How Did Money Work Circa 1870 (USA)

I’ve been reading some Hirato Alger books, most of which were published in the late 1860s and have a few questions about money from that era. The books I’ve read take place in NYC and occur “after the war” so I assume it’s the US Civil War.

First one is, did banks of that era issue their own money? Several places, it seems the hero of the book will take out money and it’ll say “was a two dollar bill issued on the Park Bank”

Or they make reference to a counterfeit bill, and the man can most certainly identify it as it was a fake on the Acme Bank.

So I am assuming in addition to US currency (weren’t they greenbacks at the time, I may be mistaken) banks issued their own bills.

Also what about checks. In one story, the child tells how his father was owed money but died. So the child finds out where the man who owes his father money is, and goes to collect.

The child gets the money in form of a check, but he has to go to the bank which the check is drawn, get the cash and then go to another bank and deposit the cash.

So were there clearinghouses for checks back then? I’m not sure if this was just a way to flesh out the story or an actual necessity.

Final question is the boys in the stories, who are all poor and usually luggage smashers, boot blacks or newspaper sellers, refer to stamps a lot.

One will stay, “I’d like to go the the theater, but I have no stamps, I have a quarter let’s get some supper instead.” Are stamps a “thing”? Or just a word for currency. I thought the latter but the admission to a theater is less than a quarter.


Andrew Jackson let the US bank die off so although the Mint was still making silver dollars, there was no federal paper money until the civil war. Humorously, it was the departure of the southern states, who always opposed federal paper money, that allowed congress to reinstate a federal bank with federal currency. In the Antebellum US each private bank issued notes backed by their own hoard of gold in the vault. The notes were generally promissory notes that could be redeemed for the equivalent in gold at the bank. Banks hated doing this since it depleted their gold supply. But what could they do?

There were many problem inherent in this system. What if the bank got robbed of its gold (or an unscrupulous banker sold it off secretly)? Were their bills now useless? What if the bank had issued more notes than it could redeem? A lot of banks did this, betting that the majority of notes would stay in circulation and they would have enough to cover the occasional redemption. But it made a run on the bank a real problem for those who came late and couldn’t get their notes redeemed.

Another issue was that the further you got from the issuing bank, the less the money was worth. Not a common problem in pre-railroad agricultural America, where most folks did their business near their local bank. But a big one once folks really began to travel. A dollar from Cleveland might be worth a dime in NYC and vice versa. Folks would stock up on silver dollars before traveling since they kept their value anywhere in the US (and illustrating why a federal currency was needed). There was a class of men who made their living as “Bill Brokers” who would buy up out of town notes in, say, NYC for the local rate of 10 cents to the dollar. Then they would take the train back to the issuing bank redeeming each set of notes as they passed through that locality. And they could buy up NYC bank notes at a discount while they were at it and redeem them at face value upon return to NYC.

Lastly, counterfeiting was rampant in those times. Since there were thousands of different banks each issuing several denominations every year, trying to keep track of good bills and counterfeits was nearly impossible. There were yearly guide books published showing the counterfeits that had been identified. The counterfeiters would use these books to improve their product.

Although the big legislative changes happened during the war, I imagine it took many years for all local printed money to disappear.

Hong Kong currency bills are still issued in this manner, by three commercial banks under the authority of Hong Kong Monetary Authority. HSBC, Standard Chartered Bank and Bank of China.

I recall some movie where the characters leave their Swedish immigrant community (in Minnesota?) to wander around the wild west, some of the group die, and the fellow returns with a very thick wad of bills, only to be told the money was worthless because the bank had failed years ago.

I suppose before FDIC, bank failure was common and a real problem of the era, too.

Postage stamps were used as a currency substitute until quite recent times.

You could buy stuff using stamps at many places. They were especially good for mail order since they were very light weight and slim. So you could sees ads telling someone to send 25c in stamps to get something. (And mail order places could in turn use the stamps in its business.)

The really odd thing is stamps are as fiat a fiat currency can be. It’s just a number printed on a piece of paper. So in the 1800s people had no problem using them as currency but paper money was considered iffy.

Other odd things about US money around 1870 is that since it was mainly silver or silver-backed, the amount of money in circulation was limited by how much silver the US government could get. There wasn’t nearly enough floating around for business purposes. In the US West in particular, most commerce consisted of trading, promissory notes, etc. since the parties in the the deal didn’t have enough actual money to carry it out. This held back the West economically and created a big East-West rift in politics.

