The history of U.S. money officially started when the constitution was passed. In article
1, section 8, it states that Congress has the power to regulate money and fix any imbalances that
might occur. Although money had already been invented, this event was a major turning point
because it specifically gave the government authority to control currency. In April of 1792, “The
Coinage Act” was passed. This act called for the creation of the dollar and stated how money
should be made. For example, money was instructed to be made from silver and to come in
forms of 1 dollar, half a dollar, quarter dollars, etc.. Instead of the cash we use now-a-days, larger
values came in the form of “Eagles”: gold coins which carried values of 2, 5, or 10 dollars. The
original definition of a dollar was: “A silver coin of the United States of the value of one hundred
cents or tenth part Eagle.”
An important statement in the constitution explains that no state has the right to use
anything else other than the official gold and silver coins as money. This statement is very
important because it made the national economy dependent on only one form of
payment/currency. In addition, this prohibited people from using paper to represent money or
debts(what we now know as checks). Finally, banks were not allowed to use Fractional Reserve
Banking, or loaning out money. As a consequence of these restrictions, the nation’s wealth was
very well distributed.
Although 2 attempts were made to create a private and national central bank, the banks
charters were both revoked because it violated the constitution's idea of evenly distributing
money. In 1861, Abraham Lincoln decided to print paper money to help pay for the civil war.
The treasury took in many coins and substituted nearly all money for paper money. Back then,
paper money was known as “The Greenback”. Although everyone knows a hundred dollar bill is
worth a lot, it is really just a piece of paper. In reality though, paper money is a binding contract.
When paper money came out, the paper said “Promise to Pay the bearer (whoever much it was
worth) amount”.This required anyone to go to the treasury in Washington and redeem the paper
money for silver coins. Since the paper money acted as a loan, the value of the dollar decreased
dramatically.
In 1886, the Treasury issued another form of paper money known as certificates. Instead
of acting as a loan, certificates acted as real money because for every certificate dollar, 1 coin
dollar actually existed to back it. This allowed for the international exchange of money.
In 1914, the Federal Reserve was established. The Federal Reserve began printing a new
form of bank notes. Although it stated that this currency could be exchanged for lawful money in
any of the federal reserve banks, it still was not lawful money. In 1932, Franklin Roosevelt
demonetized gold and silver coins and redeemable bank notes. Instead, he ordered the creation of
notes that were not redeemable. In 1957, the Federal Reserve produced the last silver dollar
because the unredeemable federal reserve notes became so popular. Although an attempt was
made by John F. Kennedy to bring back silver coins, the currency never re-emerged because he
was assassinated.
In the world we live in today, the value of the dollar keeps declining as the amount of
money circulating in the economy increases. When it comes down to the exact definition of the
paper money, it really just is a tender for all debts. Basically, the privately owned banking system
that prints the money “makes the rules” and establishes what the paper represents.