An Irish trader and Washington's false teeth

Greenback
October 17, 2003

The American dollar bestrides the world. Acceptable in every country, fervently desired in most, it is a potent symbol of American economic strength and power. But it was not always so. Indeed it was less than 100 years ago that the US Congress established the Federal Reserve Bank, the American equivalent of the Bank of England or European Central Bank.

For most of America's history, from the English colonies established on the seaboard fringe of the continent more than 400 years ago to the early 20th century, a wide and at times bizarre range of different types of money circulated within the US itself. The monopoly of the dollar in America is a comparatively recent event.

Jason Goodwin has written an entertaining and accessible account of the first three centuries or so of American money. He traces its development, from the use of shells ( wampum ) as money in the very early days to the eventual domination of the dollar.

The book is full of entertaining nuggets of information. For example, the American motto, e pluribus unum (out of many, one), which appears on coinage today, was taken from the masthead of the Gentleman's Quarterly .

The dollar sign itself was invented by an Irish trader in 18th-century Florida. And the engraving of George Washington on the one-dollar note was thought at the time to be a disaster, because he was having trouble with a new set of false teeth.

However, Goodwin's book is a serious historical account of the evolution of the American dollar. He shows very clearly that monetary union in the US took place long after the process of political union. The American republic was established in 1783, but as late as the mid-19th century a tremendous array of different types of money was circulated. States and banks were free to issue their own notes. As late as 1860, there were some 9,000 different kinds of privately issued dollar bills circulating, around a third of which were counterfeit. On no fewer than six occasions in the first half of the 19th century, Congress passed acts allowing foreign coins - French, Spanish and British - to circulate as legal tender.

Two attempts to establish a central bank, of the kind with which we are now familiar, failed. Prosaically called the First and Second Banks of the United States, both were shortlived and had wound up by 1840. America then waited until 1907 before the Federal Reserve Bank was established.

Given the current debate over the euro, the information provided by Goodwin is highly topical. America emerged as the most important economic power in the world during the course of the 19th century. By the first world war, its economy was over twice as large as that of imperial Britain, the second largest economic power, and living standards were distinctly higher. Yet these stupendous developments took place against the backdrop of a baffling plurality of currencies. The US economy blossomed despite the lack of a single currency. Indeed, the success of the dollar owes a great deal to the process of gradual evolution over which it emerged. The dollar was not established by the diktats of the political elite, but gained slow acceptance across the population.

An interesting aspect of the book is the sheer inventiveness of Americans at crucial times. They have usually seen money as an instrument to serve other aims, rather than as an end in itself. To give just one example, Congress had no compunction about depreciating the currency on a massive scale in order to finance the revolutionary armies in the field against the British. Principles of sound finance, which greatly exercised us at the time, simply did not get a look-in. The attitude persists to this day, with interest rates in America being set much lower than in Britain or Europe to try to stave off economic recession.

Goodwin does not place his evidence in the context of current policy debate on single currencies, nor indeed does he really mention the historical experiences of other major currencies such as sterling. A theme, albeit a secondary one, that compared and contrasted experiences would have been an interesting addition.

Perhaps more importantly, Goodwin could have strengthened the book by including some economics. Monetary theory is one of the few areas where economists have established genuine insights, which are far from obvious, into how the world works. The idea, for example, that banks can create money often puzzles or enrages many people. By linking the story into a theoretical framework at appropriate places, Goodwin could have given his book quite a powerful analytical content.

That said, Greenback , which is essentially a popular historical account of the emergence of the dollar, can be recommended to a wide audience, including economists. Goodwin writes clearly and entertainingly, with no specialist knowledge required on the part of the reader, about a key phenomenon in the economic history of the world.

Paul Ormerod is a director of Volterra Consulting Ltd.

Greenback: The Story of the Almighty Dollar

Author - Jason Goodwin
Publisher - Hamish Hamilton
Pages - 320
Price - £14.99
ISBN - 0 241 14098 6

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