Important Dates in the Monetary History of the US
Important Dates in the Monetary History of the United States
By David Liechty ,
1606 to 1776 – Colonial Era
Prior to the signing of the Declaration of Independence, the American Colonies were subject to the rule of English Common Law and pronouncements of the English Crown and Parliament. Charters from the English Government delineated legal powers granted to the colonies, and at least one, Virginia’s Charter of 1606 , gave that colony the power to coin its own money. Others, however, did not have this power, and it was Massachusetts’ 1652 establishment of a mint, for example, that led in part to revocation of its Charter in 1684 and closure of the mint in 1688.
English Common Law at this time, and up until 1816, required English government coin to be of precious metal (gold or silver) regulated, in terms of weight and fineness, against a “sterling” standard. Silver coin of a specific weight (one “pound”) and fineness (92.5% silver) was set as the “sterling metal” against which all other coin, foreign and domestic, was compared and valued. Silver coin was kept at a constant value, while the issue of gold coin fluctuated in denomination with changes in the relative market value of gold. This bimetallic system was followed in England from 1603 until 1816. In 1672, the English government first issued copper farthings and half-pence, which were treated differently under the common law.
This English Government-issued coin was only one medium of exchange used in the colonies, however, and was relatively scarce. The American colonists utilized a wide range of foreign coin, as well, and given the amount of trade with Spanish Colonies in the Americas, the Spanish milled dollar, or “Piece of Eight” became ubiquitous throughout, with Virginia establishing it as the standard of its colonial currency as early as 1645.
The American colonists also utilized commodity money-substitutes such as tobacco, wampum, corn, bullets, and livestock, which often circulated within the colonies in the form of warehouse receipts. “Book credit” was also common, wherein merchants would extend credit to other merchants, artisans, and farmers.
The various Colonial Governments also issued paper currencies, termed “bills of credit.” In 1690, Massachusetts issued £7,000 of “indented” bills of credit , the first such issuance in the Colonies, and said to be the origin of paper currency in the British Empire. As these bills of credit devalued against the English Pound, Massachusetts passed a law declaring them legal tender, requiring that they “pass current … in all payments equivalent to money.” Another first, the devaluating currency was foisted upon the public. Bills of credit in the Colonies were not fiat money, as they had substantive backing, issued usually in one of two ways.
In the first, government land banks or loan offices issued paper currency as loans secured by mortgages. In the second, governments paid on-going government expenses with bills of credit which they pledged to redeem using future tax receipts. These bills of credit had arguably beneficial effects on the Colonial economies, but devaluation against the English Pound was a common element to all of them.
Between 1720 and 1774, for example, devaluation of the Colonial currencies ranged from 12-13% in New York and Virginia up to 1,340% in Rhode Island. The relative rates of devaluation led to great friction between merchants in various Colonies, most notably between Connecticut and Rhode Island, as seen in some of the writings of Roger Sherman.
In 1751 and 1764 the English Parliament passed acts restricting the issuance of Colonial bills of credit, but this legislation met with fierce resistance in the Colonies. Bills of credit were seen by some parties to be essential to their economic success, and the Colonies found ways around the Parliamentary prohibitions, and continued to issue bills of credit.
The 1764 legislation curtailing bills of credit was seen by many, including Benjamin Franklin, to be a major cause of the American Revolution .
1776 to 1787 – Independence and Articles of Confederation
Upon signing of the Declaration of Independence, with the removal of English governmental authority, the independent states asserted plenary power to coin money, issue paper currency, and declare issued paper currency legal tender. The Continental Congress began developing a national system of gold and silver coin based on the Spanish milled dollar in 1776, but as early as 1775 it also issued Continental Currency and other bills of credit. These “Continentals” were ostensibly redeemable in Spanish milled dollars or their equivalent in silver or gold, and the Colonies collectively pledged to redeem them.
The amount issued between 1775 and 1779, approximately $241,500,000, dwarfed the colonial money supply available, which totaled around $10,000,000 in early 1775. This vast over-issuance when compared to potential future tax receipts, hampered by the absence of a national taxing power in the Articles of Confederation (signed in 1777), and combined with uncertainty over the eventual success of the colonies in their war against England, led to pessimism and devaluation. Large-scale counterfeiting of Continentals by the British compounded this loss of confidence and correspondent value.
