The History of American Money

During the Revolutionary War, two things almost led to the defeat of the struggle for American independence. One was the inadequate system of constitutional government, and the other was unsound money.

Congress issued about $240 million in “Continentals”–referring to money of the Continental Congress. It was understood that the money would be redeemed in gold or silver by the states after the war.

The states thought this was a great way to manufacture money so they issued vast quantities of their own paper currency.

The British saw what was happening, so they printed up bales of counterfeit “Continentals” and used them to buy supplies from Americans.

Probably no aspect of the American economy has strayed further from the Constitution than the monetary system. 

–W. Cleon Skousen, The Making of America, p. 419

Before long, confidence in the Continentals had sunk so low that by 1780 they were not even worth one cent. No further paper money was issued by the United States for over eighty years.

The American market had already accepted the Spanish dollar as its basic unit of value. It was minted in Mexico and called a “piece of eight,” or a peso. The words Spanish peso are said to have been abbreviated into an S and a P with one written over the other. This was further abbreviated to a “$” sign.

The word dollar originally came from a Bohemian word thal, meaning “valley.” A silver coin was minted in a certain Bohemian valley and became known as a “thaler,” which was transliterated into English as a “dollar.”

In the 1700s, the Spanish came out with a silver coin of almost exactly the same size and weight as a thaler. It represented eight Spanish gold “reals” and was therefore called a “piece of eight.” In the marketplace merchants referred to this as the “Spanish dollar.” However, to make change, they would cut a dollar into eight pieces or “bits.” These began to be called two bits for a quarter, four bits for fifty cents, and six bits for seventy-five cents.

In 1785, two years before the Constitution was written, the Congress accepted the Spanish dollar as the official unit of value for the United States and determined that all foreign coin would be evaluated in terms of the Spanish dollar.

In 1786, the year before the Constitution was adopted, the Board of Treasury fixed the silver weight of the adopted dollar at 375 and 64/100s grains of fine silver. The value of gold coins or any other coins was to be calculated in terms of the silver dollar of this weight and fineness.

It will be noted that three things had been established before the Constitution was adopted:

1. That the official money of the United States would be precious metals–silver and gold.
2. That the basic unit of value would be called a “dollar” and consist of 375 and 64/100s grains of fine silver.
3. All other coins, both foreign and domestic, would be evaluated in terms of this official silver dollar.

All of this was already part of the law of the land when the Constitution was adopted. Therefore, the Founders wrote the following provisions in the Constitution concerning money based on the above statutes which had previously been adopted as the official monetary system.

They wrote:

1. Congress shall have the power “to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.” (Article I, section 8, clause 5.)
2. Congress shall have the power to punish the counterfeiting of money. (Article I, section 8, clause 6.)
3. No tax on imported persons (bonded servants) shall exceed ten dollars. Note the reference to “dollars” in this provision.(Article I, section 9, clause 1.)
4. No state shall coin money, emit bills of credit, or make anything but gold and silver tender in payment of debts. (Article 1, section 10, clause 1.)
5. In civil cases for more than twenty dollars, the right of trial by jury shall be preserved. (Seventh Amendment.)

In 1792, the Coinage Act was passed. It invoked the death penalty for anyone debasing the money. It provided for a United States mint where silver dollars were coined along with gold coins beginning in 1794. Altogether nearly 900,000,000 silver dollars were coined from that time until 1935 when the treasury stopped minting them.

1. Silver dollars contained 46 grains of standard silver similar to the Spanish dollar, which had now been determined to be 371.25 grains of fine silver.
2. Half dollars, quarters, and dimes and “half dimes” contained a proportionate amount of silver.
3. Pennies and half pennies were made of copper.
4. Gold eagles were worth ten silver dollars, with a ratio between gold and silver fixed by statute. The fixing of this ratio by statute turned out to be a mistake. Each metal should have been allowed to follow its independent market value.
5. Half eagles (worth $5) and quarter eagles (worth $2.50) were also minted.
6. Free minting privileges were granted to all citizens. They could take either gold or silver to the mint and have it minted into coins. This practice lasted until 1873.

The ratio between gold and silver which was fixed by statute at 15 to 1 was soon out of phase in favor of gold. As a result, much of the American gold stocks began to be purchased by Europe.

In 1834, the ratio was changed to 16 to 1which favored silver, and from then until the Civil War the nation was, for all practical purposes, on a gold standard. Europe began buying silver, with the gold it had previously accumulated. This soon brought gold stocks back to the United States.

Paper Currency

We have already noted that there are two kinds of paper currency which are not “money” but circulate as such: the first is debt money, which can be redeemed in silver and gold on demand, and the other is fiat (paper) money, which is designated as legal tender but cannot be redeemed for anything.

As indicated earlier, the original draft of the Constitution authorized Congress to “emit bills of credit.” This had reference to debt money or currency which would be redeemed with gold or silver. After an extensive discussion the Founders decided they couldn’t risk it. There would be no United States debt currency or bills of credit. As for fiat money, this was so abhorrent to the Founders they didn’t even discuss it.

As mentioned earlier, the Founders knew that people do not like to conduct business–except for minor transactions–with precious metal. Metal money is too heavy, too bulky, and in substantial amounts is dangerous to transport. It is much more convenient and safe to use paper currency. The Founders realized this, but expected the banks to issue notes (redeemable in gold or silver) which would fill this need.

Over the objections of Jefferson and Madison, Alexander Hamilton persuaded Congress to approve a United States Bank for a period of twenty years. This was actually a private bank, but it functioned as a depository for the United States and collected taxes. It also issued redeemable bank notes which circulated as currency. Other private banks did the same. By 1798, Alexander Hamilton decided that this procedure was a mistake. He felt that if currency or bank notes were to be issued and circulated as “money,” it should have been done by Congress.

