Currency is term designating all the circulating media of exchange of a country. In this sense, a currency includes coins and paper money. The term sometimes includes credit instruments. Coins are generally designated as metallic currency, and paper money and credit instruments, as paper currency. Further distinctions are made in the latter classification: Government notes are called government currency; bank notes are designated as bank currency; and checks drawn on bank deposits are called deposit currency.
This use of the term currency is of comparatively recent origin, dating from the period following World War I. Earlier uses of the term were more restricted. In countries in which the governments did not issue paper money, the term paper currency was applied exclusively to bank notes. In the United States and a number of other countries, on the contrary, the application of the term currency was limited to government-issued, legal-tender paper money. The change from the earlier, restricted meanings of the term to its modern significance resulted in part from the great increase, following World War I, in the use of credit instruments.
In the early days of this nation, before and just after the American Revolution, Americans used English, Spanish, and French currencies. The Massachusetts Bay Colony issued the first paper money in the colonies which would later form the United States. American colonists issued paper currency for the Continental Congress to finance the Revolutionary War. The notes were backed by the "anticipation" of tax revenues. Without solid backing and easily counterfeited, the notes quickly became devalued, giving rise to the phrase "not worth a Continental." The Continental Congress chartered the Bank of North America in Philadelphia as the nation’s first "real" bank to give further support to the Revolutionary War. Continental Congress adopted the dollar as the unit for national currency. At that time, private bank note companies printed a variety of notes.
After adoption of the Constitution in 1789, Congress chartered the First Bank of the United States until 1881 and authorized it to issue paper bank notes to eliminate confusion and simplify trade. The bank served as the U.S. Treasury’s fiscal agent, thus performing the first central bank functions. The federal monetary system was established with the creation of the U.S. Mint in Philadelphia. The first American coins were struck in 1793.
The Second Bank of the United States was chartered for 20 years until 1836. With minimum regulation, a proliferation of 1,600 state chartered, private banks issued paper money. State bank notes, with over 30,000 varieties of color and design, were easily counterfeited. That, along with bank failures, caused confusion and circulation problems. During the following three decades, sometimes referred to as the dark decades of American banking, abuses of sound banking practices multiplied and assumed scandalous proportions, and speculators and counterfeiters flourished. A basis for resolving the problem of a sound currency was achieved when the American Civil War induced the federal government to raise large sums of money through the issuance of bonds. The National Currency Act of 1863, later amended and renamed the National Banking Act, was enacted by Congress to establish a national banking system and a uniform national currency. Later experience revealed that this system was not sufficiently elastic in providing adequate amounts of currency during periods of prosperity and in contracting the volume of currency in slack times.
On the brink of bankruptcy and pressed to finance the Civil War, Congress authorized the United States Treasury to issue paper money for the first time in the form of non-interest bearing Treasury Notes called Demand Notes. Demand Notes were replaced by United States Notes. Commonly called "greenbacks," they were last issued in 1971. The Secretary of the Treasury was empowered by Congress to have notes engraved and printed by private bank note companies. The notes were signed and affixed with seals by six Treasury Department employees. The design of U.S. currency incorporated a Treasury seal, the fine-line engraving necessary for the difficult-to-counterfeit intaglio printing, intricate geometric lathe work patterns, and distinctive cotton and linen paper with embedded red and blue fibers. Gold Certificates were issued by the Department of the Treasury against gold coin and bullion deposits and were circulated until 1933. The Department of the Treasury established the United States Secret Service to control counterfeiting. At that time, counterfeits were estimated to be one-third of all circulating currency. National Bank Notes, backed by U.S. government securities, became predominant. By this time, 75 percent of bank deposits were held by nationally chartered banks. As State Bank Notes were replaced, the value of currency stabilized for a time. The Department of the Treasury's Bureau of Engraving and Printing started printing all U.S. currency. The Department of the Treasury was authorized to issue Silver Certificates in exchange for silver dollars. The last issue was in the Series 1957. After the 1893 and 1907 financial panics, the Federal Reserve Act of 1913 was passed. It created the Federal Reserve System as the nation's central bank to regulate the flow of money and credit for economic stability and growth. The System was authorized to issue Federal Reserve Notes, now the only U.S. currency produced and representing 99 percent of all currency in circulation.
The Federal Reserve System was created by the Federal Reserve Act, which was passed by Congress in 1913, to provide a safer and more flexible banking and monetary system. Forapproximately 100 years before the creation of the Federal Reserve, periodic financial panicshad led to failures of a large number of banks, with associated business bankruptcies andgeneral economic contractions. Following the studies of the National Monetary Commission, established by Congress a year after the particularly severe panic of 1907, several proposalswere put forward for the creation of an institution designed to counter such financial disruptions.
Following considerable debate, the Federal Reserve System was established. Its originalpurposes were to give the country an elastic currency, provide facilities fordiscountingcommercial credits, and improve the supervision of the banking system. From the inception of the Federal Reserve System, it was clear that these original purposes were aspects of broader national, economic and financial objectives. Over the years, stability and growth of the economy, a high level of employment, stability in the purchasing power of the dollar, and a reasonable balance in transactions with foreign countries have come to be recognized as primary objectives of governmental economic policy.
An important function of the Federal Reserve System is to ensure that the economy hasenough currency and coin to meet the public's demand. Currency and coin are put into orretired from circulation by the Federal Reserve Banks, which use depository institutions as thechannel of distribution. When banks and other depository institutions need to replenish theirsupply of currency and coin for example, when the public's need for cash increases aroundholiday shopping periods depository institutions order the cash from the Federal Reserve Bankor Branch in their area, and the face value of that cash is charged to their accounts at theFederal Reserve. When the public's need for currency and coin declines, depository institutionsreturn excess cash to a Federal Reserve Bank, which in turn credits their accounts. The Federal Reserve Banks and the Department of the Treasury share responsibility formaintaining the physical quality of United States paper currency in circulation.
Each day, millions of dollars of deposits to Reserve Banks by depository institutions are carefullyscrutinized. The Reserve Banks are responsible for receiving, verifying, authenticating, and storing currency and shipping it as needed. Currency in good condition is stored for later distribution. Worn or mutilated notes are removed from circulation and destroyed. Counterfeitnotes are forwarded to the U.S. Secret Service, an agency of the Treasury Department.Currency and coin are used primarily for small transactions. In the aggregate, such transactions probably account for only a small proportion of the value of all transfers of funds.
In 1929 currency was reduced in size by 25 percent and with uniform portraits on the front and emblems and monuments on the back. Paper currency was first issued with "In God We Trust" in 1957. The inscription appears on all currency Series 1963 and later. A security thread and microprinting were introduced to deter counterfeiting by advanced copiers and printers. The features first appeared in Series 1990 $100, $50 and the $20 notes. By Series 1993, the features appeared in all denominations except $1 notes. The Secretary of the Treasury announced that U.S. currency would be redesigned to incorporate a new series of counterfeit deterrents. The newly designed $20 are now being issued. The new $50 were issued in 1997 and the new $100 notes were issued in 1996. New $10, $5, $1 bills and a new $1 coin are to be introduced in the future.
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