The difference being that the holder of a Hong Kong banknote cannot demand redemption of the note into anything. Unlike the pre-1914 gold standard, where issuing banks were obliged to redeem the note for the equivalent in physical gold which it represented (at least, that was the ideal; quite often, this convertibility obligation was suspended by acts of legislation, or simply dodged by issuing banks). You can’t walk into an HSBC branch in Hong Kong, put a HKD10 note on the table and ask for redemption. All you’ll get are other HKD banknotes, at best.

And no, you can’t demand redemption in USD. HKD are backed by USD, but the issuing banks are not under an obligation to deliver USD to owners of HKD upon demand. The way it works is this: If one of the note issuing private banks of Hong Kong wanst to issue more notes, it has to deposit USD with the Hong Kong Monetary Authority. It will get certificates of deposit in return, and the Hong Kong Monetary Authority will allow it to issue HKD banknotes up to the value of the certificates of deposit held.

Hypno-Toad explains it all quite nicely. Here is an 1840 advertisement for the sort of counterfeit detection guide he mentions.

When i teach my freshman US history course, i really like talking with my students about the veritable clusterfuck that constituted the ante-bellum monetary system in the United States. They are often amazed at the idea that money itself is only really as reliable as the system backing it up, and the trust that people have in its stability.

Re checks: there were no clearinghouses, but banks did talk to each other, although mostly to local banks and the bigger out-of-town banks. Checks drawn on another bank could in theory be deposited directly to your bank (although if the issuing bank was particularly small, distant or obscure, or known to be in difficulty, your bank might not accept it), but you would have to wait for the two banks to work out the transfer, which in the days of snail mail could take days or weeks; it would be faster to collect the money and deposit it yourself.

“Stamps” is slang for money, as you surmised. (As ftg noted, postage stamps were used as ad hoc paper money for quite some time, to the annoyance of the authorities; see this 1862 rant by a New York City postmaster.)

Thanks for the replies it’s very interesting.

But I presume you can buy USD with your HKD? Or deposit and buy from your bank acoount? Other than a premium, what’s the difference? (Unless the premium is pretty high?)

In a place where the central government only made coins, the private bank’s notes would have to be denominated in some value, such as “equivalent to those coins”. Imagine the chaos if each bank were not only their own notes, but their own version of what a “dollar” represented.

1 BofA dollar = 1.36 Wells Fargo francs = 12.4 Smith’s bank dubloons… ?? (exchange rate as of last Friday…)

So if they were denominated in a common value system, there woul have to be some means of exchanging them for that value. You $20 banknote is meaningless unless you can exchange it, somewhere, for 20 silver dollars from the US mint.

There was a good Planet Money episode on the birth of the dollar bill. You can listen to it here:

If you came to Europe before WW1, you would have found a host of small countries, many smaller than some of the American states, all issuing their own currencies. If fact, some of them allowed banks to issue their own, just as The Royal Bank of Scotland does to this day.

To make trade work, we had people like the Rothschilds. If a Rothschild issues a note in England, then a Rothschild in Bulgaria or Greece would honour it for Levs or Drachmas at whatever the rate of exchange was on the day. Not just Rothschilds of course, there were many others, but their strength was based on trust.

The difference is that there is no convertibility obligation. You can buy USD for HKD on the free market, from somebody who voluntarily agrees to sell it to you; and unless the confidence in the HKD currency board system (that’s what this monetary system is called) is weak, which it is currently not, you will readily find somebody doing so very close to the parity rate at which the Hong Kong Monetary Authority issues certificates of deposit for USD. But that’s still a voluntary transaction on a contractual basis, which you can perform with anybody who’s agreeing to do it, not necessarily the issuer. Under the classical gold standard, the issuer was under a legal obligation to redeem their issued notes for gold. And it was precisely this obligation that kept up the trust in the system.

From the point of view of people holding a note, the difference is negligible as long as confidence in the system is there. From the systemic perspective the difference is significant, because it provides a different mechanism for maintaining that confidence in the first place.

The system in Scotland is similar. Those Scottish banks which issue private banknotes (RBS, Bank of Scotland, and Clydesdale) need to deposit sterling with the Bank of England to be allowed to issue notes.

