An excerpt from
The First Wall Street
Chestnut Street, Philadelphia, and
Money is the most widely held financial asset. We all use it, most of us every single day of our adult lives. It is a wonderful thing. It seems simple enough, but in fact few of us have a deep understanding of what turns out to be a rather involved subject. In this chapter, I hope to change that. I also hope to show that when it came to money, Philadelphia was an innovator. In the colonial period, it set the standard for quality government paper money. During and after the Revolution, it led the charge to bank money. By the 1790s, it was also home of the U.S. Mint. Though for all intents and purposes a failure until the California gold rush, the Philadelphia Mint coined most of the slim stock of U.S. coins. This chapter, in other words, is truly about money (bills of credit), money (bank liabilities), money (coins). But precisely what is this elusive subject, this money? A few pages should make its essence crystal clear.
Money is literally any “thing” readily accepted in payment for goods, services, or debts. The money supply is simply the sum of all money in an economy at a given time. The set of institutions and markets that creates and redeems money is called the monetary system. Money and monetary systems have taken a wide variety of specific forms, most of which can be reduced into one of three types: barter, commodity, and fiat. Of course, those three systems can coexist, but at any given time, one system typically predominates.
Barter is by far the simplest monetary system, likely dating to roving bands of Homo erectus beginning some 2 million years ago. It is simply the exchange of one good or service for another—a hunk of antelope meat for an Acheulean hand ax, a basket of apples for a spear, a necklace of pretty stones for sex. Barter took place during chance encounters, often at the interstices of territories or ranges. Barter within groups was probably quite limited because early bands of hunters and gatherers were likely organized like modern firms. Firm or band members, most of whom were closely related, exchanged goods and services within the group on a nonprice basis. Anthropologists call this behavior “sharing” or “forging ties of mutual reciprocity.” It seems extremely unlikely that “sharing” occurred between unrelated bands, so some type of quid pro quo arrangement, or “trading,” must have taken place.
Simple trade theory shows that bands that engaged in trading activities would have been better off than those that did not engage in trade, and much better off than those that gave away resources gratis. Trade increases wealth by allowing for specialization of production and hence increased per capita productivity. On a more basic level, it allows people to rid themselves of unneeded items in exchange for more desirable things.
Those “gains from trade,” however, were limited because barter is an extremely inefficient method of exchange. The first problem is that each party must desire to acquire the exact good that the other has to offer, including the exact quantity and quality, and at the exact time the other has it to offer. This so-called double coincidence of wants is difficult to overcome within the barter system. Moreover, barter creates an enormous number of “prices,” the costs of goods and services in terms of each other. An economy with just ten traded goods and services, for instance, requires forty-five different prices, while an economy with a thousand traded goods and services requires just shy of a half million different prices!
Because of the problems with barter, commodity monies typically arise as population densities increase and as economies produce a greater variety of goods. Despite a superficial similarity to barter, commodity monetary systems are a major advance, arguably much more important to prehistoric economic growth than the invention of the wheel or the harnessing of fire. In a commodity monetary system, one good becomes a unit of account, the means by which all other traded goods and services are priced or valued. The commodity becomes a measure of value, answering the question “What is the price of that?” in the same way that inches or centimeters answer the question “How long is that?” or pounds or kilograms answer the question “How much does that weigh?” The unit of account is an abstraction of reality analogous to human abstractions of distance, mass, time, and so on.
Conceptual confusion arises because sometimes the commodity that underlies the unit of account is also used as a physical medium of exchange. In other words, the commodity upon which the abstract unit of account was formed was literally turned over to the seller to make a purchase. It is important to keep in mind, however, that the unit of account and the medium of exchange are distinct concepts. For example, imagine a monetary system with the commodity money “clams.” (Or, to be more precise, clamshells. I could not resist the pun because the word “clams” is slang for dollars.) All the goods and services in that economy would be priced in clams, not in terms of each other. A bow, for instance, might cost 20 clams, each arrow for that bow 2 clams, a bead necklace 10 clams, a handful of rare medicinal herbs 50 clams. A purchaser of those herbs might actually have paid the shaman 50 clams. Or he might have paid 2 bows and a bead necklace ([2 x 20] + 10), or 1 bow and 15 arrows ([1 x 20] + [2 x 15]). Whatever the particulars of the case, two concepts should be clear: First, commodity money systems are much more efficient than barter because the number of prices will equal the number of traded goods and services. Second, the unit of account and the medium of exchange need not be the same physical thing. The breakthrough was the creation of an abstract measure of value, not the physical form of the exchange.
