The History of Credit & Debt – Money, Credit & Debt

What is Money

Money is nothing more than a way for people to exchange labor.

Paper money can be thought of as a ticket entitling the holder to a certain amount of someone else’s hard work.

While man lived a savage existence in history, he was not able to perform all functions necessary to break out of the routine of kill, eat, grow, harvest, without the skills gained from the labor of another.

Barter is the simplest form of trading labor, but it is inherently inefficient. If you cannot easily locate someone with the exact item you want, you are out of luck. (I wonder if I can find someone to trade a chicken for this Web page?)

Before paper money (which is nothing more than debt) was created, we had hard money and we had a hard time giving it up.

For something to serve as money it had to be:

  1. Desirable — Precious metals are more desirable than. You can compress more value into a relatively small package with gold and silver.
  2. Portable — It can’t be too heavy. You don’t see coins made from iron, do you?
  3. Divisible — You have to be able to divide it up into smaller portions without considerable work. Spanish pieces of eight were often cut into bits. Two bits equaled a quarter of a dollar. “Two bits, four bits, six bits, a dollar, all for ______ stand up and holler.”
  4. Durable — Don’t have to replace it often. It won’t easily wear and tarnish.

So What is Credit?

Credit is a method of exchange of labor in lieu of money.

If you earn $20,080 dollars a year ($10/hr.) and want to buy a car worth $30,000, you would need to work 3,000 hours to pay for it (actually about 3,900 hours because you have to pay all your taxes and deductions off the top).

Rather than wait until you have gathered the necessary money by working the hours, you can pledge your future labor as a guarantee towards that obligation and get the car now. Your history of how you honor those types of obligations is your “credit rating.”

It could be said that credit is simply a state of mind that all will honor their obligations.

What is Debt?

Debt is what you create from a credit transaction and are obligated to pay back.

Credit and debt walk hand in hand. However, the levels of credit and debt are often not equal.

If you purchase a rare painting with debt and it rises in value, the present value will be more than the debt. You will have earned extra credit (current sales price – debt = credit).

However, if you purchase, say a mobile home, it will be worth less when you try to sell it than your debt against the home. You will be the proud owner of debt (current sales price – debt = debt).

Why Do I Need Confidence for Credit?

The largest factor in the continued extension of credit is confidence. Without confidence by consumers in the economy and producers in consumers, credit will dry up. Have you heard on the news about the Consumer Confidence Survey? That’s what it is all about.

So if credit is used in place of money, what else is also used? Bank checks are. The difference is they are not pledges of future labor but for labor stored in your bank account.

What about the credit card, is that like a check? No. Much like a bank check is used to exchange stored labor, a credit card is used as a tool to exchange present and/or future labor. A credit card is nothing more than a mechanism to do this – a financial tool.

If you write a check for the purchase and do not carry the balance on the card, the credit card has merely been a tool to conduct the transaction. Nothing more, nothing less.

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What about people who say that having a credit card made them spend more? It didn’t. Overspending is not caused by the tool. It is caused by the desire for things that bring us pleasure, often to compensate for issues in other parts of our lives. What causes problems is the over-pledging of future labor for a term that cannot be met. For example: You pledge 3,900 hours within five years to pay for a car, but in combination with your other credit pledges (vacations, clothes, dining out, etc.) you cannot possibly work enough hours or gather enough money to satisfy your debt before it is due. That’s what gets people in trouble.

So why don’t I put all of my money in my mattress it until I need it? That doesn’t help either. If everyone stashed their money, it would lead to a stagnation of production and work for the exchange of, guess what, money. Money keeps us busy and active as a society. Without a steady level of activity our economy would be nothing but periods of starts and stops. Credit helps to level it all out. It is not desirable for our country or individuals to be completely debt-free if we want to keep the economy stable.

Money Equals Debt. What?

The paper money we use today is debt, government debt.

The government used to maintain sufficient amounts of Spanish dollars, gold and silver on deposit to provide collateral for our paper money (in latter days, just gold and silver was held). In theory, that meant that if the government printed one million dollar bills to put into circulation, they had to have one million dollars worth of gold or silver on deposit to cover those notes.

Governments no longer hold deposits of precious metals as collateral for their currency. The paper money you carry is nothing more than a governmental promise to pay you back, a promissory note.

Look at the top of a $1 bill. It says it is a “Federal Reserve Note” and states, “This note is legal tender for all debts, public and private.”

