The situation in which the early colonists in America found themselves was such that they could draw little from the monetary experience of the mother country. During the colonial period they took from the mother country the designations, pounds, shillings, and pence. Having no mines, their stock of money had to be imported, and since they drew more wealth from England than they could export to that country, it was quite impossible to accumulate a monetary stock in this way. The little that was brought over by the colonists soon found its way back to the mother country, and in the early days especially, resort was had to various shifts to remedy the dearth of money. 

Various articles of food and produce were made receivable for taxes and other purposes. Of these the most widely known was the tobacco currency of Maryland and Virginia. In some of the colonies resort was had to the wampum currency of the Indians. But far more important in their effects were the measures taken to prevent coin from leaving the country and the issue of paper money. One of the early devices resorted to was to give the English currency a higher nominal value than its face value. It was argued that, if in the colonies a shilling piece circulated as one and a half shillings, it would not be exported. This process of rating coins had been used frequently in England for the gold coinage. 

The different colonies acting independently rated the shilling at different values, and the result was a series of colonial pounds differing from each other and from the English pound. In 1706 a proclamation of Queen Anne put a stop to this practice and fixed the nominal value of the pound in each of the colonies at the existing rate. While the money of account was for each colony a colonial pound, the actual money in circulation was a motley collection of coins of English, French, Portuguese, and Spanish origin. The Spanish dollar was the most widely known and circulated, and it thus became the term by which the currencies of the colonies were compared. In retail trade the shilling as a division of the dollar has persisted to our own day. Furthermore, as the Spanish dollar was common to all the colonies, it was the term in which later the common obligations were expressed by the Continental Congress, and thus became the basis of our national coinage.

Of even greater importance in fixing the monetary habits of the people was the issue of paper money. The first issue was in 1690 in Massachusetts, and was made to meet the expenses of an expedition against the French in Canada. The notes were received with reluctance by the people and fell to a discount, which was removed by an act of the Colonial Legislature, which placed a premium on them, as compared with coin, in the payment of taxes. Then South Carolina issued bills in 1712, and in the first half of the eighteenth century all the colonies followed these examples. Issued at first to meet extraordinary expenses of the governments, the public clamor for more money became so great that notes were issued later without any such plea in extenuation. 

In the situation of the colonies the plea for more money to make trade easy was urged with peculiar force. In Massachusetts a series of issues had taken place; and in 1749 exchange upon London, which was normally 133 pounds colonial for 100 pounds sterling, had risen to 1100 pounds for 100 pounds sterling. Parliament having voted £138,649 to reimburse the colony for its share in the expedition against Louisburg, this sum was used by the colony to redeem its paper issues at the rate of 11 to 1, and from that time onward Massachusetts was on a specie basis. 

Some of the colonies, as for example Rhode Island, North and South Carolina, had issued paper money far more extravagantly than Massachusetts; while others, notably Pennsylvania, had pursued a more conservative policy. In the latter colony there were two kinds of bills, exchequer and loan bills. The first were issued by the colonial treasury in anticipation of taxes, but the amount outstanding is said not to have exceed the probable receipts of two or three years. There were no sudden issues of large quantities and the amount of the issue was kept fairly uniform. The loan bills were issued to individuals on landed security, plate, or other valuable assets. With such security there was comparatively little danger of an over-issue, and the records show that there were comparatively few bad debts.

In 1751 Parliament forbade the further issue of notes by the colonies, and more or less successful efforts were made by them to redeem their outstanding notes. When, however, the colonies united for their struggle with Great Britain, the only fiscal resource which seemed open to them was the issue of paper money. The first issue was in August, 1775, for 300,000 Spanish dollars. Elaborate provision was made in the law for the redemption of this currency, and the amount fixed for which each colony was held responsible. Other issues followed in rapid succession, and the pretense of redemption provisions was soon dropped. As much as nine millions was issued before any depreciation took place, but with the constantly expanding volume of the currency this could not last long.

In the meantime every device known to the law was tried in vain to prevent the depreciation. The most stringent penalties enacted against those who refused to receive Continental money at its face value failed utterly to arrest the fall in value. Such enormous issues together with those of the several State governments practically destroyed the value of the paper money. As this paper was never redeemed, it was in effect a tax upon the people which caused much suffering and distress.

After the collapse of the Continental currency the circulation of the country consisted of specie, largely obtained through foreign loans, State notes, and, to a very limited extent, bank notes. In 1782 the Bank of North America at Philadelphia, was chartered by the Continental Congress. It was a private institution with a large Government subsidy and issued notes. It rendered important services to the nation, but its note issues amounted to only $400,000. Before the Federal Constitution was adopted banks of like character had been chartered in Boston, New York and Baltimore and bank issues acquired a recognized place in our monetary circulation.

The Federal Constitution vested the power to coin money in the Central Government, and forbade the states making anything but gold and silver a legal tender for the payment of debt. This eliminated State issues, and from this time until the Civil War the monetary circulation consisted of United States specie, foreign specie and bank notes.

Among the first acts of Congress was to declare the values at which foreign coins should circulate and be received at the Government offices. Of these foreign coins the most common was the Spanish dollar, which as late as 1857 was received in all payments at the post-offices of the United States. In 1792 a law was passed establishing a national gold and silver coinage. In the history of money prior to the gold discoveries of California specie played a subordinate part, its chief function being for small change and as a reserve for banking operations. We may therefore glance at the history of bank-note issues before taking up that of metallic currency.

While the Constitution debarred the States from issuing money, it did not prevent them from establishing banks and giving to the latter the power to issue notes as they might see fit. After the adoption of the Constitution State banks multiplied rapidly. In 1791 the Bank of the United States was chartered with a capital of $10,000,000. Its notes were received everywhere and were the natural medium of payments between different parts of the country. The bank acted as a controlling agent over the State banks, since by receiving or refusing to accept their notes, it could make or mar their credit. 

When in 1811 its charter expired the State banks were unrestrained in their issue of notes. In 1811 Gallatin estimated the note circulation of these banks at $46,000,000 but in 1814 it had swelled to $100,000,000, while trade was crippled by war, and specie was drained from the country. Great embarrassment was felt by the Government from the fact that as the only medium of exchange such State bank notes could hardly be refused in payments, while with the suspension of specie payments by the banks their value depended upon the vagaries of bank management. This state of affairs called loudly for a remedy, and the reorganization of the Bank of the United States was planned. 

It was eventually accomplished in 1816, and for twenty years it exercised on the whole a salutary influence upon the monetary circulation. When in 1836 its charter expired, State bank notes again ran riot and precipitated the disastrous panic of 1837. In the days of depression which followed the States generally put their banking systems in order. So long, however, as any State countenanced the loose methods which had formerly brought the whole system into disrepute, some were bound to suffer from such iniquity, but the mass of suffering was greatly reduced. 

This was in part due to the gold discoveries of California, which furnished the nation with a larger supply of metal than had ever been known, and made it comparatively easy for the banks to maintain an adequate reserve. When the Civil War broke out the State bank system was at its best, and the agitation which culminated in 1863 in the national banking system had its origin more in the fiscal necessities of the Government than in any immediate need of reform of the State banks.