Money and Currency

Sources

Colonial Exchange . During the Revolutionary War the United States had experienced high inflation and economic insecurity. These problems are natural in wartime; in the new republic they were made worse by the absence of any single standard of currency. Merchants engaged in foreign trade dealt in British pounds, Spanish dollars, Portuguese Johannes, or French guineas, while colonies also issued paper money, either dollars or pounds. In addition, private banks or other businesses issued notes, which circulated as currency. With over 70 percent of the people making their living as farmers, most of the American economy was conducted in barter. Farmers traded part of their crop for necessary goods and services, and women weaved or spun to produce

DAILY WAGE RATES IN MASSACHUSETTS, 1803-1815

clothing for their families and additional trade items. Thus, the new republic had a bewildering variety of coins, paper currency, barter items, and redeemable certificates in circulation. The value of these various currencies fluctuated wildly; by April 1780 the Continental dollar was worth four hundred times less than it had been three years earlier. Gold and silver fluctuated less in value, but merchants and others would cut gold and silver pieces into smaller parts (the Spanish dollar, for example, could be cut into eight pieces, hence the expression “pieces of eight.”) As George Washington said, “Without a Coinage … our Dollars, pistareens, &c. will be converted … into five quarters, and a man must travel with a pair of money scales in his pocket, or run the risk of receiving Gold at one fourth less by weight than it counts.”

Gold and Silver . To finance the war Congress borrowed money from France and Holland as well as from private citizens. These debts had to be repayed in gold or silver; states also had debts which needed to be paid in hard currency. Some states required taxes to be paid in gold or silver, which placed a burden on farmers, who rarely had specie. Other states, such as Rhode Island, wanted to encourage the local economy and did not want to punish debtors and so allowed them to repay loans in vastly depreciated paper or with produce. Either way, with debts repayed in gold or silver, or repayed with corn or wheat, someone would suffer. With no single medium of exchange and no central government able to repay international loans, the United States would not enjoy prosperity. In 1785 Congress could not make its payment on the loans from France and defaulted, which would make it impossible to borrow more. In 1786, when Massachusetts tried to raise taxes to pay its own war debts, farmers in the state revolted. In Maryland the state was torn apart by a debate over paper money, which was inflationary and beneficial to borrowers, versus hard currency, which fluctuated less in value and so helped lenders.

The Morris Plan . In April 1783 Robert Morris, the minister of finance under the Articles of Confederation, proposed an elaborate system to make sense of the U.S. currency. Morris and his assistant, cousin Gouverneur Morris, prepared a table comparing the values of all state currencies and proposed a standard monetary unit based on the pound and dollar, regulating it according to the constant value of Spanish dollars and British pounds received in the United States. The common unit would have avalue of 1/1600 of a British pound, or 1/1440 of a Spanish dollar. Morris’s system was tied in with his plans for a national mint, and he hired a workman, Benjamin Dudley, to begin making coins.

Complexity . The very complexity of Morris’s system made it unworkable. A pound of butter, worth one-fifth of a dollar, under Morris’s system would be valued at 288 units, and a horse, worth eighty Spanish dollars, would cost 115, 200 units. Thomas Jefferson, a member of Congress from Virginia, proposed an alternative plan. Instead of basing the currency on a common denominator, Jefferson proposed basing an American dollar on a standard weight of gold or silver and minting coins of gold (a ten-dollar “Eagle” and a five-dollar “Half-Eagle”) and of silver (dollar, half-dollar, and dime) and of copper (the cent). Jefferson based the American currency on the decimal system (dime comes from dixième, for a tenth, and cent from centum, or hundredth) rather than on the British pound, shilling, and pence. Congress approved Jefferson’s plan in 1786 but was unable to take any action.

Constitution . The Constitution allowed the new government to make some sense of the complicated financial picture. Under the new Constitution only the U.S. Congress and not the states could coin money and regulate its value, emit bills of credit, or make anything but gold or silver legal tender for paying debts. This policy required a new national currency, and Secretary of the Treasury Alexander Hamilton revived the proposal for a national mint and currency.

Proposal . In 1791 Hamilton reintroduced the subject of currency, basing his proposal on Jefferson’s and Congress’s 1785–1786 system. Hamilton modified slightly the proposed value of the dollar, averaging the weights of various Spanish dollars then in circulation to determine the value of their gold against silver. The Coinage Act of 1792 set the silver content of the dollar at 371.25 grains and made fifteen pounds of silver equal in value to one pound of pure gold. The act also allowed private citizens to bring gold or silver to the mint to be turned into coins, free of charge.

Counterproposal. Jefferson at this time proposed a different standard for American currency. As secretary of state, Jefferson was working on a uniform system of weights and measures; he wanted to base American currency and weights on the same standard, an ounce of pure rainwater, and to regulate the dollar’s value to an ounce of silver. Hamilton did not adopt this idea, but the new mint, established in 1792, created an American system of coinage which is still in operation. Instead of basing American currency on the British model, Americans adopted a system based on the decimal system, though the cent coin is still called the penny, like its British cousin.

Results . The American system of currency adopted in 1792, developed by Jefferson and Hamilton working separately, is a model of organization and rational simplicity. However, the American economy continued to be based on other currencies: bartered products, foreign currencies, banknotes, and bills of exchange. The United States would not issue its own paper currency for nearly a century, until the Civil War. The system of coinage was a step toward a national economy, though not all proponents of the measure regarded it as such.

Sources

Julian Boyd and others, eds., The Papers of Thomas Jefferson, volumes 7 and 18 (Princeton, N.J.: Princeton University Press, 1953);

Herman E. Krooss, ed., Documentary History of Banking and Currency in the U.S., volume 1 (New York: Chelsea House, 1969);

Arthur Nussbaum, A History of the Dollar (New York: Columbia University Press, 1957).