When asking about money and banking in the United States, you have to be careful to specify the era you are talking about and, sometimes, the exact year.

Money and banking were radically transformed by a series of National Bank Acts Congress passed during the Civil War. In 1860, paper money was issued by state banks. When state banks failed, their notes would become worthless. As a result, merchants and other banks sometimes would often accept state bank notes either at a discount or not at all, especially as one moved farther from the bank of origin.

During the 1860’s, Congress enacted a confiscatory tax which (deliberately) forced state-chartered banks out of bank note issue. By 1870, paper money was issued either directly by the government (greenbacks) or by nationally-chartered banks.

National bank notes were very different from the earlier state bank notes. They were backed by the government and printed by government contractors in a common format and design. They almost always circulated at face value, and people paid little more attention to the issuing bank than we pay to the federal reserve office indicated on today’s currency. When national banks failed, the government still redeemed their notes.

So yes, banks issued their own money, and continued to do so until the 1930’s, but it was safer and more standard after the war than before.

Counterfeiting was a problem. It was worse before the war, because state-chartered banks were often low-rent operations that used inexpensive printing that was easy to fake. But, national bank notes were not immune from counterfeiting, either. The Secret Service was formed specifically to fight currency counterfeiting in 1865.

Correct, greenbacks and national bank notes circulated in tandem.

Checks existed, although they were less ubiquitous than they were later. There was no such thing as a checking account with preprinted checks. Think of a check in that era as more like a cashier’s check, something you would specifically arrange to have printed by the bank.

Clearing houses date to the Eighteenth Century. They generally only existed in large cities, however, and small town practice may well have gone like your fictional description.

Postage stamps circulated as quasi-money for a time early in the Civil War, before the government ramped up the greenback presses, and were called “shinplasters”. That may or may not be what the author is referring to.

Antebellum Counterfeiting led to some interesting scams. NYC was the home of the engraving industry in the early US and therefore where the vast majority of private money was printed. A pair of enterprising criminals tried to scam a private printing firm into printing them a whole order of legitimate money from a legitimate bank by pretending to be the officials of that bank. They almost got away with it but a second check by the printers revealed the scam. If they had succeeded, what would have happened? The money was as legitimate as could be. Certainly they could be charged with fraud. But not counterfeiting.

Another, more common, scam was to advertise slyly (in a distant location) that one had lots of counterfeit money to sell for pennies on the dollar in NYC. When the rube showed up, you took him to your hotel and showed him a bag of real money from his local bank, claiming it was the counterfeit. Being real, it would pass any and all inspection. Once the rube paid you, you distracted him while your hidden buddy switched the bag with a copy. Then you got the rube to split quickly, often by faking a raid by the cops. This prevented him from looking in the bag until he was too far away to find you again.

Some private banks made a point of being in a distant, hard to reach location to prevent folks from redeeming their bills. Prior to the telegraph, if a local bank failed there was the possibility of racing off to the next town over to spend the cash before word of the failure arrived. Such was life in small town America.

Silver prices were dropping rapidly in 1870, the country was still officially bimetallic but the preponderance of silver mining over gold mining was threatening the stability of that system, Gresham’s Law predicting that the now relatively cheaper silver would drive the now relatively expensive gold out of circulation.

Until 1873, you could bring either gold or silver bullion into a US mint and they would mint it into US currency for you. The Coinage Act of 1873 made ended the legal tender nature of silver dollars, and introduced “Trade Dollars” to fill the gap. Silver producers still needed to sell their product overseas, mostly in Asia, and the silver dollar was an accepted way to do so. Producers could still bring silver bullion into a mint and have it minted into “Trade Dollars” but these were not fully legal tender anymore, rather they were intended to be used for overseas trade.

I’m not sure when it ended, but during the early days of colonial America counterfeiting paper bank notes could get you the death penalty. Some notes had “To counterfeit is death” printed right on them.

I don’t think stamps are a fiat currency. Part of the definition of a fiat currency is that it’s inconvertible. You can get a letter delivered with a stamp, it has an inherent value.

Counterfeiters generally shunned the south because A) the occurrence of runaways slaves had created a whole class of professional trackers and B) Southerners preferred to let Judge Lynch preside when they caught a counterfeiter. Also, up north, you could escape to Canada if necessary.