Financial History Issue 121 (Spring 2017) - Page 39
BY JAMES P. PROUT
Other People’s Money:
How Banking Worked in
the Early American Republic
By Sharon Ann Murphy
Johns Hopkins University Press 2017
192 pages with Notes,
Suggested Reading and Index
Americans, in general, like to haggle. I
can only imagine the back and forth that
took place over the purchase of Manhat-
tan. Today, almost everything is nego-
tiable — from hotel rooms to hip replace-
ments. But what if a merchant or seller told
you that your $100 bill would only buy $95
worth of goods? In other words, that the
quality of your money was part of the nego-
tiations. Commerce would slow to a crawl.
Confidence and trust in a medium of
exchange is absolutely crucial to build-
ing markets of any size and complexity.
This seems simple to understand. But in
our nation’s 241-year history, the jour-
ney from dodgy, untrustworthy financial
instruments and institutions to the stable
(we hope!) national standards we have
today was anything but simple.
In her book, Other People’s Money: How
Banking Worked in the Early American
Republic, Professor Sharon Ann Murphy
of Providence College charts the devel-
opment and approaches to money and
banking from the late colonial era to just
after the Civil War. It is what I would call
a micro-history; sticking to the practical
financing and credit challenges faced by a
frontier, largely agrarian economy grow-
ing towards industrialization. Along the
way, the story is punctuated by war, fraud,
Herman Melville and one emotional,
populist President who ran a multi-year
campaign against the monied classes and
institutions they supposedly ran.
To grab our attention, the book opens
with a flash-forward to 1832, to highlight
how America has always had a love-
hate relationship with financial markets.
Andrew Jackson, our seventh president,
was a General, a duelist and a cutthroat
killer of Native Americans. In short, he
was a world-class hater, and what he
hated with a special passion was banks.
He believed that the Second Bank of the
United States, which acted as a repository
of US government receipts and a sort of
nascent central bank, was evil — owned
and run by Eastern elites for their own
profit. President Jackson killed the bank
by denying its re-charter. The battle over
the bank and its power reverberates to
today, with acrimonious debates over the
size, intentions and control of the Federal
Professor Murphy then returns to the
colonial period, focusing on how, in the
absence of a ready supply of specie (hard
gold or silver), Americans adapted to
do business. Coins (many Spanish) were
chopped up into smaller pieces to facili-
tate commerce. Early banking companies
issued their own notes, supposedly backed
by specie, which were negotiated for pay-
ment. The more distant the bank, the
more likely the face value of the note was
discounted. Counterfeiting was rife, with
catalogues of phony bills and how to spot
them enjoying a brisk trade.
Because the Constitution was vague on
who could print money, and states jeal-
ously guarded their turf, state chartered
banks filled the need for credit and cur-
rency. Professor Murphy provides a lot of
detail here, as each state came up with its
own approach to the creation, capitaliza-
tion and regulation of financial institu-
tions. It’s no surprise that some were
solid, but most were not. It was a case of
fits and starts, as economic activity sped
up, credit expanded (and inevitably over-
expanded) and then contracted, some-
Were the national panics of 1819, 1837,
1857, 1873, 1893, etc., caused by banks, or
were banks victims of recurring business
cycles? It depends on how badly you were
hurt. We certainly know where Andrew
Jackson stood on the issue.
Wars and how to fund them are a con-
tinuing theme in Other People’s Money.
With little credit and no taxing author-
ity, the Revolutionary government inked
up the printing presses and issued paper
money that quickly lost almost all value.
The War of 1812 was a little better with the
use of bond sales, and the issuance of large
denomination Treasury notes offsetting
the decline in tariff receipts.
The book comes to a narrative con-
clusion in describing the financing
approaches during the Civil War. The
Confederacy had few options and, choked
by a blockade, resorted to printing money.
The North employed a larger financing
arsenal, instituting internal taxes on vari-
ous classes of goods (sort of a VAT), and
going national on selling bonds direct
to the public. The Philadelphia banking
house of Jay Cook & Company pioneered
mass market techniques to get the North-
ern bonds sold.
This is a brisk, well-researched tour of
how the American finance and banking
sector got its start. But behind the facts and
the figures there is emotion in the story.
We are just coming out of a vicious and
harmful recession and continue to argue
over what caused it and who is to blame.
Professor Murphy’s book reminds us that
there is nothing new under the sun.
James P. Prout is a lawyer and busi-
ness consultant. He can be reached at
www.MoAF.org | Spring 2017 | FINANCIAL HISTORY 37