To finance the American Revolution, the continental congress printed the new nation’s first paper money. Known as “Continentals,” the fiat currency notes were issued in large quantities, which led to inflation, which, although mild at first, rapidly accelerated as the war progressed. Eventually, people lost faith in the notes, and the phrase “not worth a continental” came to mean “utterly worthless.”
The U.S. continental states that only the federal government can coin money and states cannot coin money; therefore, the Federal government was no longer allowed to print paper currency and could only create coins. Printing money was left to the state’s banks.
At the urging of Treasury Secretary Alexander Hamilton, Congress established the First Bank of the United States in 1791, headquartered in Philadelphia. It was the largest corporation in the country and was dominated by big banking and money interests. Many agrarian-minded Americans, uncomfortable with the idea of a large and powerful central bank, opposed it. By 1811 when the bank’s 20-year charter expired, Congress refused, by one vote, to renew it.
State-chartered banks and unchartered “free banks” took hold during this period, issuing their own notes, redeemable in gold or specie. Banks also began offering demand deposits to enhance commerce. In response to a rising volume of check transactions, the New York Clearinghouse Association was established in 1853 to provide a way for the city’s banks to exchange checks and settle accounts. However, by the beginning of the Civil War, more than 1600 banks were issuing more than 10,000 different kinds of paper currency. Many did not have gold or silver backing, which was required. When people went to use their notes, merchants would often reject them if they showed up on the bad currency list.
The gold rush in California increased the amount of gold coins in circulation, and by the end of the Civil War, gold coins were everywhere. This helped lead to the Gold Standard in early 1900s due to the increased supply of gold.
The Civil War began in 1861, which required both the Union and the Confederacy to raise huge sums of money. When Congress failed to sell enough bonds to raise the money needed for the war, they decided to print paper currency for the first time. They printed $60 million in new currency that was not backed by gold or silver. This new currency was declared legal tender by Congress and was required to be accepted as payment. Due to the green ink on the reverse side they were called “greenbacks”, which made them easy to distinguish from state notes that were black on the back.