Whereas in 1777 most states acquiesced in Congress’ request to declare Continentals legal tender at full value, by 1780 none but Massachusetts would accept them for tax payment even at Congress’ lowered fixed rate, then at 1/40th par. Less than a year later Congress devalued the Continentals even further to 1/75th of par value, but finally recommended that they cease to “be current.” Throughout this period, the states continued to issue their own bills of credit and to pass laws declaring these bills legal tender.
Ratification of the Articles of Confederation in 1781, giving Congress the power to regulate coin, both its own and that minted by the states, and the power “to borrow money, or emit bills on the credit of the united states” did nothing to change the situation. The period between 1783 and 1787 was a time of economic chaos. As The Federalist describes, communities developed “[a] rage for paper money, for an abolition of debts, for an equal division of property”, and for “other improper or wicked project[s]” The Federalist No. 10 and here . States continued over-issuing bills of credit, debtors parties gained power and made this depreciated currency legal tender for all debts, and taxpayers’ revolts erupted, including Shay’s Rebellion in 1786.
In 1785, Congress reviewed a plan proposing the Spanish milled dollar as “the Money-Unit” of the United States, and resolved that the “money unit … be one dollar” (29 Journals of the Continental Congress, 1774-1789 (Library of Congress ed. 1904 et seq.) at 499-500 . A Congressional Board of Treasury statement in 1786 indicated that the “dollar” referred to by Congress in 1785 was “the common Dollars that are Current in the United States,” “will contain three hundred and seventy five grains and sixty four hundredths of a Grain of fine Silver,” and “will be worth as much as the New Spanish Dollar,” with relative value between gold and silver coin to be that which “Custom has established” (30 id. at 162-163). By this, Congress reflected the English Common Law system for a national money system as outlined by Blackstone. Congress retained silver and gold as money, established a specific weight of silver as the unit of value against which the value of all other coinage would be regulated, and recognized the propriety of permitting free trade in gold and silver.
1787 – The Constitution of the United States
The Constitutional Convention of 1787 was envisioned as a necessary rectification of the failings of the Articles of Confederation. Changes in the monetary powers granted to Congress were no exception.
Article I , Section 8, Clause 2 of the Constitution grants Congress the power “to borrow Money on the credit of the United States,” which is a significant change from the power granted under the Articles of Confederation “to borrow money, or to emit bills on the credit of the united states.”
Congress’ power under the Articles to emit bills of credit was not carried over into the Constitution. State governments were specifically barred from emitting bills of credit, as well, under Article I, Section 10, Clause 1. Similarly, “the sole and exclusive right and power” granted to Congress by the Articles to “regulat[e] the alloy and value of coin struck by their own authority, or by that of the respective states” was also altered.
While Article I, Section 8, Clause 5 retained Congress’ power “to coin Money, [and] regulate the value thereof, and of foreign Coin,” Article I, Section 10, Clause 1 barred states from coining money. This clause gave a further restriction on the states, understandable in light of the economic chaos immediately preceding the Constitutional Convention, that they not “make any Thing but gold and silver Coin a Tender in Payment of Debts.”
Two provisions in the Constitution make specific reference to “dollars.” Article I, Section 9, Clause 1 indicates the ceiling for a tax of “ten dollars” on the importation of “persons,” and Amendment VII, specifies “twenty dollars” as the required value in controversy at which jury trial must be preserved.
No internal definition for the term “dollar” is given in the Constitution itself, however Vieira has argued persuasively that this term should be understood to be the “dollar” adopted by Congress in 1785 and 1786 (Vieira, Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution (2002) 134-137 (see here) . That it must be some constant unit of value is evident given the heated debate in the Convention over the slave issue.