Unfortunately, no steps were taken to remedy this problem, so by the time of the Civil War there were thousands of banks issuing thousands of different kinds of bank notes. Furthermore, many banks were issuing far more notes than they had reserves. There was also a tremendous amount of counterfeiting. Before long the whole system began to falter.

When the Civil War required vast new expenditures, the banks wanted extremely high rates of interest on any loans to the Union (15 to 36 percent), and so Congress felt compelled to issue fiat money. These “greenbacks” could not be redeemed in gold or silver and were limited somewhat in the things for which they could be spent. Their value soon dropped to around 35 cents.

Finally, in 1878, Congress promised to redeem the greenbacks in gold. This changed the greenbacks from cheap fiat money to debt money, redeemable at face value. At first there was a run on gold as people traded in their greenbacks, but when they found they really could get the gold, then people didn’t want it. They returned the gold to the bank and took back paper money instead. This left the United States on the gold standard until 1933.

Meanwhile, Congress phased out the bank notes issued by state banks by putting a tax on them, thereby discouraging their use. In 1863-64, Congress passed a series of national bank acts which set up a system of privately owned banks chartered by the federal government. These national banks issued notes backed by the U.S. government bonds, and these national bank notes became the country’s chief currency. When the greenbacks received gold backing in 1878, they also moved up to a par value with the national bank notes.

In 1913 the Federal Reserve replaced the national bank system, and Federal Reserve notes were issued with a promise to redeem them in gold on demand.

Then, in the year 1933, the United States abandoned the gold standard. These were the circumstances:

1. On April 5, 1933, one month after his inauguration, President Franklin D. Roosevelt declared a national emergency and ordered all gold coins, gold bullion, and gold certificates to be turned in to the Federal Reserve banks by May 1. This order applied only to those residing in the United States. It did not apply to foreigners living abroad. Within the United States, only those who had special gold collections or needed the gold for industrial or professional use were allowed to retain quantities of the yellow metal.
2. As gold coins, gold bullion, or gold certificates were turned in, the American people received Federal Reserve notes redeemable in silver.
3. On May 22, 1933, Congress enacted a law (48 Stat. 31) declaring all coin and currencies then in circulation to be legal tender, dollar for dollar, as if they were gold. It also empowered the President to reduce the gold content of the dollar up to 50 percent.
4. On June 5, 1933, Congress enacted a joint resolution (48 Stat. 112) that all gold clauses in contracts were outlawed and no one could legally demand gold in payment for any obligation due him.

On January 30, 1934, the Gold Reserve Act was passed, giving the Federal Reserve title to all the gold which had been collected. This act also changed the price of gold from $20.67 per ounce to $35 per ounce, which meant that all of the silver certificates the people had recently received for their gold now lost 40 percent of their value.

The next day the President proclaimed (48 Stat. 1730) that the dollar was to be fixed at 15 and 5/21 grains of standard gold and was to be maintained at this level “in perpetuity.” This is still the definition of the “dollar” in the United States code. Russia and the central banks of Europe began buying up gold in huge quantities. Thus there came into being a dual monetary system: a gold standard for foreigners and Federal Reserve notes (redeemable in silver) for Americans.

From 1914 to 1973, American currency went through the following erosion:

1. From 1914 to 1933, every Federal Reserve note was redeemable in gold and silver.
2. Between 1933 and 1963, all Federal Reserve notes promised to pay (or be redeemed) in “lawful money,” which meant silver. Then the wording on the Federal Reserve notes began to be changed to somewhat obscure language, which should have given Americans a warning that the government was planning something.
3. In 1965 President Lyndon Johnson authorized the treasury to begin issuing debased “sandwich” dimes and quarters with little or no intrinsic value, and the quantity of silver in fifty-cent pieces was reduced to 40 percent.
4. On June 24, 1968, President Johnson issued a proclamation that henceforth Federal Reserve silver certificates were merely fiat legal tender and could not be redeemed in silver.
5. On December 31, 1970, President Richard Nixon authorized the treasury to issue debased “sandwich” dollars and half dollars.
6. By August 1971, many of the European countries had collected so many billions in Eurodollars (foreign aid, money spent by the U.S. military abroad, etc.) that European banks had begun to get nervous about redeeming their money in gold. A threatened run on the U.S. Treasury resulted in the American gold window being slammed shut. This resulted in collapse of the dollar on the world market. Since then it has fluctuated on the world market like any other commodity, since it is no longer redeemable in precious metal and therefore has no intrinsic value.
7. In 1973, the U.S. dollar was officially devalued, changing the price of gold from $35 per ounce to $42.23 per ounce.
8. On March 16, 1973, Congress set the American dollar completely afloat with nothing to back it up but the declaration of the government that it was “legal tender,” or fiat currency.
9. The world market immediately reflected serious erosion in the value of the American dollar. To buy an ounce of the gold it took not $42.23 but $100, then $200. After that, it moved higher and higher until it required $800 to buy an ounce of gold. Gradually some confidence was restored in the dollar as the symbol of the American economy, and so it settled back down to a plateau of approximately $300 plus.

Today, the American economy operates under a monetary system which is completely outside the Constitution. Its fiat money is continually manipulated both in value and quantity. This has had a devastating impact on its purchasing power, which is now down to about 8 percent of its 1933 value. It has eroded the value of savings, insurance policies, retirement funds, and the fixed incomes of the elderly.

Source: The Making of America, by W. Cleon Skouson by permission of The National Center for Constitutional Studies, Washington, DC. The National Center for Constitutional Studies is a foundation dedicated to developing within the American people an understanding of the meaning and importance of the Constitution.