Money in America – 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

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.