10/04/2014 08:18 am ET Updated Dec 04, 2014

Where Did That Money Come From?

"Two bits, four bits, six bits, a dollar; all for Lebanon stand up and holler." I was reared in Lebanon, Missouri, attended Lebanon High School, and that was a cheer used especially at our basketball games. Of course, other teams used the same cheer, inserting their own names. Back then, it was quite common to refer to a quarter as "two bits" or a half-dollar as "four bits" or 75 cents as "six bits."

We hardly see half-dollars now, and although quarters are still quite common, we seldom hear them referred as "two bits." In fact, from an informal survey I took, most people about forty years and younger do not have any idea what "two bits" or "four bits" or "six bits" or any number of bits refer to. Many people assume that using "bits" to refer to USA money is slang. But the "bit" has a legitimate historical connection with the USA monetary system that can be traced to colonial times.

There are volumes of materials about coins and terms that refer to our currency, but one must be careful to sort through what appears to be valid or inaccurate sources. I found the most acceptable resources to be highly-regarded encyclopedias, college history books, articles by Leon F. McClellan, and Merriam-Webster's Collegiate Dictionary.

During colonial days -- that is, when there were 13 English colonies in North America -- English royal law made is illegal for colonists to possess or use coins of any kind. Colonists were expected to ship any coins to England, supposedly to pay for manufactured goods received by the colonists from the motherland. During this time, the Continental Congress of the United States issued paper money for the colonists to use when trading among themselves. This worked fine until the Revolutionary War and foreign governments understandably refused to accept the paper money of a people in revolt from England and not yet established as a country, so Continental Currency (colonial paper money) became worthless.

Although it was illegal for colonists to use or keep coins, there was ample access to the Spanish dollar -- a silver coin equal in value to eight Spanish coins of lesser value called "reales." Beginning in the fourteenth century, the "reale" was a coin used for several centuries by the Spanish government and its possessions, including Mexico and Spain's settlements in North America. The Spanish "reale" comes from the Latin word regalis, giving the "reale" coins "regal" legitimacy.

Since the Spanish dollar was a coin comprised of eights lesser coins (reales), the Spanish dollar was commonly referred to as "the piece of eight," and for a considerable period of time it was the world's most used coin. The Spanish dollar was in ample supply in the English colonies, and defying English law, pieces of eight were highly circulated among the colonists, who used the coins secretly and stored them for future use. When the colonial paper money became worthless, the Spanish dollar became legal tender in the newly-born United States of America.

Coins of lesser value than the Spanish dollar were in short supply in the new country. When coins of lesser value were needed as change to balance out a purchase, it was common practice for a merchant actually, with a small axe or cutting tool, to chop or cut a piece of eight (the Spanish dollar coin) into eight equal smaller "bits," each bit being worth one-eighth of the Spanish dollar. Hence, "two bits" was worth one-quarter of a dollar, "four "bits" was equal to one-half of a dollar, and so forth. And the people actually called these small pieces of chopped-up coins "bits."

After the Revolutionary War and the United States had won its independence, there were many things the new country had to put in order to function as a country, one of which was adopting a permanent currency. Deciding upon something so important to the everyday life of the people created much debate. Finally, in the late 1780s, a monetary system based on the Spanish dollar or piece of eight was decided upon and ready for adoption. After all, the piece of eight had already been used by the colonists for many years, and the logical thing to do was officially to adopt a system that the citizens were already acquainted with and accustomed to using.

By that time, however, leaders of the world's major countries had decided upon the establishment of a new coinage system based on the decimal, a system still used by most countries today. Decimal currencies have subunits based on a factor of ten, not eight. The majority of countries using a monetary system based on the decimal divide the main unit of their currencies into one hundred subunits.

Instead of adopting a system based on a factor of eight, the United States followed the other major countries. With the passage of the Coinage Act of 1792, our government established a monetary system based on the decimal, a system we still use today: one hundred subunits to our main monetary unit. The main unit of United States currency is called the "dollar," and the dollar's one hundred subunits are called "cents."

With the adoption of decimal currency, there was no coin in U.S. currency equal in value to one-eighth of its main unit as had been the case with the "bits" of Spanish dollar. But there was a coin in the United States currency that was equal to one-quarter of a dollar, and another coin equal to one-half dollar. Reminiscent of the "bits" of the Spanish dollar, early Americans called the American quarter-dollar "two bits," the American half-dollar "four bits," and seventy-five cents as "six bits," a practice still in use when I was reared.

So the old sports cheer used by so many schools referring to "bits" has a genuine historical significance, and our use of "bits" referring to various amounts of our currency is not slang.

[Next week my blog will look into today's bitcoin, a new online form of money established in 2009 that the U.S. Treasury calls a decentralized virtual currency.]