The History of Money - Early Monetary Regulations

In the American colonies, coins of almost every European country circulated, with the Spanish dollar predominating. Because of the scarcity of coins, the colonists also used various primitive mediums of exchange, such as bullets, tobacco, and animal skins; many of the colonies issued paper money that circulated at varying rates of discount. The first unified currency consisted of the notes issued by the Continental Congress to finance the American Revolution. These notes were originally declared redeemable in gold or silver coins, but redemption was found impossible after the Revolution because of the excess of printed notes over metal reserves. Thus, the notes depreciated and became nearly worthless.

The notes issued by the Confederate treasury and the southern states became entirely worthless after the war.

In 1792 Congress passed the first coinage act, adopting a bimetallic standard under which both gold and silver coins were to be minted. The gold dollar contained 24.75 grains of pure gold and the silver dollar 15 times as much silver, making the legal mint ratio 15 to 1. At this ratio gold was undervalued at the mint, as compared with its value as bullion, and very little gold was presented for coinage. Silver dollars also were largely withdrawn from circulation, because they could be exported to the West Indies and exchanged at face value for slightly heavier Spanish dollars, which were then melted down and taken to the mint for coinage into American dollars at a profit. Until 1834, when Congress adopted a mint ratio of 16 to 1 by reducing the weight of the gold dollar, the metallic currency was limited mainly to a meager supply of small silver and copper coins. The first Bank of the United States, which existed from 1816 to 1836, issued banknotes that maintained a fairly stable value. Many state-chartered banks also issued notes that, because of the lax state banking laws, often greatly depreciated in value. After the closing of the second Bank of the United States, most of the paper currency consisted of notes of state-chartered banks and circulated only in a limited area.

Confederate Five-Dollar Bill - 1861

During the Civil War the governments in both the North and the South financed their needs through the issue of fiat money. The notes issued by the Confederate treasury and the southern states became entirely worthless after the war. The U.S. notes (greenbacks) and other paper money issued by the federal government also depreciated rapidly, especially after the suspension of payment in specie (redemption of paper money with coins, usually of gold or silver) in 1861, and gold and silver coins were driven out of circulation. In 1863, the National Banking Act authorized the establishment of national banks that could issue bank notes backed by government bonds. A 10 percent tax levied on state bank notes in 1865 forced state banks to discontinue issuing them, thus giving the national banks a monopoly of bank-note issue. The state banks, however, remained an important element in the banking system.

After the elimination of the silver dollar in 1873, the greatly expanded production of silver in the West caused the value of silver to fall sharply and led to agitation by the silver interests for restoration of the free coinage of the silver dollar. In this effort they were joined by political groups who favored the free coinage of silver as a means of improving general economic conditions. This agitation led to the passage of the Bland-Allison Act in 1878 and the Sherman Act in 1890, under which the Treasury was directed to purchase larger amounts of silver for coinage. The former law also created the silver certificate, which remained an important part of U.S. currency until it was retired in 1968. The Sherman Act, which introduced into the stream of currency an enormous quantity of overvalued silver and caused a drastic decline in the gold reserve of the Treasury, helped to bring on the panic of 1893 and was repealed by Congress in that year. Even so, silver was the main issue in the 1896 presidential campaign, when William Jennings Bryan called for free coinage of silver at a ratio of 16 to 1. The silver forces were defeated, and in 1900 the Gold Standard Act affirmed the gold dollar as the standard unit of value.

gold replaces silver

After 1834, silver was undervalued at the mint; its market value was constantly higher than its coin value. As a result, gold gradually replaced silver in the monetary stock, especially after the discovery of gold in California in 1849. To relieve the famine in small coins, Congress, in 1853, reduced the weight of the half-dollars, quarters, and dimes by 7 percent. Because the new subsidiary coins were worth more as money than as bullion, it was possible to keep them in circulation. As a result of a revision of the coinage laws in 1873 the silver dollar was omitted from the list of coins authorized to be minted. Although the coinage of silver dollars was resumed in 1878, the metallic gold dollar remained the monetary standard of value in the U.S.; thus, bimetallism was legally discontinued and the gold standard adopted. Actually, silver dollars had been an insignificant part of the currency since early in the century.