On February 3, 1690, the Massachusetts Bay Colony was said to have issued the first paper money in the United States. The purpose was to help fund military action against Canada during King William's War. Massachusetts was indeed a truly pioneering colony when it came to money, as they were also the first to mint their own silver coins in 1652, despite a British law against it (written in support of mercantilism).

The History of Paper Money

Money is anything that is commonly accepted by a group of people in exchange for goods or services. Most countries have unique exchange systems of coins and paper money. Some currencies, like the euro, can be used across entire regions.

Key Takeaways

  • Before money was invented, goods and services were exchanged through bartering or using commodities like salt, cattle, or grains.
  • People used metal objects as money to exchange goods and services as early as 5000 B.C.
  • Paper money in the United States dates back to 1690 and represented bills of credit or IOUs.
  • New currencies were introduced in the U.S. in 1861 to help finance the Civil War.
  • In 1996, a series of bills were introduced that used new methods to prevent counterfeiting.

Prior to the invention of money, goods and services were typically exchanged through bartering. For example, one person might trade eight bags of rice for a goat. Basic commodities—such as salt, tea, seeds, tobacco, and livestock—have been used as money to exchange goods and services as well.

Metal objects represented money as early as 5000 B.C. Lydians started using coins in the 7th century B.C. Earliest forms of paper money were developed in China during the Tang Dynasty (618 - 907 A.D.). In the United States, the first paper money created (in 1690) was called a bill of credit, and represented the colony's obligation to the soldiers. Soldiers could spend or trade the colony's IOU just like silver and gold coins.

During the revolution of 1775, colonial leaders tried to replicate Massachusetts' paper experiment on a wider scale, but the newly-christened continentals lacked any backing, such as silver or gold. On a small scale, it may have worked, but so much money was printed that rapid inflation stripped them of all their value.

Less than 100 years later, in 1861, two competing currencies were used to finance the opposing sides of the Civil War. Their values fluctuated with the fortunes of the war. Yet, it wasn't until the National Banks Act after the civil war that the U.S. government introduced a monetary system where banks could issue paper notes based on their holding of government bonds. These disparate currencies were taxed out of existence in the following decades and replaced with national bank notes, giving the U.S. its first uniform paper currency.

The Federal Reserve Act of 1913 created a national banking system that could keep up with the changing financial needs of the country. The Federal Reserve Board then issued the first federal note the form of a ten-dollar bill in 1914. The Federal Reserve later decided to reduce the actual size of the notes by 30%. Designs on the notes would not change again until 1996, when a series of improvements were made to make the U.S. dollar more counterfeit-proof.