A Brief History of American Money - Part One

Americans under fifty years of age can be forgiven for believing that the U.S. dollar has always been federal reserve notes, backed by nothing in particular, and designated as being legal tender for all debts, public and private. The truth is much more complicated, and the lessons of our past may point the way toward solutions for future crises.

The first significant money myth we are taught as schoolchildren is not about money, rather it purposefully omits money. The American Revolution, we are told, arose out of anger over a British tax on tea imports, which colonists reacted to by dumping a shipment in Boston’s harbor at the end of 1773. What goes unsaid is the real upheaval in the twenty years leading up to it when the British government outlawed the Colonial scrip that had up to then circulated freely due to the shortage of British money, creating a persistent depression. Far more significant than a mere tax on tea, this was a grip on the colonists’ throats, and turned them overnight from prosperous free men to serfs compelled to remit their wealth to the rapacious Crown. Indeed, the tax on tea may be seen as an attempt to recoup losses on Britain’s slight liberalization of anti-scrip laws enacted that same year. Modern day parallels to Colonial scrip are proliferating as I write this, particularly in hard-hit areas like Greece and Michigan. At least for the moment it’s perfectly legal in the U.S.

Once the Colonies had gained their freedom, they sought a loose confederation, but one important hurdle was that the $241 million in currency that had been issued during and after the Revolutionary War was depreciating badly, and ultimately lost 99% of its value by the time the Constitution was ratified. In large measure the British were again to blame: they counterfeited the Continental currency wholesale in secret New York workshops. America had suffered its first (and only so far) bout of hyperinflation. The fledgling nation’s bad experience with the Continental currencyresulted in a protective prohibition in the Constitution forbidding the states to make anything but gold and silver legal tender for the payment of debts. In 1782, the French provided money to found the Bank of North America, which issued currency and acted as our first central bank although it was in private hands.

Britain soon reasserted control over the U.S. banking establishment when the Bank of the United States supplanted the French-led bank in 1791, and only the Congress’s narrow vote refusing to renew the new bank’s charter in 1811 pried them loose again. But without American vigorish flowing to the Bank of England’s coffers, our sailors were fair game for impressment into their navy, Britain incited Indian tribes against us, and also attempted to leverage Canadian territorial ambitions. The result was the War of 1812, highlighted by the burning of Washington, D.C.

The aftermath of the war left Americans feeling so empowered and established that by 1816 they unwisely put the British back in the driver’s seat by establishing the second Bank of the United States. But by 1832, Andrew Jackson stood up to the Bank’s head Nicholas Biddle and vetoed renewal of its charter. Biddle vowed to throw the country into a ruinous depression and Jackson hammered back, ultimately crushing the bank and eliminating the national debt. A would-be assassin plunged two pistols into Jacskon’s stomach but both misfired.

Through the next several decades leading up to the Civil War, bankers’ intrigues focused not on the establishment of another bank, but on tearing the Union apart. Exploiting the divisions that arose from the economic dichotomy between the industrial North and the agrarian South soon produced a schism that owed as much to Britain’s competition as a customer for southern cotton and other raw materials as it did to the moral issue of slavery. When war broke out it was a win-win for Britain. If the South  remained separate, Britain would have a vassal state and the North would starve for cotton and other southern raw materials. If the U.S. remained united through a ruinous war, the weakened whole would eventually be back in her clutches. Abraham Lincoln, however proved to be a wild card. 

In 1862 Lincoln did the unexpected. For the first time, the U.S. government itself issued money, printing “greenbacks” that  could not be redeemed in gold from the U.S. treasury. Established by law as “legal tender” (also for the first time requiring paper money’s acceptance under pain of law) the currency’s might enabled the U.S. to win the war and reunite. It also enraged banking interests. The victorious Lincoln died by an assassin’s bullet.

In the post-war, post-assassination political environment, Lincoln’s fiat currency was understood to have been a wart.ime measure, and much of it was gradually withdrawn from circulation.  In the aftermath of the financial panic of 1873, which was allegedly caused by the withdrawal, “sound money” proponents prevailed over agrarians who favored inflation, and the remaining $346 million was made redeemable in gold. No less an economic light than the late free-market economist Milton Friedman opined that tying the U.S. currency to gold alone (although silver had been statutorily a monetary metal established by Alexander Hamilton and that law had not been repealed, just henceforth ignored) was a huge mistake and bimetallism would have been far more advantageous.

