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In 1789 the Constitution of the United States tried to prevent a repetition of the Continental currency fiasco by forbidding any state or federal authority to issue Bills of Credit. However, an enormous loophole was discovered.The Constitution did not ban bills of credit issued by private or municipal authorities.
The first privately issued notes in colonial America were issued in New London, Connecticut in 1732, the year George Washington was born. The experiment failed then, but was reinstated and popular by the time Washington was on his way to the presidency in 1790. State and private note issues became a flood in the 1800s. The Constitution allowed state issues provided they were regulated by the state.
In his report to the Congress on December 9, 1861, Secretary of the Treasury Salmon P. Chase the said: It has been questioned by the most eminent statesmen, whether a currency of banknotes, issued by local institutions under State laws, is not, in fact, prohibited by the national Constitution. Such emissions certainly fall within the spirit, if not within the letter, of the constitutional prohibition of the emission of bills of credit by the States... (Knox12).
The history of broken banknotes ranges from the hilarious to the tragic. Crooks, thieves, and sharpies perceived at once what governments could do with paper money, they could do as well. A printing press, an impressive design, and a con man's talent could bring riches overnight. An example from the earliest days of state banknotes is instructive. In 1806 Judge Augustus B. Woodward of the village of Detroit, Michigan (population 600), organized the Bank of Detroit. He announced its capital at $1 million, ordered at least $3 million from the printer in notes of $1 to $10, signed them, or had them signed for him, and shipped them East. Smart Easterners can always take advantage of country folk, so they bought up the issue at discounts of 10 to 25 percent. When they tried to redeem the notes at face value in 1808, they found that the Bank of Detroit had closed its doors. Judge Woodward, a Cheshire cat smile on his face, had in the meantime put quite a bit of money in the form of hard coin in another, honest bank. As late as 1824 outraged citizens were still trying to prevent Judge Woodward's continuing reappointment by the United States Senate to the local bench. Woodward's Bank of Detroit notes are today the most common of all broken banknotes.
The weak, Michigan General Banking Law of 1837 really opened the gates of the paper flood. Fifty-five banks were immediately organized, most of them for the sole purpose of issuing paper money. A year later, after the disaster had almost wrecked the state, the law was suspended. The 55 banks and many previously established banks, honest or not, had gone broke, adding notes for the modern collector and subtracting wealth from the Michigan citizenry.
A little caution might well have averted such a disaster. Supervision of bank operations seems obvious to our modern minds, and the bank examiner is a well-known contemporary official. What little inspection was done in those days was satisfied with false books, uncollectible collateral and mortgages, or cash borrowed for the day of the inspection.
To discourage inspectors, or note-holders, from paying a visit many banks had their Main Office far out in the woods. Some notes were postdated or had false bank addresses to hamper any attempts at redemption. The Bank of Battle Creek, Michigan (1838-1840) used the ruse of having its cashier, Tolman W. Hall, run out the back door whenever a note-holder came in the front. The "pigeon" found the bank deserted except for a singing janitor, who eventually drove the note-holder away by incessantly whistling or singing and answering all questions with gibberish. In Barry, Michigan the Farmers Bank of Sandstone (1837-1838) tried to be honest in that it offered to redeem its notes in merchandise of the locality. Since the principal natural resource of the area named Sandstone was exactly that, the bank would redeem a $10 note with one millstone, a $5 note with one grindstone, and $1 notes with one whetstone. As can be imagined, few note holders bent on redemption took advantage of the offer, especially if they had come by horse or buggy from a great distance.
Bowen's State banknotes of Michigan has many such stories, some comic and some tragic. Many of the stories represent not only broken banks but broken hearts, homes, hopes, farms and families as well. The ultimate victims of these frauds were the local working people, the immigrants, the settlers.
There were also some honest banks out in the sticks. After traveling by train and then horseback, Alexander L. Stimpson, an agent for Adams Express Company, finally reached what he was told was Morocco, Indiana, although he was in the middle of the prairie. It seems that the blacksmith, the only person around, was also the banker. When Stimpson presented $100 in notes issued by the Bank of America (Morocco, Indiana), the blacksmith, after removing pounds of potatoes from a large barrel, brought forth a bag from which he took five $20 gold pieces and gave them to his astonished visitor.
As if the broken bank problem was not enough it was compounded by counterfeit notes that were almost worthless were nevertheless altered or counterfeited by other crooks trying to get in on the orgy. In order to combat these privately issued notes, dozens of counterfeit detectors were published to assist bankers and merchants in the detection of bogus bills. An Iowa banker, H. Price, said, The two most important books that every businessman needed was a bible and a counterfeit detector. And of these two, the detector book seemed to be the more important for at least six days out of seven.
The private banknote companies that prepared most of the notes issued by state banks employed the best engravers to engrave designs difficult to engrave without years of experience. After the camera was invented, counterfeits were photoengraved. Even the previously mentioned counterfeit detector could not always come to the rescue. The result of the intricate, geometric patterns, the lovely vignettes, and the colors that were introduced, was some exceptionally beautiful notes. Some, in many respects surpassed present-day currency.
Even during the worst period of the broken banknote era there were honest and far-seeing bankers who issued reliable money. They realized that the convenience of paper money was necessary if the nation was to develop and expand. These bankers were the ones who took the countermeasure of superb production to its limit. Seven engraving companies serving these bankers merged to form American banknote Company in 1858, which continues to produce currency and a variety of security paper for many nations. For an example, check out the Gold Notes of China.
The history of obsolete or broken banknotes came to an end after the Civil War. When the Confederacy was formed, paper money issued by the Richmond government and by the Sovereign States supplanted private bank issues very quickly. In the beginning the Confederacy tried to back its paper money with cotton bales stored in Southern ports, but the Confederate notes went the way of Continental currency and ultimately became worthless paper. As part of the National Bank Act of 1863, a 10 percent tax was levied on all private banknote issues. The issue of scrip below $1was also forbidden. By 1866 private and state banks had either joined the National Banking System or closed their doors. The colorful, fascinating, humorous and tragic broken banknote era came to an end.
Most obsolete banknotes now available were printed during and before the Civil War and a large percentage of them were not signed and never issued. Most do not have serial numbers and many are only printed on the front side. Most do not have dates on them and if they are dated, most have the date hand written in after the number 18__.
Collectors of U.S. and World Banknotes printed by the American Banknote Company will be happy to know that they engraved and printed notes for quite a few broke banks between 1858 and 1865.
One of the more interesting notes of the time period is a $3.00 note, few banks printed $3.00 notes, a scarce note in any condition.
Over the last several years the interest in both Civil War and Pre-Civil War notes have caused major price increases and we have seen more people chasing these notes than there are notes available.
Because of the many early expert counterfeit notes and lack of comparison notes, one of the ways of collecting is to collect notes that were never issued, signed, or dated. Most of these notes have never been circulated, except in the hands of other collectors. One of the easier ways of detecting counterfeit Obsolete Banknotes is that they have printed signatures in black ink, rather than hand written signatures and dates. Notes that are on yellow looking parchment paper are all counterfeits and have black printed signatures.
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