In a perfect world, you wouldn’t need money. You could just walk into any store and be provided with goods or services straight from the giving heart. But this is an imperfect world. The custom of trading an item in exchange for goods or services has long been extinct. We’ve come a long way from the days of trading with precious stones or pelts of fur, which got us thinking about American currency and how it came to be. Once we became independent from British rule, how did the United States create a currency that’s still viewed as one of the strongest and most stable in the world?

A first in the history of currency

IOU promissory note resting under blue pen
Credit: Kameleon007/ iStock

Today's paper bills are commonly used worldwide, but when they first started circulation in the New World in 1690, it was ground breaking. Before this, coins were the standard choice for paying for services rendered. When the Massachusetts Bay Company planned a military expedition to Canada that year, they issued paper bills instead of coins. The paper bills served as an “I owe you” for the expedition’s cost and represented a promissory note of debt that needed to be paid. While this was a foreign concept in Europe, paper bills serving as a promise to pay debt became standard practice in the colonies even at the onset of the American Revolution.

Growing pains with American currency

At the start of the American Revolution, the Continental Congress decided to create their currency as further proof that the colonies had separated from Britain. This currency was called the Continental Currency and was paper money that was intended to be backed by gold or silver bullion. Unfortunately, the bullion was never provided. It’s easy to see how this could be problematic. The value of the Continental Currency was questionable because there was no gold or even silver to back the paper money that was being treated like promissory notes.

All of this was made worse by the fact that both the Continental Congress and individual states were printing Continental Currency and often printing in excess to cover debts and maintain cash flow. If you understand economics, you know that flooding markets with additional paper currency — especially when it’s not backed by a tangible item of value — does nothing to bolster growth or stabilize an economy. Often, paper bills couldn’t be redeemed for their value — leaving citizens embittered. By 1780, the value of the Continental Currency had dropped to one-fortieth of its original value and Congress decided to end production. It was time to go back to the coin-based currency.

The Mint Act of 1792

Stack of minted coins against a blue backdrop
Credit: Filograph/ iStock

Shortly after the Constitution was ratified, Congress realized that it was time to reform the country’s currency. Citizens were leery of paper money because of the massive depreciation during the war. The Mint Act was passed on April 2, 1792 and created a clear coinage process that relied on the decimal system that we still use today. The dollar was the primary base unit. On a national level, the U.S. government wasn’t printing paper money, but individual banks throughout the states opted to print paper money to make it easier to support their economies and pay down debts. While this was an improvement over the Continental Currency, this system also made it easy for unscrupulous financial institutions to create counterfeit versions.

Paper money returns

Stack of American paper currency in various denominations
Credit: agcuesta/ iStock

At the end of the Civil War, both the U.S. and Confederate governments found themselves with heavy military debts that couldn’t be covered by their respective inventories of gold and silver. To ease the financial strain, both governments began printing paper money. In the Union, this money was known as “demand notes” or “greenbacks” and could be immediately redeemed into coins for their face value. “Greenback” is still a word that we use to this day. With the National Banking Act of 1863, the U.S. government consolidated issuing power for paper currency by converting independent banks and financial institutions into national banks, which is our current system. This curtailed counterfeit paper bill production and helped stabilize the currency.

The Federal Reserve emerges

Even though paper money was meant to be a temporary fix during a wartime economy, it was never retired — even after the Civil War ended in 1865. After the economic panic of 1907, however, the U.S. government recognized that something needed to be done to ensure that the value of paper money wouldn’t fluctuate.

The Federal Reserve was created in 1913 to serve as a safety net to make sure that the government could pay its debts. In 1914, paper money production was consolidated and only Federal Reserve Notes were produced and accepted as legal currency. While designs and safety measures to prevent counterfeiting have modernized, the United States still relies on Federal Reserve Notes for our paper money, which is printed at the Bureau of Engraving and Printing. Meanwhile, our coins have always been produced by the U.S. Mint.