Bank Notes and Shinplasters

The Rage for Paper Money in the Early Republic

Joshua R. Greenberg

• Publisher: University of Pennsylvania Press
• Year: 2020
• ISBN:
  9780812297140
• Topic: History
• Subtopic: North American History
• Index: History

The colorful history of paper money before the Civil War Before Civil War greenbacks and a national bank network established a uniform federal currency in the United States, the proliferation of loosely regulated banks saturated the early American republic with upwards of 10, 000 unique and legal bank notes. This number does not even include the plethora of counterfeit bills and the countless shinplasters of questionable legality issued by unregulated merchants, firms, and municipalities. Adding to the chaos was the idiosyncratic method for negotiating their value, an often manipulative face-to-face discussion consciously separated from any haggling over the price of the work, goods, or services for sale. In Bank Notes and Shinplasters, Joshua R. Greenberg shows how ordinary Americans accumulated and wielded the financial knowledge required to navigate interpersonal bank note transactions.Locating evidence of Americans grappling with their money in fiction, correspondence, newspapers, printed ephemera, government documents, legal cases, and even on the money itself, Greenberg argues Americans, by necessity, developed the ability to analyze the value of paper financial instruments, assess the strength of banking institutions, and even track legislative changes that might alter the rules of currency circulation. In his examination of the doodles, calculations, political screeds, and commercial stamps that ended up on bank bills, he connects the material culture of cash to financial, political, and intellectual history.The book demonstrates that the shift from state-regulated banks and private shinplaster producers to federally authorized paper money in the Civil War era led to the erasure of the skill, knowledge, and lived experience with banking that informed debates over economic policy. The end result, Greenberg writes, has been a diminished public understanding of how currency and the financial sector operate in our contemporary era, from the 2008 recession to the rise of Bitcoin.

PART I
Circulation

CHAPTER 1
Passing the Buck

IN THE MIDST of the Panic of 1857, the Georgia Supreme Court ruled on Hutchings & Co. vs. the Western and Atlantic Railroad. The case concerned whether an individual who carried large amounts of cash in his luggage was responsible for a freight charge separate from his passenger ticket. The issue came up when Louisville exchange broker Eusebius Hutchings traveled through Georgia in possession of a large carpet bag filled with $87,000 in bank notes and specie. When train officials charged him a forty-dollar freight fee even though he held his bag during the entire trip, he protested. The ruling ultimately hinged on a passenger’s obligation to pay published rates, but the case provided a rare glimpse into a money broker’s activities and how professional paper money handlers expedited the movement of currency around the country. Eusebius left his thriving Kentucky business to make stops in Dalton, Atlanta, and other Tennessee and Georgia bank towns before he returned home. His trip served two functions: to push new bills into circulation at a noticeable distance from their banks of issue and to redeem notes for specie at their home institutions.¹

This chapter examines how professional paper money men like Eusebius Hutchings facilitated the circulation of bank notes in the early republic economy. Such individuals acted as conduits for the nation’s paper money to ensure that bills moved from one place to another in ways that benefited banks’ and their own bottom lines. The work of bankers, brokers, and carpetbaggers demonstrates that early republic institutions did not just print up bills and release them into the wild, but rather calculated how best to manipulate bank notes to create profit. Banks employed several methods to push notes into circulation: they issued short-term business or personal loans; they issued loans to professional brokers; they purchased assets for the bank; or they came to an arrangement to swap bills with a distant institution. The corporate quest to maximize profit—not the state’s interest to create a stable economy—determined the nation’s currency supply and its circulation patterns. While it was paramount to the government to monitor inflation and ensure that enough cash existed to meet both mercantile investment and personal spending demands, individual banks’ interest in circulating whatever amount of paper money would generate the best returns controlled the money supply. Moreover, an American economy with a persistent cash shortage gave paper money men powerful leverage when they chose to push bank notes only where and when it suited them.²

