Written By: Larry LaBorde
Edited By: Christopher LaBorde
In the last history of money installment, we introduced that the legal definition of the dollar may not be completely solid because of its change in what backs it. This installment looks at the landscape that drove us from a country of thousands of banks and notes to a country of mega banks with one note.
In the early 19th century all banks in the United States, with the exception of the 1st and 2nd National Banks, were State chartered banks. In the frontier states, some of these banks were called "wildcat banks,” because they were managed by unscrupulous men and were often located on the edge of civilization. These men would obtain a state bank charter, issue their own notes, spend these notes and then make it nearly impossible to redeem them. Each state’s charter still required that the notes be backed by gold, so a game of hide-n-seek was set in motion. This brand of banker would often locate their “bank” in a small unheard-of town on the edge of the frontier amongst the wilderness and proceed to generate notes that would eventually be deemed worthless. Their reputations would quickly catch up with them and they would not last long. They were not prolific in number, but it only took a few to make life more difficult for the sound bankers in the state.
These dishonest bankers’ role in history was to serve as the fuel for the men pushing for the mandate of federally chartered banks. Opponents to state-chartered banking never missed a chance to discredit these banks by lumping them in with the practices of the wildcat bankers. Despite these accusations, most banks handled their money quite well. Most kept 20% or better gold reserves in-line with the recommendation of Thomas Paine, an English American intellectual of the time and author of Common Sense and The Rights of Man. These banks all issued their own notes. Of their own designs, on their own engraved plates. There were a multitude of different paper note designs, sizes and denominations. Most banks circulated their notes in their immediate area to be fully redeemed at any time, but as they say, a couple bad apples can spoil the whole bunch.
The wildcat banks were famous for over printing notes and purposely circulating them far from their banks, where redemption would be difficult. However, the system of the day dictated that the further the bank note traveled from the issuing bank, or the more obscure it was, the more it was discounted. "Reporters" and "Detectors" were publications describing suspect and counterfeit notes from failed banks. The information was circulated for the benefit of merchants and bankers who were asked to accept out of town notes unfamiliar to them. It was an imperfect system, but it functioned with its own checks and balances.
Whenever merchants had several unfamiliar notes, they went to a "shaver" who purchased the notes at a discount. These notes were then loaded into a carpetbag and brought to the bank for full redemption. Finding obscure banks and bankers had an entire cottage industry of players around it with their own interesting stories. One of the more charming accounts of wildcat banking that I have come across is the story of a shaver on the hunt for the Bank of Morocco.
The Bank of Morocco was born to an enterprising banker who obtained several bank charters from the Indiana State Legislature. He gathered a list of obscure towns that had been recently platted in remote county courthouses and set up banks and partnerships in each of them. One such town that nobody had ever heard of was Morocco, Indiana, a town that would only be known on the most recent of maps.
A very determined shaver purchased deeply discounted notes from the Bank of Morocco and set about to redeem them. He visited the State auditor's office, and they could only tell him that the Town of Morocco was in Newton County. He traveled by train, stagecoach and rented horse. At dark he finally happened onto a small settlement in Newton County that only contained a few cabins and a blacksmith shop. The shaver asked for directions to Morocco and was informed by the smithy that he was there, but when he inquired on directions to the bank, the blacksmith became defensive. Finally, after much verbal fencing it was determined that the blacksmith was the banker but that the bank was closed for the day and would not reopen until the next morning.
The shaver ate dinner with the blacksmith and his family but had to spend the night on the open plain to await the bank opening the next morning. The next morning the blacksmith led him to a small cabin and they went inside. The shaver was then told they were inside the Bank of Morocco and to state his business. The shaver then pulled out the $1,000 worth of bank notes and asked for redemption in gold. This round of hide-n-seek had just been won.
The blacksmith carefully counted out the notes and then went over to a barrel filled with potatoes and carefully removed the potatoes. From the bottom of the "vault" he withdrew a sack labeled $10,000 and counted out fifty gold double eagles. Afterwards he placed the notes in the bag along with the remaining gold that backed the entirety of the outstanding notes and carefully placed it back in the barrel sealed under the potatoes, thus locking the vault of the bank of Morocco. The shaver thanked the banker and asked if he could pay for his meal the night before. The blacksmith/banker told him that he was the only customer to ever find the bank and that if he did not reveal the location to anyone else that his meal the night before would be free.
As tricky as the boutique banking of the early 1800s must have been, my father often explained to me that banking used to be an extreme privilege, entrusted to an honorable few. Their knowledge of people and business allowed them the ability to leverage their assets, capital and brand to create money and value out of thin air. This power was always going to be abused by some on smaller levels, but it virtually mandates abuse at larger scales.
From the time of wildcat bankers until now, we have traded the fear of possible losses in purchasing power of small boutique banking notes for being captive to mega-banks with guaranteed losses in purchasing power of our only note. Somewhere in the middle was a better system.
As a proud Louisianian I am compelled to note that in the early 1800’s that only the notes from the great Citizen's Bank of Louisiana in New Orleans were accepted at full value anywhere in the country. The Citizen's Bank of Louisiana was a commerce giant for the entire Mississippi valley of the US and issued the famous ten-dollar notes printed in English on one side and French on the other. These ten-dollar notes in French had a prominent "DIX" for ten on one side and were known as dix’es. New Orleans and the surrounding area became known as dix’es-land, which became “Dixie.” The first verse of the song “Dixie” was originally, "I wish I was in the land of dix’es.” A good reputation and solid business practices were all that was needed for the universally held value of a note, unfortunately, these lessons were lost and the US was still in store for the creation of two privately owned national banks, we now call the second one The Federal Reserve. Though this is another story for another time.
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