Commodity monetary systems have existed in some human communities for at least the last several thousand years and perhaps much longer than that. As self-equilibrating systems, they need no government aid to form or to continue. In fact, they function better when governments leave them alone. Here is how they work: Suppose that clams are the unit of account or measure of the value of things. Further suppose that the economy produces 10 goods and services, A through J. Suppose, too, that at the initial condition, each unit of each good can be produced on average in 1 hour (total) and hence all cost the same in terms of clams, say, 1 clam. To wit, A = 1 clam, B = 1 clam, C = 1 clam, and so on. Now let us suppose that an individual can on average harvest 5 clams in an hour. Obviously, it will be more lucrative to harvest 5 clams in an hour rather than to spend that hour producing 1 unit of A or B, et cetera. Individuals will quite rationally harvest clams and exchange them for A Ç J. By introducing more clams into the economy, however, the clam price of A ... J will increase. In other words, soon it will take 2 clams to acquire a unit of A Ç J, then 3, then 4, then 5. At that point, individuals in the economy will be indifferent about whether they produce 1 unit of A ... J in their hour, or if they harvest 5 clams and then exchange the clams for 1 unit of A ... J.
Of course, the numbers used above are just for the sake of example. If 100 clams could be harvested in an hour, then the nominal clam price would be higher but equilibrium would still be reached. Conversely, if it became easier to produce A Ç J, so that 5 units could be produced in an hour, then the clam price of A Ç J would drop until people would again be indifferent about producing A Ç J or harvesting clams. In other words, commodity monetary systems are self-equilibrating systems where the supply of money grows or shrinks as market forces indicate.
Interestingly, clamshells were a fairly effective commodity money, as were animal teeth, beads, bronze, cattle and other large domesticated quadrupeds, coconuts, feathers, furs, leather, needles, rice, rum, salt, sundry types of shells, stones, tobacco, wheat, wool, and a huge host of other non-rare commodities. As late as the 1960s, monetary theorists in the United States seriously considered a monetary system based on common bricks. The problem with such monies is not their lack of rarity, which, as we will see is actually a great virtue, but rather their lack of uniformity. One variety of tobacco is better than another, insect-infested wheat can be mixed with good grain, and so forth. Heterogeneity creates incentives for buyers (or debtors) to adulterate their payments. Consider the problem from another angle—diamonds, rubies, and other precious stones are extremely rare but almost never become money because it is not easy to distinguish valuable gems from common or flawed ones.
Gold and silver are the classic commodity monies not because of their rarity but because of their homogeneity. They are, after all, elements. Though susceptible to debasement by mixture with lesser metals, there are fairly easy ways, like water displacement and standardized weights, to distinguish between adulterated blocks of precious metals and blocks of specified purity.
The relative rarity of the precious metals actually decreased their effectiveness as units of value. When the gold standard ruled, there were periods of inflation (higher prices) and deflation (lower prices) due to fluctuating supplies of new gold. When new gold supplies slowed, the monetary supply could not keep up with increased demand, and the market price of gold moved higher. The prices of goods and services, therefore, trended lower because each ounce of gold purchased more goods and services. That, of course, induced more people to seek out gold in expectations of above-market returns. After gold strikes, the money supply expanded rapidly and inflation ensued, as with the clam example above. And as with the clam example, there was a natural limit to the price increases because as the aggregate price level rose—that is, as each ounce of gold purchased fewer goods and services—it became less lucrative to mine gold. Eventually the equilibrium point was reached where the return from producing gold equaled the going risk-adjusted market rate of return. The monetary system was again in balance or equilibrium.
