A Brief History of American Curre

Consider the American Dollar. Much to the chagrin of the Chinese, it is the most widely used currency. In fact, many countries use it as their official currency, and in many others, it might as well be. However, the dollar as we know it today has only been around since the 2nd Revolutionary War. For me, the most interesting time for American currency will be the focus of this post, the Colonial Period.

Currency at the time was dominated by resources. If you had access to silver, you had access to more currency. If you were a resource poor region like England or the Netherlands, this meant that you had to run a trade surplus to move currency into your country. What England saw in the New World was an opportunity



to acquire gold or silver to increase their coffers. Obviously the colonists brought British currency with them and you were expected to trade with the British using their currency. In fact, very quickly the British barred the import of silver into the New World, and decreed that all trading be done in silver. This quickly led to a deficit in money in the new colonies.

If there is no money to spend, obviously people can’t spend it. So, across the country, people came up with their own means of buying and selling. Barter was a frequent means of trading, but people also used wampum and any resource that was plentiful in the area. For a very long time, Tobacco was the de-facto currency in the Chesapeake Bay Area. That link is an absolutely fascinating read by the way, I would thoroughly recommend it.

For all its scarcity in Northern America, South America had vast amounts of gold and silver. Eventually a bunch of Spanish Silver pieces (strongly resembling the German “thaler” a term which eventually became “dollar”) made their way to the colonies. This effectively became a standard currency. However, because the population was far greater in North America, Spanish silver was in very high demand. The price for Spanish silver became outrageously overpriced, and in 1642, the Massachusetts General Court said that a Spanish silver piece was to be

This is a later version of what we were dealing with.

This is a later version of what we were dealing with.

exchanged at 3% higher than the British pound, this rate would steadily increase over the course of the century to 33% later on.

Massachusetts realized importing Spanish silver was no way to trade with England, so they opened up a mint in 1652, pricing the new Silver coins at 22% over the Pound (25% over the Spanish pound). They did this so their coinage would be kept locally. Despite this, the value of silver coinage rose. If you lived in any of the colonies, you could expect to trade with the British with any number of coins from the Netherlands, Spain, Spanish America and Germany. Rarely did you deal with the Pound. Adding to this confusion was the fact that the exchange rate for all of these coins varied depending on your location, whether it be a colony, Britain or any other European country. Despite this variety of coinage, the price of silver kept rising against legislation, and colonists had a severe lack of currency with which to make financial arrangements.

Then in 1685 something kind of cool happened. The French colony in Canada realized that it didn’t have enough silver to pay the troops it had garrisoned. So, they chopped up a deck of playing cards and said that the cards could be used for currency around the town. Anyone, not just soldiers, could use this new “currency”. Technically this is a promissory note but it functioned just as well as money.

The first true issue of public paper money, like many things in history, is rooted in a tactical folley. In 1690 a bunch of men were rounded up and sailed up to French Canada to take over a fort. They were promised half of the plunder from the raid in payment. In addition, the leader took out a loan which was to be re-payed with a quarter of the plunder. Well it turns out the raid failed, and everyone was pretty pissed about it. The British weren’t going to bail them out, and there was no money left in the colony’s treasury. So, the Massachusetts Bay Colony General Court printed £7,000 in paper currency, and basically said, take it or leave it, you’re getting paid with paper.

Economics 101 time. What happens if you just start dumping currency into a fixed system? That’s right, inflation. All of a sudden these soldiers were running around with paper that was literally worth nothing. Nobody was going to accept that crap in everyday business.

Massachusetts was a step ahead. They made it so you could pay your taxes, at a premium of 5%, with this new scrip. Then they could destroy the scrip in order to regulate the currency rate. In addition, being able to pay your taxes gave an air of legitimacy to the paper that was necessary. Massachusetts started exchanging paper for silver if there was any in the treasury.

The second issuance of scrip by Massachusetts

The second issuance of scrip by Massachusetts

At this point, the exchange rate for Spanish silver to English pounds had started to stabilize, especially in the South. They also had a pretty good deal going using tobacco, so they took a while to take to the concept of paper money. Despite their legitimizing of paper currency, Massachusetts still had inflation problems. Where they originally exchanged 6 pieces of paper for a Spanish dollar, by 1737 it was 26 pieces to a dollar. So to deal with this they issued a new set of paper currency, which they said was worth 3 times as much as the previous issuance. Obviously, issuing more currency did not help the inflation problem. Over the next 6 years they issued 3 more currency series, each “worth” more than the first. 5 points if you can tell me what effect this had on inflation. In addition to this, there was no standard of exchange between each piece of scrip and the British pound. Things were a mess. The Court actually printed out charts to give to local merchants to keep track of exchange rates.  Great Britain eventually bailed them out by shipping them a whole mess of silver, and Massachusetts bought up all the scrip at a strict rate, tightening up the supply. In exchange for this, the colony was barred from printing their own currency, which they adhered to, until the Revolution.

Pennsylvania tried something similar in 1723, but were more cautious. First off, they made it legitimate from the get-go. Whereas the Massachusetts currency was backed by the promise of British pounds, the Pennsylvania currency was backed by local commodities and debts.  In addition, Pennsylvania didn’t give the money away, they loaned it out, at 5%. Which not only meant an extra degree of legitimacy, it also meant that the debt would be re-payed back to the government, meaning no excess in the money supply.

There were many issuances of the Pennsylvania pound, and it was extremely successful. It was so successful that many, Ben Franklin included, credit the eventual British barring of their currency as being the strongest factor in the incitement of the 1st Revolutionary War. Back me up founder of Cooper Union College, Vice-President of the New York Board of Currency and US Presidential Candidate Peter Cooper:

After Franklin had explained…to the British Government as the real cause of prosperity, they immediately passed laws, forbidding the payment of taxes in that money. This produced such great inconvenience and misery to the people, that it was the principal cause of the Revolution. A far greater reason for a general uprising, than the Tea and Stamp Act, was the taking away of the paper money.

Anyways, that’s it for now. At some point in colonial times, each colony produced its own currency, but the stories of Massachusetts and Pennsylvania are by far the most important and interesting. Thought exercise for next week is to think about why you are able to use that dollar in exchange for goods and services.

Published in: on September 1, 2009 at 3:55 pm  Leave a Comment  
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