The pro-slavery faction would not have conceded to a tax on importation of slaves that could have been manipulated in such a manner as to make importation practically prohibitive. That the Spanish milled dollar, or its equivalent value in weight and fineness, is the “dollar” intended by these provisions is clear, also, given the universal presence of this coin throughout the colonies, and both the Congressional resolution immediately preceding the Convention and legislation afterwards, in 1792.
1792 – Coinage Act of 1792
The Coinage Act of 1792 (Act of 2 April 1792, , ch. 16, 1 Stat. 246 , ) further codified English Common Law principles regarding monetary policy as described by Blackstone. In this Act, Congress established a standard of value, a monetary “unit”, against which the value of all other commodities, services, etc., in the market would be compared. The “Unit” of value adopted, termed the “dollar” (§20, 1 Stat. at 250), was a coin “contain[ing] three hundred seventy one … and four sixteenths [(371.25) grains] of pure … silver”, and was set equal in value to “the Spanish milled dollar as [then] current,” or in use, in the Colonies (§ 9, 1 Stat. at 248). Half- dollar, quarter-dollar, “dismes” (or “tenths”), and “half-dismes” were also established, each containing a proportionate amount of silver, and Congress also created copper “cents” and “half- cents” (id).
Congress further established gold coins,
“Eagles” and “Half-Eagles”, which were to “be of
the value of ten [and five] dollars or units” respectively
(id.). Statutorily setting a silver to gold exchange rate of
15:1 (§11, 1 Stat. at 249), close to its historical
average, Congress required gold “Eagles” to contain the
equivalent amount of gold, i.e., 247.5 grains, to make them
equal in value to the silver contained in ten “dollars or
units,” i.e., 3,712.5 grains of silver. The amount of gold
required for Half-Eagles was also set in this way (§9, 1
Stat. at 248). Gold coins were not termed “dollars,” but
were to “be of the value”, or equivalent to, a certain
number of “dollars or units” of money as established
(id). Congress in this way set silver coin of a specified
weight and fineness as the benchmark “unit” of value for
the United States, following the English
Common Law tradition. Gold, like any other commodity, was to be valued in relation to this standard “unit”. Congress, empowered by the Constitution to “regulate the Value” of its coinage (Article 1, §8, cl. 5), set the rate of exchange between gold and silver for these purposes, and created gold coins according to this rate and the amount of silver in the benchmark “unit.” Essentially, Congress put the United States monetary system onto a “silver standard .”
Coins “struck at, and issued from” the mint established in this Act Congress made “lawful tender in all payments whatsoever,” those of “full weight” according to their statutory value and those “of less than full weight” at “values proportional to their respective weights” (§16, 1 Stat. 250). In this way, Congress reaffirmed the role of the statutory “dollar,” the “full weight” of silver, as the nation’s standard of value, the measurement against which all other commodities or services, etc. would be compared and valued.
By the Act of 1792, Congress also provided for free coinage, wherein private parties could bring gold or silver bullion to the mint to be coined (§14, 1 Stat. at 249). For a “one half per cent” fee, the individuals could receive previously-minted coin immediately, or, for no fee, they would receive “coins of the same species of bullion …, weight for weight” when their bullion was actually coined (id). Those government employees responsible for the coining process were required to post “sureties” of $10,000 each (§5, 1 Stat. at 247), were given annual salaries of $1,500 (§6, 1 Stat. at 247), could be fined $1,000 for giving “preference” in the coining process (§15, 1 Stat. at 250), and were subject to capital punishment if found debasing the coin (§19, 1 Stat. 250).
1791-1857 – Fractional Reserve Banking Backed by Coin
Gold and silver coin conforming to the Act of 1792 formed the basis of the US monetary system for over seventy years. Certain foreign coin, including Spanish dollars, was also allowed to circulate under the Act of April 10, 1806 (ch. 22, 2 Stat. 374). Fractional reserve banking based on reserves of this US and foreign coin developed rapidly during this time.
The Federal government incorporated the first Bank of the United States in 1791 (Act of 25 February 1791, 1 Stat. 191), and gave this private bank, in which the US held 20% ownership, a monopoly right to issue national bank notes up to $10 million over the “monies” held in reserve. The Act made these notes quasi-legal tender by accepting them as payment for any debt owed to the United States government. The number of state-chartered private banks increased rapidly, also, each issuing bank notes redeemable in coin.
