Paper Currency

Definition

Paper currency refers to money in the form of notes or bills that is issued by a government or financial institution and is used as a medium of exchange. In colonial America, the emergence of paper currency marked a significant shift from barter systems and metal coins, enabling smoother trade and commerce. Its adoption was influenced by the need for a more convenient, portable, and efficient way to facilitate transactions among colonists, especially given the limitations of gold and silver supply at the time.

5 Must Know Facts For Your Next Test

1. Paper currency was first introduced in the American colonies in the late 17th century to address a shortage of coins for trade.
2. Colonial governments issued their own paper scrips, which were often subject to inflation and loss of value due to overproduction.
3. The Continental Congress issued paper money during the Revolutionary War to fund military expenses, but it quickly depreciated, leading to the phrase 'not worth a continental.'
4. Paper currency allowed for larger transactions without the need for heavy coins, significantly easing commerce and trade among colonists.
5. By the late 18th century, paper currency was widely adopted, laying the groundwork for the modern banking system and national currency.

Review Questions

• How did the introduction of paper currency impact trade and commerce in colonial America?
  • The introduction of paper currency transformed trade and commerce by providing a more convenient medium for transactions. It reduced reliance on cumbersome metal coins and facilitated larger exchanges without physical weight limitations. Additionally, it allowed for easier payment of debts among colonists and helped stimulate economic growth during a time when coin availability was limited.
• What were some challenges associated with the use of paper currency in colonial America, particularly regarding inflation?
  • One major challenge with paper currency in colonial America was inflation, particularly when colonial governments overissued their scrips. This overproduction led to decreased trust in the value of the currency and resulted in rapid depreciation. For example, during the Revolutionary War, excessive issuance by the Continental Congress caused their currency to lose significant value, which undermined economic stability and public confidence in paper money.
• Evaluate the long-term effects of adopting paper currency on the evolution of American banking and finance systems.
  • The adoption of paper currency set off a chain reaction that influenced the development of American banking and finance systems. By moving away from barter and metal coins, it laid the foundation for modern banking practices, including the establishment of banks that could issue notes as loans. This evolution allowed for greater liquidity in the economy, supported business expansion, and eventually led to the creation of a centralized banking system in the U.S., facilitating national monetary policy and economic stability.

Related terms

Colonial Scrip: A form of paper currency issued by colonial governments in America, often backed by land or future tax revenues, used to pay debts and facilitate trade.

Fiat Money: Currency that has value primarily because a government maintains it and people have faith in its value, rather than being backed by a physical commodity like gold or silver.

Currency Crisis: A situation in which the value of paper currency falls sharply, often leading to hyperinflation or loss of confidence among the public.