The Turbulent Beginnings of Paper Money

Book Review

Greenberg, Joshua R. Bank Notes and Shinplasters: The Rage for Paper Money in the Early Republic. American Business, Politics, and Society. Philadelphia: University of Pennsylvania Press, 2020.

With Covid-19 as an accelerant, paper money in the 21st century is going the way of the dinosaur! Today’s disdain for physical cash is in sharp contrast to the burgeoning demand for paper currency two hundred years ago. In his new book, Bank Notes and Shinplasters, Joshua R. Greenberg describes the chaotic, opaque, and sometimes downright dishonest use of paper money in Early America.

In early 19th century America, the only government-issued money consisted of specie coins. Supplementing US gold and silver, British, Spanish, and other country coins freely traded throughout the nation. However, the fast-growing economy required additional money. Before national regulations, state governments chartered banks to operate within their jurisdictions and to issue private banknotes. Redeemable in specie, borrowers received banknotes when entering into a loan with the bank. Banks made loans and issued banknotes far in excess of specie in their vaults, depending on limited demand for specie redemption. State laws regulating local banks and mandotory levels of loans to specie reserves widely differed. Further complicating currency markets, the privately-owned Bank of the United States issued competing paper notes in all states.

Fairly transacting business among buyers and sellers was a “wild west” affair. To use a banknote, each party must understand two factors. First, buyes and sellers needed to understand any discount upon exchanging the note for specie and secondly they needed to assess the banks financial condition and solvency. It was not uncommon for banknotes to be reduced in value by 20 to 80 percent in commercial transactions. Generally, the further geographically the bill was from the bank, the larger the reduction in value. Making paper currency even harder to use, the lack of common currency opened the door to counterfeiters and fraudsters to pass forged money. Unknowingly, the bank may be out of business or have suspended conversion in specie. In some cases, even likely worthless bills are circulated and used in transactions by mutual agreement. To represent a fair exchange of value, paper currency transactions required participants to ascertain the value of many currencies and possess a sophisticated understanding of the likelihood of eventual conversion to specie.

The use of shinplasters is one of the fascinating topics in Greenberg’s book. Merchants and other sellers frequently did not have small bills or change to give purchasers. To complete the transaction, the seller would give the buyer a written note promising to pay the bearer the appropriate difference. Collogically, these merchant-issued notes came to be known as shinplasters. State prohibitions against small denomination notes gave rise to shinplasters, which freely circulated similar to banknotes.

When depositors lost confidence that the bank could redeem notes for specie, frantic runs on banks were prevalent. Bank managers responded by suspending specie payments, further reducing the value of outstanding banknotes. Several industry-wide waves of panic plagued the early 19th century, resulting in hundreds of bank insolvencies.

Despite dealing with a complicated and sometimes obtuse banking system, Greenberg’s book is highly understandable. He provides a clear definition of the 18th-century financial system designed for those with or without a finance background. Demonstrating artistic interest, unusual paper currency examples are interspersed throughout Greenberg’s narrative.

Greenberg concludes that modern, standardized paper currency printed by the US Government trained generations of Americans not to gain skeptical financial literacy. He cites this deficiency as a significant cause of the Great Recession of 2008. Further, he compares bitcoins to the shinplasters of the 19th century. While Greenberg’s scholarship of the currency markets of the 19th century is impeccable, his truncated analysis of the relationship to our modern era is without sufficient foundation. He could have explored more critical parallels. For example, while over four hundred banks failed in the 2008 recession, no bank customer lost FDIC insured deposits. In the great recession, the Federal Government bailed out some financial institutions. Still, many banks and other companies that were not transparent failed to meet customer expectations and went out of business just as they did in the Early Republic. Lastly, his conclusions on crypto-currency seem premature as the final chapter has not been written. In some markets, Bitcoins appears to be more lasting than shinplasters and are out-competiting US currency!

While I might have a different view on the lessons learned from the 18th-century banking markets, I highly recommend Bank Notes and Shinplasters. It is an engaging read describing ordinary Americans’ everyday problems navigating the country’s nascent financial system.

Banknote issues by short-lived Kentucky bank

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