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 $18.49 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 Reserve System. 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 BOOK REVIEW 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- times violently. 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  |  Spring 2017  |  FINANCIAL HISTORY  37