Fostering curiosity in kids (and their parents) since 2011

“Why did California ban paper money in 1850?”

Sailing card for the clipper ship, California, commanded by Henry Barber. (Public Domain)

Thanks for stopping by Caterpickles.

The good news for you today is that I’m mostly done writing about potatoes. But The Great Potato Gold Rush Project of 2016 still has riches to offer us. In the course of figuring out whether miners would have actually bought supplies with gold dust anywhere other than on a Hollywood set, I discovered a rather surprising fact.

When California became a state in 1850, its first state constitution explicitly banned the use of paper money.

That seemed really weird to me. After all, I live in a world where I can pay cash for my chai latte and the barista will be perfectly happy to take it.

black and white line sketch of a man wearing a flat brimmed hat dipping a pan into the river and shaking it to find gold.

Prospector panning for gold in the Mokelumne River during the California Gold Rush. At the time, Californians apparently viewed the practice of sorting river rocks in the hopes that one of them would prove to be gold to be a better bet than using paper money. (Illustration: Harper’s Weekly, 1860. Public Domain.)

But in 1850, paper money didn’t offer the same protections we rely on today. Bank notes were issued by private banks, not the federal government. If the bank that issued them went out of business, the paper money lost all of its value.

Banks went out of business a lot back then. Things got so bad in California that when California became a U.S. State in 1850, its first state constitution specifically outlawed bank notes:

“Sec. 34. The Legislature shall have no power to pass any act granting any charter for banking purposes; but associations may be formed, under general laws, for the deposit of gold and silver, but no such association shall make, issue, or put in circulation, any bill, check, ticket, certificate, promissory note, or other paper, or the paper of any bank, to circulate as money.”

As the Haywood Gazetteer of 1853 summed it up, “the circulation of paper as money is forbidden.”

Paper money may have been outlawed in the pre-Civil War California, but coins issued by other countries were perfectly legal.

At the start of the Gold Rush in 1848, California was technically still a part of Mexico, although it was under American military control. The most common currency was the Mexican silver Real, valued at about 9 pence each. Still, even reales were relatively scarce, and as such, were typically reserved for gambling, a game in which having convenient access to coins of relatively standard value was pretty important.

This was pretty standard at the time across the U.S. by the way. After all, silver or gold coins at least retained the value of the metal they were made of. Foreign coins weren’t banned as legal tender in the U.S. until 1857, after the California Gold Rush had proven that the United States had enough silver and gold within its own borders to mint a steady supply of U.S. coins.

California wasn’t alone in viewing paper money with skepticism. The pre-Civil War U.S. government didn’t much care for it either. 

Article One of the U.S. Constitution only grants Congress the authority to issue and regulate the value of coins. It doesn’t say anything about paper money. The paper money the Continental Congress had printed to finance the American Revolution had become worthless by the time Article One was drafted. Our Founding Fathers didn’t want to make that mistake again.

Something akin to our current system didn’t appear in the U.S. until 1862, when President Abraham Lincoln signed the Legal Tender Act. Passed in an effort to help fund the Civil War, the Legal Tender Act allowed the U.S. government to issue paper money that couldn’t be directly redeemed for gold or silver, but which could be used to pay off taxes, debts, and other obligations. Breaking the direct link between paper money and the gold or silver backing it made financing much easier to obtain. By the end of the war, the U.S. federal government had issued some $430 million of these new greenbacks.

The 1862-1863 greenback literally had a green back -- as in the back of the dollar bill was printed entirely in green. The front featured black, red, and green ink. The version shown here, the $1 greenback, sported a portrait of Salmon P. Chase, who was Secretary of the Treasury at the time.

1862-1863 U.S. Greenback. (Credit: National Numismatic Collection, National Museum of American History via Wikipedia)

But even the establishment of a national banking system to back the new federal currency in 1863 didn’t calm the fears of the everyday American when it came to paper money that wasn’t backed by some sort of gold standard.

Ultimately, Congress passed the Resumption Act of 1875, which allowed Americans to once more begin exchanging their greenbacks for gold. Knowing that they could exchange their federal paper dollars for gold from the U.S. Government was apparently all Americans needed to actually begin using them.

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