How Paper Money Replaced Hard Currency
Until the 1860s, virtually all of America’s currency was in the form of copper, silver and gold coinage. Other than a small issuance of paper money in the 1770s and 1780s, federally-issued money was hard money made out of valuable metals. Private banks and firms issued paper money and notes, but they did not circulate freely—and were often mistrusted. Federally-issued paper money was not freely accepted and often traded at a discount to face value.
This sentiment changed in the 1860s with the advent of the Civil War, albeit out of necessity. Gold, silver and even copper prices spiked dramatically due to the uncertainty surrounding the war. In many cases, coins were worth more in melt value than face value. Tremendous amounts of American coinage was destroyed during this period—and what little money was left over was hoarded metal by concerned citizens.
The federal government struggled to replenish the rapidly vanishing coin supply. The composition of certain denominations was changed. For instance the one cent and five cent coins were changed to new alloys of bronze and nickel—this was cheaper than using the previous formula of copper and silver. However this option was not available for larger denominations.
The federal government decided that paper money was the ultimate solution. Not only would this help bring official currency back into everyday circulation, but it also allowed the cash-strapped federal government to issue money without purchasing expensive gold and silver. Public acceptance was reluctant at first, but eventually the paper notes became more commonplace in day-to-day commerce.
As economic conditions improved, so did the public’s opinion of paper money. Gradually the federal government began printing more and more paper currency, but it still represented a small percentage of the overall money supply. Paper money was widely accepted as a unit of exchange, but coins remained dominant in everyday commerce.
Paper money overtook coinage as the primary means of exchange in 1933. Franklin Roosevelt banned private ownership of gold, which meant the end of the $2.50 quarter eagle, $5 half eagle, $10 eagle and $20 double eagle. Production of these larger denominations halted immediately and the coins vanished from circulation. The general public no longer had a choice; large transactions had to be handled using paper money.
In summary, Americans have essentially accepted paper money out of necessity. When both large-denomination coins and paper money were issued simultaneously from 1862 through 1933, the vast majority of currency was in the form of coinage. In fact, for periods of time, federally-issued paper money traded at a discount to face value. Granted, Americans now have greater trust in fiat currency, but then again, they no longer have the option of hard money for their everyday transactions.