A Brief History of Money In America - Part I

A while back, I wrote about a pending academic research project I was embarking upon with Jeremiah Newhall, a good friend of the site. Below you will find a draft version of a chunk of a section of our paper on the history of money in the US. Part of the reason I am posting this is to solicit feedback, so please feel free to submit your thoughts in the comments section below. Additionally, please bear with us on the citations and the first-draft wordsmithing.

Like many British colonies,[1] the American colonists lacked a sufficient money supply.[2] Colonists sent remittances home, and the lack of coin forced a barter economy.[3] This led, predictably, to market inefficiencies owing to a massive currency shortage. It also made taxes impracticable; there were not enough coins in which to pay any taxes levied.[4] In the New England colonies wampum, a shell valued by Native Americans (though not as money), became the dominant currency in trade.[5] Thus the colonies acted out a sort of microcosm of the history of money on fast-forward, moving from barter to shells (the wampum bear an eerie similarity to the cowry) and finally to paper money.[6]

Ironically, the colonies did the right thing—increasing the money supply—for the wrong reason. When we said in the last section that governments print currency to make money, not profits, we spoke aspirationally; in fact, the development of paper money as legal tender in the United States has been driven entirely by the need for the government to fund itself.[7] To pay its bills, every American colony began issuing paper money before the American Revolution.[8] The increased money supply permitted trade when barter would have been impossible, greasing the wheels of the colonial economy. But it disadvantaged traders in London, who saw the value of the colonial paper money plummet in value against the pounds sterling used to purchase the goods they sold to colonists.[9]

The Currency Act of 1764[10] ended the colonies’ money-making mischief until the Revolution. By law, no paper money produced by the colonies was to be “legal tender,” though the colonies retained limited ability to print notes payable for public debts (i.e., local taxes), but not for private debts (all other transactions).[11] The Continental Congress issued the first national paper currency, the Continental dollars, in 1775 to finance the Revolution.[12] But the value of these dollars quickly plummeted, such that the nascent government borrowed a tick from Kublai Kahn, and made the refusal of payment in Continental dollars an act of treason.[13]

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[1]
[2]

[3]
[4]
[5] See Robert G. Natelson, Paper Money and the Original Understanding of The Coinage Clause, 31 Harv. J.L. & Pub. Pol'y 1017, 1036 (2008); see also Knox v. Lee (Legal Tender Cases 2d), 79 U.S. 457, 464 (1870) (“It is true that, at certain periods in the history of some of the States, the skins of the beaver passing by tale; strings of shells, known as wampum, passing by measure; and packages of tobacco of defined weights were, in the absence of the precious metals, used as money, and were made the medium of exchanges.”). The Native American tribes used wampum in sacred jewelry.
[6]
[7] See Henry Phillips, Jr., Paper Currency in the American Colonies, Prior to The Adoption of The Federal Constitution 60, n.5 (1865); Joseph Albert Ernst, Money And Politics in America, 1755–1775, 353–54 (1973)
[8] See Phillips, Jr., supra note 7, at 61, n.5.
[9]
[10] Stat. at Large, 4 Geo. iii, c. 34 (1763).
[11] Id.
[12] John J. Chung, Money As Simulacrum: The Legal Nature and Reality of Money, 5 Hastings Bus. L.J. 109, 122 (2009)
[13] Id.

Jeremiah Newhall is a graduate of The George Washington University Law School and currently serves as a law clerk in Chicago. He can be reached via the miracle of email. Joshua Sturtevant is also a GW Law grad, and currently serves as an in-house legal fellow at a renewable energy financing and development firm.