The rarity of precious metals turned out to be the main cause of their downfall. The supply of the precious metals was not, in the words of economists, sufficiently “elastic.” Unlike common commodities like clams or bricks, which can be harvested or manufactured virtually at will, the precious metals, particularly gold, were often elusive. There were periods when the entire known stock of gold was in circulation or other use. When commodity prices began to fall, signaling a need for more gold money, new natural deposits had to be discovered before equilibrium could be restored. The process could take years, even decades. In the second half of the nineteenth century, many Americans urged moving from a gold standard to a silver standard on the supposition that the supply of silver was more elastic than that of gold. Silverites, like the Populists, ultimately failed. Gold strikes in the Klondike relieved the pressure on gold supplies until the government decided to do away with commodity money entirely.
Only after the coercive powers of the state are well developed does a fiat monetary system have a chance to succeed. In such a system, the government establishes a unit of account literally by fiat or decree. To help make the decree stick, the government often creates a medium of exchange, composed of paper bills and/or metal tokens, that it proclaims to be “legal tender for all debts, public and private.” The great strength of such a scheme is that the supply of fiat monies, like today’s Federal Reserve notes, is in theory perfectly elastic. In other words, the supply of money can be increased or decreased as needed. That flexibility, however, turns out to be a great weakness. Fiat systems are not self-equilibrating. They are similar to the command economies of communist nations. Unless the commander, like Federal Reserve chairman Alan Greenspan, is an able or lucky one, the results can be disastrous. Often the central monetary authority, the government agency responsible for determining the supply of money, creates too much. That, in turn, causes inflation, as during the 1770s—and 1970s. Sometimes, as in the case of the United States in the early stages of the Great Depression, the central monetary authority creates too little money, leading to deflation and greatly reduced per capita economic output. Over long stretches, fiat monetary systems almost invariably create inflation. The aggregate price level of the United States, for instance, has increased tenfold since it abandoned gold in favor of Federal Reserve money.
After the first few years of initial settlement, colonial Pennsylvanians, like colonists in the rest of British North America, resorted to barter only infrequently. Barter was extremely inefficient, and the colonists knew it. “Bartering one species of property for another,” they realized, “would be endless labour.” “For some years after the settling of this colony,” a Pennsylvanian wrote in 1768, “we had but little specie, and trade was carried on chiefly by truck or barter.” “Under such inconveniences,” the aged man correctly noted, “it was found impossible for a colony to flourish, or the inhabitants make any considerable progress in their improvements.” The legal monetization of country produce, like wheat and beef, helped but was not as efficient as the use of coins, which finally began to circulate after about 1700.
When in the late 1710s and early 1720s “the balance of trade carried out the gold and silver as fast as it was brought in” to the province, domestic trade again temporarily had to be “carried on by the extremely inconvenient method of barter.” In response to that crisis, Pennsylvania issued a fiat medium of exchange called “bills of credit.” The bills, made of paper, were essentially non-interest-bearing government promissory notes (IOUs). The government redeemed the bills when citizens presented them to government officials to pay taxes or to repay sums borrowed from the government’s General Loan Office, or GLO. (When an IOU is returned to its maker or issuer, it is effectively repaid because it is nonsensical to owe something to oneself.) Sometimes the Pennsylvania government issued the bills to government suppliers and called them in via taxes. At other times the government, through the GLO, lent the bills to citizens on the security of land or other assets. In that case, the bills were redeemed when presented by the borrowers to make loan repayments. Between their issuance and redemption, bills of credit passed hand to hand as cash, canceling debts and making purchases. Between 1723 and 1775, Pennsylvania emitted a grand total of just over £1 million bills of credit. Never, however, did the total volume of bills outstanding exceed £500,000.
