The history of paper currency in the U.S. is closely intertwined with the growth of our nation. As we prepare for the Federal Reserve’s Centennial this year, we are reminded of the Fed’s critical role in maintaining confidence in U.S. currency. The Federal Reserve Act of 1913 was the foundation for the independent central bank, but the history of currency in the U.S. has a long and colorful past.
In 1690, early Americans in the Massachusetts Bay Colony were the first to issue paper money in the colonies to meet the high demand for trade and as a response to the shortage of coins, which were the primary form of money at that time. Other colonies followed suit and, although this early money was supposed to be backed by gold or silver, some colonists found that they could not redeem the paper currency as promised, and it rapidly depreciated.
It was not until 85 years later, in 1775, that the Continental Congress authorized the limited issuance of paper currency, called “Continentals,” with the primary purpose to help finance the Revolutionary War. The Continentals were denominated in dollars and backed by the "anticipation" of future tax revenues once the colonies achieved their independence. Without solid backing in silver or gold, and with rising inflation, the Continentals soon became worthless. Following the Declaration of Independence, the new country needed a way to fund the ensuing war effort. Distrust in paper money notwithstanding, the Continental Congress issued the first notes bearing the words, “The United States” in 1777 and sought to give them credibility with well-known revolutionary figures as signatories.
The First Bank of the United States was chartered in 1791 and operated until 1811. It was succeeded by the Second Bank of the United States, which operated from 1816 to 1836. Although privately owned, these banks were chartered by Congress and performed several central bank functions, including the authorization to issue paper bank notes. President Andrew Jackson vetoed the recharter of the Second Bank, and for the next 25 years the “Free Banking Era” reigned. During this time, American banking consisted of state-chartered banks with no federal regulation or uniformity. These banks issued State Bank notes in various sizes, shapes and designs. By 1860, an estimated 8,000 different state banks were circulating bank notes in denominations from ½ cent to $20,000.
In 1861, to finance the Civil War, Congress authorized Demand Notes, which were the first issue of paper money by the government since the Continentals. In 1862, Congress discontinued Demand Notes and issued Legal Tender Notes, also known as United States Notes, which were the first national currency notes used as legal tender for most public and private debts. These notes, and all paper money issued since 1861, are still valid and redeemable in current cash at face value.
Congress passed the National Banking Act in 1863 to establish a national banking system and uniform national currency. The national banks were required to purchase U.S. government securities as backing for their National Bank Notes.
The Department of the Treasury's Bureau of Engraving and Printing (BEP) (Off-site Link) began printing all United States currency in 1877. August 29, 2012, marked the BEP's 150th anniversary.
President Woodrow Wilson signed the Federal Reserve Act in December 1913, which created the Federal Reserve System as the nation's central bank. In 1914, Federal Reserve Notes, issued in denominations ranging from $1 to $10,000, replaced National Bank Notes. The first major change to affect the appearance of U.S. paper money occurred in 1929, when currency size was reduced and standardized designs were instituted for each denomination. This standardization made it easier for the public to distinguish between genuine and counterfeit currency notes. Beginning in 1990, new series notes were issued with advanced features, such as a security thread and micro printing, to deter counterfeiting.
In our world of rapidly advancing technology and payment alternatives, the Federal Reserve, the BEP and the U.S. Secret Service continually strive to ensure that the public remains confident in U.S. currency, and that it evolves to meet changing societal needs.
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