A HISTORY OF MONEY AND BANKING IN THE UNITED STATES, THE COLONIAL ERA TO WORLD WAR II
By Murray N. Rothbard
PART 1 A HISTORY OF MONEY AND BANKING IN THE UNITED STATES BEFORE THE 20TH CENTURY
As an outpost of Great Britain, colonial America of course used British pounds, pence and shillings
as its money.
Great Britain was officially on a silver standard, with the shilling defined as equal to 86 pure
troy grains of silver, and with silver as so defined legal tender for all debts, that
is, creditors were compelled to accept silver at that rate.
However, Britain also coined gold and maintained a bimetallic standard by fixing the gold
Gold Guinea weighing 129.4 grains of gold as equal in value to a certain weight of silver.
In that way, gold became, in effect, legal tender as well.
Unfortunately, by establishing bi-metalism, Britain became perpetually subject to the
evil known as Gresham's Law, which states that when government compulsorily overvalues
Hence, the popular catchphrase of Gresham's law, bad money drives out good.
But the important point to note is that the triumph of quote bad money is the result not
Not of perverse free market competition, but of government, using the compulsory legal
tender power to privilege one money above another.
In 17th and 18th century Britain, the government maintained a mint ratio between gold and silver
that consistently overvalued gold and undervalued silver in relation to world market prices,
with the resultant disappearance and outflow of full-bodied silver coins and an influx
Attempts to rectify the fixed bimetallic ratios were always too little and too late.
In the sparsely settled American colonies, money, as it always does, arose in the market
as a useful and scarce commodity and began to serve as a general medium of exchange.
Thus, beaver fur and wampum were used as money in the North for exchanges with the Indians,
and fish and corn also served as money.
Rice was used as money in South Carolina, and the most widespread use of commodity money
was tobacco, which served as money in Virginia.
The pound of tobacco was the currency unit in Virginia, with warehouse receipts in tobacco
Tobacco circulating his money back to 100% by the tobacco in the warehouse.
While commodity money continued to serve satisfactorily in rural areas, as the colonial economy grew,
Americans imported gold and silver coins to serve as monetary media in urban centers and
in foreign trade.
English coins were imported, but so too were gold and silver coins from other European
in countries. Among the gold coins circulating in America were the French guinea, the Portuguese
joe, the Spanish doubloon, and Brazilian coins, while silver coins included French crowns
and livre. It is important to realize that gold and silver are international commodities
and that therefore, when not prohibited by government decree, foreign coins are perfectly
The Federal Reserve is only capable of serving as standard monies.
There is no need to have a national government monopolize the coinage, and indeed foreign
gold and silver coins constituted much of the coinage in the United States until Congress
outlawed the use of foreign coins in 1857.
Thus, if a free market is allowed to prevail in a country, foreign coins will circulate
naturally.
Silver and gold coins will tend to be valued in proportion to their respective weights,
and the ratio between silver and gold will be set by the market in accordance with their
relative supply and demand.