Episode 421: The Birth Of The Dollar Bill : Planet Money Before the Civil War, there were 8,000 different kinds of money in the United States. On today's show, we figure out how this world worked. And explain how the war changed everything.
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Episode 421: The Birth Of The Dollar Bill

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Episode 421: The Birth Of The Dollar Bill

Episode 421: The Birth Of The Dollar Bill

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Imagine you're a bartender in New York City in the year 1859. The bar where you work looks pretty familiar. There is a wooden bar, stools, tables, some people drinking. But now go behind the bar and open up the box where you keep the money. What you see there is crazy.

BRIAN MURPHY: You'll see a big mess. You could see any one of 8,000 different kinds of state bank notes and local bank notes. You'll see small change. You might see small change that's been cut up into pieces.

GOLDSTEIN: Did you say 8,000?

MURPHY: I did say 8,000. Yeah, it's not a good system.


GOLDSTEIN: Hello and welcome to PLANET MONEY. I'm Jacob Goldstein.


And I'm David Kestenbaum. Today on the show - the birth of the dollar.

GOLDSTEIN: How we went from being a country with thousands of different currencies to being a country with just one.

KESTENBAUM: That world you just heard described by Brian Murphy - he's a historian at Baruch College - it is amazing to me that it existed at all. Why didn't our founding fathers - when they're setting up a new country, I mean, you set up a new country. You need a national anthem to sing. You need a flag. And you need a currency.

GOLDSTEIN: The U.S. government, it did create a currency, did issue some gold and silver coins, but there were not enough of these coins to go around. The government was not printing paper money. For the most part, the government did what countries all around the Western world did at that time and let people use whatever they wanted as money. Often, what they wanted to use as money was these pieces of paper issued by banks that were called banknotes. Matt Jaremski, an economist at Colgate University, he says sometimes the bank notes would have these very serious pictures of like bank presidents on them, but that was not always the case.

MATT JAREMSKI: So I'm looking at the Howard Banking Company's $5 bank note. It's one of my personal favorites because it's a Santa Claus note.

GOLDSTEIN: What? It's Santa Claus?

JAREMSKI: A Santa Claus note. You get a picture, I think, of the bank president up in the left-hand corner. And then right in the middle, you get a picture of Santa Claus on a sleigh. So what basically this note will do is that if you have this note, Santa Claus and all, you'll go to the Howard Banking Company. And they are obligated to pay you $5 in gold and silver coins if you demand it at their bank.

GOLDSTEIN: If you demand it at their bank, but nobody else outside that bank is required to give you gold or silver for the note or, for that matter, even to accept it at all. Sometimes people might choose to take the bill at full face value. Sometimes they might not want it. Sometimes they'll say, yeah, I'll accept it but it's a $5 bill. I'll give you $4 for it. A dollar bill was not always worth a dollar in this world. Now, you could argue - and some people do - that this universe of 8,000 different kinds of currency is the free market at work and that this market for bank notes helped keep banks honest. But this world, it did create huge problems for people.

KESTENBAUM: People, for example, like this one traveler who kept a diary. Matt Jaremski's good to read from it. And before you hear it, there is one term that may be unfamiliar. The term is shin plaster. It means worthless paper. OK, here's the diary entry.

JAREMSKI: (Reading) Starting for Virginia with Virginia money, reached the Ohio River. Exchanged $20 Virginia note for shin plasters and a $3 note of the bank of the West Union. Paid away the $3 for breakfast, reached Tennessee, received $100 Tennessee note. Went back to Kentucky, forced there to exchange the Tennessee now for $88 of Kentucky money. Started home...

KESTENBAUM: It goes on and on and on and on.

JAREMSKI: (Reading) A hundred yards from the tavern door, all notes refused except Baltimore and Ohio Railroad.

KESTENBAUM: So that's if you're trying to spend money. What if you run a store? What if you run that bar in New York and some guy walks in and gives you some bill that you've never seen before? What do you do? Well, that's when you take out your trusty bank note reporter, this huge book the size of a phone book. This thing, it tells you what bills are in circulation, what they're supposed to look like and how much they might be worth.

KESTENBAUM: You would take out this big, you know, encyclopedia-looking thing. And you'll say, OK, you know, it's the Howard Banking note. You'd look in this. You'd find the Howard Banking Company list. It would then tell you where the bank was. And then it would tell you at what discount the note was to be accepted at. So, for instance, if this was a particularly good bank, $5 note would trade at $5. You, as a bartender, would accept it at that. If it was trading at a discount, it would also say that. If the bank had defaulted, you'd know that. And you'd know that it's worthless and not to accept it.

GOLDSTEIN: And these books, new ones come out every month to keep up with the news. And you have a different book for every city. This is because a bill from, say, a Boston bank might be worth $5 in Boston but only $4 in New York. Usually, the further you get from a bank, the less its money is worth. People's money loses value just because they're traveling.