It used to say at the top “Silver Certificate. This certificate is legal tender for all debts public and private.” It was redeemable for an actual amount of silver. Other larger denominations were backed with gold as “gold certificates.”




During the Revolutionary War of 1775 to 1783 (Remember? The war where the 13 colonies fought for freedom from their parent country, Great Britain) paper money became almost worthless. America had a real problem – not enough hard assets to back up the value of its Continental money.

The government made its citizens use the money as debt instruments and they really didn’t want to. As early as 1776, Congress resolved that “Who ever should refuse to receive in payment Continental bills, should be declared an enemy of his country.” That is not something you want to be charged with. Thousands were and they lost everything.

Our forefathers were printing money like crazy and telling the people to use it.

Continental Money – Amounts issued

The Revolutionary War actually cost, in hard money, $135,193,703

On June 22, 1775 the Continental Congress directed the issuance of “bills of credit in defence of America” by the twelve confederated colonies (New Hampshire, Massachusetts Bay, Rhode Island, Connecticut, New York, New Jersey, and New Castle, Kent, and Sussex on Delaware, Maryland, North Carolina and South Carolina). The colonies were pledged as collateral for the redemption of the bills of credit, paper money. The colonies were also supposed to cough up the hard money to back the currency.

Congress had managed to pledge the country as collateral for the money to be issued, backed by our old friend, the Spanish dollar.


A Spanish Dollar
A Spanish Dollar


The bills of credit were issued as follows:
49,000 bills of 8 dollars = 392,000
49,000 bills of 7 dollars = 294,000
49,000 bills of 5 dollars = 245,000
49,000 bills of 4 dollars = 196,000
49,000 bills of 3 dollars = 147,000
49,000 bills of 2 dollars = 98,000
49,000 bills of 1 dollar = 49,000
11,800 bills of 20 dollars = 236,000
403,800 bills for a total of 2,000,000

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They directed, “The form of the bill be as follows, Continental Currency, Dollars” and that each bill had to be signed by two appointed gentleman and they would receive compensation of $1.33 for each thousand bills signed.




The most expensive slice of ham

People began to lose confidence in the value of the bills of credit as money. They liked real money, not the paper stuff. Once people lost confidence, it created a real mess in our country.

The depreciation of the original “bills of credit” was a real problem.
March, 1777, $1 in coin (hard currency) was worth $1.75 in paper.
Sept., 1778, $1 in coin was worth $4 in paper.
March, 1778, $1 in coin was worth $16 in paper.
Sept., 1779, $1 in coin was worth $18 in paper.
March, 1780, $1 in coin was worth $40 in paper.
Dec., 1780, $1 in coin was worth $100 in paper.
May, 1781, $1 in coin was worth $500 in paper.

During these latter days it was not uncommon to pay $20,000 in Continental currency for a ham, and $10,000 for half a pound of tea (no wonder they dumped it into Boston harbor).

How did this happen?

While the Revolutionary War was a noble cause, it bankrupted our country. The seven-year war had emptied the treasury and the country had no money or credit.

Money was so scarce at the end of the Revolutionary War that the government couldn’t even pay the troops. It is said it took all the influence George Washington had in order to persuade his troops to go home without their pay.

In June 1783, while the Federal Congress was meeting in Philadelphia, a “band of mutinous soldiers” broke into the session and behaved in a “grossly insulting manner and demanded of that body the back pay now due for their services during the war, which amounted to a considerable sum.”

After the soldiers were expelled from the hall, the members of congress felt the seat of the General Government should be located away from any current large city to avoid such future outbreaks.

Congress sought a location that would provide easy access from all parts of the Union or United Colonies of America, as they wanted to call our country.

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Several locations were selected. The Maryland locations included Havre de Grace, Baltimore and Conococheague (now Washington, D.C.).

While many of the states, especially Pennsylvania, wanted the new government city, which was to be 10 miles square, to be built in their state, it was primarily due to the cooperation of Virginia and Maryland that D.C. ended up where it is now.

On April 15, 1791 the cornerstone of the city was laid at Jones’ Point near Alexandria. This act was performed with the ceremonies prescribed by the Masonic ritual.

The District was called Columbia, in honor of the great discoverer of the Continent. It wasn’t until later that the city was named in honor of George Washington.

In 1844 Congress gave back to Virginia the town of Alexandria and the portion south of the Potomac River.



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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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