When the Second Continental Congress met in Philadelphia in 1775, it authorized the issue of bills of credit to the value of two million Spanish milled dollars as a way of funding the Revolutionary War. The Continental Congress granted a charter to create the Bank of North America in Philadelphia to issue the notes. Paul Revere of Boston engraved the plates for the first of these bills, which were known as Continental Currency. As had been the case in the days of Colonial Scrip, each of the colonies printed its own notes, some denominated in pounds, shillings, and pence, and others in dollars. Over the course of the Revolutionary War, additional issues of bills of credit were made, leading to widespread inflation. By the war’s conclusion in 1781, the exchange value of Continental notes had fallen to one-hundredth of their nominal value and would later fall to 1000 to 1. In spite of giving rise to the phrase ‘not worth a Continental’—meaning utterly worthless—Continental Currency was of great value in financing the Revolutionary War.
In spite of its utility in funding the Revolutionary War, the depreciation of the Continental Currency could be seen as a case study in the unreliability of paper money. The framers of the Constitution still thought of money primarily in terms of gold and silver coins. Article 1 of the Constitution specifies that Congress, not the States, ‘shall have the power … To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures’ (Section 8) and warns that ‘No State shall … coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts’ (Section 10). The Coinage Act of 1792 established the U.S. Mint and instituted the dollar as the unit of account in the United States. The dollar was defined in terms of both gold and silver (bimetallism) and was to be subdivided into one hundred cents, making it the world’s first decimal currency, and one of the few areas in which Thomas Jefferson’s advocacy of decimal-based systems won the day.
Although the Constitution prohibited states from issuing their own currency, it did not prohibit them from chartering banks to do so, and state-chartered banks sprung up across the United States during the early 1800s, each issuing its own bank notes. In theory, these notes were redeemable at the issuing bank for their equivalent in gold or silver coins. However, the reliability of banks varied, and the further away the notes were from the bank that had issued them, the more of a discount at which they tended to trade.
