A Payment History of the United States

by Kaz Nejatian

  A Payment History of the

  United States

  Kaz Nejatian, CEO of Kash

  Copyright © 2017 Kash Corp

  All rights reserved.

  I dedicate this book to all retailers everywhere;

  especially my favorite retailer, my mother.

  CONTENTS

  Introduction

  1 Bills and Cash

  The Coinage Clause

  US Gold & Silver Coins

  Free Banking

  Greenbacks

  Redemption of Gold

  Federal Reserve

  2 Checks in America

  Boston in 1681

  Spike in Popularity

  Federal Reserve to Rescue - Again

  3 Automated Clearing House

  SCOPE

  NACHA

  4 Cards

  Early Retail Cards

  Charg-It

  DinersClub

  Fresno Drop

  Debit Cards

  5 Digital Currency & Blockchain

  Bitcoin

  Price & Usage

  Conclusion

  Introduction

  Money is an odd, odd thing. It is hard to understand how it works; and you don’t have to be an economist to know that money is complicated.

  Just turn on the radio. After love, the most complicated subject of all, money is the second most popular topic among the people writing the songs that we all love.

  Money is so complicated that it is easier to rhyme the words to Notorious B.I.G’s "mo money, mo problems” or to sing Liza Minelli’s “money makes the world go around” on key than it is to describe what money actually is.

  If you ask an economist what money is, they will be able to answer you very quickly. They will tell you, money is anything that can fulfil three functions:

  A store of value: a thing that people can save and use later, something that doesn’t just expire or disappear if you hold on to it.

  A unit of account: a thing based on which everyone can measure the value of other things

  A medium of exchange: a thing that people can use to transfer value to one another. More easily, a thing that people can use to buy things, pay the government, or settle debts.

  But lots and lots of things can serve those functions. My wife will serve me dinner every night in exchange for me taking out the garbage once a week. Obviously there is a store of value there. She will give me dinner five or six times before I have to do anything. We also agree that there is a price and that there is an exchange. Five or six dinners per garbage disposal.

  But does me taking out the garbage make the garbage bag a medium of exchange? Obviously not.

  The economic definition of money doesn’t actually help much when it comes to telling us what money is.

  The best way to think about money, I find, is to think about what money is not rather than what money is.

  If money did not exist, we would be reduced to bartering for things we need and want. In other words, I could get someone to make me a t-shirt in exchange for me singing them a Miley Cyrus song. Or you, presumably being more talented than I, could fix someone’s car in exchange for a pair of shoes.

  Every thing that allows us to get away from this barter world is money.

  To put it in a positive way, money is something that can hold its value over time (at least a day or so), whose value can be easily measured against things that we may need or want that are for sale, and that most people we want to transact with will accept.

  Throughout history many different things have been money. Human beings have used barley, peppercorns, glass, gold, silver and even pieces of paper with no apparent value as money.

  But if you think about it, money by itself is not actually all that interesting. Money is only interesting when it is used in human interactions. No one really cares what the value of a piece of gold buried under a pile of rocks is. That gold is only valuable if you are trying to use it to get something else.

  It is when human beings become involved that money becomes interesting. This makes sense. Money, after all, is a human invention. In fact, it is not just a human invention. Modern money is decidedly an American invention.

  To understand how money works and how the exchange of money, or payments, work we have to understand the history of payments in the United States.

  That is the aim of this book; to give a cursory review of how we got to where we got.

  We’ll start with some basic assumptions about money. We won’t go too far back. There will be no discussion in this book about invention of money. For a fascinating history of money, read The Ascent of Money: A Financial History of the World by Niall Ferguson.

  The focus of this book will be the modern history of money and how people pay for things. We will start at a time when gold and silver coins were the most broadly accepted forms of payment. We’ll start there because for much of the history of money before gold and silver came into play, humanity was at a loss trying to figure out how to find something that served the three functions of money best. We’ll focus on the United States because virtually every innovation since humanity figured out that gold and silver were probably better forms of money than barley and rice (for one, they could not be eaten by rodents and were more easily transported) has had its footing in the United States.

  A final note. This is not an academic work. Its goal isn’t to tell the reader everything the reader should know about money. The goal is much simpler. The aim is to tell the entertaining history of payments in the United States so as to demystify why things work the way they do.

  Okay. You’ve been adequately warned. If you keep reading, you have no one to blame but yourself.

  1 Bills and Cash

  The modern history of money in the world is inextricably linked with the fact that for centuries the people of Massachusetts seem to have been unable to get their state’s government in order.

