EARLY COLONIAL TIMES AND BARTER
The Pilgrims and early settlers in the New World had little wealth or money. They relied on hard labor to sustain themselves and what they could not make, they would obtain in trade from the Native Americans. Thus developed an economy of barter based largely on wampum (strung shell beads) and tobacco. Later, nails and other items were added as media of exchange and gradually, as trade with the old world steadily increased, coins were no longer scarce and became the standard money.
BIRTH OF THE NATION THROUGH THE GREAT DEPRESSION
This section summarizes money in the late 18th through early 20th century. All of the US coin denominations used for daily trade are shown below. However, foreign coins were far more plentiful in the United States than U.S. coins during the first half of the 19th century. It is estimated there was only about one United States coin in circulation per American!
Hard money was preferred until the 20th century
|EXAMPLE||DENOMINATION||FIRST ISSUED||MOST RECENT ISSUE||Browse on Ebay|
|Half Cent||1793||1857||half cents|
|Large Cent||1793||1857||large cents|
|Small Cent||1856||present||small cents|
|Two Cent||1864||1873||two cents|
|Three Cent|| || ||three cents|
|Five Cent|| || ||five cents|
|Twenty Cent||1875||1878||twenty cents|
|Half Dollar||1794||present||half dollars|
|Quarter Eagle ($2.50)||1796||1929||quarter eagles|
|Three Dollar piece||1854||1889||3 dollars|
|Four Dollar piece||1879||1880||four dollars|
|Half Eagle ($5.00)||1795||1929||half eagles|
|Double Eagle ($20.00)||1849||1933||double eagles|
However, coins were not convenient for large transactions and sometimes metal shortages abroad would create profit opportunities for melting and exporting them, causing domestic coin shortages. This, and economic growth beyond what the coin supply could keep pace with, allowed paper money to have a place. As the law demanded that Congress could only authorize production of hard mettalic money (by the US Mint through the Department of the Treasury), the government did not issue paper money. However, private banks could. Congressional chartering of the 'Bank of United States' in 1791 (central bank precursor to the Federal Reserve) skirted the law via the private bank loophole. The quasi-public 'Bank of United States' provided a nationwide standard currency to replace the dozens of free-wheeling private bank issued currencies that were prone to volatile and highly variable exchange rates, and were worthless upon the bank's failure. Early US political history was steeped in a raging debate over either the necessity or the "evils" of a central bank. The debate continues today.
Paper money in those days was a note, or I.O.U, payable on demand in gold or silver. The issuing bank would have in its vaults at all times, precious metal sufficient to retire all or part of its circulating notes. This guaranteed convertibility of paper money into gold is known as the gold standard. Customer deposits were, unlike today, not insured. Periodic 'bank panics' of widespread withdrawals would empty the bank vaults causing bank failures and crippling losses for depositors. The 19th century was plagued by these bank panics nearly every decade, though it was in that century that the US economy on the whole rose from a that of a fledgling nation to dominate the world's production.
Gold bugs adhere to the notion that a gold standard resumption is necessary to avoid the inevitable financial catastrophe of unbacked fiat money failing. They say (ignoring the last several decades of our history) that money cannot be viable unless it has intrinsic value backing such as gold. Many also claim that inflation (generally rising prices) is caused specifically by oversupply of unbacked money. Intrinsic value refers to money that is useful, or valuable, even should the issuing authority or government (and consequently, faith) fail. A gold coin is still so many grams of gold, so it is valuable purely as a lump of metal. Fiat, on the other hand, refers to money such as paper money that is only valuable by decree or 'fiat'. It cannot be officially redeemed for a fixed amount of any commodity, and so becomes worthless if the issuer fails. However, perceptions of value can even blur these cut and dried distinctions. For instance, the Confederate States of America's paper money became worthless when the Union won the Civil War, because the issuing government was defunct. However, a century later that fiat Confederate money of a defunct government was actually valuable once again as a collectible.
Today's financial fright and faltering economy are a new experience to those born after World War II. However, scary times and financial panics are not new in the context of US history. The following periods were all strife with bank collapses, widespread fear and deep recession. As you can see, nearly every decade of the 19th century saw yet another financial panic and recovery. These frequent disruptions were of great concern to the nation. After the serious 'Panic of 1907', there was much pressure for the government to take action. Following a great deal of political wrangling, Congress' response was the Federal Reserve Act of 1913.
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