The phrase “paper money men” is not just lyrical; it is demographic, based on the fact that it was overwhelmingly white, male individuals who organized and engineered the early republic bank note system. Women used paper money in daily commercial and personal transactions, actively participated in credit markets, and occasionally issued loans, but bankers, brokers, and the legal system of coverture denied them access to the formal positions that produced and arranged the monetary system. So, even though institutions such as R. K. Swift’s banking house in Chicago offered special afternoon hours “for the benefit of Ladies” to conduct their business, there were few official opportunities for women to organize the wider currency regime. This was not new in the nineteenth century. Scholars have shown that years before the Revolutionary War, urban women’s familiarity with both currency and credit transactions highlighted their central place within commercial settings even as they generally remained outside key parts of the financial sector.³

Likewise, although both free and enslaved African Americans utilized paper money in their market activities, they had few opportunities for formal relationships with banking institutions and no African American men managed chartered banks before the Civil War. A small group—like Philadelphia barber Joseph Cassey, master sailmaker James Forten, and lumber and coal merchant Stephen Smith—operated as private money brokers, provided loans, and exchanged bank notes for individuals who often could not obtain credit or favorable rates from white-run institutions. Madame Eulalie “CeCee” d’Mandeville Macary similarly challenged numerous categorizations when, in addition to her other New Orleans merchant activities, she used her considerable wealth to discount notes. However, legal barriers such as an 1853 Maryland statute that prevented savings banks from being run by African Americans circumscribed most finance opportunities and led the National Negro Conference to organize a Banks and Banking Institutions Committee to advocate for a black-run bank. That would not happen until more than a decade later.⁴

Whether inside or outside formal monetary networks, all parts of the population depended on financial institutions for their supply of cash because it was the banks, rather than the government, that produced most of the legal paper money used in the United States between the 1790s and 1860. Government officials certainly hoped that when this system functioned properly, enough capital and currency would be available to grow the economy, but without adequate controls on the money market the potential for abuse and collapse was ever present. One 1814 pamphlet stated that banks worked together to “keep up a kind of perpetual motion of bills, which amounts to an important circulation. But the motion is like that of a drunken man. It must be kept up, or serious consequences may follow to the institutions.” The country’s currency supply was therefore not tied to any predetermined amount that was meant to produce stability; the process that capitalized the nation rested in the hands of bankers who sought benefits for themselves and their institutions and not the general welfare of the nation.⁵

A shortage of ready cash did not exist in every area of the country, but at certain times could be acute and provided bankers with a population eager for investment money or just an acceptable currency to buy daily necessities. There was no widespread resistance to the adoption of a paper money economy. There just wasn’t always enough cash to make it work. Barter systems even persisted in some locations because currency shortages prevented the nation as a whole from making a quick transition to a cash market system. Such conditions affected all potential consumers, not just merchants and businessmen. As late as the 1830s, Roxanna Stowell of St. Johnsbury, Vermont, wrote that sometimes “money is so very scarce and we must have some.” The growing nation never seemed to have enough paper money to meet the demand.⁶

Just the prospect of a new bank in a small town offered a community hope of access to credit and a cash infusion. In his diary in 1804, Dr. Nathaniel Ames of Dedham, Massachusetts, noted a “Rage for Banks triumphant” among the population south of Boston as different villages competed for new charters. The promise of a new source of paper money gave immense power to bankers who found recipients for their notes regardless of quality. One Panic of 1837 pamphlet explained that “no kind of money is too bad to suit a needy borrower.” Not all banks reacted equally to this leverage. Some exploited the money market more than others to benefit themselves and their institutions, but all sought advantages by using their ability to make money by making money.⁷