KESTENBAUM: And we haven't even mentioned counterfeiting yet. Here's Brian Murphy.

MURPHY: This is the great huckster scam of the 19th century. People make up fake banks. One of my favorite ones is a - it's issued by I think the bank of the Golden Fleece, right?


GOLDSTEIN: And whoever takes it is getting fleeced, right?

MURPHY: That's right. That's right. So that the engraving - right? - the detail, this beautiful engraving on the front is this fleece is this sheep being shorn.

KESTENBAUM: You might think the next step in this story is that the government decides this is crazy, we're going to have one central currency - but that is not how it happens.

MURPHY: No, that is not how it happens.

KESTENBAUM: What happens is the Civil War. And the war is incredibly expensive. The government, the Union, starts to run out of money. And it needs to buy cannons and bullets and pay soldiers. And so the federal government does two dramatic things.

GOLDSTEIN: Dramatic thing number one - the government prints up paper money and uses it to buy stuff. This paper money, it's called greenbacks. And, David, I actually printed out one. I think it's sitting in front of you there.

KESTENBAUM: Here we go.

GOLDSTEIN: So basically, it's green, we can say perhaps obviously - it's called a greenback. And, you know, it looks a lot like a dollar bill or a $10 bill. This is actually a picture of a $10 note. It's got a picture of Abraham Lincoln on it. It's got an eagle. It says United States. It's got a one and a zero. It's written out $10. It looks like a $10 bill, an old $10 bill.

KESTENBAUM: And this was basically the first dollar bill issued by the U.S. government, though during the war, these dollars, they were not always worth a dollar in gold.

JAREMSKI: So oftentimes, you would have discounts of - early on, a couple cents as the war wasn't going in the U.S.'s favor - or, actually, the Union's favor. However, once the Union kind of started winning a lot of the battles, you would have - you had it shoot back up because it was a bet on the Union's victory.

KESTENBAUM: So this was not a plan to establish a single national currency. It was a plan to fund war. Jaremski says the greenbacks, they were seen as an emergency thing, something a government would only do in time of war.

JAREMSKI: The underlying belief was that these greenbacks were temporary in the sense that we would issue them, the war would end and that, you know, within 10 years, they'd be gone. The problem was that the consumers kind of liked them.

KESTENBAUM: Surprising then, not surprising today. Would you rather use a bill issued by a bank you're not sure exists or would you want to use a bill that everyone recognizes? So the greenback, that was dramatic thing number one.

GOLDSTEIN: And dramatic thing number two - slightly wonkier than the greenback but equally important - national banks, banks that are regulated not by states but by the federal government. These banks are created during the Civil War and they also help raise money for the Union because in order to be a national bank, you had to buy government bonds. In other words, you had to lend money to the government.


GOLDSTEIN: And these banks, of course, they could issue their own bank notes. And at the end of the Civil War, the government actually starts putting a tax on those old bank notes issued by the state bank. So after the Civil War, the only paper money that's circulating is the greenbacks and the bank notes issued by the national banks. And those bank notes issued by the national banks, they all start to look alike. So in the post-war years, there's this convergence. Bills are looking more and more uniform. And for the first time, they're all worth what they say they're worth.

JAREMSKI: So if you have a $10 First National Bank note of New York, then that will trade in that bar at $10. OK. So anywhere you travel to, so if you took that first National Bank of New York bank note into, say, Ohio or Wyoming or Louisiana, it's still going to trade at its face value.

KESTENBAUM: So the United States at this point has kind of accidentally stumbled on an economic innovation - a $10 bill that is worth $10 in New York and in Connecticut and in New Jersey. You can take it all the way to Wyoming and it is still worth $10. And now, finally, if you're a bartender - life is much easier.

JAREMSKI: So this bartender has a lot of free time now. He doesn't - every time he gets a note, he doesn't have to pull out this big book and set it on the bar. At the end of a day, he doesn't have to go find brokers to exchange these bank notes. All he has to do is kind of take it and accept it.

KESTENBAUM: He's got time. He can go and do something important like invent the martini.

GOLDSTEIN: So this really is how we got from a world of 8,000 kinds of money and of monthly guides that tell you if a $5 bill is actually worth $4 to the world basically that we know today, where if somebody gives you a $5 bill, you know it's worth $5. This makes travel and trade much, much more efficient. And really more broadly, the Civil War is this moment when the U.S. finally answers this question - are we one country or are we lots of little countries? The answer, of course, we're one country. And this is true for our money as well.

KESTENBAUM: And as we get into the 20th century, we take the final step. We move to just one government-backed form of paper money - the dollars you have in your wallet.


BEYONCE: (Singing) We going to take it to the moon, take it to the stars. How many people you know can take it this far? I'm supercharged.

KESTENBAUM: As always, we want to hear what you think. Send us email - planetmoney@npr.org. I'm David Kestenbaum.

GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.


BEYONCE: (Singing) You don't know what we been through to make it this far. So many scars, about to take this whole thing to Mars.

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