A History of U.S. Paper Money

Liza Minnelli famously sang about the role of money in the award-winning Broadway play Cabaret, saying “Money makes the world go round.” Oscar Wilde cleverly wrote about it, as well, stating “When I was young, I used to think that money was the most important thing in life. Now that I am old, I know it is.”

Whether or not you wholeheartedly agree with these theories about money, at some level there is an element of truth to them. While the American monetary system was by no means the first, it’s an interesting and compact case study because the United States is such a relatively young nation.

The first forms of paper currency used by British colonials in the New World were issued by the province of Massachusetts, beginning in 1690, explained Peter Treglia, Director of Currency at Stack’s Bowers. At the time, the colonies issued their own paper money as a matter of convenience when paying for goods and services..

“(It was) essentially a form of fiat money, as it was not backed by any precious metals,” explained Treglia. That would change over time, with the decision to print a federal form of paper currency.

Fewer than 10 examples of the 1861 $20 Demand Note are recorded in the census, and most are in the Very Good to Fine range. This example’s grade is PCGS Very Fine 25. At the center of the specimen is a vignette of Liberty, with sword and shield in hand. It sold for $93,000 during Stack’s Bower’s March 2018 auction of the John R. Anderson Collection of United States Paper Money. The 64-lot auction realized more than $8 million. Image courtesy Stack’s Bowers

“The first form of paper currency, in 1861, was demand notes. They were designed to help finance the Civil War,” Treglia explained. “It did so by Congress authorizing demand notes; because the cost of the war exceeded the government’s limited income from tariffs and excises, and it was the only way to fund it.”

The forms of federally-issued paper currency quickly expanded beyond demand notes to include many different types including Silver Certificates, Gold Certificates, Legal Tender Notes, and Federal Reserve Notes. Both Silver Certificates and Gold Certificates were backed by gold, beginning in 1863.

“It was the most secure form of currency in the eyes of the government and the people of the United States,” added Treglia. “It allowed one to deposit physical gold and silver for paper currency. It was easier to carry as it was much lighter than say $50 worth of gold or silver.”

The last Gold Certificates were printed in 1928, and on June 5, 1933 President Roosevelt suspended the gold standard. The first Federal Reserve Note issue was the series of 1914, and it remains the sole form of paper currency in the U.S. today.

Example of the first federally-issued $2 note. This 1862 $2 Legal Tender Note appears in grade PCGS Gem New 65 PPQ and was part of the “greenback” currency issue that began in 1862. Alexander Hamilton appears at the center of the note, which sold for $20,400 during the March 2018 auction of the John R. Anderson Collection through Stack’s Bowers. Image courtesy of Stacks’ Bowers

“Because of the Great Depression, the government found it could do little to stimulate the economy, and in order to deter people from depleting the gold supply, President Roosevelt decided to remove the nation away from the gold standard,” said Treglia. “By doing this, it allowed for lower interest rates and for the government to pump money into the economy via fiat currency…This proved to be successful.”

As explained in detail on Wikipedia, “Federal Reserve Notes are authorized by Section 16 of the Federal Reserve Act of 1913 and are issued to the Federal Reserve Banks at the discretion of the Board of Governors of the Federal Reserve System. The notes are then put into circulation by the Federal Reserve Banks, at which point they become liabilities of the Federal Reserve Banks and obligations of the United States.”

Federal Reserve Notes are printed at the United States Bureau of Printing and Engraving, located in Washington, D.C. Tours of the BPE are offered to the public during specific months of the year. Admission is free, but anyone interested in taking the 40-minute tour is required to obtain tickets. If you are considering a tour of the BPE while visiting Washington, be sure to check the  HYPERLINK “https://www.moneyfactory.gov/washingtondctours.html” BEP site, as renovations to the area are slated for the latter part of 2018.

With such an involved history, selecting one particularly significant moment in the evolution of U.S. paper currency may seem like a tall order. However, Treglia offers his take without hesitation.

“Hands down, the National Banking Act,” he said. “Prior to the Civil War, state banks could issue their own currency backed by financial securities held by the bank. Because it was so lax, many of these private banks went bankrupt rather quickly, and it encouraged lots of fraudulent institutions to issue worthless bank notes.”

Treglia further explained, “In 1863, President Lincoln created the National Banking Act, which allowed National Bank Notes to be issued by private banks with the government’s oversight and backing. The act allowed banks to issue local currency with standard government-provided designs. This prompted great confidence in the currency and allowed tremendous growth in the economy, and security in business and commerce. That was arguably the most important time in United States paper-money history.”

One of only four known examples of the 1862 and 1863-dated $1,000 Legal Tender Note, with this being the finest graded (PCGS Choice About New 58) in private hands. At the center is a portrait of founding father and Superintendent of Finance Robert Morris. Notes of this denomination were typically used in bank-to-bank transactions and were not used by the public. It sold for $960,000 during a March 2018 auction through Stack’s Bowers. Image courtesy Stack’s Bowers.

Regarding who and what has appeared and continues to appear on U.S. currency, there’s been a lot of change within a framework of consistency.

“It was common early on to use powerful figures on currency, not just presidents,

Treglia said. “Female allegorical designs, important historical individual such as Lewis and Clark, and Ben Franklin have appeared on currency.”

Furthermore, the Eye of Providence was decided upon by a design committee and was first used in 1776.

Adding to the excitement of its rich history, the current market for collecting U.S. paper currency is robust.

“Today’s paper money-collecting market is very strong, especially in very rare material,” said Treglia. “(Stack’s Bowers) is currently selling one of the greatest pre-1923 U.S paper money collections of all time. It consists of only 240 notes and will sell over two years with a total estimated value of $30,000,000.”