A bimetallist candidate did attain the presidency in 1881, James Garfield, who campaigned on a platform of hostility to banking interests. Immediately upon taking office he refinanced the national debt, reducing the 6% paid by the government to 3.5%. Unfortunately, before he could reinstate bimetallism his reformist path was cut short by an assassin’s bullet. 

By the late 1800s, the fixing of the currency at the $346 million figure again chafed uncomfortably, and the Free Silver movement advocated strongly for a policy that would allow silver to circulate as additional wealth, with their cries becoming particularly strong as a financial panic struck in 1896 (Presidential candidate William Jennings Bryant even gave a speech denouncing the gold standard as crucifying the ordinary American, and L. Frank Baum’s “The Wizard of Oz” is a thinly veiled allegory in favor of silver). Their view would not prevail until the early 1960s, and then only briefly. Meanwhile, the discovery of the cyanide process for extracting gold ore and major gold strikes in South Africa and the Klondike effectively mooted the arguments for looking beyond gold to expand the monetary base. Economic growth resumed as President McKinley put in place tariffs that crushed imports and an act that firmly established the gold standard, statutorily ending bimetallism, although he continued to negotiate with the European powers trying to get them  to agree to use silver. Then he was assassinated.

Following the financial panic of 1907, powerful banking interests jockeyed for the ability to put in place what they claimed was a long-term solution. The “Aldrich Plan” was conceived in top secrecy in 1910 at Jekyll Island, Georgia by a cabal of bankers who created a system of large private banks cooperating to control the amount and value of money in circulation. Three major opponents of the plan, Astor, Guggenheim and Strauss conveniently perished on the Titanic in 1912, and the Federal Reserve Act passed in the dark of night on December 23, 1913. Selection of the enormously powerful Chairman of the Federal Reserve is perhaps the least democratic process in the United States: The president is presented a short list by the Federal Reserve itself, he chooses one name to send to the Senate for confirmation, and although he faces periodic pro forma reconfirmation hearings, that person serves until he resigns or dies.

The most immediate consequence of the creation of the Federal Reserve was the issuance of Federal Reserve Notes, which circulated alongside the Treasury’s dollars at par. The amount of Treasury-issued cash remained fixed, while the number of Federal Reserve notes was ever-growing. By 1966 the Treasury’s dollars were authorized to be sunsetted.

Despite the fact that the Federal Reserve was ostensibly created to prevent financial panics from occurring and repair the ones that did occur, 1933 found the U.S. in the Great Depression. Democrat Franklin Delano Roosevelt was elected president, and upon entry into the White House he temporarily closed America’s banks and promptly outlawed private ownership of gold by executive order, requiring those “hoarders” in possession of it to turn it in for payment at the official rate of $20.67 per ounce, a rate that had been set almost one hundred years before in 1834. Rather than turn in their gold, most owners simply shipped it off to Switzerland. Private parties were forbidden to include clauses permitting their contracts to be settled in gold, and the price of gold was re-fixed at $35 an ounce, giving the government 69% profit overnight on the gold it now held. The depression raged on, but FDR assured the government’s popularity by giving it a new role as a direct public benefactor, financed by its massive dollar devaluation. America’s wealthiest, including Prescott Bush, conspired to overthrow FDR until their own chosen FDR successor, retired General Smedley Butler exposed their plot. An investigation concluded the plot was real, but no one was prosecuted.

Although private parties were no longer allowed to own gold, the U.S. remained on a gold standard with respect to external trade, and in the aftermath of World War II the Bretton Woods system required each western nation to redeem its currency for a specific amount of gold. This put nations on an agreed fiscal discipline. By the late 1950s, it was clear that the agreement was not necessarily advantageous to the U.S., which was becoming a net seller of the government’s gold. In 1963 president John F. Kennedy issued Executive Order 11110 authorizing the Treasury to issue silver certificates which provided additional liquidity beyond what the Federal Reserve was willing to authorize. Within six months, he was assassinated in Dallas and one of Lyndon Johnson’s first acts as president was to eliminate the silver certificates.