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The History of Money and Banking in the United States

by Murray Rothbard

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Rothbard's compilation of the history of money and banking from the colonial era to WW2 is an excellent recounting of money, how it has changed over the last few centuries and the impediments that accompanied the progress. Oddly enough, this work was one I initially set out to read in early 2017 to assist in complimenting my journey of disproving Bitcoin as a sound investment. As a former banker, I also find the subject intriguing. However, the desired result never occurred and instead, the exact opposite happened. One of the first significant books I read which forced me to evaluate Bitcoin's functional properties from a cultural and custodial perspective. The dire need we have for something better than fractional reserve banking and everything that led up to it. - Nicholas Beaird

Favorite Quots from The History of Money and Banking in the US

Unfortunately, by establishing bimetallism, Britain became perpetually subject to the evil known as Gresham’s Law, which states that when government compulsorily overvalues one money and undervalues another, the undervalued money will leave the country or disappear into hoards, while the overvalued money will flood into circulation.

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 circulating as money backed 100 percent by the tobacco in the warehouse.

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 capable of serving as standard moneys. 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.

Apart from medieval China, which invented both paper and printing centuries before the West, the world had never seen government paper money until the colonial government of Massachusetts emitted a fiat paper issue in 1690.

In contrast to government paper, private bank notes and deposits, redeemable in specie, had begun in western Europe in Venice in the fourteenth century. Firms granting credit to consumers and businesses had existed in the ancient world and in medieval Europe, but these were “money lenders” who loaned out their own savings. “Banking” in the sense of lending out the savings of others only began in England with the “scriveners” of the early seventeenth century.

By the end of the civil war, in the 1660s, the goldsmiths fell prey to the temptation to print pseudo-warehouse receipts not covered by gold and lend them out; in this way fractional reserve banking came to England. There were, however, no banks of deposit in England until the civil war in the mid-seventeenth century

To finance the Revolutionary War, which broke out in 1775, the Continental Congress early hit on the device of issuing fiat paper money.

The issue of this fiat “Continental” paper rapidly escalated over the next few years. Congress issued $6 million in 1775, $19 million in 1776, $13 million in 1777, $64 million in 1778, and $125 million in 1779. This was a total issue of over $225 million in five years superimposed upon a pre-existing money supply of $12 million. The result was, as could be expected, a rapid price inflation in terms of the paper notes, and a corollary accelerating depreciation of the paper in terms of specie. Thus, at the end of 1776, the Continentals were worth $1 to $1.25 in specie; by the fall of the following year, its value had fallen to 3-to-1; by December 1778 the value was 6.8-to-1; and by December 1779, to the negligible 42-to-1.