The Copper Panic of 1789 was a financial crisis in the early United States that was caused by debasement and loss of confidence in copper coins that occurred under United States first president George Washington.
The loss of cooper coins is what caused a recession and essentially ended with the introduction of paper money.
George Washington’s new government had only been in place a few months, when it face it’s first financial crisis. The new government under the constitution had been elected, the treasury department hadn’t formed yet, but the country was dealing with the collapse in the value of colonial and confederation-era coinage.
Colonial currency had always been problematic. Among the citizen of United States, the penny was the most used of all of the currencies. America had not switch to decimalization, money was still counted in the British fashion with 12 pennies per shillings, 20 shillings per pound.
While there was 240 pennies per pound, a penny was still considered to be a lot of money. A private, during the American Revolutionary War, expected to earn 8 pennies a day for their service.
At the root of the copper panic there was an issue of counterfeiting. The problem was that copper was too easy to counterfeit. As more counterfeiters began production and caused minters to have to debase their coins to remain in business, the value of copper began to fall. Several laws were passed during this time period, including the prohibiting of debased coins from being considered legal tender. The State of New York prohibited the circulation of copper coins entirely. The State of New Jersey in 1787 declared it would no longer accept any legal tender of other states for any debts. This furthered the decline in copper prices, forcing minters to shut down, leaving only counterfeiters who produced extremely low quality coins.
By 1789 the market was completely flooded with debased copper coins that were officially illegal and caused the citizens to lose all confidence in them. The federal Government attempted to value the coins at 48 coppers to the shilling, but merchants refused to cooperate and the coin became almost entirely worthless.
The copper situation was alleviated, on August 6, 1789 when the Bank of America in Philadelphia began issuing paper bank notes to replace the cooper coins. The State Governments cooperated with the plan and established the small fiat currency as an active medium trade. With stability returning to the economy the value of cooper also rose again, the monetary system had fully restored.