During the early 1800s, the only paper money in the united states consisted of hundreds of kinds of bank notes. Each bank promised to exchange its notes on demand for gold or silver coins. But numerous banks did not keep enough coins to redeem their notes. Many notes therefore were not worth their face value—that is, the value stated on them. As a result, people hesitated to accept bank notes.

   The soundest bank notes of the early 1800s were issued by the two national banks chartered by the U.S. government. The first bank of the United States was chartered by Congress from 1791 to 1811, and the Second bank of the United State from 1816 to 1836. Both banks supported their notes with reserves of gold coins, and people considered the notes as good as gold.

   Paper money as we know it today dates from the 1860s. to help pay the costs of the American Civil War (1861-1865), the U.S. government issued about $430 million in paper money. The money could not be exchanged for gold or silver. The bills were called legal tender notes or United States notes. But most people called them greenbacks because the backs were printed in green. The government declared that greenbacks were legal tender—that is, money people must accept in payment of public and private debts. Nevertheless, the value of greenbacks depended on people’s confidence in the government. That confidence rose and fell with the victories and defeats of the North in the Civil War. At one time, each greenback dollar was worth only 35 cents in gold coin. In the South, the Confederate States also issued paper money. It quickly became almost worthless.

   In 1863 and 1864, Congress passed the National Bank Acts, which set up system of privately owned banks chartered by the federal government. These national banks issued notes backed by U.S. government bonds. Congress also taxed state bank notes to discourage their use. As a result, national bank notes became the country’s chief currency.

   Some greenbacks also continued to circulate. The government announced that, beginning in 1879, it would pay gold coins for greenbacks. The U.S. Department of the Treasury gathered enough gold to redeem all the greenbacks likely to be brought in. but as soon as people knew they could exchange their greenbacks for gold, they were not anxious to do so. The fact that the Treasury paid out only gold coins meant the country was operating on an unofficial gold standard, rather than the bimetallic standard of the early 1800s. The gold standard is a system in which a nation defines its basic monetary unit as worth a certain quantity of gold and agrees to redeem its money in gold on demand.

   The new nation banks system eliminated the confusion that had existed when hundreds of different bank notes were in circulation. But the system did not provide for the federal government to increase the supply of money when needed. Shortages of money contributed to a series of economic slumps during the late 1800’s. many people called for the government to provide more money by coining unlimited amounts of silver. Such a policy was called free silver, and the argument over free silver became an important political issue.

   The dispute reached a climax during the presidential election of 1896. The republican candidate, William McKinley, favored the gold standard. McKinley defeated William Jennings Bryan, the Democratic candidate, who supported free silver (see Free silver). In 1900, congress passed the Gold Standard Act, which officially put the nation on a gold standard. The United States went on and off the gold standard several times and finally abandoned it in 1971 (see Gold standard).

   The United States suffered from repeated monetary difficulties until 1913, when Congress passed the Federal Reserve Act. This act created the Federal Reserve System, a central banking System interest rates and the availability of money and loans.

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