Money in North American History

From Wampum to Electronic Funds Transfer

See also  Money in Fiction Financial Scandals

How did the United States develop into the world's richest and most powerful nation from an inauspicious beginning as a collection of colonies where currency was in such chronically short supply that all sorts of substitutes, e.g. tobacco and wampum, had to be used as money?

Apart from its intrinsic interest, history can often shed light on current political controversies. Many political disputes revolve around questions of economics and of all the matters that fall under the purview of economic history there is one that has had, and still has, a profound impact on many aspects of everyone's daily life, and that is money. This essay is based on a book on monetary history by Glyn Davies which contains a considerable amount of material on the financial development of the United States.

The reference is:

Davies, Glyn. A history of money from ancient times to the present day, 3rd ed. Cardiff: University of Wales Press, 2002. 720 pages. Paperback: ISBN 0 7083 1717 0.

The Potlatch, Gift Exchange and Barter

Money is often, mistakenly, thought to have been invented simply because of the inconvenience of barter. In fact the development of money was due to many causes and even barter itself often had important social functions in addition to its purely economic purposes.

The potlatch ceremonies of Native Americans were a form of barter that had social and ceremonial functions that were at least as important as its economic functions. Consequently when the potlatch was outlawed in Canada (by an act that was later repealed) some of the most powerful work incentives were removed - to the detriment of the younger sections of the Indian communities. This form of barter was not unique to North America. Glyn Davies points out that the most celebrated example of competitive gift exchange was the encounter, around 950 BC, of Solomon and the Queen of Sheba. "Extravagant ostentation, the attempt to outdo each other in the splendour of the exchanges, and above all, the obligations of reciprocity, were just as typical in this celebrated encounter, though at a fittingly princely level, as with the more mundane types of barter in other parts of the world." (page 13).

Wampum - Monetary Uses by Native Americans and Settlers

Since the use of primitive forms of money in North America (as in the Third World) is more recent and better documented than in Europe, the American experience is discussed in the introductory chapter on the origins of money. Whereas the Incas in Peru had reached a high level of civilization without the use of money, in Mexico the Aztecs and Mayas used gold dust (kept in transparent quills) and cocoa beans (kept for large payments in sacks of 24,000) as money. The best known form of money among the native Americans north of Mexico was wampum, made out of the shells of a type of clam. However its use was not confined to the coastal states but spread far inland, e.g. the powerful Iroquois amassed large quantities by way of tribute. Wampum's use as money undoubtedly came about as an extension of its desirability for ornamentation. Beads of it were strung together in short lengths of about 18 inches or much longer ones of about 6 feet.

Wampum came to be used extensively for trade by the colonists as well as the natives, e.g. in 1664 Stuyvesant arranged a loan in wampum worth over 5,000 guilders for paying the wages of workers constructing the New York citadel (page 458). Like more modern forms of money, wampum could be affected by inflation. Some tribes such as the Narragansetts specialized in manufacturing wampum (by drilling holes in the shells so that the beads could be strung together) but their original craft skills were made redundant when the spread of steel drills enabled unskilled workers, including the colonists themselves, to increase the supply of wampum a hundredfold thus causing a massive decrease in its value. A factory for drilling and assembling wampum was started by J.W. Campbell in New Jersey in 1760 and remained in production for a hundred years.

Forms of Money in use in the American Colonies

The British colonies in north America suffered a chronic shortage of official coins with which to carry out their normal, everyday commercial activities. An indication of the severity of this shortage and of the resultant wide variety of substitutes is given by the fact that during 1775 in North Carolina alone as many as seventeen different forms of money were declared to be legal tender. However, it should be remembered that all these numerous forms of means of payment had a common accounting basis in the pounds, shillings and pence of the imperial system.

The main sources which provided the colonists with their essential money supplies fall into five groups.

  1. Traditional native currencies such as furs and wampum which were essential for frontier trading with the indigenous population but thereafter were widely adopted by the colonists themselves, e.g. in 1637 Massachusetts declared white wampum legal tender for sums up to one shilling, a limit raised substantially in 1643.
  2. The so-called "Country Pay" or "Country Money" such as tobacco, rice, indigo, wheat, maize, etc. - "cash crops" in more than one sense. Like the traditional Indian currencies these were mostly natural commodities. Tobacco was used as money in and around Virginia for nearly 200 years, so lasting about twice as long as the US gold standard.
  3. Unofficial coinages, mostly foreign, and especially Spanish and Portuguese coins. These played an important role in distant as well as local trade. Not all the unofficial coins were foreign. John Hall set up a private mint in Massachusetts in 1652 and his popular "pine-tree" shillings and other coins circulated widely until the mint was forced to close down in 1684.
  4. The scarce but official British coinage.
  5. Paper currency of various kinds, particularly in the colonies' later years.

