Demand Note - Treasury Notes and Early United States Paper Money

Treasury Notes and Early United States Paper Money

Between the adoption of the Constitution and the Civil War the United States government did not issue paper money as we know it today, but on many occasions it did issue short term debt called Treasury Notes. The Demand Notes were a transitional issue connecting these Treasury Notes to modern paper money. The Demand Notes had been intended to function as money but were authorized within the legal framework of Treasury Notes since the U.S. was not generally assumed to have the authority to issue banknotes at that time.

The Continental Congress had issued Continental Dollars between 1775 and 1779 to help finance the American Revolution. The paper Continental Dollars nominally entitled the bearer to an equivalent amount of Spanish Milled Dollars but were never redeemed in silver and lost 99% of their value by 1790 despite the American victory. With the fate of the Continentals in mind, the Founding Fathers embedded in the Constitution no provision for a paper currency, and the Constitution explicitly prohibits states from making anything but gold or silver legal tender. As a result, the pre-Civil War circulation of banknotes in the United States consisted of private issues, including issues by private federally chartered banks such as the First and the Second Bank of the United States.

While the Constitution did not explicitly grant the power to issue paper currency, it did grant the power to borrow money. Treasury Notes, as a form of debt, were an innovation to help bridge Federal financing gaps when the government encountered difficulty selling a sufficient amount of long term bonds, or loan "stock". Treasury Notes were first employed during the War of 1812 and were issued irregularly up through the Civil War. Characteristically the issues were not extensive and the "polite fiction" was always maintained that Treasury Notes did not serve as money when, in fact, to a limited extent they did. These notes usually bore interest, their value varied with market conditions, and they rapidly disappeared from the financial system after the crisis associated with their issuance had ended.

Among the several issues of Treasury Notes, of special note are the "Small Treasury Notes" of 1815 which, like the Demand Notes, did not bear interest and were intended to circulate as currency – and thus are also candidates for "the first U.S. paper money". However only $3,392,994 were issued, and these were rapidly exchanged for bonds. In witness to the limited circulation achieved by these notes, only two issued uncancelled examples of the Small Treasury Notes are known today vs. almost 1000 examples of the Demand Notes.