Evolution of Money



Before the stable monetary standard system we have today came into existence, currencies first went through a tough evolution. Centuries of wars and chaotic governance have witnessed the evolution of the financial system we have today.

During the 17th century, England limited the money supply and made it illegal for colonies to mint coins of their own in an effort to keep control of US colonies and the natural resources they had. The colonies were forced to trade with English money for English goods only. Colonists were trading their goods with the English bills as well, preventing them from trading with other countries.

The colonies then resorted to a barter system using nails, tobacco, plets, ammunition, and other things that can be traded. Colonists collected every foreign currency they could, the most popular of which was the Spanish dollar. These were dubbed “pieces of eight” because they needed to put out their knives to hack the money into eight bits every time they had to make a change. From this system, the term “two bits” was derived, which means a quarter of a dollar.

Massachusetts Money

Massachusetts was the first colony to take down the British force. In the late 1600s, the state minted its own silver coins. In 1690, Massachusetts introduced its first paper money, which was called “bills of credit”.

The tension between US and Britain continued to get worse until the beginning of the Revolutionary War in 1775. The colonists declared independence and launched a new currency dubbed “continentals”. However, each government printed bills as much as it needed without establishing any monetary standards. The continentals then experienced drastic inflation and eventually became worthless. The unfortunate event discouraged the use of paper money for almost a century.

Post-Revolution

After the chaos, most currencies in the US were worthless. The aftermath was resolved in the late 1700s when the Congress was given constitutional powers to regulate money and its value.

The Congress devised a national monetary system and gave birth to the dollar. During this time, there was a bimetallic standard, which means that silver and gold may be valued in dollars.

The completion and circulation of the monetary standard took 50 years to stabilize. In the early 1800s, the US government was ready to try the paper money experiment again. Bank notes have already been circulating for quite some time but since financial institutions released more notes than the coins they had, the notes were traded at less than face value.

During the Civil War, US issued over $400 million, which were called greenbacks. The government supported the currency believing that it may be used to settle public and private debts.

Post-Civil War

After the American victory, the National Bank Act enacted by the US Congress in February, 1863 established a monetary system in which national banks are to issue notes backed by US government bonds. The government choked out notes from banks by taxation. The US Treasury then pulled greenbacks out of circulation in order for the national bank notes to become the sole currency in the nation.

In 1900, the Gold Standard Act was passed to address the ongoing debate as to whether people should continue the bimetallic standard or not. Under the said law, people can take their money to FortKnox and exchange it for gold.

In 1913, the US government gave rise to the US central bank, the Federal Reserve, which was given the power to oversee the money supply and interest rates of the US.

In 1971, the US dollar totally wiped off the gold standard, making it possible to issue more money than there was gold to back it. With this move, the currency value is entirely dependent on the economic health.

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