Currency

Currency is term designating all the circulating media of exchange of a country. In this sense, a currency includes coins and paper money. The term sometimes includes credit instruments. Coins are generally designated as metallic currency, and paper money and credit instruments, as paper currency. Further distinctions are made in the latter classification: Government notes are called government currency; bank notes are designated as bank currency; and checks drawn on bank deposits are called deposit currency.

This use of the term currency is of comparatively recent origin, dating from the period following World War I. Earlier uses of the term were more restricted. In countries in which the governments did not issue paper money, the term paper currency was applied exclusively to bank notes. In the United States and a number of other countries, on the contrary, the application of the term currency was limited to government-issued, legal-tender paper money. The change from the earlier, restricted meanings of the term to its modern significance resulted in part from the great increase, following World War I, in the use of credit instruments.

In the early days of this nation, before and just after the American Revolution, Americans used English, Spanish, and French currencies. The Massachusetts Bay Colony issued the first paper money in the colonies which would later form the United States. American colonists issued paper currency for the Continental Congress to finance the Revolutionary War. The notes were backed by the "anticipation" of tax revenues. Without solid backing and easily counterfeited, the notes quickly became devalued, giving rise to the phrase "not worth a Continental." The Continental Congress chartered the Bank of North America in Philadelphia as the nation's first "real" bank to give further support to the Revolutionary War. Continental Congress adopted the dollar as the unit for national currency. At that time, private bank note companies printed a variety of notes.

After adoption of the Constitution in 1789, Congress chartered the First Bank of the United States until 1881 and authorized it to issue paper bank notes to eliminate confusion and simplify trade. The bank served as the U.S. Treasury's fiscal agent, thus performing the first central bank functions. The federal monetary system was established with the creation of the U.S. Mint in Philadelphia. The first American coins were struck in 1793.

The Second Bank of the United States was chartered for 20 years until 1836. With minimum regulation, a proliferation of 1,600 state chartered, private banks issued paper money. State bank notes, with over 30,000 varieties of color and design, were easily counterfeited. That, along with bank failures, caused confusion and circulation problems. During the following three decades, sometimes referred to as the dark decades of American banking, abuses of sound banking practices multiplied and assumed scandalous proportions, and speculators and counterfeiters flourished. A basis for resolving the problem of a sound currency was achieved when the American Civil War induced the federal government to raise large sums of money through the issuance of bonds. The National Currency Act of 1863, later amended and renamed the National Banking Act, was enacted by Congress to establish a national banking system and a uniform national currency. Later experience revealed that this system was not sufficiently elastic in providing adequate amounts of currency during periods of prosperity and in contracting the volume of currency in slack times.

On the brink of bankruptcy and pressed to finance the Civil War, Congress authorized the United States Treasury to issue paper money for the first time in the form of non-interest bearing Treasury Notes called Demand Notes. Demand Notes were replaced by United States Notes. Commonly called "greenbacks," they were last issued in 1971. The Secretary of the Treasury was empowered by Congress to have notes engraved and printed by private bank note companies. The notes were signed and affixed with seals by six Treasury Department employees. The design of U.S. currency incorporated a Treasury seal, the fine-line engraving necessary for the difficult-to-counterfeit intaglio printing, intricate geometric lathe work patterns, and distinctive cotton and linen paper with embedded red and blue fibers. Gold Certificates were issued by the Department of the Treasury against gold coin and bullion deposits and were circulated until 1933. The Department of the Treasury established the United States Secret Service to control counterfeiting. At that time, counterfeits were estimated to be one-third of all circulating currency. National Bank Notes, backed by U.S. government securities, became predominant. By this time, 75 percent of bank deposits were held by nationally chartered banks. As State Bank Notes were replaced, the value of currency stabilized for a time. The Department of the Treasury's Bureau of Engraving and Printing started printing all U.S. currency. The Department of the Treasury was authorized to issue Silver Certificates in exchange for silver dollars. The last issue was in the Series 1957. After the 1893 and 1907 financial panics, the Federal Reserve Act of 1913 was passed. It created the Federal Reserve System as the nation's central bank to regulate the flow of money and credit for economic stability and growth. The System was authorized to issue Federal Reserve Notes, now the only U.S. currency produced and representing 99 percent of all currency in circulation.

The Federal Reserve System was created by the Federal Reserve Act, which was passed by Congress in 1913, to provide a safer and more flexible banking and monetary system. Forapproximately 100 years before the creation