The first State issue of notes (in north America) was made in 1690 by the Massachusetts Bay Colony. These notes, or "bills of credit". were issued to pay soldiers returning from an expedition to Quebec. The notes promised eventual redemption in gold or silver and could be used immediately to pay taxes and were accepted as legal tender. The example of Massachusetts was followed by other colonies who thought that by printing money they could avoid the necessity to raise taxes.

Another early form of paper money used in north America was "tobacco notes". These were certificates attesting to the quality and quantity of tobacco deposited in public warehouses. These certificates circulated much more conveniently than the actual leaf and were authorized as legal tender in Virginia in 1727 and regularly accepted as such throughout most of the eighteenth century.

In addition to the State issues, a number of public banks began issuing loans in the form of paper money secured by mortgages on the property of the borrowers. In these early cases the term "bank" meant simply the collection or batch of bills of credit issued for a temporary period. If successful, reissues would lead to a permanent institution or bank in the more modern sense of the term. One of the best examples was the Pennsylvania Land Bank which authorized three series of note issues between 1723 and 1729. This bank received the enthusiastic support of Benjamin Franklin who in 1729 published his Modest Enquiry into the Nature and Necessity of a Paper Currency. His advocacy did not go unrewarded as the Pennsylvania Land Bank awarded Franklin the contract for printing its third issue of notes.

Gradually the British government began to restrict the rights of the colonies to issue paper money. In 1740 a dispute arose involving a "Land Bank or Manufactury Scheme" in Boston, and the following year the British parliament ruled that the bank was illegal in that it transgressed the provisions of the Bubble Act of 1720 (passed after the collapse of the South Sea Bubble - one of the most notorious outbreaks of financial speculation in history). Restrictions were subsequently tightened because some colonies, including Massachusetts and especially Rhode Island, issued excessive quantities of paper money thus causing inflation. Finally, in 1764 a complete ban on paper money (except when needed for military purposes) was extended to all the colonies.

The American Revolution and the War of 1812

When he was in London in 1766 Benjamin Franklin tried in vain to convince Parliament of the need for a general issue of colonial paper money, but to no avail. The constitutional struggle between Britain and the colonies over the right to issue paper money was a significant factor in provoking the American Revolution.

When the war broke out the monetary brakes were released completely and the revolution was financed overwhelmingly with an expansionary flood of paper money and so the American Congress financed its first war with hyperinflation. By the end of the war the Continentals had fallen to one-thousandth of their nominal value. Yet although the phrase not worth a Continental has subsequently symbolized utter worthlessness, in the perspective of economic history such notes should be counted as invaluable as being the only major practical means then available for financing the successful revolution.

During the Revolution the Bank of Pennsylvania was established (with the support of Thomas Paine) in June 1780 but it was little more than a temporary means of raising funds to pay for the desperate needs of a practically starving army. The Bank of North America was a more permanent institution, granted a charter by Congress (by a narrow margin of votes) in 1781 and beginning its operations in Pennsylvania on 1 January 1782. It was followed after the war by the Bank of New York and the Bank of Massachusetts, which both opened in 1784, and the Bank of Maryland in 1790.

The financial chaos of the aftermath of the revolution and outbreaks of violent conflict between debtors and creditors led to the establishment of the dollar as the new national currency replacing those of individual states. However, owing to shortages of gold and silver bullion and the rapid disappearance of coins from circulation legal tender was restored to Spanish dollars in 1797 and it was not until 1857 that the federal government felt able to repeal all former acts authorizing the currency of foreign gold or silver coins, but by then coins were merely the small change of commerce.

