The Secret History Of The First Dollar Ever Made

The story of the first dollar goes back well before the American Revolution. Money was a bit of a messy business in the Thirteen Colonies because there wasn't much of it to go around. According to the Federal Reserve Bank of Philadelphia, early English settlers often bartered goods or used Native American wampum as money. English law banned the colonies from minting coinage, so settlers emitted bills of credit, which were promises to pay money in the future. But as with most paper currency, the non-standardized colonial bills were victims of rampant inflation from overprinting.

Massachusetts was the first state to mint its own coinage in defiance of the ban. These "pine tree" shillings were all stamped with a date of 1652 regardless of their actual date of creation. They never caught on much. Instead, colonists conducting trade with Spanish and Portuguese colonies in Latin America and the Caribbean introduced the milled Spanish dollar. According to the National Museum of American History, these dollars were machine-minted in Mexico and spread throughout the Americas through colonial commerce. 

Colonial Williamsburg reports that the practice of milling created distinct grooved edges (similar to modern U.S. coinage) that made it easy to identify mutilated and counterfeit coins. But there were not enough Spanish dollars to pay for an expensive war, so when the American Revolution finally broke out in 1775, the Continental Congress had to find alternative ways to finance the conflict.

In 1783, Great Britain recognized the United States. Now came the hard part: building a functioning country ("e pluribus unum") from 13 states whose interests often clashed. Among the major debates of the 1780s was the problem of money. According to the State Department, the United States was saddled with French and other debts. For the founders', it seems that currency printing was not a viable option.

George Washington, the first president of the United States, was at the forefront of opposition to paper currency printing. In a 1787 letter to Rhode Island governor Jabez Brown, Washington noted that paper money did nothing but "ruin commerce — oppress the honest, and open a door to every species of fraud and injustice." Washington did not elaborate, but it is likely that his experience with the worthless Continental to pay his soldiers influenced his view.

Thomas Jefferson's letters bluntly contextualize Washington's criticisms: "paper is poverty," he wrote. In a 1788 letter to Virginia statesman Edward Carrington, Jefferson noted that paper money is not money. It is not a safe, stable store of value, but "the ghost of money." As the Bank of England explains, notes are effectively an IOU that are redeemed for precious metals. An economy built on paper currency, according to Jefferson, collapses in hard times. Alexander Hamilton had warned of such a problem in 1783, since paper money depreciates as more is printed and eventually lands governments into unmanageable debt. To fix this problem, the United States needed hard currency. But disunity placed obstacles to this goal in the form of the Articles of Confederation.

To fix the mess that the Articles of Confederation had created, America's founders convened during the hot summer of 1787 in Philadelphia to draft a new document that would serve as the country's legal framework. The result was the Constitution of the United States. The document's strongpoint was the clear separation and enumeration of rights and duties to the states and the federal government. The federal government had the responsibility of national defense and guaranteeing basic constitutional rights, such as free speech, religion, and the right to bear arms. All rights and responsibilities not reserved to the federal government were delegated to the states or the people under the Tenth Amendment.

Among the rights that the states lost was the right to issue their own currency. Article I, section 8 of the U.S. Constitution (via Cornell Legal Information Institute) gave congress the right "to coin money [and] regulate the value thereof..." States, meanwhile, were forbidden under section 10 from emitting bills of credit (IOU's) or issuing their own money. Congress alone could issue money (but interestingly, not bills of credit), and by the words of the Constitution, as Forbes notes, it had to be gold and silver coinage, the only accepted state-level tender according to section 10. Such was the Founders' disdain for paper that according to the Mises Institute some wanted federally issued paper banned. Instead, they would establish a mint that would set the standards for American money whose value would be based on gold and silver, not government fiat.

The Coinage Act's archaic language and units make it difficult for modern audiences to grasp its importance. The number and units do not mean much to people today because the popular definition of a dollar has changed. If someone today were to define a dollar, they would undoubtedly pull out a $1 bill. These bills, however, are Federal Reserve Notes. Each is a bill of credit, which is a promise to pay money. It's an excellent example of Jefferson' "ghost of money." It is not what sound money proponents refer to as a "constitutional dollar" (via Mises Institute) since it is not made of precious metal.

Fortunately, the Coinage Act defined the dollar as well. In fact, it created an immutable standard based on Spanish antecedents that historically served as the reference point for all US coinage. The Coinage Act of 1792 defined the dollar as a silver coin containing "three hundred and seventy-one grains and four sixteenth parts of a grain (0.7734375 troy ounces) of pure, or four hundred and sixteen grains of standard silver" (~90% Ag,~10% Cu). The content of gold coins was usually adjusted according to this silver dollar standard, which has never changed and is technically still in force today. With the standard set, Congress could finally order the creation of the nation's first coinage, the hallmark of a truly independent and sovereign nation.

Although the Flowing Hair Dollar was a bit of a fiasco, it set the United States down the long, hard road towards a stable money system. According to the U.S. Mint, the United States had trouble achieving a functional money system in the first 80 or so years of its existence. Often, the precious metals to mint coins were provided by banks, and there was not always enough. When banks received their coins, they preferred the large denominations, although the average person used fractional coins such as dimes and quarters for daily transactions instead of gold eagles or half-eagles. By 1857, the U.S. Mint expanded operations by opening branches across the country. This allowed small change coins to be distributed where they were needed and produce enough coinage to cover the needs of the entire nation.

Although the silver dollar seemed to be working, much of the world had moved to a gold standard. The Coinage Act of 1873 (via the U.S. Mint) demonetized silver. Silver dollars would continue to be erratically issued in the late 19th century, but the standard was now based around gold instead of the old 1792 standard. But even this would not last long, as banking interests and the federal government would soon replace America's precious metal coins with currency.

Although gold coins were melted down and converted into bars, silver continued to circulate. The U.S. Treasury emitted silver certificates redeemable in silver, most recently under Executive Order 11110 during the Kennedy Administration. Dimes, quarters, and half-dollars remained 90% silver. This all changed on November 22, 1963, when President John F. Kennedy was shot and killed on a visit to Dallas. His VP, Lyndon Johnson, took over. 

In 1965, Johnson signed another coinage act which removed silver from U.S. coinage and replaced it with base metals, although it took a few years to implement. Without silver to give it value, coins could now be debased too. This was the second nail in the coffin. Now, the dollar's value was dependent solely on its tenuous link to gold, which would be severed for good six years later.

The final nail came in 1971. Although Congress had banned gold convertibility in 1934, it was still possible for foreign nations holding dollars in reserve to exchange for gold held in US reserves. According to Bloomberg, the prospect of a gold run threatened to drain America's gold reserves. In response, Nixon slammed the gold window shut, officially ending the dollar's convertibility to gold completely. The dollar became a fiat currency backed by government diktat and debt, making it easy to debase through printing. The storied tradition of American bullion begun in 1794 with the Flowing Hair dollar had come to an end and the Founders' greatest fear had come true.