Managing the Nation's Currency

Using paper money in the United States before 1863 was a complicated and costly endeavor: A state-issued banknote worth $5 in New York City did not have the same value across the Hudson in Newark, New Jersey, and converting that piece of paper to be used in New Jersey often involved a fee.

That is because paper currency was issued by individual banks, and the rules they followed varied from state to state. Some states owned and operated banks themselves, and others adopted "free banking," granting charters to all applicants that met established conditions.

More than 7,000 state banknotes circulated throughout the states and territories.

As a result, thousands of banks issued thousands of paper notes in various denominations. In theory, holders of a bank's notes could return them to the bank and receive face value in gold or silver. However, banks tended to issue more notes than they had gold or silver available—especially where state supervision and oversight were weak. And that led to bank runs and failures, and fistfuls of worthless paper for bank customers, as described below in the (Philadelphia) Public Ledger about a bank collapse in the early 19th century.

Hundreds of poor laborers were running in every direction with their hands full of the trash [cash] and not able to induce a broker to give six-pence to a dollar for them. We passed in the market a woman who makes her living by selling eggs, butter, and vegetables, who had almost all she was worth about $17, in the bank's notes. When apprised that it was worthless, she sank down in agony upon her stool and wept like a child. This is but one of 100 similar cases. — (Philadelphia) Public Ledger, early 19th century

To complicate matters, counterfeit notes were rampant—so much so that entire periodicals were published to help businesses identify fake currency and to determine the discount rate for notes from distant banks.

Ending the chaos, President Abraham Lincoln said, "is peculiarly the duty of the national government to secure to the people a sound circulating medium . . . furnish[ing] to the people a currency as safe as their own government." Lincoln and Treasury Secretary Salmon P. Chase then created legislation to establish a national banking system and an Office of the Comptroller of the Currency to supervise it. Congress agreed and passed the National Currency Act in 1863.

Although the act was promoted partly as a wartime measure because the new national banks were required to buy government bonds as security for the banknotes they issued, Lincoln left no doubt that his primary intention was to create a system that would serve the country long into the future. He explained this goal in his 1864 State of the Union speech:

The national system will create a reliable and permanent influence in support of the national credit and protect the people against losses in the use of paper money. — President Lincoln, 1864 State of the Union speech

President Abraham Lincoln and Treasury Secretary Salmon P. Chase working on the national banking legislation. In 1920 N.C. Wyeth painted this mural in the lobby of what was then the Federal Reserve Bank of Boston. The former bank building is now the Langham Hotel.

The National Currency Act of 1863 created the national banking system and the Office of the Comptroller of the Currency.

The first $100 and $500 national banknotes feature John Trumbull's paintings Declaration of Independence and Surrender of General Burgoyne. Both paintings now hang in the U.S. Capitol Rotunda.

One reason for using paintings on national banknotes was "to teach the masses about the prominent periods in our country's history," according to an internal U.S. Department of the Treasury letter. "The laboring man, who should receive every Saturday night a copy of the Surrender of Burgoyne for his weekly wages would soon wonder who Burgoyne was and to whom he surrendered."

That same year, Pocahontas became the first nonmythical woman to appear on a U.S. banknote. An engraving of John Chapman's Baptism of Pocahontas appeared on the back of a $20 bill (and was used again in 1875). The painting also hangs in the rotunda.

In addition, using such intricate art made counterfeiting engraved designs almost impossible. Modern banknotes are almost always engraved, as are plates for printing money, checks, bonds, and other security-sensitive papers.

The most skilled engravers in their respective specialties have been employed by the Bureau of Engraving and Printing from its very beginning. The specimens of portraits, vignettes, and lettering exhibited by this bureau were awarded the highest premiums.

President George Washington first appeared on the $1 note. The image is based on a portrait painted by Gilbert Stuart. The artist said, "When I painted him, he had just had a set of false teeth inserted, which accounts for the constrained expression so noticeable about the mouth and lower part of the face."

Congress designated the Bureau of Engraving and Printing as the sole producer of federal currency.

Former U.S. Sen. Blanche Kelso Bruce (R-Miss.) became the first African American to have his signature printed on all U.S. currency as Register of the Treasury.

Martha Washington became the second woman (after Pocahontas) to appear on U.S. currency, on a $1 silver certificate.

Her image was based on a painting by Gilbert Stuart, a companion to his portrait of her husband that appeared on the $1 bill.

Martha Washington appeared again on a silver certificate. This certificate was what collectors call an educational note because it depicts a specific aspect of U.S. history.

The back of the certificate includes a personification of history pointing to the Potomac River and Washington, D.C. The Washington Monument and the Capitol are in the background. The Constitution is on the right. Circling the motif are the last names of famous Americans, including Martha's husband, George, and Samuel Morse.

President Woodrow Wilson signed the Federal Reserve Act, which established the nation's central bank to monitor and control the volume of money and provide liquidity in times of financial stress.

The Federal Reserve would oversee a new, more flexible currency that could grow with the needs of the economy and take the place of national banknotes in the money supply.

As a result, the OCC began gradually turning over the job of creating and managing U.S. currency to the Federal Reserve System and sharpened its focus on maintaining the safety and soundness of the national banking system.