Money by Jacob Goldstein

Author:Jacob Goldstein [GOLDSTEIN, JACOB]
Language: eng
Format: epub
Publisher: Hachette Books
Published: 2020-09-08T00:00:00+00:00

Finally, our hero writes, he makes it back across the Virginia border—where he has to spend two days negotiating the exchange of his crap money for the Virginia money he needs. He loses 10 percent in the deal.

Free banking sounds like a nightmare—shady banks, all these different pieces of paper with different values, counterfeits, and no central bank to keep the system in check. And clearly sometimes it was a nightmare.

But in the 1970s, as belief in free markets and skepticism of government intervention started to take off, economic historians went back and started to reexamine the free banking era. Rather than rely on anecdotes (like one unlucky traveler’s often-cited Kentucky-to-Virginia trip), they tried to look at data—at the total number of banks, the number of bank failures, and how much it typically cost people to change money. And they found that free banking wasn’t so bad!

Travelers typically lost around 1 or 2 percent when they exchanged paper money, in the same ballpark as the fee I pay today when I can’t get to my bank and have to use another bank’s ATM. Also, the historians found, there weren’t actually that many shady banks.

And the insane proliferation of paper money issued by the banks across the western frontier had its uses. It meant that settlers could borrow paper money to buy the seed and livestock and equipment they needed to go into business. As the economist John Kenneth Galbraith wrote, “The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit could have done.”

When the Civil War broke out and the federal government needed to raise money, Abraham Lincoln’s Treasury secretary pushed new laws through Congress that created a kind of free banking for the nation. Now anyone who met certain rules could create a national bank. Crucially, for funding the war, the national banks’ paper money had to be backed by US government bonds. In order to exist, national banks had to lend money to the Union. (The Confederacy printed its own money, which became worthless when the South lost the war.)

A final banking bill was signed by President Lincoln on March 3, 1865—“the day before his second inaugural, a month before the fall of Richmond, six weeks before his murder,” the economic historian Bray Hammond wrote. The bill put a 10 percent tax on paper money issued by state banks. Its intent was to tax state banknotes out of existence, leaving only the uniform paper money issued by national banks. It worked as intended, and soon all the money printed by state banks was gone.

The Civil War was the moment when people stopped saying “the United States are” and started saying “the United States is”—when it went from being a bunch of different states to being a single country. Destroying the world of thousands of different kinds of money issued by state-chartered banks and creating the world of one kind of paper money—uniform bills issued by national banks—was a small part of that shift.

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