After World War II, the US dollar, as an international reserve currency, was once beloved and circulated around the world. However, you may not know that the US dollar was not always the way it is today since the establishment of the United States in 1776. In fact, the current US dollar is more accurately known as the Federal Reserve Note, which was first issued in 1914. So what did the US dollar look like before that? Let's take a look today.
Bank of North America Era (1781-1791)
After the founding of the United States, Alexander Hamilton, the first Secretary of the Treasury, tried to establish a national central bank. However, the proposal was met with strong opposition. The reason is simple: from the beginning, the United States has been a loose federation of independent states, and the power of the states far exceeds that of the federal government. A central bank controlled by the federal government would reduce the power of the states, create a monopoly, and affect the business of private banks in the states.
After the American Revolutionary War, however, it became necessary to create such an agency to pay war debts and manage the treasury's finances. After mutual compromise, the Bank of North America in Philadelphia obtained the right to issue banknotes in 1781, but it could not perform the functions of a central bank and was only a transitional solution.
Since the United States did not have its own currency at the time, banknotes issued by North American banks were originally denominated in British pounds. It was not until 1785 that the U.S. Congress formally passed a bill adopting the U.S. dollar as the legal unit of currency that the U.S. dollar entered the stage of history.
First Bank of the United States Era (1791-1811)
The Bank of North America is not a central bank, and its charter is contested by the states. At this point, Hamilton stood up again, overcame opposition, and finally established his ideal central bank in Philadelphia in 1791, the First Bank of the United States. However, in an effort to assuage concerns and opposition from the states, the bank could only operate for 20 years, after which it must seek approval from Congress to continue to exist.
The First Bank of the United States was essentially a privately owned commercial bank. Due to the needs of the war, whether it could be established and operated as a central bank was an important factor. It balanced the post-American Revolutionary War financial order and war debts to a 20-year operating license.
The First Bank of the United States does not issue paper money, and its main business is still based on checks. At this time, the main currency circulating in the U.S. market was still hard currency, including silver coins and gold coins.
But the shareholders of the First Bank of the United States were not Americans but Europeans, and the states' doubts about the expansion of the federal government continued.
The Second Bank of the United States Era (1816-1836)
In 1812, the War of 1812 broke out, which was the first foreign war since the founding of the United States. When the Americans launched the war, they hoped to occupy Canada, which was still a British colony at that time, and expand their territory. The war ended in a draw, and the borders eventually returned to their pre-war status. The U.S. failed to invade Canada, and Canadians dubbed the war the War of 1812.
The needs of the war prompted Americans to consider creating a central bank similar to the First Bank of the United States. In 1816, the Second Bank of the United States was established, and like its predecessor, it was only chartered by Congress for 20 years.
The Second Bank of the United States still issued paper money, but the paper money it issued was a promissory note, and the bank itself was the issuer. The note can only be used for immediate payment, so the bank assumes payment responsibility. Essentially, these notes are similar to banknotes, but in higher denominations.
However, by 1815, the war was over, the banking system was gradually restored, and the war debt was basically settled. At this time, the Second Bank of the United States was in fierce competition with the state banks, which led to the resistance of the states. Unsurprisingly, in 1836, 20 years after its founding, the Second Bank of the United States met the same fate as its predecessor and was forced to close.
The Free Banking Era (1837-1862)
After that, a relatively peaceful and economically prosperous period ensued, and the federal government of the United States did not attempt to establish a central bank-like institution. The United States experienced a laissez-faire period of financial development.
Chartered banks existed in the United States since the era of the Bank of North America in 1781, and they competed with the First and Second Banks of the United States. By the time of the Free Banking Era in 1837, only state-chartered banks existed in the United States. They could issue banknotes without being regulated by the federal government, and they were free to develop. The number of banks increased from 24 to 712.
The downside of unregulated and laissez-faire development was the outbreak of financial crises, which planted the seeds for the future emergence of the Federal Reserve.
The National Banking Act (1862-1913)
In 1861, the American Civil War broke out, and in order to raise funds for the war effort, Congress authorized the Department of the Treasury to issue a type of banknote called a Demand Note. To prevent counterfeiting, the notes were printed with green ink that was difficult to copy, earning them the nickname greenbacks. This was the precursor to the modern U.S. dollar.