  For much of its early history and especially in the late 17th century, the government of Massachusetts did not collect enough in taxes to fund its extravagant spending plans. To make up for this shortfall, the government of Massachusetts would fund its activities by launching plunder expeditions against Canada.

  Being short on many things, including gold coins, armies from Massachusetts would head north to Quebec to invade and plunder treasures from the rich but poorly defended French territory. Of course, since it was short on money, Massachusetts did not have the funds necessary to pay soldiers up front for this campaigns. Those governing Massachusetts would simply assume that their expeditions to plunder Quebec would be successful and that he soldiers could be paid once the army returned to Boston and sold its booty.

  Year after year, this was a good assumption. In October 1690, however, the Canadians were ready for war. They had a new leader who had grown tired of losing battles. Given the chance to surrender, to lose some money and to live to fight another day, Governor-General Louis de Buade de Frontenac said to the invading Massachusetts army that his only response to the offer of surrender would be by “the mouth of my cannons.”

  What was supposed to be a short plunder campaign turned into a long battle - a battle for which the invading army from New England was ill prepared. After weeks of futile battles, in late October 1690, the Massachusetts army waved the white flag and retreated in a state of panic leaving many valuable field guns on the battlefield in a rush back to Boston.

  A few weeks later, the army arrived back in Boston with no booty but with thousands of pounds in debt to the returning soldiers whose salary had not yet been paid.

  Unfortunately, Massachusetts had no money. It had no reserve of gold and no silver coins. The whole
purpose of these plunder campaigns to Quebec was to fill the treasury in Boston with gold and silver. It seems that no one had considered what might happen should one of these campaigns not end with a surplus of gold and silver coin.

  In desperation, the government of Massachusetts turned to Boston merchants as a source of 3,000 pounds in gold coins the government needed to borrow to pay the soldiers; but Massachusetts had a history of not paying its bills and Boston merchants, more shrewd than patriotic, were unwilling to lend the government any money.

  In a crunch and facing a group of ornery, well-armed soldiers, the government of Massachusetts did something that no government had ever done before.

  In December 1690, right before Christmas, the government of Massachusetts invented paper currency.

  Instead of turning to merchants and bankers from other colonies, knowing that the answer from all of them was likely no, Massachusetts simply turned on its printers and printed pieces of paper that it claimed were worth 7,000 pounds.

  Knowing that soldiers might question the value of paper, Massachusetts made two promises. First, it promised that the paper notes would be exchanged for gold or silver within a couple of years. Second, it promised that it would never print any paper money ever again.

  Of course, as we now know, Massachusetts kept neither of these promises. It printed more money within weeks and it did not settle the notes handed out to the soldiers for decades.

  The Massachusetts government’s penchant for paper alchemy caused some concern in the old colony. The whole idea behind the paper currency had been a promise that the government would be able to exchange it for gold at some point. If Massachusetts kept printing more and more money, everyone was relatively certain that it would never have the gold reserve needed to pay off these paper notes.

  Seeing this, the soldiers who were holding this paper currency began selling them on the open market to whoever was willing to exchange them for gold right away. As more and more holders of paper money sold their money in exchange for gold, the value of the paper fell more and more.

  Within a year the value of the world’s first fiat currency had fallen by nearly 50%.

  Seeing this devaluation, Massachusetts had two options. It could have stopped printing money or it could have brought in a law requiring that the paper money be the official legal money of the colony and not subject to devaluation.

  Massachusetts, once again facing a massive budget shortfall and lack of coins, chose the latter. It continued printing massive amounts of paper money - 500,000 pounds of it in one month in 1691. It also brought in a law that anyone not accepting the paper money at par with gold or silver would be jailed and have all of his or her property confiscated by the government.

  Seeing Massachusetts’ almost unending ability to fund its expenses through printing of money, other colonies quickly followed suit.

  As other colonies began printing money, Massachusetts inflation got worse. It could no longer rely on its relatively worthless currency to be exchanged for gold and silver in Rhode Island or Connecticut. For example, in 1740 the value of Massachusetts printed money fell by 46%. In 1747, it fell by 46%. By 1750, the par value of Massachusetts money had collapsed by more than 90%.

  The currency devaluation between 1690 and 1750 had become such a problem that it ultimately required the Parliament in London to intervene directly in Massachusetts’ monetary policy. The colonial legislature in Massachusetts passed a law, in 1749, effectively banning its own paper currency. It ordered that all paper currency outstanding to be returned by March 31, 1750 and exchange for gold sent by His Majesty King George’s treasury to Massachusetts.

