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As Phony as a $3 Bill


Tags Money and BanksU.S. EconomyU.S. HistoryMoney and Banking

02/07/2002Clifford F. Thies

With all the recent news about con men operating phony businesses, I was struck by a curious item I came across on eBay. It was a $3 bill from the Salem & Philadelphia Manufacturing Company of New Jersey, dated 1828.  It wasn't the $3 amount of the note that caught my attention, as notes from that period came in many amounts that have long since gone out of style.  It was the issuer, the Salem & Philadelphia Manufacturing Company.  From my reading of the newspapers of the day, I recognized the issuer to be one of the many scams of that time, indeed, one of the more audacious.

During the time, the paper money in circulation was issued by banks, such as the Bank of New York and the Bank of Philadelphia, most of which were privately owned and state-chartered. There were, in fact, hundreds of banks across the country that issued their own, often distinctive, paper money. Most of the larger cities had several "banks of issue."

To be sure, nobody had to accept the paper money issued by these banks. Only gold and silver were legal tender. But for convenience, most larger transactions involved indirect claims on gold and silver, such as bank notes, as this $3 note appears to have been. Smaller transactions usually were conducted in silver coins. Some states, in fact, prohibited--or at least tried to prohibit--"small bills" (that is, bank notes of less than $5) in order to protect the common people from the fraud that was frequently involved in banking.

Sometimes people would start a bank in an isolated place and then try to put the notes of their banks into circulation in another part of the country.  Until enough of their notes were returned to the bank in demand of payment--so as to exhaust whatever gold and silver was in the vault of the bank, thus causing the bank to suspend--the owners of the bank would be able, essentially, to print their own money!  This was known as "wildcat banking," because the banks were located where only the wildcats roamed.

There was only one tiny obstacle to the perpetrators of this fraud: they first had to get a state charter. Once the charter was granted, however, the notes enjoyed a new legitimacy that they would not have had otherwise. Fortunately for the con artists (and unfortunately for their victims), there were always politicians stupid enough or corrupt enough to grant such charters.

Consider the case of the Bank of Detroit, granted a charter in 1807 by the territorial government of Michigan. The territorial governor and his council were hoodwinked by several "bankers" from Massachusetts, who convinced them that a bank would enable the vast potential of the territory, then a wilderness, to be developed.  The territorial officials granted the proprietors a bank charter, with the governor subscribing to one share of stock himself so as to qualify himself to serve as president of the bank (which was more of an honorary position than an executive one).  

The newly chartered bank spent a few thousand dollars to construct and equip a banking office in Detroit, and then proceeded to issue hundreds of thousands of dollars--perhaps as much as $1.5 million--in paper money in the Boston area.  As soon as the first notes reached Detroit for redemption, the bank failed.  The holders of the notes were left with worthless paper, and the proprietors were long gone.

Sometimes, the financial wheeler-dealer didn't even need to get a new bank charter.  In the case of the Farmers' Bank of Gloucester, Rhode Island, a certain Dexter White of Massachusetts bought out the original owners in 1809.  At that point, Mr. White expanded the bank's notes from $45,000 to over $600,000, lending the entire increase to himself!  When the bank failed, all that was found in the vault were a few dollars in copper coins.

As the possibilities for fraud in banking became obvious, state governments started to regulate banks,  by inspecting them, for instance, and requiring that banks keep a certain amount of gold and silver in their vaults for every paper dollar that they issued, or that they put state bonds on deposit with the state government.  For honest bankers, these regulations merely increased the cost of doing business, which made the entire sector less competitive. For the schemers, these regulations were nothing more than challenges to their imaginations.

When a state required that, before a bank charter would be granted, a bank commissioner had to verify that the prospective bank had so much gold and silver on hand, the schemers would temporarily borrow the requisite gold and silver. When a state required that state bonds had to be posted as collateral, the schemers deposited bonds of Arkansas (which, even before Bill and Hillary arrived on the scene, was a corrupt, backwater state) and other states that had defaulted on their debt. The market values of these bonds were way below their face values.

Which brings us to the $3 bill issued by the Salem & Philadelphia Manufacturing Company.  If you read the fancy script, you find that the note is simply a bearer bond for $3.  That the note is for a small amount of money, making it convenient for hand-to-hand currency, is "mere coincidence."

The overall layout of the note, including in particular the font, size, and location of the word "Philadelphia," is very similar to comparable denomination notes of the Bank of Philadelphia, a fine, conservatively managed bank of the time.  Indeed, if you didn't know that the note was issued by the Salem & Philadelphia Manufacturing Company, the highly stylized "M" and the strange, atrophied "g" in "Manuf'g" would make it difficult to read the abbreviation.  It seems clear that this string of characters was to be misread as "Bank."

In the February 11, 1832, issue of Nile's Reporter of Baltimore, the editor writes of a $5 note of the Salem & Philadelphia Manufacturing Company he received in the mail in "payment" of a subscription. "The words `Philadelphia Manuf'g,' on the note were set in large letters," he wrote, "and the word `Manuf'g' flourished so as to look like `Bank,' the obvious attempt being to fool people into thinking this was a note of the Philadelphia Bank."

A few months later, on September 8, 1832, this editor included the following news item in his publication:  "A fellow in St. Louis, Missouri, arrested, having $2,750 in notes of the Salem & Philadelphia Manuf'g Company of New Jersey."

Of course, not all cases of fraud have such happy endings.  During the 1980s, in the biggest bank robbery in history, various criminals--aided by their lackeys in the Democratic Party, including Jim Wright of Texas, Tony Coehlo of California, Ferdinand St. Germain of Rhode Island, and Don Reigle of Michigan--stole something like $200 billion from the savings and loan associations of the country. Again, the schemers outsmarted the regulators and found the politicians pliable enough.  And, again, honest bankers and the public-at-large were made to suffer.

The worst response to these cases is the one most frequently chosen by the political class: pass more government regulations, centralize the system, and put the bureaucrats in charge of rooting out cheats and crooks.  It never works. Often, this path kicks the crooks up a little higher in the food chain, so instead of wildcat banking, we get wildcat central banking and international business cycles. The best advice to investors is--as it has always been--caveat emptor.

But getting back to the $3 bill of the Salem & Philadelphia Manufacturing Company: at least it wasn't a total loss.  After the passing of 170 years, this note is finally worth something--as a collector's item.

Image source: commons.wikimedia.org

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