From the establishment of the federal government through the Civil War, money in the United States consisted mainly of specie (gold and silver coins), bank notes (paper money issued by banks), bank deposits, and at times currency issued by the federal government. The U.S. Mint, established in 1792, produced coins of gold, silver, and copper. Foreign coins also circulated, especially Mexican, Latin American, and Spanish silver pesos. These and other designated foreign coins were legal tender for most of the period. The Mint assayed specimens of these coins and determined their legal tender values. Legal tender status for foreign coins was discontinued in 1857.

During this period, the United States was on a bimetallic standard. Both gold and silver coins were legal tenders, and when specific amounts of gold and silver were brought to the Mint, it was required by law to convert the metals into coin. The content of the silver dollar was set at 371.25 grains of silver, and the content of the gold dollar was set at 24.75 grains of gold, thus establishing a "bimetallic ratio” or "mint ratio” of 15:1. One rationale for bimetallism was that gold coins would provide a convenient medium for large transactions, while silver coins would be convenient for small transactions. A second rationale, one that became more important after the Civil War, was that bimetallism would reduce the threat of deflation and produce greater price stability. If the stock of one metal, say gold, grew too slowly to produce stable prices, the other metal, silver, might be used in its place.

In practice, the ability of the United States to maintain both metals in circulation, and thus to satisfy the first rationale, was limited by the tendency of the coins made from the metal worth relatively more in world markets to be withdrawn from circulation and exported. In the early decades of the nineteenth century, the rising price of gold on world markets produced a situation in which most of the coin in circulation was silver. Partly to remedy this situation, the amount of gold in the gold dollar was reduced from 24.75 grains to 23.22 grains in 1834, thus establishing a mint ratio of 16 : 1, which was more in line with world markets. Although this change encouraged the circulation of gold, the main reason gold began to replace silver was the discovery of gold in California in 1848 and the related discoveries in other areas. Although silver did not entirely disappear, the circulation shifted rapidly toward gold in the 1850s. The idea that the cheaper money would replace the dearer (provided the two monies circulate at a fixed exchange rate owing to law, custom, or convenience) is known as Gresham's law, often summarized as "bad money drives out good,” although "cheap money drives out dear” is more accurate.

Bank notes were payable in specie on demand except during financial crises or wars, when convertibility was suspended. Bank notes were issued by local private banks and by the First and Second Banks of the United States. The local banks were chartered by the states; the First and Second Banks were chartered by the federal government. The legal procedures for chartering local banks and the rules regulating banks varied greatly from state to state. In some states, banks were chartered individually by the state legislature but, under the so-called free banking laws, anyone could start a bank provided that the bank complied with certain rules and regulations. One of those regulations was that notes issued by free banks had to be backed by government bonds, typically bonds of the state where the bank was located. Perhaps the most important common feature of the early banking laws was that banks with charters from one state were not permitted to set up branches in other states. Restrictions on branching, particularly the ban on interstate branching, produced a system of geographically isolated banks that persisted well into the twentieth century and distinguished the U.S. banking system from the systems prevailing in other industrialized countries. In those countries, bank offices typically were branches of a few large banks with headquarters in the nation's financial center.

The large number of distinct bank notes in existence (because each bank issued its own notes) gave rise to an unusual currency system. Bank notes generally circulated in the vicinity of the bank that issued them. Notes taken into another region had to be converted into local money. Generally, a discount would be charged on nonlocal notes, analogous to the charges sometimes levied for withdrawing cash from an automated teller machine (ATM). The appropriate discounts on bank notes issued by solvent banks – and lists of notes of bankrupt banks, and counterfeits – were published in reference books known as bank note reporters. Although considerable research has been conducted on the determinants of the discounts and other aspects of the system, it is still not known whether the volume of discounted or counterfeit notes was sufficient to affect the accuracy of the monetary statistics from the era.

The First Bank of the United States was chartered in 1791 for a term of twenty years; the Second Bank was chartered in 1816, again for a term of twenty years. The notes issued by the First and Second Banks of the United States enjoyed a higher status than those issued by state-chartered banks. The high status of their notes flowed from the decision to make them a legal tender for the payment of taxes, from the fact that the First and Second Banks alone had a nationwide system of branches, and from the patronage of the federal government enjoyed by the First and Second Banks. As might be expected, the competition between the state-chartered banks and the federally chartered banks was intense, and it was a major factor in the decisions not to renew the charters of the First and Second Banks.

Deposit banking in those days was similar in many respects to our modern system of deposit banking, but it was restricted, especially in the early years of the nineteenth century, to a relatively small class of people who were literate, numerate, and possessed of sufficient means to make deposit banking worthwhile. The share of deposits in the total supply of money, however, grew dramatically between 1800 and 1865. By 1860, deposits were a larger component of the stock of money than bank notes were (see Table Cj7–21).

The federal government did not issue paper money in peacetime, but during the War of 1812 and especially during the Civil War, large amounts of fiat paper money (money not redeemable in specie) were issued. The motive was simply the need for revenues to finance the wars. Taxes and borrowing were also used to finance the wars, but the printing press was an attractive alternative. In effect, printing new money was a low-cost (in terms of administrative expenses) way of taxing a widely held asset: money held by the public. The result of relying on money creation was substantial inflation. During the Civil War, both the North and the South experienced major inflation, but the inflation in the South was far more severe, in part because the South relied far more on printing money than did the North.

