History of Paper Money

Although the first United States paper money under the Constitution dates from the year 1861, paper money actually circulated in the country long before then. As early as the 17th century, while still under British rule, the American colonies issued their first notes.

There was a growing shortage of coins in the colonies because as more and more people were settling in America, there were fewer coins to go around. Prior to the Revolutionary War, the early colonists were eager to establish some economic self-sufficiency. They wanted to market their surplus produce at reasonable prices, then use that income to buy necessities and comforts not made locally. They preferred to do this without royal interference, but unfortunately, in the 17th and 18th centuries, England regarded this as treason!

To put an end to such activity, England made it impossible for the colonists to get their hands on gold or silver. None ever left the mother country. Colonists were forced to trade in furs, fish, grain and musket bullets. As a precaution against the colonists somehow obtaining precious metals, England insisted that taxes be paid first in gold or silver - then in grain if there was nothing else of value. But in order to meet the needs of the expanding population, and in an effort to encourage local trade, it was necessary for the colonies to issue their own paper currency. Those earliest types were called Colonial Notes and originally served as a means of payment for military campaigns in defense of the issuing colony.

When the colonists made their final break from England, war became the high price to pay for that freedom. The newly-formed nation needed money in order to finance its war effort, but because of England's attempts to keep gold and silver out of the colonies, the colonists had no precious metals. Thus, the Revolutionary War would have to be financed with paper. In mid-1775, the Continental Congress authorized the issuance of paper currency. These war notes were redeemable in Spanish Milled Dollars - large silver coins of 8 Real denomination (the famous "pieces of eight") struck at the Spanish colonial mints in Mexico and South America.

Because the Continental Congress authorized their creation, these notes became known as Continental Currency. Unfortunately, it quickly depreciated to where the face value of the money was worth less than the paper on which it was printed. This depreciation in value created the popular expression of the day, "it's not worth a Continental." However, today the notes are in great demand by collectors!

After their experience with Continental Currency, Americans were extremely reluctant to accept paper money issued by our government. Consequently, America did not find it necessary to produce paper money, as we know it, for nearly a century!

Once the Constitution was ratified, the coinage system of the United States was established. America's first coins were struck in 1793 at the Philadelphia Mint, and from then until 1861 (68 years later), the government saw no need for a national paper currency.

But during this period, several important events took place. The War of 1812, the Mexican War of 1846, the Panic of 1857, and the uneasy period immediately before the outbreak of the Civil War all caused a severe drain on the U.S. Treasury. To overcome these deficits, the federal government issued so-called Treasury Notes from time to time. They were simply signed "promissory notes" which earned interest, and did not circulate as money except for a brief time in 1815.

Despite such difficult economic periods, the country continued to grow. It became apparent that there simply was not enough money in circulation to meet the ever-increasing needs of daily commerce. In an effort to remedy the situation, some states gave private banks the right to issue their own currency. The backing for this currency was the amount of money the bank had on deposit.

Unfortunately, when times were hard, people failed to pay their loans, and banks lost their source of income. Without money coming in, banks literally "went broke" and were forced to close their doors.

The currency issued by these ruined banks became known as "Broken Bank Notes," and their wide range of artistic designs, unusual denominations and the oftentimes colorful names of the banks themselves, have all made them popular collectibles today!

The Civil War was to have the greatest impact on America's paper money. Because of the duration of the conflict, financing the war became a major problem. Supplies, clothing and pay for the military had to come from somewhere. And it wasn't long before the United States found itself in a desperate financial situation. Remedies included increasing the national debt, enacting the first income tax and issuing a national paper currency.

Putting their faith in paper money

Congress finally passed the Act of July 17, 1861 which permitted the Treasury Department to print and circulate money. "Specie" payments were suspended, which meant the new paper money could not be converted into either silver or gold coins.

