In the early days British currency, or sterling, was in short supply in New South Wales. Much of it was exchanged for imported goods and therefore left the colony. This led to a widespread barter system, where rum was often exchanged for other goods. By punching a hole through Spanish pieces of eight, Governor Macquarie’s administration created the holey dollar, which was only acceptable within the colony, alleviating the crisis.

According to the Royal Australian Mint  the only currency that arrived with the First Fleet was 300 pounds in English coinage held by the Governor, and other foreign currency held by private individuals. This included English coins as well as Dutch guilders, Indian rupees and Spanish reales. In 1797, a “cartwheel penny” was minted in London to be shipped to the colonies, alleviating the shortage of coins. However, the supply of coinage continued to diminish and the use of rum as a trading commodity increased. This benefited a privileged group of marine corps officers (who became known as the Rum Corps) and other wealthy citizens who could import the liquor. In 1806 Governor Bligh tried to prohibit the use of rum as a currency, inciting rebellion among his officers.

Governor Lachlan Macquarie arrived in New South Wales in 1810 and took steps to remedy the currency problem. He imported 40,000 silver Spanish eight-reale pieces and employed a convicted forger called William Henshall to cut a hole in the centre of these coins and counter-stamp them with their new identity.  The coin with the hole became known as the holey dollar, while the small piece stamped from the centre was called a dump. Both were used as currency.

Macquarie wrote: ‘Having decided it essentially necessary to adopt every possible precaution to prevent this
Useful Supply of Dollars from being Exported, or Carried out of the Colony, I gave immediate Direction for Constructing a Machine here for the purpose of Stamping, Milling and Cutting a piece out of the Center of each Dollar, previous to my circulating this Specie in the Colony. Intending that each Dollar, and the small piece Cut out of the Center of each, should have the Value thereof, respectively, and the Name of the Colony stamped on it. The Value I determined on giving to the Dollar was Five Shillings Sterling, and fifteen pence to the small piece Cut out of the Center of each Dollar.’

This made the value of the new holey dollar higher than that of the Spanish coin it was cut from.  Although the coins were dated 1813, the first batch was put into circulation in 1814. They continued in common use until 1829, by which time adequate supplies of Sterling were available in the colony. The coins were then sent back to Britain to be melted down. Coins were not minted in Australia until 1853, although the Bank of New South Wales was issuing government sanctioned banknotes by 1817.

Governor Macquarie also acted to reduce the value of rum as a commodity. In 1814 the monopoly of the rum trade by the contractors who built Sydney’s “Rum Hospital” ended. A government order allowed others to import spirits and imposed a duty.