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Today's capital woes pale next to credit squeeze of long ago.

Byline: Albert B. Southwick


You think we have money problems now, in 2008? How would you like to be dealing with money transfers in the old days?

For an example, consider Col. Henry Hunt, stationed in Florida, who in April 1818 wrote his wife in New York that he was sending her money:

"I herein enclose the half of a $50 bill of the United States Bank N313 payable at the Savannah Branch to G. Richardson dated at Philadelphia 6th of May, 1817 (Jones, President). I have likewise sent you but one half, for the same reason & shall send you the other half by some other conveyance."

Presumably Mrs. Hunt eventually received both halves of that 50-dollar bill and was able to use it to good effect. But it's quite a contrast to our ATM society.

From time immemorial, money had been in the form of specie - coins made out of gold and silver. But when it came to developing the farms and factories of the New World, there was a chronic shortage of specie. Barter was the main means of trade in those days, but barter had its limits. If a Worcester merchant in 1800 wanted to buy flour, shoes or other goods in Boston, he had to use some form of paper. That often came at a hefty premium.

Hanging over my office desk is an agreement signed in 1803 by my great-grandfather, Amasa Southwick of Leicester, with Daniel Waldo Jr. of Worcester. My grandfather needed money to start manufacturing card clothing, the wire brushes used to comb out wool and flax so they could be spun into yarn or thread. At one time 200 years ago, Leicester was the national center for card-clothing production.

Mr. Southwick, needing cash, went to Mr. Waldo, a prominent merchant and money lender, and signed an IOU, promising to pay "One hundred and ninety Spanish Milled dollars on Demand with lawful interest in like Money after thirty days."

In 1803, that was the only way for a Worcester County entrepreneur to raise capital. Worcester County had no bank until 1804, when Mr. Waldo, Stephen Salisbury and other local men of means obtained a charter for the Worcester Bank, the first in the state west of Boston.

After 1804, the Worcester Bank issued notes. But those notes were discounted by the Boston banks. A Worcester Bank note for $50 might be worth only $45 at the Suffolk Bank in Boston. That discrepancy caused endless arguments between the Boston banks and the "country banks" like Worcester Bank.

The first paper money proposal in the Colonies was in 1690 when the Massachusetts Bay Colony issued a limited number of tender notes. But when the Massachusetts Land Bank in 1740 wanted to issue paper, the project was quickly suppressed by the British authorities, who didn't want the locals fooling around with such dangerous notions.

Paper money didn't really catch on until 1775, when the Continental Congress authorized notes to finance the Revolution. They were backed by the "anticipation" of tax revenues and soon lost much of their listed value. The phrase "not worth a Continental" is one of the reminders of that difficult time.

But those notes eventually paid off for those who collected them and held onto them. They were redeemed at face value by George Washington's first administration 16 years later, thus setting off a national controversy over "speculators."

But problems persisted. Although the establishment of the First Bank of the United States in 1791 greatly helped the national credit and simplified trade, the spread of local banks issuing bank notes led to fraud, counterfeiting and worthless paper. As the Waldo loan to my great-grandfather showed, Spanish milled dollars were still the currency of choice, even though the U.S. Mint at Philadelphia began producing coins in 1793.

Counterfeiting was a national plague. The Spy, Worcester's main weekly, printed regular warnings about phony bank notes:

On Feb. 5, 1806, a front-page box in The Spy listed counterfeit bank bills supposedly issued by 10 different banks in Massachusetts and Maine, with details about how to identify them. Thus, the Nine Dollar bills listed for the bank at New Bedford are, the Spy warned, "hard to distinguish from genuine bills - except in the motto `Peace in the World.' In world, the l and d is in a shade in the counterfeits - The true bills have only the d. Paper more spongy and whiter than original."

An 1808 item reported that "Nine counterfeiters of Bank Bills have been committed to gaol in Boston. Their tools, plates, etc. have been discovered and destroyed. It is said a number who were concerned have fled."

Some banks issued nine-dollar bills, others seven-dollar bills and five-dollar bills. We find it hard to imagine how confusing it must have been to conduct business matters and household operations.

The First Bank of the United States (1791 to 1811) had no real regulatory authority over local banks, and from 1811 to 1816 there was no national bank at all as Federalists and Democrats argued over what the bank would be authorized to do. The Second U.S. Bank was finally chartered in 1816 to help the government cope with the fiscal aftermath of the War of 1812. It was forced to close in 1836 after President Andrew Jackson switched federal deposits from it to state banks.

State-chartered, private banks continued to thrive until the 1830s. By 1836 there were an estimated 1,600 of them issuing 30,000 varieties of notes, many easily counterfeited. Not until the Civil War did Congress authorize the U.S. Treasury to issue paper money in the form of non-interest bearing Treasury notes.

From that time comes the first modern system of national currency regulation (and federal income tax).

It is all pretty hard for us to comprehend. After all, no ATMs? No Federal Reserve? No stock derivatives? No investment bank holding companies? No credit swaps market? No Fort Knox? How did they ever manage?

Albert B. Southwick's column appears regularly in the Telegram & Gazette.
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Title Annotation:COMMENTARY
Publication:Telegram & Gazette (Worcester, MA)
Date:Oct 2, 2008
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