2016-11-08 Tue

Paper money is all about “the full faith and credit” of the issuer. Initially, people would ask for gold or silver coins equivalent of its face value. People in antebellum, America believed that bank notes would be converted on demand into coin of some type.

During economic recession 100 years ago, people worried whether their money was safe with banks. The issuer of the paper money was a local bank which led to more panic and mistrust.

During the Panics of 1837 and 1857, the recession of 1854 and the War of 1812, people wanted to own coins worth the paper money before it was “too late.”

Banks used the following tactics to combat this issue.

Banks used to lock the doors if they knew that they did not have sufficient coins to meet the demand. In other cases, they used to buy time and pay off note holders in the smallest silver coin available, the half dime.

So the tellers used to take their time to count all the dimes carefully and people used to calm down. Clever bankers had their own people act as a “customer” who deposited money.

Banks were disallowed to not redeem even a single note, but during the panics of 1837 and 1857, this rule was taken off on a temporary basis.