The History Of Money: Currency Wars

By Andrew Beattie AAA

Money has played a very important role in every war since its creation. Ancient kings played with the percentages of precious metals in their coins to create more money to raise armies, feudal lords tried to undermine each other's treasuries and counterfeiters have run rampant throughout history. The most famous currency war, however, took place between the British Empire and its colony in America.

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Currency Wars
In the 17th century, England was determined to keep control of both the American colonies and the natural resources they controlled. To do this, the English limited the money supply and made it illegal for the colonies to mint coins of their own. Instead, the colonies were forced to trade using English bills of exchange that could only be redeemed for English goods. Colonists were paid for their goods with these same bills, effectively cutting them off from trading with other countries.

In response, the colonies regressed back into a barter system using ammunition, tobacco, nails, pelts and anything else that could be traded. Colonists also gathered whatever foreign currencies they could, the most popular being the large, silver Spanish dollars. These were called pieces of eight because, when you had to make change, you pulled out your knife and hacked it into eight bits. From this, we have the expression of, "two bits", meaning a quarter of a dollar. (To read about money's beginnings, see The History Of Money: From Barter To Banknotes.)

Massachusetts Money
Massachusetts was the first colony to defy the British. In 1652, the state minted its own silver coins, including the pine-tree and oak-tree shillings. It circumvented the British law stating that only the monarch of the British empire could issue coins by dating all their coins 1652 - a period when there was no monarch. In 1690, Massachusetts issued the first paper money as well, calling it bills of credit.

Tensions between America and Britain continued to mount until the Revolutionary War broke out in 1775. The colonial leaders declared independence and created a new currency called "continentals" to finance their side of the war. Unfortunately, each government printed as much as it needed without backing it to any standard or asset, so the continentals experienced rapid inflation and became utter worthlessness. This discouraged the government from using paper money for almost a century.

Aftermath of the Revolution
The chaos from the war left the monetary system in America a complete wreck. Most of the currencies in the newly formed United States of America were useless. The problem wasn't resolved until 13 years later in 1788, when Congress was granted constitutional powers to coin money and regulate its value. Congress established a national monetary system and created the dollar as the main unit of money. There was also a bimetallic standard, meaning that both silver and gold could be valued in dollars and used as money. (For related reading, see The Gold Standard Revisited.)

It took 50 years to get all the foreign coins and competing state currencies out of circulation, but by the early 1800s, the U.S. was ready to try the paper money experiment again. Bank notes had been in circulation all the while, but because banks issued more notes than they had coin to cover, these notes often traded at less than face value.

In the 1860s, the U.S. created more than $400 million in legal tender to finance the Civil War. These were called greenbacks simply because the backs were printed in green. The government backed this currency and stated that it could be used to pay back public and private debts. The value did, however, fluctuate according to the North's success or failure at certain stages in the war. Confederate dollars, also issued during the 1800s, followed the fate of the confederacy and were worthless by the end of the war.

Aftermath of the Civil War
Following its victory, the U.S. government got the National Bank Act through congress (February 1863). This act established a monetary system whereby national banks issued notes backed by U.S. government bonds. The government then choked out notes from state banks by taxation. The U.S. Treasury then worked to get greenbacks out of circulation so that the national bank notes would become the only currency.

During this period of rebuilding, there was a lot of debate over the bimetallic standard. Some were for using silver to back the dollar, others were for gold. The situation was resolved in 1900 when the Gold Standard Act was passed. This meant that, in theory, you could take your money to FortKnox and exchange it for the corresponding value in gold. Another innovation brought the Federal Reserve into being in 1913. The Federal Reserve was given the power to steer the economy by controlling money supply and interest rates on loans. (For more insight, see The Gold Standard Revisited.)

Gold No More
In 1971, the U.S. dollar moved off the gold standard. The significance of moving away from the standard is that it became possible to create more money than there was gold to back it. Money's value was now decided purely by its purchasing power as dictated by inflation. There is no shortage of people who believe this is going to cause the end - with the dollar going the way of its forefather, the continental. There is a danger of losing the value of the dollar, but now it is backed by the health of the American economy. If the economy takes a nosedive, the value of the U.S. dollar will drop both domestically through inflation, and internationally through currency rates. Fortunately, the implosion of the U.S. economy would plunge the world into a financial dark age, so many other countries and entities are working tirelessly to ensure that never happens. (To learn more, read What's the relationship between a country's currency and the strength of its economy?)

Money in the Future
Although the paper bills we carry around now have high-tech watermarks and security threads, the future of money is moving toward cards and chips. One day, a chip in your wallet may register purchases just by waving it over a product you want to walk out with - no clerk, no smile, no "hi my name is" badge. Internet currencies, such as the Paypal system, are also contenders for the next generation of money as the world becomes more interconnected. Many nations are still worried about cash they can't track or tax, but an internet economy is as inevitable as a free-trading America was. Money has changed a lot since the days of shells and skins, but its main function hasn't changed at all. Regardless of what form it takes, money offers us a medium of exchange for goods and services and allows the economy to grow as transactions can be completed at greater speeds.

To read more about money and currencies, see What Is Money?

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