Simply put, an early republic bank note was a piece of paper that promised its face value in coin when returned to the issuing institution; how banks produced and distributed these bills was not so simple. Each bank note represented a liability for its home institution, but banks understood that the “doctrine of chances” said that their paper money could not all be redeemed at the same time. Conservative institutions limited this liability by only issuing notes at two or three times the amount of specie they held in their vaults, while more reckless ones might have tens of thousands of bills in circulation and a bare cupboard at home. Regardless of how many notes they released, every bank had an interest in keeping their bills in circulation as long as possible before they returned for redemption. Separate from properly managed note-to-specie ratios, fraudulent wildcat institutions with no intention or ability to redeem their notes actively engaged in misdirection to trick bank regulators and the public into thinking that they could redeem bills just like any other bank.⁸

Banking institutions that operated to maximize profits primarily used business and personal loans to release their bank notes. Early republican bank loans did not function like modern loans. They were paid out with paper money issued by the institution itself, a fact that dramatically affected bank decisions about how much currency to circulate. Banks took interest on loans in advance, so a ninety-day loan of $1,000 at 6 percent would yield $985 in paper money to the borrower. The full $1,000 had to be repaid by the end of ninety days, at which point the loan could be reissued for another $985 in cash. Given the number of satirical pieces that mocked merchants for last-minute “shinning”—a term for running around and borrowing money to make a payment—few loans seem to have been repaid in advance and most were paid off just in time for renewal. So, as soon as the borrower obtained his bank notes, a race began to see what would happen first: the repayment of the loan or the redemption of the bills. Since only the interest was prepaid, any bank notes that came back for redemption before the loan’s principle was repaid represented a loss for the bank. The longer the bills circulated the more the bank earned from the interest. If a bank got really lucky some of the notes might be lost or destroyed and never come back home.⁹

It should be no surprise to learn that bankers who controlled the production of paper money often used institutional loans to improve their own fortunes and not necessarily to do what was best for the nation’s monetary needs. The satirical “Diary of a Bank Director,” cheekily stated that banks were “not established by people who want to lend money, but by people who want to make money.” This sentiment buttresses the argument that New England industrialists and businessmen used their position as bank officials to steer loans to themselves and their corporate allies through what one scholar terms “insider lending.” Among better-capitalized banks in the Middle Atlantic, credit was still not distributed equally around the community; even white, male artisans found it extremely difficult to obtain loans in the early republic.¹⁰

When banks and borrowers entered into negotiations over loan terms, each side looked to use whatever advantage they could obtain. Borrowers learned from guidebooks like The Young Merchant that they had some leverage because “the bank is under a great temptation to give large credit, for the sake of the greater circulation of these profitable notes.” So borrowers understood that promises they made to banks about a slow redemption of notes could yield tangible results like a reduced interest rate on a loan from 6 percent to 5¾ percent. Banks conversely understood that customers needed capital to conduct business and that anything they arranged to ensure extended circulation would make the loan more profitable. Bankers hedged their bets with an investigation into where their notes would travel geographically, how long it might take before they returned, and what terms might be reached about the quality of the cash involved in the loan payoff. Aside from loans structured with short repayment terms (sixty or ninety days were common), banks developed a variety of schemes to complicate or dissuade the return of their bank notes. These impediments extended circulation times but created a more complicated currency landscape for the rest of the population.¹¹

Bank officials and customers understood that not all bank notes circulated with equal confidence, so the quality and type of bills being loaned and those subsequently used for the payoff could be negotiated. One Cleveland borrower told a Michigan bank that if he were given low-denomination notes, the bills would enjoy a long circulation because the city severely lacked small change. Current law held that federal deposit institutions could not issue notes worth under five dollars and every bank in Cleveland held federal funds. The result was a city without small bills and a merchant who hoped to use that monetary information to obtain increased credit. Questionable banks in the old Northwest often asked borrowers to pay back loans of wildcat bills with higher quality paper money. For example, the Western Reserve Bank agreed to a four-month loan to Samuel Rhoads provided the money was repaid in “Eastern Paper.” However, there were limits to how questions of value could officially enter a loan agreement. Banks with poor-quality notes could not legally profit from a loan of bad money with the hope that the bills would appreciate by the time of repayment. Nashville Bank v. Hays & Grundy ruled that a loan made in bills with a 25 percent discount and repaid at par constituted usury as it altered the terms of the original loan and gave the bank a significant extra profit.¹²