  Additionally, Massachusetts passed a law making it a criminal offence to bring any paper money from its neighboring colonies, New Hampshire, Rhode Island, and Connecticut into Massachusetts.

  This ban on use of paper currency had the desired effect in Massachusetts. To the delight of merchants and consumers, by April 1, 1750, virtually all paper money had disappeared from Massachusetts. While the disappearance of paper money from the colony caused a shortage of coins and other means of exchange, at least the spiraling Massachusetts hyperinflation had been stopped.

  To fight the shortage of coins, a few months after the retirement of its now worthless currency, Massachusetts introduced a new kind of paper currency. This time, the paper currency was not simply backed by a promise that it would eventually be exchanged for gold at some future date - it was a treasury note that differed from money in three very important ways.

  First, unlike the earlier paper currency, these notes were not legal tender. They could not be used to repay debts and no merchant was obligated to accept them as a form of payment. Second, while they were outstanding, they earned interest to be paid by the government of Massachusetts. Third, they could be converted on demand into gold or silver coins.

  These three features meant that the government of Massachusetts could not simply print endless amounts of money as it had before.

  Having seen the experience in Massachusetts, in 1751 the Parliament in London on the advice of King George forbid all colonies in New England from printing paper money.

  By 1752, the flood of paper money into the United States had turned into a trickle - but the dam was about to burst with the Revolutionary War in 1775.

  As Massachusetts had previously learned from its repeated attempts to invade Canada, and as the Founding Fathers of the United States would soon learn, wars - especially against the British empire - cost an obscene amount of money.

  Soldiers, even volunteers, must be fed. They must be armed. They must be housed. To pay for these expenses, the newly minted United States began issuing its own paper currency. This currency, called a Continental, would be issued for a limited time and in a limited amount, the new United States government promised. Within 7 years, the people were told, this currency would be retired using the taxes that would be levied by the victorious states of the new country.

  Of course, as had been the case in Massachusetts almost a century earlier, the new Congress did not abide by its promise to limit the printing. Instead, the US Congress authorized the printing of an almost unlimited amount of the Continental paper currency.

  Because of this massive influx of new money, backed by virtually nothing other than a promise, the value of the Continental fell almost immediately after its introduction. A year after its introduction, the Continental was worth 25% less than it had been upon introduction.

  Seeing this decline, King George delighted in the failure of the new currency. Correctly assuming that the United States could be harmed if its money supply was attacked, British forces in the United States began creating counterfeit currency as a way of undermining the public’s trust in the new US currency, and as an extension, the new country itself.

  The proliferation of counterfeit bills and the fact that Congress had increased the total money supply in the United States by nearly 20-fold in 4 years caused the value of the Continental to collapse. By 1780, Continentals had one-fortieth of the value that they had upon issue. In fact, the American idiom that something is “not worth a continental” started out as a way to mock the new US currency.

  Unsurprisingly, in 1780 the production of the Continental was discontinued. During this civil war period, several states had also began printing money that had become virtually worthless by the end of the war.

  This meant that by the time the Founding Fathers of the United States gathered in Philadelphia on May 25, 1787, the United States federal and state governments had experienced and failed at creating and maintaining at least a dozen different forms of paper money. Some, like Maryland’s “indented bills” were actually paper backed by stock in the Bank of England. Others, like those in Pennsylvania favored by Benjamin Franklin, were “coined land” which was simply a paper currency backed by real estate. Interestingly, Franklin, as a businessman, had helped design and print the failed paper money in most of the early colonies. He was personally responsible
for the design of the currencies of New Jersey, Pennsylvania and Delaware.

  The Coinage Clause

  It was against this backdrop that James Madison was tasked with drafting of the US constitution. Madison a representative from Virginia, was particularly well-versed with the history of paper currencies. Virginia’s paper currency had the dishonor of being one of the weakest and most devalued currencies of the new world.

  Madison’s view of paper currencies and competing currencies was firmly set out by him in Federalist Papers No. 42 where he wrote that

  “All that need be remarked on the power to coin money, regulate the value thereof, and of foreign coin, is, that by providing for this last case, the Constitution has supplied a material omission in the articles of Confederation. The authority of the existing Congress is restrained to the regulation of coin struck by their own authority, or that of the respective States. It must be seen at once that the proposed uniformity in the value of the current coin might be destroyed by subjecting that of foreign coin to the different regulations of the different States. . . . The regulation of weights and measures is transferred from the articles of Confederation, and is founded on like considerations with the preceding power of regulating coin.”