The History of Money

currencyPull that dollar bill from your wallet. Anything else you have as well—perhaps a five, ten or twenty. Lay them down side by side and study them carefully. Notice the artistry and great detail. All the seals, stamps and identification numbers, which make them seem so official. It makes you really wonder where these numbers could take you. Perhaps Fort Knox—where a little piece of gold lays in waiting ensuring the value of your dollars?

Nope. It may surprise you to learn that no matter what the denomination; every circulating bill you could possibly have is worth about 3 cents apiece for the paper and the ink.

So why can I drive down the street to my local mini-mart and buy a Twix with that dollar bill? Why would someone give me a crunchy cookie wrapped in delicious chocolate for a piece of paper worth a measly three cents? One word: Trust. We all trust that our money is worth what it says it’s worth based on the word of our government. Yet the true value of a dollar really begins only where perception departs from reality. While we all trust that our money is worth something, we actually determine what that value is. By collectively setting and demanding the value of the goods we produce or the work we do, the value of a dollar shifts. Furthermore investors on Wall Street and around the world regularly speculate on whether these values are going up or down and then buy or sell our currency on the open market for profit. All together this means the value of that dollar in your wallet is always changing depending solely on what people think.

It wasn’t always this way. In the span of human history people have used a variety of commonly valued materials as currency, such as: rocks, salt, wood, gold, silver, platinum and copper. Many of you may remember coming across an old greenback, silver dollar or buffalo head nickel without knowing that Americans have used a variety other forms of natural currency throughout history. While cigarettes are taking quite a beating these days, in the 1600s, Americans in the South actually used tobacco leaves and tobacco notes as legal tender. For people who would have rather smoked their weeks pay, they could always have depended on Spanish “pieces of eight,” which were made of gold, to be accepted at the local feed store. For larger purchases most businesses would except cows and pigs as well.

Americans depended on these currencies with some real basis of value because no one trusted the word of the government which backed their printed money. Throughout history paper money has always suffered a crisis in confidence. It was first developed in China in the thirteenth century and was adopted in Europe after the return of Marco Polo. The logic behind currency notes was that metal coins with intrinsic value were too difficult to carry around place to place (especially if you were wealthy). Thus, the King or the local government would allow the treasury to accept the deposit of gold coins in return for issuing “bills” or receipts stating how much any given individual had deposited.

People could then trade these receipts amongst each other based on the value they had deposited. Thus, paper money was always a proxy for some other valuable good —meaning at some point anyone could turn your bills in and get some gold back.

The trust and the problem with this paper money is that throughout history governments have printed more bills than they have gold to finance wars, castles, fancy china and suits of armor. Whenever it became clear that there was more paper than gold, the value of the bills would drop. This was largely the problem throughout the early history of America. The colonies each had their own currencies, which were in reality like the dollars in your wallet today—near worthless. And they knew it! So few people would except in exchange for anything, the colony governments passed laws to make it “legal tender.” This meant that any business refusing these bills would be subject to severe penalties. While these words remain on our money today, they had little effect on people at the time.

Making these problems even worse was a rampant plague of counterfeiting which occurred throughout the colonies. A currency with already little value on its own could not survive a flood of impostor bills. This money was so worthless that Britain passed a law making it illegal for the colonies to use “legal tender” bills. After the Declaration of Independence, the Continental Congress struck back with the resolution, “Any person who shall hereafter be so lost to all virtue and regard for his country, as to refuse to receive said bills in payment....shall be deemed, published and treated as an enemy of his country.” The punishments for refusal increased as the pressures of war swept across the colonies. Fines were supplemented by imprisonment and when this didn’t work the ante was upped to a loss of both ears.

Yet as George Washington said, “A wagon-load of money will scarcely purchase a wagon-load of provisions.” Which makes it all the more confusing why Washington would have been throwing silver dollars across the Potomac. Historian Carl Moore believes, “it was conceivable that he could have thrown it a long distance if so inclined. But George Washington was a conservative and thrifty person and it is questionable that he would have wasted a silver dollar.”

Washington played a critical role in the development of American money. After the War, Congress produced a plan for new coins. Washington was shocked to see his head as the central element. He felt that throughout history, monarchs had used their image on coins as a show of power and prestige. Washington told Congress, I am certain it will be more agreeable to the citizens of the United States to see the head of Liberty on their coin, than the head of presidents.” Thus, America has a tradition of non-presidents on their coins. For example the Indian head penny, buffalo nickel, the Liberty Dollar and the Susan B. Anthony dollar.

In print, only two men have appeared on American currency which were not presidents. The first was Benjamin Franklin on the hundred-dollar bill and the second Head of the Treasury, Salmon Chase, on the $10,000 bill. You may recognize the name Chase that lives on through Chase Manhattan Bank and millions of credit cards today. While no living individual has ever seen their portraits grace a dollar bill, a few have seen their mugs in coin. This occurred for two reasons. The first was that the US federal government minted coins but did not print any paper money from 1790 to 1861. Instead it was left up to a private Federally charted bank to issue notes as well as state banks who produced their own bills. Thus Washington, Hamilton and Jackson would never live to see their faces in green. Later federal law would outlaw, the portrayal of any living person on US currency, thus Lincoln and Grant never had a chance either.

This rather confusing state of affairs left the young American nation without a united currency. Throughout this period our money was caught in a battle over slavery. Southern states took every opportunity to fight for “state rights” which would protect their economic well being. The control and ability to print money was one of the surest ways to ensure their sovereignty. Thus, it is of little surprise that the US Federal government was not able to print its own money until 1861.

The some 8,000 different forms of state and private currencies that existed before this time had varying values depending on whether the local bank backed the currency with gold or silver. Each bank had currency of varying shapes, sizes and colors. With few regulations they rarely backed the currency with any assets and therefore inflation and instability was rampant. The federal government learned valuable lessons from this experience and thus made their currency exchangeable for coin, gold or silver in 1879. Thus these bills are distinguished from our currency today by the imprint of the words “Payable to Bearer on Demand.” With varying releases by 1886 there were $1, $2, $5, $10, $20, $50, $100, $500 and $1000 federal bills in circulation.



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