Bank officers tried to plot the journey their notes would travel because they understood that distance equaled time for note redemption. Promises to move bills to other states met with approbation. James B. Ralston asked the Concord Bank in New Hampshire for good terms on his loan since he had the ability to “scatter [bills] in the north and west” of Vermont where he resided. John Norton, the cashier of the Michigan State Bank, likewise approved one applicant who promised to “go south for the purpose of purchasing produce this month and the money will have the best of circulation being paid only to farmers for wheat.” Better yet, the Bank of Wisconsin dealt with one Cleveland customer who pledged to “give your bills as extensive a circulation in Ohio as we possibly can and in such manner that they will not be returned until [the loan is repaid].” Such individual guarantees could track the circulation of small quantities of bank notes, but institutions sought more intricate plans to frustrate mass redemption.¹³

Banks sometimes used redemption terms written on a bill itself to control its circulation. Most bank notes were payable to the bearer on demand, but others altered that language to prevent a payout before the completion of the loan or to track which borrower was responsible for redemption. The easiest way to do this was with a post note redeemable only after a specific date, stated on the bill itself, from ten days to over a year after being issued. Connecticut banks used several variations of post notes during the War of 1812, such as a Hartford Bank two-dollar note “payable two years after the war.” After the conflict, Providence newspapers complained that Rhode Island was overrun by the bills and that “many an honest man has been hoaxed with the ‘two years’ notes as they are precisely similar to the old notes, and the difference cannot be discovered without a perusal of the promissory clause.” Luckily, few institutions circulated post notes because their charters or state regulations required notes to be paid immediately on demand; moreover, post notes raised serious red flags for a public constantly trying to determine which banks deserved their confidence.¹⁴

Another option for banks was to circumscribe who could redeem the note right on its face. This was usually accomplished by spelling out the borrower’s name, such as when the Bank of Pennsylvania issued a bill bearing the words “Promises to pay DeWitt Clinton or bearer on demand Ten Dollars.” While nothing stopped Governor Clinton of New York from passing along the bill to someone else who could redeem it, the bank could use the note marked with his name to hold him responsible if it was redeemed too soon. In The Nature and Uses of Money and Mixed Currency, political economist Amasa Walker explained that if a customer received $10,000 worth of marked notes under the condition that they would circulate for six months, the institution would quickly know if any returned prematurely. Then, “as fast as these bills are returned to the bank, [the customer] is obliged to redeem them at once with other money.” Banks were guaranteed not to lose any money with this method. It was rare, but one last way a bank could alter a note was to tie it exclusively to one person by changing the words “or bearer” to “or order.” Such bank notes did not circulate widely because they functioned more like checks, which did not become common until later in the century.¹⁵

Rather than tracking individual bills, financial institutions often fashioned agreements with remote partners to help them design more predictable circulation patterns. In the endlessly malleable world of early republic banking, formal or casual relationships between distant institutions could either help or hinder the movement of their notes. Dumping a bunch of bills with a collaborator could generate a circulation far enough away that redemption was unlikely. When a bank wanted to create efficiencies and give customers more flexibility to use their capital, it might forge an alliance with a bank in New York City that ensured easy and predicable redemption in the nation’s financial center. The most significant attempt to establish an advantageous regional system of paper money circulation was through the Suffolk Bank system.¹⁶

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Table of contents

• Cover
• Title Page
• Copyright
• Contents
• Introduction. From Madison to Monroe
• Part I. Circulation
• Part II. Material Culture
• Part III. Political Economy
• Epilogue. We Don’t Need No Monetary Education
• Notes
• Index
• Acknowledgments