Currency, a uniform medium of exchange that is created to facilitate commerce. Although over the past few thousand years there have been many different forms and usages of currency, none is more prevalent in today's society then American currency. Ever sense we won the revolutionary war in 1776 and even before this our country has been in a constant battle determines what our money is worth, and where it gets value from. Primarily, for the purposes of this article the relevant changes deal mainly with devaluation. In regard to American currency devaluation applies because our money used to obtain its value from the metals that coins were produced from, to where not money is always made out of cotton, base metals, and cannot even be physically held in most situations. Paper MoneyPaper money plays a crucial role in understanding how and why American money has been devalued. When reading this, please keep in mind that although paper money has always represented wealth, it has never been made of materials that are considered to have a uniform value. Continental CurrencyContinental currency is the country’s first attempt at using paper currency. These amazing pieces of history were produced primarily so the government would be able to pay for the revolutionary war, which unfortunately did not work out at all. This economic system completely collapsed in May of 1781 when the ratio of paper currency to hard money (gold or silver) went from 500:1 to 1000:1; which caused people to be devout to coins that were minted out of gold or silver after this point. Currency from State Chartered Banks The era of paper money that arise because of state chartered banks is crucial in understanding the devaluation of American currency. Starting in 1836; state-chartered banks started to produce their very own paper currency which was backed solely by the medals that were in their vaults, which created major problems because there was nothing that controlled a number of notes that were printed comparison to the reserves that were held. In addition, because they were made in so many different areas, it was very difficult for people to actually use these bills in areas that were not close to where they were made; yet the system thread. Although this situation does appear to be similar to the one created by continental currency, the US supreme court actually proved the production of this money to be constitutional and legal in the case Briscoe v. Bank of Commonwealth of Kentucky. Shockingly, this displayed that the federal government was relatively relaxed when it came to paper currency and the devaluation of American money. Three Cent Silver PieceThe next major thing that arose in the devaluation of American currency was the introduction of the three cent silver pieces. In 1849 the gold rush occurred where millions of ounces of gold was discovered in California which flooded the market. What most people do not realize about the gold rush, is at the time American coinage was minted with a ratio of gold to silver which was 16 to 1. The gold rush flooded the market with gold, which increased its supply so much that people could melt silver coins and exchange it for gold at the same face value, making a profit. This caused people to hoard silver coins, which lead to a coin shortage. Out of necessity the government introduced what is known is “fiat money” which is money that has a melt value that is made to be lower than its face value. Instead of the normal 90% silver and 10% copper composition that coins were always made out of, these coins were age out of 75% silver and just 25% copper and were really accepted by the public due to necessity. These coins were produced at the Philadelphia and New Orleans mint, with the only year that they were produced at New Orleans was 1851. The Legal Tender Act of 1862This legal tender act is crucial in understanding the devaluation of American money because it lead to the production of the nation’s first official paper currency; which were known as greenbacks due to their color, which were produced primarily to finance the civil war. These bills represented the nation’s debt but were given legal tender status so people had to accept them for their face value in commerce. Most people at the time thought that they would fail, but they were wrong as greenbacks were actually quite successful! Three and Five Cent NickelsDuring the civil war, there as another massive hoarding of coinage due to the public's uncertainty. This caused the government to produce fractional currency to replace the silver coins that were taken from circulation. First, they were paper which were widely unliked by the public due to their low quality. Then, the government took drastic measures by producing three and 5 cent nickels which were both composed of 75% copper and 25% nickel to replace the paper notes in circulation. Amazingly, these coins were very successful and circulated widely! Additionally, the five-cent nickel is the only coin that is still made out of its original composition! Furthermore, these coins were actually called nickels due to their appearance and not their actual composition!
Well, there it is. The devaluation of American Currency from the colonial era to the civil war! In a few weeks, there will be a part two to this series which will take this subject all the way to modern times! I really hope that you enjoyed this article, and remember; Let’s Start A Coin Collection!
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Author: Brandon Spiegel.
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