Data on the stock of money and its components before 1867 are often incomplete and available at irregular intervals. Data on the notes and deposits issued by private banks after the mid-1830s are available in reports the banks made to state government regulatory agencies, which in turn reported them to the Secretary of the Treasury. Considerable data for earlier decades were uncovered by Joseph Van Fenstermaker (1965), who combed government records, newspapers, and other sources for the balance sheets of the banks. Data on the issue of fiat paper money are also available in the Reports of the Secretary of the Treasury. The figures on the amount of coin in circulation are more problematic. Although the amount minted is known, the amount of coin (of domestic or foreign origin) entering or leaving the United States can only be approximated from imprecise and incomplete statistics on foreign trade.

Since the nineteenth century, scholars have attempted to combine estimates of coin, bank notes, and deposits into estimates of the stock of money. The work of Milton Friedman and Anna J. Schwartz (1963, 1970) clarified the conceptual framework for estimating the stock of money. The first effort to apply their framework to the antebellum period was made by George Macesich (1960), who prepared estimates of the stock of specie and the stock of money for the years 1834–1845, and used them to reinterpret the monetary disturbances of the Jacksonian Era. Peter Temin (1969), building on the work of Macesich, prepared estimates covering the years 1820–1858 for his study of the Jacksonian Era. Temin's data are shown in Table Cj22–25. Comprehensive estimates from 1790 of the stock of money and its components were first assembled by Milton Friedman and Anna J. Schwartz (1970). Table Cj7–21 is a version of Friedman and Schwartz's Table 13. It has been simplified for the general reader in several ways: (1) when Friedman and Schwartz give alternative estimates, we present only what appears to us to be the best estimate; (2) when Friedman and Schwartz present data for different months toward the end of the year, we have combined them into a single end-of-year estimate; and (3) we have omitted certain minor monetary variables. Readers engaged in detailed research should consult the original source.

The monetary aggregates presented here are, with the exception of certain figures for the North in the Civil War, simple arithmetic sums of the amount of coins, paper money, and deposits. This is probably the best that can be done for now, but it is unlikely that this method is ideal. If acceptable procedures existed for weighting assets on the basis of their "moneyness,” then the weight on coins in the monetary aggregates would be higher than the weight on notes and deposits, and the weight on notes and deposits issued by the First and Second Banks of the United States would be higher than the weight on notes and deposits issued by the state-chartered banks. However, practical systems for assigning the weights are lacking.

During some of the banking panics – there were banking panics in 1819, 1837, 1839, and 1857 – and during the War of 1812 and the Civil War, convertibility of bank notes and deposits into coin was suspended. The price of coin in terms of notes and deposits then became a market price that varied over time. Valuing coin at market prices would produce a larger estimate of the stock of money, and valuing paper at coin prices would produce a smaller estimate, than the arithmetic sum that included coins and notes and deposits all at face value. Economic theory, however, does not provide a clear basis for choosing among these approaches.

The Civil War also created additional problems for interpreting the monetary statistics. The nation was split into several distinct currency areas. In the North and Midwest, the famous greenback dollar, a fiat paper currency, dominated. Gold and silver could be purchased at a premium in the bullion market, but typically gold and silver were not used in domestic transactions. Similarly, in the Confederacy, the Confederate dollar reigned. On the Pacific Coast of the United States, however, gold remained the dominant form of money, and the greenback dollar was treated as a "foreign” currency that circulated at a discount. In part, this odd state of affairs was achieved through social pressure that stigmatized individuals who insisted on paying debts with or otherwise using greenbacks. The South also was split into two currency areas after the North gained control of the Mississippi River. In both the North and the South, moreover, the governments issued interest-bearing notes designed to circulate as money. The extent to which they circulated from hand to hand and whether they should be included in estimates of the stock of money, however, remain controversial topics. Estimates for the South in the Civil War are presented in Table Eh111–117, Table Eh118–124, Table Eh125–127 and for the North in Table Cj26–41.

Despite all the problems noted in the preceding paragraphs, the monetary statistics from the antebellum and Civil War eras compare favorably in terms of breadth of coverage and accuracy with other sorts of quantitative data from this period. Modern monetary data, it is true, are available more frequently and are based on more comprehensive underlying sources. However, the simpler structure of the financial system during the antebellum and Civil War eras may make the interpretation of the monetary statistics, and the choice among candidate estimates of the money stock, easier than they are today. In any case, the antebellum and Civil War monetary statistics clearly provide a valuable tool for understanding the early history of the United States and a rich field in which to test the principles of monetary economics.

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Fenstermaker, Joseph Van. 1965. The Development of American Commercial Banking: 1782–1837. Kent State University Press.

Friedman, Milton, and Anna Jacobson Schwartz. 1963. A Monetary History of the United States, 1867–1960. Princeton University Press.

Friedman, Milton, and Anna Jacobson Schwartz. 1970. Monetary Statistics of the United States: Estimates, Sources, Methods. Columbia University Press.

Macesich, George. 1960. "Sources of Monetary Disturbances in the United States, 1834–1845.”  Journal of Economic History 20 (3): 407–34.

Rockoff, Hugh. 2000. "Banking and Finance, 1789–1914.”  In Stanley L. Engerman and Robert E. Gallman, editors. The Cambridge Economic History of the United States, Volume 2, The Long Nineteenth Century. Cambridge University Press.

Temin, Peter. 1969. The Jacksonian Economy. Norton.