By John Steel Gordon
There were no banks in colonial America for the simple reason that Britain forbade them. Britain also did not allow the export of British coinage, although some came to the colonies in the pockets of travelers.
Without banknotes and a proper coinage, the money supply in the colonies was a hodgepodge of tobacco warehouse certificates, scrip, IOUs and other informal currencies. In North Carolina in the 1730s, there were no fewer than 17 different forms of legal tender in circulation.
The principal coin in use was the Spanish dollar minted in South America and long used as an international standard. The post-Revolution American dollar would be based on it. Often clipped into halves, quarters and eighths to make small change, Spanish dollars were frequently known as pieces of eight.
Even wampum — beads made from the shells of freshwater clams and sewn onto strips of leather — was in regular use in colonial America until J. C. Campbell of New Jersey opened a factory to manufacture counterfeit wampum, destroying the value of the real thing, in 1760.
With the onset of the American Revolution, the lack of a proper monetary system was no small part of the problems faced by the Continental Congress. For as Cicero had pointed out two thousand years earlier, “The sinews of war are infinite money.”
There are only three ways to finance a war: a government can tax, borrow or print. With no power to tax (the Congress had to ask the states for money, which was seldom forthcoming), and few willing lenders, the Congress had no alternative but to print.
Even before declaring independence, the Congress began issuing negotiable bills of exchange called “continentals,” to meet expenses. Continentals were fiat money — i.e., not backed by anything and money only because the government said it was money. As has always happened, its value rapidly depreciated, setting off a virulent inflation.
By the end of 1779 the Continental Congress had issued a staggering $225 million in continentals. By 1781 they were nearly worthless.
In that year Congress finally appointed Robert Morris, remembered as the financier of the Revolution, as head of the new finance department. Among his first acts was to establish a bank, the Bank of North America, chartered by the Congress. Morris knew how valuable the Bank of England had been for Britain during the endless wars of the 18th century, allowing it to borrow at much lower rates than its enemies could.
Morris’ new bank would, like the Bank of England, function as a central bank, issuing banknotes that could be redeemed for specie and handling the borrowing needs of the government.
The Bank of North America was capitalized at $400,000. Morris invested personally in the venture as did other wealthy Philadelphia merchants. But most of the capital came from money that France and the Netherlands had loaned the Continental Congress.
When the Bank of North America began issuing banknotes in 1782, they came with a promise that they could be redeemed for silver. Not surprisingly, the American public, badly burned by the continentals, were skeptical. But when the promise turned out to be true, the banknotes began to rise in value. The following year, when several states began accepting the banknotes in payment of taxes, they quickly rose to par.
The United States, whose independence was finally recognized by Britain that year, was still in financial turmoil, a problem that would take more than a decade, a new constitution and the genius of Alexander Hamilton to solve. But the American banking system had been born.
Acclaimed economic historian John Steele Gordon is the author of An Empire of Wealth, The Great Game and Hamilton’s Blessing.
