Suspension of Payments in War of 1812 (United States)

The British attack on Washington in 1814 unnerved the public’s confidence in a banking system that had overextended itself in the issuance of bank notes. Banks in the Washington area suspended payments on their obligations to redeem bank notes, touching off a round of payment suspensions that spread to every region except New England.
In the early banking system individual banks issued their own bank notes, which they were obliged to redeem in gold and silver coin (specie). Bank customers received bank notes instead of a checking account and checkbook, and each bank held reserves of coin to redeem bank notes, just as a modern bank holds vault cash and other reserves to redeem checking accounts. A suspension of payments meant that banks no longer redeemed their bank notes with specie, putting the United States on an inconvertible paper standard. An inconvertible paper standard is a monetary system based on paper money that cannot be converted into precious metal at an official rate.
The War of 1812 contributed only part of the pressure on the banking system that preceded the crisis. From 1799 until 1811 the First Bank of the United States oversaw the banking system and made sure that individual banks could redeem their bank notes in coin. In 1811 the First Bank lost its charter from the United States government, substantially removing what regulation there was of state-chartered banks. From 1811 to 1815 the number of banks increased from 88 to 208, and the value of bank notes in circulation rose from $23 million to $110 million. The capitalization of the banking system only doubled during the same time, and most states allowed banks to issue bank notes without regard to capital or reserves. The circulation of bank notes had outgrown the supply of gold and silver, leaving the banking system floating on a thin film of public confidence. After the suspension of payments these bank notes circulated at discounted values, usually between 10 and 20 percent, but some notes from Kentucky banks were discounted 75 percent.
The United States government encountered difficulty financing the war because its bonds not only sold at a discount, but it received payment in depreciated bank notes. In addition to interest-bearing bonds, the Treasury issued $5 noninterest-bearing notes that were not legal tender but were acceptable as payment of taxes.
Congress soon regretted its decision not to renew the First Bank’s charter, and in 1816 granted a charter for the Second Bank of the United States. The bank opened for business on 17 January 1817 and by February had negotiated agreements with state banks in major cities to resume redemption of bank notes in of gold and silver coins.
The suspension of payments put the United States on an inconvertible paper standard for over two years, a rather short time considering that England from 1797 until 1821 was on an inconvertible paper standard. Just as England avoided the excesses of the paper money of French Revolution, the United States during the War of 1812 avoided the excesses of paper money that arose during the American Revolution. Today, virtually all countries are on an inconvertible paper standard.
See also:
Chown, John F. 1994. A History of Money.
Hepburn, A. Barton. 1924. A History of the Currency of the United States.
Meyers, Margaret, G. 1970. A Financial History of the United States.
Timberlake, Richard H. 1978. The Origins of Central Banking in the United States.

Sugar Standard of the West Indies

From the mid-seventeenth century sugar became the reigning monetary standard on the Leeward Islands, and to a lessor extent on Barbados and Jamaica. Jamaica, because of its importance as a naval base as well as a favorite of the buccaneers, was always furnished with a plentiful supply of coins, but nevertheless made use of sugar money. Barbados and the Leeward Islands perennially wrestled with coinage shortages, forcing the expedient of commodity money. Before sugar rose to the forefront, tobacco met the need for a medium of exchange and unit of account in the West Indies.
A Barbados law of 1645 concerning family prayers provided that “whomsoever shall swear or curse, if a master or freeman he shall forfeit for every offense 4 pounds of sugar; if a servant, 2 pounds of sugar” (Einzig, 1966). Fees and wages were also measured and sometime paid in Muscovado or brown sugar at rates established by an act of the legislature. A rate of 10 shillings per 100 pounds of sugar prevailed for a while as the monetary standard of Barbados.
Sugar displaced tobacco a bit later on the Leeward Islands. Laws enacted in 1644 and 1688 declared that a fine of a 1,000 pounds of good tobacco in a roll awaited anyone found guilty of commerce with the heathen or Sabbath breaking by “unlawful gaming, immoderate and uncivil drinking—or any other prophane and illicious Labours of the Week-days, as digging, hoeing, baking, crabbing, shooting and such like indecent actions” (Einzig, 1966).
The Leeward Islands turned to sugar as the monetary commodity after midcentury. In 1668 Montserrat paid an “able preaching Orthodox Minister” a salary of “fourteen thousand pounds of sugar or the value thereof in Tobacco, Cotton Wool, or indigo.” The going rate for sanctifying a marriage was 100 pounds of sugar or “the value thereof in Tobacco, Cotton Wool or Indigo.” For about 30 years the sugar standard on the islands maintained a stable parity for sugar, equating “five score pound of good dry merchantable Muscavado Sugar” to 12 shillings and 6 pence.
By the beginning of the eighteenth century metallic currency had made inroads into the Leeward Islands’ monetary system. An act of 1700 provided that coinage could be substituted for commodities in payment of debts at a rate of:
  • 12 shillings and 6 pence for 100 pounds of muscavado sugar
  • 2 shillings for one pound of indigo
  • 9 pence for one pound of cotton wool
  • 1 1/2 pence for one pound of tobacco or ginger
  • (Einzig, 1966)
Sugar played a modest monetary role in the eighteenth century. On 24 August 1753 the assembly of Nevis considered, but failed to enact, legislation making sugar and other commodities legal tender for debts in an attempt to ease a shortage of metallic currency. In 1751 Jamaica, which did not have a coin shortage, enacted legislation making sugar legal tender “where both parties agree for payment in sugar and other produce of this kind.” In 1756 up to two-thirds of a tax obligation in Antigua could be paid in
sugar. In 1784 St. Christopher enacted revenue legislation stating that, “And whereas it may be burdensome and oppressive to the inhabitants of this Island to pay the amount in specie, be it enacted that the payment of the taxes aforesaid may be in cash, sugar, or rum at the option of the person or persons liable to pay the same” (Einzig, 1966).
By the end of the eighteenth century coins had edged out commodity money in the West Indies.
See also:
Einzig, Paul. 1966. Primitive Money.
Nettels, Curtis P. 1934. The Money Supply of the American Colonies before 1720.
Quiggin, A. Hingston. 1949. A Survey of Primitive Money.