After 1862, the Treasury Department continued to issue these banknotes under the name United States Note, and added modern dollar features such as a serial number, treasury seal, and the Secretary of the Treasury's signature.
In 1863, the National Banking Act was passed, which authorized private and state banks to issue banknotes under federal supervision. These banknotes were called National Bank Note and featured a brown seal.
In order to issue National Bank Notes, private banks had to pay a 2% tax to the federal government, which later increased to 10% and 20%. This created a national banking system where private and state banks were regulated, as opposed to the previous era of free banking. Though there were still thousands of banks within this system, they were now subject to oversight. The charter for National Bank Notes was revoked in 1935.
In addition to the two types of banknotes mentioned above, the U.S. government also issued many other types of currency during this period, such as Gold Certificates, Silver Certificates, Treasury Notes, and National Gold Bank Notes.
Federal Reserve Act (1913-2023)
During the period of the Federal Reserve Act from 1913 until today, there was a lot of chaos in the US financial market due to various banknotes being issued with different sizes, denominations, and specifications from 1861 to 1928. Although a national banking system was established, its supervision over the banks was weak, with the government only collecting taxes but having no actual control. The frequent financial crises could not be addressed, and the call for a central authority gradually grew louder. However, the fear of such a central authority among the states in the US never disappeared since 1781, and so establishing a unified central bank still faced strong opposition from many members of Congress. The US needed a balance point.
In 1912, Wilson was elected as the US President, and based on his considerations for the healthy development of the US financial market, he supported the need for such an institution. Finally, in 1913, a consensus was reached among all parties, and the Federal Reserve Act was passed, leading to the beginning of the era of the Federal Reserve in the US.
The clever part of the Federal Reserve is that it is composed of the Federal Reserve Board in Washington and 12 Federal Reserve Banks distributed in various states, thus avoiding the lessons learned from the failures of the First and Second Banks of the US, while taking care of the interests of each state. The organizational structure adopted is a dual structure of a federal government agency and a non-profit organization, with the Federal Reserve Board in Washington as a federal government agency, while the 12 Federal Reserve Banks are private organizations not belonging to the federal government, thus dispelling concerns about power being concentrated in the hands of the federal government.
Starting from 1914, the Federal Reserve began issuing Federal Reserve Bank Notes, specifically used to recover national banknotes issued by private banks. In 1934, the issuance of Federal Reserve Bank Notes stopped, followed by the cessation of national banknotes in 1935, and the discontinuation of Federal Reserve Bank Notes in 1945. At this point, the various types of banknotes causing confusion in the market had been largely dealt with. You can understand that the Federal Reserve Bank Note was a transitional currency specially designed to replace banknotes (less than 1% of which are still in use and have not been invalidated).
At the same time, in 1914, the Federal Reserve also issued another type of banknote for daily use, the Federal Reserve Note, which is the current US dollar. It differs from the Federal Reserve Bank Note in that it has the word Bank omitted from its name, but is still a different type of US dollar banknote.
The head on the left side of the banknote is the Federal Reserve Bank Note, while the head in the middle is the Federal Reserve Note.
The Federal Reserve Note comes in large and small sizes. The large size version comes in two editions: 1914 and 1918, while the small size version includes the Small Head version (1928 edition), the Large Head version (1996 edition), and the Colorful version (2004 edition).
Currently, $1 and $2 banknotes are mainly of the Small Head version. The Large Head and Colorful versions do not have $1 and $2 denominations, and the US plans to coin $1 and discontinue $2 banknotes in the future, so $1 and $2 banknotes will eventually disappear. For banknotes with a denomination of $5 and above, the Colorful version is the main version available at banks, while the Large Head version can occasionally be obtained. If you happen to get a Large Head version, keep it safe and don't spend it.
The history of the US dollar is a game of tug-of-war between federal centralization and state freedoms. When the United States faced war or financial crises, there was a need for a centralized banking institution to effectively regulate and unify the financial market. This resulted in the temporary emergence of central banks, which would eventually revert to free-market finance once the crises were overcome. The establishment of the Federal Reserve System provided Americans with a balance point, and from then on, the US dollar became the foundation for a stable international currency.