In 1731 Parliament forbade the further issue of notes by the colonies. and inure or less suecessful efforts were made by them to redeem their out standing notes. When however, the colonies united for their struggle with Great Britain. the only fiscal resource which seemed open to them was the issue of paper money. The first issue was in August, 1775, for 300,000 Spanish dol lars. Elaborate provision was made in ilie law for the redemption of this currency, and the amount fixed for which each colony was held re sponsible. Other issues followed in rapid suc cession, and the pretense of redemption pro visions was soon dropped. As much as nine millions was issued before alit• depreciation took place, but with the constantly expanding volume of the currency this could not last long. The following figures tell the story of the rapid mul tiplication and depreciation of this money: In the meantime every device known to the law was tried in vain to prevent the depreciation. The most stringent penalties enacted against. those who refused to receive Continental money at its face value failed utterly to arrest the fall in value. Such enormous issues together with those of the several State governments prac tically destroyed the value of the paper money. As this paper was never redeemed. it was in ef fect a tax upon the people which caused much suffering and distress.
After the collapse of the Continental currency the circulation of the country consisted of specie, largely obtained through foreign limns, State notes, and, to a very limited extent, bank notes. In 1782 the Bank of North America, at Philadel phia, was chartered by the Continental Congress. It was a private institution with a large Govern ment subsidy and issued notes. It rendered im portant services to the nation, but its note is sues amounted to only $400,000. Before the Federal Constitution was adopted banks of like character had been chartered in Boston, New York, and Baltimore, and bank issues acquired a recognized place in our monetary circulation.
The Federal Constitution vested the power to coin money in the Central Government, and for bade the States making anything but gold and silver a legal tender for the payment of debt. This eliminated State issues, and from this time until the Civil War the monetary circulation con sisted of United States specie, foreign specie, and bank Dotes.
Among the first acts of Congress was to declare the values at which foreign coins should circulate and be received at the Government offices. Of these foreign coins the most common was the Spanish dollar, which as late as 1557 was re ceived in all payments at the post-offices of the United States. In 1792 a law was passed es tablishing a national gold and silver coinage. In
the history of money prior to the gold discoveries of California specie played a subordinate part, its chief function being for small change and as a reserve for banking operations. We may therefore glance at the history of bank-note issues before taking tip that of metal lie currency.
While the Constitution debarred the States from issuing numey. it did not prevent them from establishing banks and giving to the latter the power to issue notes as they might see tit. After the adoption of the Constitution State banks mul tiplied rapidly. In 1791 the Bank of the United States was ehartered with a capital of $10,000. 000. Its notes were received everywhere and were the natural medium of payments between different parts of the country. The bank acted as a controlling agent over the State banks. since by receiving or refusing to accept their notes. it could make or mar their credit. When in 1511 its charter expired the State banks were unre strained in their issue of notes. In 1511 Gallatin estimated the note circulation of these banks at $46,000,000, but in 1514 it had swelled to $100, 000,000, while trade was crippled by war, and specie was Ilrained from the country. Great em barrassment was felt by the Government from the fact that as the only medium of exchange such State bank notes could hardly be refused in payments. while with the suspension of specie pay mein, by the hanks their value depended upon the vagaries of bank management. This state of affairs called loudly for a remedy, and the re organization of the Batik of the United States was planned. It was eventually accomplished in 18111, and for twenty years it exercised on the whole a salutary infinenve upon the monetary circulation. When in 1836 its charter expired, State bank notes again ran riot and precipitated the disastrous panic of 1837. In the 'lays of de pression which followed the States generally pot their banking systems in order. So long. how ever. as any State countenaneed the loose meth ods winch hail formerly brought the whole sys tem into disrepute, some were bound to stiller from such iniquity. hut the mass of sufTering was greatly reduced. This was in part due to the gold discoveries of California, which furnished the nation with a larger supply of metal than hail ever been known, and made it comparatively easy for the banks to maintain an adequate re serve. When the Civil War broke out the State bank system was at its best, and the agitation which in 1863 in the national bank ing system had its origin more in the fiscal neces sities of the Government than in any immediate Heel I of reform of the State hanks.