On Feb. 3, 1690, the Massachusetts Bay colony issued the first paper money in the United States in order to pay for military action against Canada during the war of king William.
Massachusetts was a truly pioneering colony when it came to money, as they were also the first to mint its own silver coins in 1652, despite a British law against it. Paper money created in 1690 was called a bill of credit, and represented the responsibility of the colony for soldiers. Soldiers could spend or trade the receipt of a colony just like silver and gold coins.
During the revolution of 1775, the colonial leaders tried to repeat Massachusetts ‘ paper experiment on a wider scale, but the newly christened foreigner deprived of any support, such as silver or gold. On a small scale it can work, but so much money was printed that rapid inflation has deprived them of all their meaning.
Less than 100 years later, two competing currencies used to Finance the opposing sides of the Civil war. Their value fluctuated with the fortunes of war. However, it was not until the national banking Act after the civil war that the U.S. government has imposed a monetary system, where banks could issue paper notes based on their holding of government bonds. These disparate currencies were taxed out of existence in the following decades and replaced with national Bank notes, giving the U.S. its first unified paper currency.
To learn more about monetary policy tools of the fed to influence the economy.