From the “Collecting Paper” column in the Nov. 21, 2016, issue
of Coin World:
Paper money acceptance has historically been based on the fact that
it was backed by something other than “the full faith and credit” of
Because paper really has no value in and of itself, the willingness
to accept it was often based on the belief that you could ask for the
equivalent of its face value in hard money; usually silver or gold coins.
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In antebellum America, it was generally assumed that bank notes
would be converted on demand into coin of some type. Before enactment
of the Coinage Act of 1857, that could include a variety of world
coins that were accepted as legal tender in the United States.
So when was this an issue? Well generally, in times of economic
recession or depression, people started to worry about how safe their
money was; remember this was a century or so before the advent of the
Federal Deposit Insurance Corporation and other federal protection
plans, and was also a function of the fact that the issuer of the
paper money was not the federal government but typically a local bank
that might or might not be a pillar of financial strength.
During the Panics of 1837 and 1857 and, to a lesser extent, during
the recession of 1854 and earlier periods of financial retrenchment
after the War of 1812, nervousness led to concern, which led to panic,
which led to efforts to get something tangible for your paper money
before it was “too late.”
While note holders and depositors milled around in long lines
outside of a bank waiting to get their money, banks had a couple of
strategies that could be followed:
1. “Lock the Doors” — this
was done if the bank knew that the coins it had on hand had no chance
of satisfying demands placed upon the bank for redemptions. This only
delayed the inevitable, but might work if the city’s or state’s banks
suspended specie payments en masse as happened several times.
“Buy Time” — if the bank was well respected, tellers might be
instructed to pay off note holders in the smallest silver coin
available, the half dime.As you can imagine, paying off even $50 in
notes with half dimes that were very carefully and very slowly counted
out by experienced tellers took forever.
In the time it took to count out all the dimes, so the theory went,
people would calm down, decide that the world as they knew it was not
ending, and decide that maybe everything was OK after all. Really
clever bankers sometimes planted a “customer” in the line that, with
great flair, deposited money.
The downside for the banks was that, typically, refusing to redeem
even one note in specie on demand was grounds for suspension and
forfeiture of their charters. However, during widespread panics such
as in 1837 and 1857, sometimes this enforcement was waived temporarily.