In the 17th century, Britain was determined to maintain control of both the American colonies and the natural resources they controlled. To do this, the British restricted the money supply and made it illegal for the colonies to mint their own coins. Instead, the colonies were forced to trade in English banknotes that could only be exchanged for English goods. Colonists were paid for their goods with these same invoices, effectively eliminating them from trade with other countries.
In response, the colonies reverted to a barter system using ammunition, tobacco, nails, hides, and whatever else could be traded. The colonists also collected as many foreign coins as they could, the most popular being the large Spanish silver dollars. These were called pieces of eight because, when the change had to be made, he would take out the knife and cut it into eight pieces. From this, we have the expression “two bits”, which means a quarter of a dollar.
Massachusetts was the first colony to challenge the homeland. In 1652, the state minted its own silver coins, including oak and pine shillings. The state circumvented British law by stating that only the monarch of the British Empire could issue coins by dating all of his coins to 1652, a time when there was no monarch. In 1690, Massachusetts also issued the first paper money calling it credit notes.
Tensions between the United States and Great Britain continued to grow until the outbreak of the Revolutionary War in 1775. Colonial leaders declared their independence and created a new currency called the Continental to finance their part of the war. Unfortunately, every government has printed all the money it needs without backing it up with any standards or recourse, so the continentals have suffered rapid inflation and become useless. This experience has deterred the United States government from using paper money for nearly a century.
Consequences of the revolution
The chaos of the Revolutionary War left the new nation’s monetary system in complete ruin. Most of the coins of the newly formed United States of America were useless. The problem was not resolved until 13 years later, in 1788, when Congress gained constitutional powers to mint money and regulate its value. Congress established a national monetary system and created the dollar as the main monetary unit.12 There was also a bimetallic standard, which meant that both silver and gold could be valued and used to back paper dollars.13
It took years to get all foreign currencies out of circulation and compete for state currencies. Notes had always been in circulation, but because banks issued more notes than they had coins to cover, these notes were often traded for less than face value14.
Finally, the United States was ready to test paper money again. In the 1860s, the United States government created more than $ 400 million in legal tender to fund its battle against the Confederacy in the American Civil War. These were called green bills because their backs were printed in green. The government supported this currency and said it could be used to pay off public and private debts. The value, however, fluctuated according to the success or failure of the North at certain stages of the war.
Confederate dollars, issued by the secession states during the 1860s, followed the fate of the Confederacy and had no value at the end of the war.
Consequences of the civil war
In February 1863, the United States Congress passed the National Bank Act. This law established a monetary system under which national banks issued notes backed by United States government bonds. The United States Treasury then worked to take state banknotes out of circulation so that national banknotes would become the only currency.
During this rebuilding period, there was a debate about the bimetallic standard. Some claimed that they only used silver to back the dollar, others claimed gold. The situation was resolved in 1900 when the Gold Standard Law was passed, which made gold the only support for the dollar. This support meant that, in theory, he could take his paper money and exchange it for the corresponding value in gold. In 1913 the Federal Reserve was created and given the power to lead the economy by controlling the money supply and interest rates on loans.17