It is essential to understand that those bills never became Pennsylvania’s unit of account. They served only as one of many media of exchange. In other words, the bills represented value but did not define it. Many modern Americans will have difficulty understanding this point because they are so accustomed to having the unit of account and the medium of exchange coincide. A moment’s reflection will reveal that even today, the unit of account and the medium of exchange are conceptually distinct aspects of money. Suppose, for example, that you decide to sell your used car for $10,000. When you draw up the contract, you do not specifically state that the buyer may take possession of the vehicle when he delivers a hundred $100 bills or anything of the sort. In fact, you would probably find it odd if the buyer tendered cash at all. You might want a money order or cashier’s check instead of the buyer’s personal check, or to maintain possession of the vehicle until the check cleared, but, except perhaps to avoid taxation, you would not expect a cash payment. In other words, when you think “$10,000,” you have an abstraction in your mind, a measure of what you can buy with that $10,000, not a particular thing in mind. Indeed, if the buyer of your automobile happened to have $10,000 worth of goods and services that you wanted, say a thousand shares of a particular $10 stock that you wanted to own or a thoroughbred racehorse worth $10,000 that you wanted to race, you would be just as happy to take either of them as the money. Importantly, you would not be engaging in “barter” because you would have valued each item according to its current dollar price.
If you lived in Russia, or many other areas of the world, the distinction between the medium of exchange and the unit of account would be very clear to you. In Russia and elsewhere, people and firms often express prices and contract terms in U.S. dollars because the dollar holds its value better than the ruble (and many other national currencies). The purchaser/payer/borrower still usually tenders rubles (or other national currency), but the number of rubles s/he forks over will depend on the going exchange rate between the ruble and the dollar. The use of the dollar as a unit of account in Russia is so ubiquitous that “bucks” has become part of the Russian language. A common joke is that when Russian tourists reach the United States, they are amazed to learn that Americans use “Russian bucks.”
So when a colonial Pennsylvanian made a contract for £100 “Pennsylvania currency,” he or she did not have a hundred £1 bills of credit in mind. All that s/he expected was that goods and services totaling PA£100 would be paid to satisfy the contract. The payment might be made in whole or in part in Pennsylvania’s bills of credit. But it might also be made in the bills of credit of other colonies, in coins, in bonds, in labor, in livestock, in “country produce,” or in any other good or service that the creditor desired and upon which a money price could be ascertained.
Both the Pennsylvania government, then located in Philadelphia, and Pennsylvania’s leading businessmen, Philadelphia merchants, had a hand in creating “Pennsylvania currency,” the colony’s unit of account. Early on the legislature passed laws that regulated the value of coins in the province. In 1723, for instance, the assembly inserted into a bill a clause that stipulated that Spanish pistoles and other gold coins should continue to pass current at £5 10s. per ounce. The British eventually made it clear that they disapproved of such statutes, so the coin-rating business became a private matter. Leading merchants periodically convened, as they did in September 1742 and February 1775, to assess and modify the ratings. Increasing the value of a coin in terms of local currency, of course, tended to attract and retain that coin in local circulation. As water always flows downhill, so, too, does money always flow to where it will “fetch” the most.
By the late 1730s, Pennsylvanians had determined that the Spanish milled dollar, a silver coin, was worth 7 shillings and 6 pence (7s. 6d.) Pennsylvania currency, the rating that held for the rest of the century. Other silver coins also had ratings, based on their silver content. Similarly, Pennsylvanians settled on the values of various gold coins. Almanacs often printed the ratings of the major coins, so we know that the coin ratings did occasionally change but not drastically so.
In their domestic dealings, Pennsylvanians understood that 7s. 6d. and $1 were as interchangeable as 1 inch and 2.54 centimeters or 1 pound and .45 kilograms. Only when they dealt with outsiders did they find it necessary to explicitly equate the two units of value. For example, when in 1757 Philadelphian “Sylvanus Americanus” proposed the publication of a monthly “American magazine” for circulation throughout British North America, he carefully described the subscription price as being “One Shilling Pennsylvania money for each magazine, or its value in the current coin of the several places above mentioned, allowing Seven shillings and Six pence for each Spanish Dollar.”
