for gold. In 1933 the federal government feared the depletion of its gold supply, so it decided to go off the gold standard. That same year, President Franklin Roosevelt declared a national emergency and decreed that anyone holding more than $100 worth of gold or gold certificates file a disclosure form with the United States Treasury. The following year, the Gold Reserve Act of 1934 was passed. It required citizens, banks, and businesses to turn their gold and gold certificates over to the government. Those who did were compensated with Federal Reserve notes and other forms of federal currency. Those who did not had their gold and gold certificate holdings confiscated.
The United States has been under the incontrovertible fiat money standard since 1934. Under this standard, the money supply is incontrovertible because U.S. citizens cannot convert it into gold or silver. It is a fiat money standard because government decree declared dollars legal money. The money supply of the United States is a managed money supply. The government tries to control the quantity, composition, and even the quality of the money supply. This task has proved to be easier since a single currency has replaced the early forms of currency. National currency and Treasury coin notes were withdrawn from circulation in the 1930’s, and gold certificates were confiscated in 1934. In 1968, the government last issued greenbacks and stopped redeeming silver certificates for silver dollars. Today’s money consists largely of checking accounts, coins, and a single currency issued by the Federal Reserve System.