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Central banking in the United States

30 April, 2015 - 16:51

In 1690, the Massachusetts Bay Colony became the first to issue paper money in what would become the United States, but soon others began printing their own money as well. The demand for currency in the colonies was due to the scarcity of coins, which had been the primary means of trade 1. Colonies' paper currencies were used to pay for their expenses, as well as a means to lend money to the colonies' citizens. Paper money quickly became the primary means of exchange within each colony, and it even began to be used in financial transactions with other colonies 2. However, some of the currencies were not redeemable in gold or silver, which caused them to depreciate 3. The Currency Act of 1751 set limits on the issuance of Bills of Credit by the New England states and set requirements for the redemption of any bills issued. This Act was in response to the overissuance of bills by Rhode Island, eventually reducing their value to 1/27 of the issuing value 4. The Currency Act of 1764 completely banned the issuance of Bills of Credit (paper money) in the colonies and the making of such bills legal tender because their depreciation allowed the discharge of debts with depreciated paper at a rate less than contracted for, to the great discouragement and prejudice of the trade and commerce of his Majesty's subjects. The ban proved extremely harmful to the economy of the colonies and inhibited trade, both within the colonies and abroad 5.

The first attempt at a national currency was during the American Revolutionary War. In 1775 the Continental Congress, as well as the states, began issuing paper currency, calling the bills "Early American currency|Continentals". The Continentals were backed only by future tax revenue, and were used to help finance the Revolutionary War. Overprinting, as well as British counterfeiting caused the value of the Continental to diminish quickly. This experience with paper money led the United States to strip the power to issue Bills of Credit (paper money) from a draft of the new Constitution on August 16, 1787 6, as well as banning such issuance by the various states, and limiting the states ability to make anything but gold or silver coin legal tender 7.

In 1791 the government granted the First Bank of the United States a charter to operate as the U.S. central bank until 1811 8. The First Bank of the United States came to an end under James Madison|President Madison because Congress refused to renew its charter. The Second Bank of the United States was established in 1816, and lost its authority to be the central bank of the U.S. twenty years later under Andrew Jackson|President Jackson when its charter expired. Both banks were based upon the Bank of England 9. Ultimately, a third national bank, known as the Federal Reserve, was established in 1913 and still exists to this day.