Clearly, Pennsylvania’s early money supply was far from homogenous. In 1755 a robber managed to lay his hands on “about Seventy Pounds,” fifty of it in bills of credit and the balance in foreign coins. In 1764 a mugger made off with “in Paper Money two Five Pounds Bills, and three Twenty Shilling Bills, and other small Money, which amounted to £17 5 s. 6 d., 4 Dollars, some English shillings, and £45 in Gold, chiefly English Guineas, some Moidores and Doubloons.” Similarly, in 1772 a thief stole “about 190 Half Joes, about 30 Pistoles, 8 Moidores, 4 Guineas, 60 Pieces of Eight, and 48 Pounds in Jersey Six Pound bills,” not to mention “a number of bonds, to the amount of £1,500.”
But were that all! Much early money existed only as notations in account books. Say a neighbor needed a pig for breakfast. Most likely, she would not have any coins or bills with which to pay for it. So the seller and the buyer would mark the transaction down in their respective account books. Maybe the next week the pig seller would want “a plug of tobacky.” Again, both parties would dutifully mark down the exchange, noting the money price of the tobacco. Once a year or so, the two parties would settle their accounts. Then, and only then, might cash be tendered to pay a balance down or eliminate it completely. Though this system appears a bit awkward, it was quite efficient and widely used. In fact, the vast majority of purchases, especially in rural areas with stable populations, were made on book account.
Even storekeepers extended credits. “Credit is a thing so very common here,” a colonist in Westmoreland County, Virginia, wrote in 1774, “that there is not one person in a hundred who pays the ready money, for the goods he takes up, to a store.” (When in high school in the mid-1980s, I worked in a small country store that still extended book credit to steady customers.) In the colonial period, the use of cash was more common in urban centers with more fluid populations, like Philadelphia, but even there the use of book credit was ubiquitous.
The use of book credit declined during the Revolution because the supply of bills of credit increased so rapidly. As inflation began to kick in, people realized that holding the bills for extended periods was a losing proposition because with each passing day a given amount of bills would purchase fewer goods. So the game was to spend your money ASAP, if not sooner. But that was no way to live, so after the Revolution Philadelphians generally supported monetary reforms, including replacing government paper money with private bank money. The U.S. Constitution, which prohibited states from issuing bills of credit, marked the apex of that monetary reform movement. But one final reform was still needed.
Soon after passage of the Constitution, state currencies disappeared, replaced by a national unit of account known as the U.S. dollar, a slightly modified version of the Spanish milled dollar unit, rated at 7s. 6d. The entire nation adopted Philadelphia’s rating of the dollar. Indeed, in the 1780s and the early part of the 1790s, the U.S. dollar was often divided into “ninetieths”—7s. times 12d. per shilling plus 6d. So after about 1795, it no longer makes economic sense to speak of Pennsylvania’s money supply—U.S. dollars were U.S. dollars, regardless of their state of origin or circulation. But Philadelphia still had an important role to play in American monetary history.
After the final redemption of state bills of credit in the late 1780s and early 1790s, the major media of exchange were foreign coins and bank liabilities, specifically banknotes and deposits. A bank liability is simply an IOU owed by a bank to the owner or holder of the liability. Most readers will be familiar with the bank liability known as “checkable deposits” or “transaction deposits.” The principles of such accounts today are the same as they were in the late eighteenth and early nineteenth centuries. Namely, the bank holds a sum of value for the depositor until the depositor requests the funds to be paid to him- or herself (a withdrawal) or his or her assigns (a check). Bank checks were used to make long-distance remittances as early as 1782, when Philadelphia’s Bank of North America, the nation’s first commercial bank, began full operation. Over the decades, the use of checks exploded as the number of banks grew and the complexity of bank payment networks increased. Provided the maker of the check had sufficient funds in his or her account, checks were payable in specie upon demand. If certified by the cashier as “accepted,” checks were literally as good as gold, as long as the bank remained solvent, of course.