Suffolk System

The Suffolk System was the first effort to regulate private banking in the United States. Although banking regulation later became a government activity, the Suffolk System was born of a private initiative that saw a need to regulate country banks.
The Suffolk Bank of Boston first established the Suffolk System in 1819 and in 1824 six other Boston banks joined the system. The Suffolk System required country banks around Boston to deposit reserve balances totaling $5,000 in one or more of the seven Boston banks participating in the system. These reserve balances acted as a guarantee that country banks could always redeem their bank notes in specie.
In the pre–Civil War United States individual banks issued their own bank notes, rather than the current practice of issuing checkbooks or debit cards to accompany checking accounts. In today’s United States economy, only the Federal Reserve System can issue bank notes. Under the banking system in which individual banks issued their own bank notes, financially sound banks could always redeem their bank notes in gold and silver coinage; therefore their bank notes circulated at face value, and were accepted in trade as equivalent to gold and silver coinage or other bank notes. Bankers, however, often fell prey to the temptation to issue more bank notes than was reasonable, considering the bank’s gold and silver coin reserves. This left the public holding bank notes that they could not be confident would be redeemed in gold and silver coin. These bank notes circulated below par and anyone accepting one of these bank notes in trade risked taking a loss. Banks that often had to take bank notes as deposits were particularly vulnerable to sustaining a loss from bank notes issued by overextended banks.
The Suffolk System was designed to protect the public and Boston banks from country banks that issued more bank notes than they could be counted on to redeem in gold and silver coin. The Suffolk banks always accepted at par the bank notes of country banks that maintained reserves in the Suffolk System.
In the course of trade bank notes issued by country banks flowed into the hands of the Suffolk banks. The Suffolk banks then immediately presented these bank notes to the issuing banks for redemption, as a way of keeping the issuing banks honest. The Suffolk banks, however, treated the banks that kept reserves within the Suffolk System with a certain amount of consideration, allowing these banks to redeem their bank notes at a steady pace over time. Country banks refusing to keep reserves in the Suffolk System often found themselves suddenly presented with a large volume of their bank notes for immediate redemption, putting an intolerable strain on reserves of gold and silver coin. Without a legal sanction, the Suffolk System was able to coerce the country banks to participate in the Suffolk System.
By 1825 virtually all New England bank notes could be converted at face value in the bank notes of any other bank, or in gold and silver coin, due in no small part to the discipline enforced by the Suffolk System. From 1825 to 1860 New England boasted of the advantages of a uniform currency, a rare accomplishment at that stage of the history of paper money in America. The practice of centralizing reserves in a few banks made itself felt in the development of modern central banks such as the Federal Reserve System.
See also:
Calomiris, Charles W., and Charles M. Kahn. 1996. The Efficiency of Self-Regulated Payments Systems: Learning from the Suffolk System. Journal of Money, Credit, and Banking, 28, no. 4 (November): 766–797.
Davis, Lance E., J. R. T. Hughes and D. M. McDougall. 1969. American Economic History.
Myers, Margaret G. 1970. A Financial History of the United States.

Stop of the Exchequer (England)

In January 1672 Charles II issued a proclamation that suspended payment on tallies and Exchequer orders to pay, an action that became known as the Stop of the Exchequer. The British treasury is called the Exchequer, because during the Middle Ages transactions with the British treasury took place in a room with tables covered by checkered cloth. The modern term check is a derivative of exchequer.
During the reign of Charles II the Exchequer discounted tallies and Exchequer orders to pay to goldsmith bankers, paying interest rates above 6 percent. Tallies were wooden sticks that represented a debt of the government and Exchequer orders to pay were paper orders that were replacing the wood tallies, which were a holdover from the Middle Ages. The goldsmith bankers paid 6 percent interest on near-money accounts (deposits not readily available on demand, such as modern certificates of deposit) in order to raise funds for discounting tallies and paper orders from the government. Tallies and paper orders were similar to some present-day government bonds that are bought at a discount (an amount less than face value), and can be redeemed at face value at some maturity date in the future. The government pledged to redeem the tallies and paper orders in a rotating order.
When the goldsmith bankers had no more money to loan out, and were no longer able to discount tallies and paper orders, Charles stopped redemption of the tallies and paper orders already held by the goldsmiths. This Stop of the Exchequer initially caused a run on the goldsmith bankers and many were eventually ruined by this action. Later the government honored about half of its debt to the goldsmith bankers.
The Stop of the Exchequer reminded people of the seizure of the mint in 1640 and created more doubt about government involvement in banking. It also cast a shadow on paper money, and postponed the development of an institution such as the Bank of England for another 20 years. The credibility of government money suffered a severe setback from this experience, and in England issuing paper money became the province of banks.
See also:
Davies, Glyn. 1994. A History of Money.
Horsefield, J. K. 1982. Stop of the Exchequer Revisited. Economic History Review, 35, no. 4.

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