The charter of the First Bank of the United States
lapsed in 1811 and was not renewed by Congress.
The Federal Government made numerous issues of Treasury Notes during 1812-1816 to fund the War of 1812 and accepted private bank notes as payment. This encouraged vast over-issuance of private bank notes relative to reserves on hand, leading many banks to over-extend themselves. Rather than let these risk-taking banks collapse, state governments often allowed them to suspend payment in coin, transferring loss to those customers holding the notes.
In 1816, Congress incorporated the second Bank of the United States (Act of 10 April 1816, ch. 44, 3 Stat. 266), citing a need for a reliable source of lending in emergencies. The US again retained 20% ownership, gave the bank a monopoly right to issue national bank notes, and made these notes quasi-legal tender by accepting them as payment for any debt owed to the United States government. The Bank was also required to pay $1.5 million as consideration for the rights granted by the statue. As in the first Bank of the US, stock could be purchased using a mix of coin and debt instruments, but as a practical matter the ratio of debt to coin used to purchase stock in this bank exceeded that allowed by the statute.
The constitutionality of the second Bank of the United States was challenged in two primary cases. In McColloch v. Maryland (17 U.S. 4 Wheat. 316 (1819), the Court held that creation of a national bank was ”necessary and proper” (Article I, Section 8, clause 18) for Congress to effect movement of and access to federal money throughout the nation. In Osborn v. Bank of the United States (22 U.S. 9 Wheat. 738 (1824), the court held that a private corporation, even one owned in part by the Federal government, acts as a private corporation, and can undertake activities considered necessary to effect the purposes to which it was created, in this case banking services and emission of notes and bills, regardless of governmental ownership.
In 1832, four years prior to its lapse, Congress voted to renew the second Bank’s charter, but the act was vetoed by President Andrew Jackson. In 1836 the Treasury Secretary moved Federal deposits into a network of state and territorial banks meeting requirements set forward by Congress (Act of 23 June 1836, ch. 115, 5 Stat. 52v) as to reserve and redemption policies. In 1840, Congress began a system of “sub-Treasuries” dispersed throughout the nation which would hold Federal funds, thus dispensing with the use of private banks (Act of 4 July 1840, ch. 41, 5 Stat. 385).
The market value of silver dropped in relation to gold during this time, and in the Coinage Act of 1834 (Act of 28 June 1834, ch. 95, 4 Stat. 699) Congress reduced the amount of gold in the “eagle” to reflect this change, setting an effective statutory exchange rate of silver to gold at 16:1. Congress thus continued to recognize the standard “unit” of value in the US as the silver “dollar” set forward in the Coinage Act of 1792, modifying the amount of gold in the coin “having the value of” ten dollars. In the Coinage Act of 1837 (Act of 18 January 1837, ch. 3, 5 Stat.136), Congress altered the amount of alloy in gold and silver coins to be minted to 1/10 by weight, and expressly recognized all previously minted coin as continuing to be legal tender.
Privately issued bank notes continued to be the main media of exchange circulating in the US at this time, and some states took full or part ownership in these private banks. The constitutionality of these banks and the notes issued thereby challenged in Briscoe v. Bank of Kentucky (36 U.S. 11 Pet. 257 (1837), Woodruff v. Trapnall (51 U.S.10 How. 190 (1850) , and Darrington v. Bank of Alabama (54 U.S. 13 How. 12 (1851). The Supreme Court, however, held that these banks were private corporations, regardless of the extent of government ownership, and therefore the issued notes were not “bills of credit” under Article I, Section 10, Clause 1. These state-owned banks followed their counterparts’ pattern in over-issuing bank notes and suspending payment, often with direct legislative intervention to facilitate suspension where it had been specifically forbidden in legislation creating the banks.