Banknotes were also bank liabilities or IOUs. Redeemable in gold or silver on demand, like deposits they did not pay interest to the holder. Unlike checks, notes were bearer instruments designed to pass from hand to hand as cash. Although also composed of paper and physically similar to bills of credit, specie convertibility made banknotes a very different animal, indeed. Unlike fiat bills, the volume of which was essentially at the whim of legislatures, the market largely determined the volume of banknotes in circulation. Specie convertibility served to check bank emissions by forcing bankers to keep larger reserves, that is, higher ratios of specie to liabilities, on hand to meet redemption requests.
It is important to note that banknotes were not a legal tender. They circulated as cash to the extent that the bank gained the market’s confidence by promptly redeeming any notes presented for payment. The market realized that bankers held only a fractional reserve of specie against their liabilities. Liability holders became anxious only if it appeared that the fractional reserve was too small. Most of the time, most banks held adequate reserves, so their notes circulated locally at full par, that is, dollar for dollar. When local notes slipped in value, it was because the market perceived that the bank’s reserves were inadequate or, in other words, that the bank was in trouble and might default or because counterfeits were rampant.
Banknotes that strayed very far from the bank of issue traded below par, for example, at 99 cents on the dollar. In most instances, such discounts were not risk premia and hence should not be taken as indications of the supposed instability of the banking system. Rather, such discounts were simply reflections of the cost and time it would take to redeem the notes at particular distances from the bank of issue. Banknotes, of course, were redeemable only at the bank that issued them (or sometimes their branches, but until very recently branch banking was a rare bird in America).
Quotations of the prices of Pennsylvania banknotes appeared in newspapers published in Massachusetts, New York, Maryland, Virginia, South Carolina, Louisiana, and elsewhere. Likewise, Philadelphia papers quoted the prices of notes issued by banks in those and other states. The money supply in the early national and antebellum periods was truly national in scope.
Our story cannot end here because Philadelphia was home to the U.S. Mint, the part of the federal government responsible for manufacturing the nation’s coinage. The Mint was of little economic importance in the early decades of the nation’s existence because it minted relatively few coins. A political football, the early Mint didn’t function terribly well. It did possess sufficient internal and external checks and balances to prevent major frauds. The situation persisted because most banks were content to hold foreign coins and bullion as reserves and most domestic payments were made with banknotes or checks. By the 1850s the nation’s monetary situation began to change drastically and the Mint’s importance grew many times over. By then, however, Chestnut Street’s financial dominance was little more than a memory.
On April 2, 1792, George Washington signed into law a bill establishing a mint, a factory for the production of coins, for the federal government, under article 1, section 8, of the U.S. Constitution. (That same clause also empowered Congress to “regulate the Value . . . of foreign Coin,” a power that it also exercised.) The bill drew upon the earlier work on coins and mintage proffered during the Confederation period by Thomas Jefferson, Gouverneur Morris, Robert Morris, and others and the more recent recommendations of Alexander Hamilton, whose “Report on the Establishment of a Mint” Congress had received on January 28, 1791.
The law stipulated that the Mint should “be situate and carried on at the seat of the government of the United States, for the time being,” which was simply legalese for Philadelphia. In some ways, Philadelphia was the logical location for the institution. The city, after all, was home to the headquarters of the Bank of the United States, the nation’s central bank. Moreover, it was a thriving commercial center. On the other hand, Philadelphia was not a likely candidate for the nation’s permanent capital. And, as a more practical matter, the city proper offered little in the way of waterpower and much in the way of disease. Indeed, the Mint suspended operations during parts of 1797, 1798, 1799, 1802, and 1803 due to the yellow fever epidemics that ravaged the city each autumn of those years. The institution also found itself reliant on inefficient horse- and manpower until the introduction of steam presses in the 1810s.
