There was a time in America’s history when our currency was an imprecise, ill-defined medium of exchange. Harking back to prerevolutionary years, colonists freely used French, Spanish, and English coins to conduct commerce. Individual colonies often issued their own money, leading to endless confusion. It was a time when a “buck” was valued as the trade equivalent of a deerskin or buckskin and five bucks bought a cask of whisky.
Conducting a war, however, has always been an expensive proposition. On the eve of the American Revolution, the newly minted Continental Congress was pressed to find a way to finance it. In addition to issuing a Declaration of Colonial Rights and Grievances, they decided to mint Continental dollars, which took the form of both metal coins and paper currency. The dollar coin itself, which was composed of lightweight metals such as pewter, was reportedly designed by Benjamin Franklin and bore the cryptic inscription, “Time flies, so mind your business.” The first dollar plates were struck by a highly regarded Bostonian silversmith named Paul Revere.
Unfortunately, these Continental dollars soon suffered a woeful deflation, largely because Congress lacked the gold and silver to back them up. In a short time, their value plummeted so low that the phrase “not worth a Continental” became popular. (Ironically, a Continental coin in excellent condition is worth around $15,000 in today’s currency.)
States Issued 7,000 Different Bank Notes
The development of a national currency in the years following the war was anything but smooth. In 1792, Congress passed the Mint Act, establishing the coinage system and making the dollar America’s primary measure of currency. The following year, the Philadelphia Mint struck the first dollar coins. Nonetheless, until the beginning of the Civil War, some 1,600 private banks printed and circulated their own paper currency under state charters. The result was disastrous; approximately 7,000 different types of state bank notes—each with its own design—were put into circulation.
Throughout the first six decades of the 19th century and in the face of the War of 1812 against the United Kingdom and its allies and the Mexican-American War of 1846–1848, as well as the Panic of 1857, the government scrambled to establish a solid monetary system. In 1863, in the midst of what was already appearing to be an interminable Civil War, the federal government passed the National Banking Act.
According to the US Senate website, Senate.gov, “The act had three objectives: to create a market for war bonds, to reestablish the central banking system … and to develop a stable bank-note currency.” Paying for the war was of utmost priority. Prior to the Confederate troops firing on Fort Sumter, the US government’s national debt was $64.8 million; by the war’s end, it had soared to an estimated $5.2 billion, an astronomical sum, which in today’s currency would be valued at around $104 billion. The government soon began printing paper money. National banks were still permitted to print and distribute their own currency, but this time, the National Bank Notes were printed on government paper with the same design. This practice would go on until 1929, when the Great Depression began.
A Panic is When You Have Lost Your Pants
Many Americans likely look at the series of financial cataclysms throughout the 1930s as one isolated calamity. Yet, while the Great Depression was unquestionably the worst social and economic disaster in our nation’s history, it was far from the only one. In fact, America, as with most growing nations, has always been susceptible to financial downturns. The distinction between recessions, depressions, and panics is generally one of degree. An interesting attempt at defining the differences was made in the January 21, 1949, edition of The Ephraim Enterprise, a newspaper based in Ephraim, Utah. “A Recession,” it reads, “is where you tighten your belt; a Depression is when you haven’t any belt to tighten, and a Panic is when you have lost your pants.”
Since its beginnings, America has suffered recessions, depressions, and panics with some frequency. There have been nearly 50 recessions in our nation’s history, according to Victor Zarnowitz, author of Business Cycles: Theory, History, Indicators, and Forecasting. The first genuine panic in America occurred in 1819 and lasted more than two years. Apparently, it was caused by a combination of downturns, including a struggling cotton market, unemployment, bank failures, mortgage foreclosures, and a dramatic drop in agricultural prices. There were several recessions throughout the 19th century, some either leading to or deriving from significant panics. The Panic of 1857 was marked by the failure of thousands of banks and businesses and has been considered by some historians to have been one of the underlying causes of the Civil War.