After the revolution one might have expected the newly independent Americans to have welcomed with enthusiasm their freedom to set up banks but in fact there was a great deal of opposition to banking in general. The first true American bank, the Bank of North America had its congressional charter repealed in 1785. The first national bank, the Bank of the United States, though a financial success, was forced to close when its charter was not renewed. As a result, when the 1812 War broke out there was no government bank to exert a restraining hand on the commercial banks which issued far too many notes backed by far too little specie and the American financial scene reverted to its familiar inflationary pattern.

After the 1812 War the Second Bank of the United States was set up but once one of the heroes of that war, General Jackson, became president it was doomed to failure. Jackson admitted to Nicholas Biddle, the last president of the Bank, "ever since I read the history of the South Sea Bubble I have been afraid of banks." By killing the Second Bank Jackson delayed the establishment of a sensibly regulated banking system for eighty years. During this period the Treasury was left to carry out the increasingly difficult task of being its own banker. There was a divergence between the more settled areas of the country, such as New England where opinion veered towards sounder money, and the frontier states which tended to welcome easy credit but following the Californian gold discoveries in 1848 even the sound-money men became expansionist.

A Banking free-for-all, 1833-1861

The Second Bank of the United States was the only bank whose notes circulated at face value throughout the country. All other banknotes circulated at a discount, if not locally, then at a distance from the issuing bank. The death notice of the Second Bank was a green light to the States to charter their own banks or to encourage their citizens the set up banks for themselves. A "Free Banking" movement sprang up which claimed that citizens had a right to set up banks rather than be dependent on seeking a privilege granted by the State. Banks varied from worthless "wild-catters" that profited from making quick note issues and then quickly moving on, to the opposite example of prudently managed institutions. Some large islands of sanity and security were to be found in the general sea of financial chaos. The total number of banks rose from 330 in 1830 to a pre-Civil War peak of 1,601 in 1861. They poured out a flood of notes most of which were accepted only at a discount from their face value.

Not only every banker but every trader of any importance had to make constant reference in the course of his everyday business to one or other of a series of banknote guides. Thus Hodges Genuine Bank Notes of America, 1859 listed 9,916 notes issued by 1,365 banks, and even then around 200 genuine banknotes had been omitted. In addition there were, according to the Nicholas Bank Note Reporter, counterfeit notes of 5,400 different kinds in circulation, and this dispite the best efforts of the banks themselves, which had set up in 1853 their Association for the Prevention of Counterfeiting.

The US Civil War

The war required a rapid transfer of resources from diffused and decentralized civilian expenditure to concentrated and centrally controlled military expenditure, by means of some combination of taxing, borrowing and printing money. The mixture actually chosen differed markedly between the Unionists and the Confederates.

The Union government levied two direct taxes; the first was on each of the states in proportion to population rather than ability to pay and it was therefore regarded as unfair by the poorer states. Rather better yields were obtained by a general income tax but even so these two taxes together yielded less than $200 million. Much more important were indirect taxes which at their maximum rates yielded over a billion dollars. Initial attempts at long term borrowing were not very successful but after an Ohio banker, Jay Cooke, was put in charge of marketing bonds an issue of $500 million was oversubscribed by the public. During 1863 and 1864 another $900 million were issued but the low interest rate no longer appealed to the public and so the Union had to rely on the assistance of the banks to ensure the sale of the debt instruments.

In the South the imposition of adequate taxes and their collection was a case of too little too late. The Confederacy's borrowing policy was more successful than its taxation policies but was still inadequate. The Southern states relied on Europe's dependence on "King Cotton" to raise loans of $15 million but because of the blockade only around a quarter of the expected supplies came from such sources. The one seemingly unlimited resource was the printing press and hyperinflation resulted from its use. The South could probably at best only have moderated hyperinflation to a limited degree as the mix of fiscal and financial policies available to the Union was just not possible for the Confederacy to put into effect.


The secession by the anti-federalists opened the way for monetary reforms by the Union government, and "Greenbacks" came into existence when the Treasury was given the right, in 1862, to issue notes that were not convertible into specie but were authorized as legal tender for most purposes. Although the North's record on inflation stands up well in comparison with the experience of victorious countries in later wars, the Greenbacks worth in gold fell to half their nominal value. Their use had in any case only been intended as a temporary measure and the government started reducing the number in circulation, but this coincided with and reinforced a depression which led to the formation of a Greenback Party in 1875 which campaigned for an increase in note circulation and returned 14 members to Congress in 1878. As a compromise it was agreed to fix the number of Greenbacks in circulation at the then current amount.