The public was expected to accept this money purely on faith that it would be good. People did use the currency. But the mounting costs of fighting the Civil War, and the uncertain financial position of the North cheapened the paper dollar so much that circulating copper, silver and gold coins were hoarded and almost disappeared completely!

The first United States notes of 1861 are known as Demand Notes, and in 1862 they were replaced by Legal Tender Notes. From the first U.S. paper money issued in 1861 through to the present day, all paper currency issued by the U.S. government has remained legal tender!

On February 9, 1861, the Confederate States of America established a provisional government with its capitol in the city of Montgomery, Alabama. Jefferson Davis was elected president. Five days after Louisiana seceded from the Union, her state troops seized the United States Branch Mint and Custom House at New Orleans. The Congress of the Confederate States resolved that the mints at New Orleans and Dahlonega, Georgia should be continued - striking U.S. coins dated 1861, though now under Confederate supervision.

Once the Confederate government was fully established, it resolved to solve its financial woes by issuing its own paper currency. Southerners were asked to accept it on a par with regular money or bank notes - enabling it to perform the functions of legal tender. Eventually, as the war dragged on and continued to drain the South's finances, it was patriotism alone that gave the Confederate currency any value.

The South battles inflation

The expenses of the Confederate States of America continued to increase and, as the war went on, Southern currency continued to depreciate in value. Confederate President Jefferson Davis' wife kept a diary of those trying days in the South. Paper money in denominations of $5 and under was useless. The Confederate money supply was so inflated it could buy little. Mrs. Davis recalled that turkeys sold for $60 each, tea was $22 a pound and milk was $4 a quart. One bar of soap could sell for as high as $50, and an ordinary suit of clothes cost $2,700! In spite of the inflation, the Confederate Congress continued to issue millions of dollars worth of notes.

At the time of the war's conclusion, the amount of currency authorized by the Confederate Congress consisted of hundreds of varieties. Several states of the Confederacy (Georgia and North Carolina, in particular) issued their own money, too. As true mementos of the Civil War, genuine Confederate currency is hard to beat!

The North's war chest runs low

While the Civil War was in progress, Lincoln's administration needed increasing sums of money to wage the war. The nation lacked a central banking authority, and was relying largely on private banks - banks whose finances were not always sound.

In 1863, the National Banking Act was passed to create more money with which to fight the war. The act also attempted to regulate the country's chaotic currency system. The new act encouraged private banks to apply for federal charters, thereby making them "national banks."

National Banks to the rescue - 1863

Newly chartered "national banks" used their funds to buy Union bonds (thus raising money for the war). They deposited the bonds with the Treasury in Washington, D.C., and were then allowed to issue National Bank Notes for up to 90% of the value of the bonds on deposit.

The National Banking Act created certain advantages both for the government and former private banks. The government received cash and started a federal banking system capable of regulating banking activity. And private banks that "went national" commanded more respect and trust than banks that failed to take advantage of the federal charters.

During the act's first year, 179 banks "went national." By the end of the Civil War (in 1865) the number was nearly 2,000. When the last bank notes came off the presses in 1935, over 14,000 banks had become members! All of them issued paper money with their own name on it and all are still legal tender today.

At the onset of the Great Depression (1929), banks began to fail. Newly elected President Franklin D. Roosevelt briefly ordered the U.S. banks closed and had the system closely examined. It was determined that the National Bank Note System was outdated, inflexible and not equipped to manage the nation's finances in depression. Roosevelt's government placed its faith in the new Federal Reserve System, and National Bank Notes became obsolete.

However, the sheer extent of varieties, including the number of banks that issued them, the different signatures of local bank officials and the towns where these banks were located all serve to make National Bank Notes an appealing collector favorite today.

Today's so-called "small-size" or "modern" notes are the direct descendents of all the influential people and fascinating historical events that contributed to the development of our nation's paper money. America's currency continues to evolve, and new collecting opportunities are being created all the time! Now is a great time to join in the fun of this exciting and satisfying hobby!