A major step in the development of paper money took
place in 1661 when the Stockholm Banco of Sweden issued
the first bank notes, which were private obligations of
the bank and could be redeemed there in gold or silver by
the bearer. Because redemption in precious metals was
guaranteed, many people had enough confidence in the
value of the notes to exchange them for goods and
services. However, Swedish merchants feared that the
notes would be bought up by foreigners who would redeem
them and eventually deplete Sweden's gold and silver
reserves. The issue lasted only one year.
In the 17th century, colonists settling in North
America brought coins with them, but most of these were
quickly returned to Europe to pay for goods that were not
produced in the colonies. This led to a shortage of
coins, so Indian wampum -- beads of polished shells
strung in strands -- was widely used as money throughout
the colonies. However, when settlers learned to
counterfeit wampum, it lost its value.
In addition to wampum, the colonists also used as
money those items that were staples of the local
economies because they were always in demand. For
example, in Virginia it was tobacco, and in Massachusetts
it was grain and fish. Nails and bullets frequently were
used for small change.
After trade between the colonies and the West Indies
developed, Spanish eight-reales coins circulated widely.
These coins, known as "pieces of eight." were used until
1857. They were frequently cut to make change: Half a
coin was "four bits" and a quarter section was "two bits"
-- a slang expression for the modern American quarter.
The first coin struck in the colonies was the pine
tree shilling -- which bore a picture of a pine tree --
in a Boston mint in 1652. All issues of the coin, even
those struck in later years, claim that no additional
coins had been minted since 1652, in case the British
Crown decided to enforce its ban on the colonists
producing their own coins. Despite the efforts of the
colonists, the British shut down the mint in 1686.
During the 18th century, again contrary to British
wishes, hundreds of different types of paper notes were
printed throughout the colonies.
Those notes, issued
before the American Revolution, usually were denominated
in pounds and shillings and made reference to the Crown
of England for credibility. Some colonies issued too
many bills, however, and their value quickly sank to
small fractions of their face amount, making trade
between colonies difficult. Despite the depreciation,
these bills helped offset economic slumps caused by a
scarcity of metallic money in an expanding economy.
Before the start of the American Revolution, the
Continental Congress, facing huge expenses without
adequate taxing power, authorized a limited issue of
currency in 1775 -- the first paper currency issued by
what was to become the United States. These notes,
called continentals, were printed from plates engraved by
Paul Revere to read "The United Colonies" and sometimes
even depicted colonial minutemen. They had no backing in
gold or silver and could be redeemed only if and when the
colonies became independent.
In January, 1776, the Continental Congress made it
treason for people not to accept continentals or to
discourage their circulation in any way. In 1777, after
the Declaration of Independence, the first notes bearing
"The United State" were issued. However, because people
were reluctant to accept paper money, well-known
revolutionary figures were asked to sign the notes to
give them credibility.
For about a year and a half, continentals changed
hands at close to face value, but this stability was
short-lived. People hoarded goods and coins during the
war, which caused inflation. As a result, continentals
became basically worthless. As George Washington
commented: "A wagon-load of money will scarcely purchase
a wagon-load of provisions."
The currency's vanishing
value led to the expression for worthlessness that
remains today -- "not worth a continental." The failure
of continentals produced a deep mistrust of paper money
throughout the colonies.
However, the brief period when continentals
circulated successfully was significant because it marked
the first time that the worth of U.S. currency lay in its
purchasing power, as it does today, and not in its
intrinsic value.
After the failure of continentals, more than 70
years passed before the federal government would issue
paper money again. However, until then, state-chartered
banks made up for the lack of a national currency by
issuing their own paper notes, which were obligations of
individual banks. These state-bank notes became the
dominant form of currency used between the time of the
American Revolution and the Civil War.
Each bank designed its own notes, so they differed
in size, color, and appearance. By 1860, an estimated
8,000 different state-banks were circulating what were
sometimes called "wildcat" or "broken" bank notes in
denominations from $1 to $13.