In 1800 the Senate considered the expediency of moving the Mint to Washington, D.C., the nation’s new prefab capital. But the Mint was already well ensconced in the Quaker City. The Washington administration had seen to that, instructing the institution to purchase real estate outright rather than to lease. The most suitable available area was composed of three lots located on Seventh Street between Market and Arch, just two blocks north of Chestnut. In the middle of June 1792, Mint director David Rittenhouse, a world-renowned Philadelphia scientist, personally negotiated a price of £1,600 cash on the barrelhead and assumption of a £21 per annum ground rent payable to the Almshouse. After Thomas Jefferson and Washington approved the deal, construction moved quickly. On July 31 the cornerstone of the plain but relatively substantial brick edifice was laid.
Though the lots proved too small for the Mint within just a few years, the institution remained in its original location (and a lot that it rented in the Northern Liberties, then a suburb just north of the city line) until 1833. That year it relocated to a new building—under construction since July 4, 1829—on the corner of Chestnut and Juniper streets near Penn Square. The new building was more spacious and visually appealing than the old, thanks to two Ionic porticos and a complete marble covering. Contemporaries believed that only Girard College—a school for orphaned boys bequeathed by Philadelphia merchant-banker Stephen Girard—rivaled its beauty. The new building was more functional too, as it was fireproof and contained ample room for steam-driven presses and other technical improvements. It was something of a miracle, however, that the Mint survived long enough to acquire such modern posh digs.
The 1792 law charged the Mint with the manufacturing of copper cents ($.01) and half-cents ($.005), silver half-dimes ($.05), dimes ($.10), quarters ($.25), half-dollars ($.50), and full dollars ($1.00), as well as gold eagles ($10), double eagles ($20), half ($5) and quarter ($2.50) eagles, and $3 gold pieces. Half-cents fell out of favor by about 1830 and the $3 gold pieces were not a big hit, but most of the other denominations were popular. (Indeed, most of those denominations are still in use, though gold has long since given way to paper and silver to baser metals coated with a silver-looking finish.) The Mint could purchase copper or accept deposits of specie by private parties (individuals, partnerships, and corporations), but it could not purchase the silver and gold that it needed to coin dollars and eagles, respectively. That proved its undoing.
Active Mint operations began in October 1792. By November 6 of that year, the Mint had successfully produced a special batch of silver half-dimes. Its auspicious beginnings, however, soon gave way to torpor. High copper prices plagued the minting of pennies and half-pennies from the start. Worse still, not until July 1794—almost two years after commencing operations—did the Mint receive a private deposit of silver, some $80,000 of French coins owned by the Bank of Maryland. The first private gold flow into the Mint occurred in February 1795, when New England merchant Moses Brown deposited $2,276 worth of gold bullion.
The Mint paid its officers well, especially considering how little work they did. The director received the same salary as a city bank president, while the other officers earned as much as a bank cashier (the chief operating officer, not a mere teller). The directorship, at least at first, was a very high-profile federal position, so it managed to attract considerable talent. The Mint’s first director, for instance, was Philadelphian David Rittenhouse, perhaps the only American with both the mechanical and financial experience requisite for the job. A clockmaker, astronomer, and paper maker, Rittenhouse had long served as Pennsylvania’s state treasurer. Even Rittenhouse could not draw blood from a stone; the Mint languished for half a century simply because it obtained precious few deposits of the precious metals.
The 1792 law, after all, made no provision for the Mint to purchase gold and silver bullion on behalf of the public. An act for regulating foreign coins passed in February 1793 authorizing the president to proclaim that foreign coins, save Spanish milled dollars, were no longer legal tender and authorizing the secretary of the treasury to turn over to the Mint for re-coinage all such foreign coin paid to the U.S. federal government. No president made such proclamation, so the Mint relied solely on a trickle of voluntary private deposits.
Between its inception and 1830, the Mint coined, in aggregate, only about $37 million—$18 million of that during the 1820s. By way of comparison, on any given day after 1800, the banking system had more than $40 million of banknotes in circulation! Moreover, most of the coins that the Mint did produce immediately flowed out of the country or were melted down. The only remedy—“debasing the coin” so that it was worth more as a coin than as bullion—was a measure that early U.S. politicians were loath to consider.
