A History of Money and Banking in the United States: The Colonial Era to World War II - Murray n. Rothbard

Part 1
A HISTORY OF MONEY AND BANKING
IN THE UNITED STATES
BEFORE THE TWENTIETH 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 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 bimetallism, Britain became perpetually subject to
the evil known as Gresham’s Law, which states that when gov-

ernment compulsorily overvalues one money and undervalues
another, the undervalued money will leave the country or dis-

appear into hoards, while the overvalued money will flood
into circulation. Hence, the popular catchphrase of Gresham’s
Law: “Bad money drives out good.” But the important point to
note is that the triumph of “bad” money is the result, not of per-

verse free-market competition, but of government using th

compulsory legal tender power to privilege one money above
another. 
In seventeenth- and eighteenth-century Britain, the govern-

ment maintained a mint ratio between gold and silver that con-

sistently overvalued gold and undervalued silver in relation to
world market prices, with the resultant disappearance and out-

flow of full-bodied silver coins, and an influx of gold, and the
maintenance in circulation of only eroded and “lightweight”
silver coins. Attempts to rectify the fixed bimetallic ratios were
always too little and too late.1
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 cur-

rency unit in Virginia, with warehouse receipts in tobacco circu-

lating as money backed 100 percent by the tobacco in the ware-

house. 
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 cen-

ters and in foreign trade. English coins were imported, but so
too were gold and silver coins from other European countries.
Among the gold coins circulating in America were the French

A History of Money and Banking in the United States: The Colonial Era to World War II - Murray n. Rothbard