In the Coinage Act of 1849 (Act of 3 March 1849, ch. 109, 9 Stat. 397) Congress introduced “gold dollars … of the value of one dollar, or unit”, thus applying the term “dollar” to a gold coin directly for the first time, though continuing to reflect the silver dollar as the fundamental unit of value (§1, 9 Stat. 397). The actual market exchange rate between silver and gold at this time was such that silver coin became scarce, and in the Coinage Act of 1853 (Act of 21 February 1853, ch. 79, 10 Stat. 160) Congress reduced the amount of silver in coins of half-dollar and lower denominations to 93.1% of their previous weight, but restricted their legal tender status to debts “not exceeding five dollars” (§2, 10 Stat. 160). In the Coinage Act of 1857 (Act of 21 February 1857, ch.56, 11 Stat. 163), Congress repealed all acts “authorizing the currency of foreign gold or silver coins,” thus eliminating the Spanish milled dollar from circulation for the first time, and limiting circulating coin in the US to that minted under the acts of 1792 and 1837 (§3, 11 Stat. at 163).
1861-1862 – Greenbacks and the Rise of National Paper Money
In 1861, as the Civil War began, gold and silver coin remained the only national currency, while private-issued fractional-reserve bank notes, redeemable in coin, remained the major medium of exchange. Coin did circulate, however, due at least in part to Congressional acts requiring the United States government to transact in coin (see Veazie Bank v. Fenno (75 U.S. (8 Wall.) 533, 536 (1869)).
Congress initially borrowed money to fund the war by authorizing sale of $10 million in Treasury notes fundamentally similar to earlier-issued notes, which were interest-bearing and redeemable at a definite point in the future (Act of 2 March 1861 (ch. 68, 12 Stat. 178). This initial sale was insufficient, however, and in July of 1861, Congress authorized issue of $250 million in “Demand Notes”, Treasury notes “not bearing interest, but payable on demand”, which could be “issued in exchange for coin” or used directly to “pay salaries or other dues from the United States”, which forwent the need to actually “borrow money” to place them into circulation (Act of 17 July 1861 (ch. 5, §1 12 Stat. 259)).
In December of 1861 the state banks again suspended payment on their issued notes (see Veazie Bank, 75 U.S. at 537), causing further difficulty for Congress to raise funds. In February and March of 1862, after heated debate, Congress passed the Legal-Tender Acts, authorizing issue of $150 million in “United States notes, not bearing interest, payable to bearer” which were “lawful money and a legal tender in payment of all debts, public and private, within the United States, except” duties on imports and interest on bonds, which had to be paid in coin (Act of 25 February 1862 (ch. 33, 12 Stat. 345)).
Rather than being redeemable in coin, these “Greenbacks” could only be exchanged for interest-bearing United States bonds (§1 12 Stat. 345). As gold and silver coin minted under the Coinage Acts of 1792 and 1837 remained the standard “unit” of value, these bonds were ultimately redeemable in coin, however, and this coin remained the fundamental monetary unit on which the national monetary system was built. Congress eventually authorized $850 million in Greenbacks, using them directly to pay government expenses, and over the next two years their value dropped from par to a low in July 1864 of $285 in Greenbacks to $100 coin.
The Legal-Tender Acts were declared unconstitutionally invalid in a majority decision delivered by Chief Justice Salmon Chase, the former Treasury Secretary who had lobbied for the Greenbacks and whom President Lincoln appointed specifically to uphold the Acts (Hepburn v. Griswold, 75 U.S. (8 Wall.) 603 (1870)). This was a highly politicized issue, however, and a year later the Supreme Court bent to outside pressure, revisited the issue, and reversed itself in a five-four decision (Knox v. Lee (The Legal-Tender Cases), 79 U.S. (12 Wall.) 457 (1871)).
The majority opinion found expansive “auxiliary” powers associated with the Constitution’s “express [grant of] power” to Congress, including “a general power over the currency” emanating from the power “to coin money and regulate the value thereof” (id. at 542). This general power over the currency included not only the non-expressly-forbidden power to emit bills of credit, but the power to declare “the government’s promises to pay money … equivalent” to the statutory “unit” of value (id. at 546, 553). Chief Justice Chase delivered a dissenting opinion in which he reaffirmed his earlier finding that the acts were unconstitutionally invalid.