Working at the Mint, either as an officer or as a laborer, does not appear to have been particularly onerous given the standards of the day. Some of the officers stayed at their jobs for decades, for instance, while others brought, or attempted to bring, friends and relatives into the organization while simultaneously fending off the entreaties of numerous supplicants. Neither practice jived with classical republican political theory, which argued for term limitations and if not for meritocracy, then at least against nepotism. Moreover, the officers often deputized clerks to sign receipts, vouchers, and the like for them. At least one clerk quit when he calculated that “the sacrifices” of time he made “have been nearly equivalent to the compensation allowed me for my services at the Mint.” He quit because he was only slightly overpaid! The skilled technicians received so little practice at their trades that they botched what little work they did have. One assayer, for example, effectively ruined $974.75 worth of silver by inadvertently mixing it with ashes and broken crucibles.
Laborers and technicians were expected at their posts eleven hours a day. In the 1790s their hours changed with the seasons. By the 1820s they worked a fixed schedule from 5:00 a.m. to 4:00 p.m., except Saturdays, when they could knock off at 2:00 after the weekly cleaning routine; Sundays, of course; and the Mint’s two official holidays, Christmas and Independence Day. They received a small extra stipend, called “drink money,” during the summer months. The money was for cooling drinks, not alcohol-laden ones, because workers also received stern warnings not to be “found drunk” or to “bring spirituous liquors into the Mint.” When in production, the Mint was a dangerous work environment, even for the sober. Indeed, smoking was also forbidden, and long before its prohibition in the workplace became trendy. Because the Mint attracted visitors, workers were also enjoined not to use profane or indecent language. Perhaps as a compensation for such onerous regulations, Mint laborers received paid sick days, a rarity in the era.
With the Mint operating at low volume, the nation’s small denomination currency, its pocket change, came from three major sources: foreign coins, fractional banknotes, and various fractional paper currencies—the infamous “shinplasters” emitted by some retail stores, nonbank corporations, and municipalities. The small foreign coins were often severely debased or even counterfeit. They were essentially tokens upon which foreigners earned the seigniorage. Similarly, the seigniorage from the circulation of fractional banknotes went to bank stockholders, not the government. The notes were adequate as small change, as long as they were genuine and the issuing bank remained solvent. Private shinplasters issued by nonbanks were more frequently counterfeited and less likely to be redeemed. Public shinplasters were essentially bills of credit and hence technically unconstitutional. But they circulated within the community of their issuance anyway.
None of those sources of small change was as good as an ample supply of domestically produced small coins would have been. Many politicians, egged on by private firms that wanted to win contracts to produce small coins for the government, found the small-change situation disagreeable and laid blame squarely on the Mint. Joshua Coit—a Connecticut Federalist who died in 1798 at the age of only forty—fired the first round, introducing a motion to investigate the Mint. Elias Boudinot, a staunch Hamiltonian Federalist from New Jersey, then rose and attacked the Mint as inefficient. William Smith—a representative from South Carolina who had been born in Bucks County, Pennsylvania, in 1751—opined that the Mint was “of little or no use whatever.”
Copyright notice: Excerpt from pages 44-58 of The First Wall Street: Chestnut Street, Philadelphia, and the Birth of American Finance by Robert E. Wright, published by the University of Chicago Press. ©2005 by the University of Chicago. All rights reserved. This text may be used and shared in accordance with the fair-use provisions of U.S. copyright law, and it may be archived and redistributed in electronic form, provided that this entire notice, including copyright information, is carried and provided that the University of Chicago Press is notified and no fee is charged for access. Archiving, redistribution, or republication of this text on other terms, in any medium, requires the consent of the University of Chicago Press. (Footnotes and other references included in the book may have been removed from this online version of the text.)
Robert E. Wright
The First Wall Street: Chestnut Street, Philadelphia, and the Birth of American Finance
©2005, 218 pages, 3 line drawings, 9 tables
Cloth $25.00 ISBN: 0-226-91026-1
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