The Gold Standard

In practice, if not in law, by 1873 when the silver dollar ceased to be the standard of value America was virtually on the gold standard. Williams Jennings Bryan campaigned vigorously but unsuccessfully against crucifying mankind "on a cross of gold." His fears were not realized as new discoveries in Alaska, Africa and Australia led to an enormous increase in gold supplies, stimulating the world economy and in 1900 America officially accepted the gold standard. Meanwhile banking was becoming increasingly important. Already by 1890 over 90 percent in value terms of all transactions were carried out by cheque (or check, to use the American spelling) and in 1913, after a series of bank failures in New York and growing public unease about the concentration of financial power in a few hands, the Federal Reserve System ("Fed") was set up to provide a more effective supervision of banking.

The Great Depression

If the years 1914-1928 were the period in which the Fed found its feet the next 5 years revealed it to have feet of clay. In 1928 the New York Federal Reserve Bank cut its rediscount rate, partly to help Britain to stay on the gold standard (a goal more easily achieved if US rates were lower than those of Britain) and the Fed also expanded credit by purchasing securities. These moves came at the worst possible time. The speculatory fever that gripped America during the second half of the 1920s had just moved from land in Florida to the New York Stock Exchange and the easing of credit helped feed the boom on to its inevitable collapse.

On Black Thursday 24 October 1929 the collapse came. Having fed the fever the monetary authorities now proceeded to starve the sick economy by persisting in a contraction of credit which is probably the most severe in American history. Net national product fell by 53 per cent. The Fed which had been set up to provide an elastic currency strangled its patient. Roosevelt's first action on becoming president was to declare a bank holiday. The world's largest economy was left virtually bankless for at least 10 days as a necessary prelude to the enforced reform of the whole financial system.

From the New Deal to the Apogee of American Power

The New Deal required a new banking system to restore business confidence in order to revive industry and agriculture and reduce the country's appalling total of 13 million unemployed. The first relief agency (which had already been set up by President Hoover in 1932) was the Reconstruction Finance Corporation which played an important role not only in the recovery from the Depression but also supplied vitally needed investment for military purposes during the 2nd World War.

From $16 million in 1930 the national debt rose to $269 million in 1946. This immense increase in borrowing was accomplished at very low interest rates (2.5% or less) which showed the great strength of the reformed financial system, as did the swift and gigantic change over that the US economy made from war to peace afterwards. American strength was also manifested in helping to rebuild war-shattered Europe, through the Marshall plan, and in helping to ensure a generation of growth and relative stability for the world economy, through the Bretton Woods agreement.

Relative Decline of the US Financial System?

However in the last couple of decades certain signs of relative decline have become apparent, in the financial sector as well as in American industry. Losses estimated by the Brookings Institute as exceeding $100 billion, or $400 per US citizen, were incurred as a result of the numerous failures of Savings and Loan Associations or thrifts in the late 80s. A more insidious relative decline is demonstrated by the fact that in 1970 the ten largest banks in the world were all American but by June 1991 there were no American banks in the top 20.

It is still incredibly incongruous when millions of dollars can instantly be transmitted across the globe by satellite that US banks, the main creators of the country's money, may still not be allowed to open a branch even a few miles away (especially in other States) without quite disproportionate effort. The complexity of the American financial system has provided a paradise for lawyers, while the Byzantine supervisory structure has imposed heavy annual operating costs, currently of over a billion dollars, which have to be carried by banks and their customers, quite apart from the periodic massive reconstruction costs borne impatiently by the US taxpayers.

Although America has officially enjoyed a single currency since 1790 it has not yet achieved a single banking market. It is one of history's exquisite ironies that Europe, or most of it, reached the goal of a single market by 1992 and, despite considerable scepticism, has now achieved its other goal of a single currency. The Euro was adopted by the banking systems of the participating countries in 2001 and although it lost value against the dollar after its launch it nevertheless remains a potential threat to the supremacy of the dollar in the international financial system, despite the interest in dollarization, or the substitution of the US dollar for national currencies, in parts of Latin America.

Nevertheless whatever the future of money, an optimally adjusted supply is the foundation both of capitalism and of freedom. In the words of Dostoevsky (in House of the Dead, part 1, chapter 2):

"Money is coined liberty"

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Roy Davies - Last updated 9 October 2008.