The Long Depression of 1873, lasting nearly six years, followed a panic and was marked by landmark events such as the Great Railroad Strike of 1877. Panics occurred in 1893, 1896, 1907, and 1910, with recessions dotting the calendar between them; they were each marked by bank closures, shrinking production, and unemployment. Bank closures are nothing new. In the three years between 1930 and 1933 alone, some 9,000 banks closed their doors many of them large, urban, seemingly indestructible institutions. Banks have been failing since the nation’s early days, and they continue to do so today. In fact, the greatest bank failure in American history occurred in 2008, when Washington Mutual Bank went under following a run on the bank.
President Wilson Signed the Legislation
The often problematic Civil War-vintage National Banking Act had enjoyed a longevity far beyond its relevance, which became all too evident during both the Panic of 1907 and the Recession of 1913. There was little question that it had to be replaced remedially by a more up-to-date piece of legislation. President Wilson declared, “[The new banking system must be] public not private, [and] must be vested in the government itself so that the banks must be the instruments, not the masters, of business.”
In late December 1913, the Democrat-led Congress passed the Federal Reserve Act, and President Wilson signed it into law. This created the Federal Reserve System, which was—and is to this day—America’s central financial banking system. It was specifically designed to provide the nation with a safer, more flexible, and more stable monetary and financial system.
The December 28, 1913, edition of the Brooklyn Daily Eagle was one of the countless national to carry the front-page news: “DIED, SUDDENLY, OLD BANKING ACT! Congress Cuts Short Existence of Measure Born During Civil War. Served its purpose well. Adequate to needs of those days. It has long outlived its usefulness.” The article goes on to state, “Essentially a war measure, the National Banking Act assumed a permanency among the statutes of the United States that the framers of it probably never contemplated.”
The new Federal Reserve Act mandated that all nationally chartered banks become members of the new system. The system itself, which consisted of 12 private regional Federal Reserve banks, each with its own branches, board of directors, and district boundaries, was designed to answer a number of fiscal needs. The 12 banks would be responsible for managing the country’s money supply, making loans, and providing oversight to other banking institutions. The new system would be overseen by a Federal Reserve Board of Governors, the members of which were to be appointed by the president himself. It also authorized these Federal Reserve banks to issue Federal Reserve bank notes, which they began doing in 1914. To this day, the Federal Reserve note is the only currency being manufactured by the Bureau of Engraving and Printing.
• Photo by Federal Reserve Banks of Kansas City.
• Photo by Federal Reserve Bank of St. Louis.
Was it Politics or Geography?
Today, the 12 Federal Reserve banks are located in cities from Boston to San Francisco, which begs the question: If the plan was to scatter locations throughout the United States for the best possible fiscal coverage, why then is Missouri the only state to have two? Indeed, a Federal Reserve bank can be found in St. Louis and in Kansas City. There are at least two purported explanations for this, with the possibility that one, both, or neither are correct.
It has been alleged that the decision to place two of the 12 Federal Reserve banks was politically motivated, made to placate the farmers of the Midwest farm belt, a strong voting block at the time. In fact, as the Federal Bank of St. Louis states on its website, “Both the Speaker of the US House of Representatives and a powerful member of the Senate Banking Committee hailed from Missouri, which at the time was a solidly Democratic state.”
The second reason was geographic. As the Federal Bank of St. Louis states on its website, “Both St. Louis and Kansas City were among the top choices of bankers, many of whom had established correspondent relationships with banks in the two cities. St. Louis and Kansas City also served distinct markets—St. Louis to the south and east, and Kansas City to the west and southwest. Moreover, Kansas City dominated its rivals for a Reserve Bank serving western states, especially in terms of banker preferences and railroad connections. Thus, while it is impossible to rule out a role for politics in the selection of either city for a Reserve Bank, let alone both of them, both cities were reasonable choices for banks on the basis of the stated criteria of the Federal Reserve System’s founders.” And in fact, both federal banks of Missouri have maintained fine reputations among their peer institutions.
Over the nearly two and a half centuries since the establishment of the United States, the federal government has made enormous progress in formalizing and stabilizing its currency and banking practices. The system has required reinvention and readjustments from time to time; the Federal Reserve Act itself has undergone several changes and amendments since its passage. But there always seems to be forward movement toward a better, more efficient system for controlling America’s economic practices. We have come far since fiscal transactions were determined by the value of a buckskin.
This article was originally published in the September 2024 edition of Missouri Life magazine.
