Counterfeit currency concerns beleaguered the early republic.

Byline: Albert B. SOUTHWICK

COLUMN: ALBERT B. SOUTHWICK

On Feb. 5, 1806, the Massachusetts Spy, Worcester's main weekly, published a front page article headlined COUNTERFEIT BILLS. And thereby hung a tale.

The story noted that: "The following Counterfeit Bank Bills are in circulation in the Northern States" and it went on to list fake paper currencies purportedly issued by 11 Massachusetts banks, four New Hampshire banks, four Maine banks (Maine then was part of Massachusetts), two Connecticut banks, four Rhode Island banks, three New York banks and also some purportedly issued by the United States Bank.

In addition there were some "handsome looking" bills issued by the Newbern Bank. But "no such bank exists." There were $9 bills and $4 bills, there being no regulatory agency to lay down rules.

A few months later the Spy printed another warning: "The Public are cautioned to beware of Counterfeit Five-Dollar bills of the Smithfield Bank, payable to D. Angell, bearing date 22d August, 1805...the resemblance to the true ones is so great that it requires a critical attention to distinguish them."

It took the new nation many years to establish a reliable money system. Supplies of money had been a problem for years, particularly during Shays' Rebellion in the 1780s, when bankrupt farmers who could not pay their taxes and mortgages closed down the courts.

The U.S. Mint was established at Philadelphia in 1793 in the first Washington administration. By 1806, according to a report submitted to Congress by President Thomas Jefferson, it had coined a total of $4,749,343, including "Eagles, Half Eagles, Quarter Eagles, Dollars, Half Dollars, Quarter Dollars, Dimes, Half Dimes, Cents and Half Cents." Those coins have long since become collectors' items.

But the mint couldn't keep up with the demand. In 1797 Congress authorized the use of "Spanish milled dollars" for money transactions. "Dollar," derived from the German "Thaler," had been familiar in the American Colonies for generations.

I have above my desk a note issued in 1802 by Daniel Waldo to my great-grandfather, Amasa Southwick, for the value of "Four hundred and Nine spanish milled Dollars and Fifty eight cents in Gold or Silver," redeemable "on Demand, with lawful Interest, in like money." Mr. Waldo was one of Worcester's leading money lenders, and also a founder of the Worcester Bank. My great-grandfather wanted to expand his carding business in Leicester.

Specie in the form of gold or silver coins has long been considered as real money. But there rarely was enough specie in the 18th century British Colonies of North America, and that led to a need for something more elastic and plentiful, such as paper pledges of various sorts. As early as 1740, the Massachusetts Bay Colony set up a Land Bank for the issuance of paper money, but it was shut down by the British Parliament after a few months. England did not want any colony exercising such a basic function.

Paper money came to Americans during the Revolution. Untold thousands of bank notes were issued from 1776 to 1783 by hundreds of banks. Those notes plus loans from France and Holland financed the Revolution. Although most paper notes were supposed to be redeemable in hard money, they rapidly depreciated in value until "not worth a Continental" became a common phrase. But those seemingly worthless notes took on value years later when Alexander Hamilton, George Washington's secretary of the Treasury, pushed through federal legislation to redeem them at face value.

In the 1790s, Americans were using some 40 currencies, including coins from various parts of Europe and "scrip" issued by states, cities and private enterprises.

That was the background for the First National Bank, chartered in 1791 for a 20-year term. It was heatedly opposed by Thomas Jefferson and his Republican-Democrat Party, but it proved valuable in putting U.S. finances on a stable course. It probably made things easier for President Jefferson in 1803 when he agreed to pay France $15 million for the huge Louisiana Territory. Its charter was not renewed in 1811.

But by 1816, the pressing need to stabilize the currency led to the establishment of the Second Bank of the United States. That bank, located in Philadelphia, came under the control of a wily, unscrupulous operator named Nicholas Biddle.

It was, in effect, the Federal Reserve of the day, except that Mr. Biddle was a political powerhouse, dispensing and withholding favors left and right. He was regarded with high suspicion by many, particularly by Democratic politicians including Andrew Jackson.

When Mr. Jackson became president in 1829, he resolved to not renew its charter in 1836 and to switch federal deposits from the Second Bank of the United States to state banks. Mr. Biddle's bank went out of business in 1841.

During those early years of the 19th century, states struggled to keep the economy and the currency stable. But with as many as 1,600 local, state-chartered banks issuing paper scrip and notes, confusion reigned. Counterfeiting and speculation became rampant. Although the Worcester Bank, headed for 40 years by the prudent Daniel Waldo, was careful to keep an adequate supply of gold and silver coins on hand to back up the bank's paper, it was the exception. Most local bank notes quickly lost their value, thereby fueling the various recessions and panics of the first half of the 19th century.

In 1861, to finance the Civil War, Congress authorized the U.S. Treasury to issue paper money - demand notes bearing no interest but always redeemable. The country at last was on the road to a stable currency.

Albert B. Southwick's column appears regularly in the Telegram & Gazette.