John Maynard Keynes:

Should the government refrain from regulation (taxation), the worthlessness of the money becomes apparent, and the fraud can no longer be concealed.

-The Economic Consequences of the Peace (pub. 1920)

Holding paper dollars provides the Federal Reserve with an interest-free loan for the privilege of being taxed. 

-Jason Hommel, silver specialist, 2008

 

Vanished Banking Practices

To disprove the idea that banking is a staid and boring subject let us consider in fact that the opposite condition holds true for whether we like it or not money is a major concern of our lives. The banking practices below relate in general to the unregulated state banking system and generally pre-date the institution of the semi-public Federal Reserve system, where the "lender of last resort" consists of privately held member banks.

 

Circulating checks as currency: the bank requires endorsement of checks as verifiable proof that the check, which is really a note, has been satisfied. There was a time when a check could be passed on in payment, just like a Federal Reserve note. All the payee had to do was to endorse the check with a further "pay to" endorsement to a third party --  some old checks show evidence of a fourth, fifth or even sixth party payee! 

 

At Sight Drafts also worked like currency and were to be paid by the bank immediately upon presentation and represented cleared funds, and were paid even if the payee's account did not have sufficient funds to cover the draft. 'At sight' drafts were usually associated with journal vouchers or business payments to creditors or collection agencies.  

 

Drafts are still in use today but infrequently or seldom seen by the average bank customer.  A Draft represents an order by one financial institution to have funds paid to an individual, institution or company by a another third-party financial house. In other words a draft can be identified when two separate financial institutions are specified on the same paper check.  Usually the issuing bank will have it's logo in the center of the check and the paying bank will have it's information on the lower left.  Drafts are used today among financial institutions but seldom seen in public.   A 'traveler's check' issued by a commercial company with a separate paying bank might qualify as a draft but only qualifies if the issuing company itself is a bank or financial institution

   

Kiting: The practice of kiting involved writing a draft on funds that would appear later on in the account, basically the note is presented to the payee before the funds are deposited in the bank, and the drafting party hopes that the funds will be present in his/her account when the note reaches the bank. Although this practice still exists today the 'kitee' has a much shorter time window to work with than in the old days and proves impractical in most circumstances. 

 

Scrip: Scrip was a paper representation of coin and therefore scrip was the equivalent of a localized version of a treasury note; and like a treasury note interest was not payable to the bearer with scrip. Scrip was generally used during coin shortages, financial excitements, or financial panics.  More detailed information on scrip and it's usefulness appears here.

 

This mining scrip was issued during the 1870's when coin shortages and financial panics were common.  The miners would not accept these notes, leading to labor unrest, and very few of these notes were ever issued to miners or to any other employees of the company.  The revenue stamp was a device used to assist the federal gov't in paying for the Civil War.

Protest:  The concept of protest has fallen out of favor as a general method of monitoring credit-worthiness of an individual or business.  Protest is explained in terms of a refused payment instrument which can be a check, note or bill of exchange and the resultant protest note published by the bank to it's partner institutions.  With a dishonored payment instrument - eg failure to pay or paying with an invalid at-sight bill, draft, or note - the creditor can employ a notary to draft a Protest note that binds the indebted party to pay at a later date while impacting the debtor's credit at any and all financial institutions notified of the Protest; as the notary drafts an instrument of public information the protest can be quite damaging to the debtors credit. In other words the Creditor is Protesting that the debtor has failed to pay his note on time and the creditor is making this information available to other institutions; usually however the Protest note resulted in a suspended or closed account at the crediting bank until the note was satisfied with interest. The concept of Protest also applied to bills and notes in general even though certain types of notes could not be protested by the Creditor. 

 

Today the concept of Protest exists in modified form  - presumably today's business credit rating has replaced the practice, and likewise the three major credit agencies that monitor individual credit can easily be seen to have replaced the old idea of individual institutions protesting a failure to satisfy debt.

 

Promissory Notes, Personal Notes and Loans: The idea that paper money is equivalent to specie (something of monetary value) is so common today that the public of the former United States no longer thinks of 'dollar bills' as being just that; ergo a note representing a loan made by us (the holders of the notes) to the Federal Reserve. A one dollar bill is really a note from the Federal Reserve where we holding this bogus entity's paper note in exchange for one dollar in specie held by them, in other words the dollar bill is an at sight draft for the real thing - one dollar held by the bank in specie coin. Or, we are loaning the Federal Reserve one dollar in specie coin (held by the Federal Reserve)  with an 'at sight' note in our possession that can be 'cashed-in' for coin (specie) at any participating Federal Reserve bank... at least, that is the original idea behind paper money. 

 

Unfortunately, today our Fiat monetary standard is relative only to other currencies and not relative in value to tangible resources like specie (gold/silver) held by the Federal Reserve. So, 'cashing in' our one dollar loan (note) made to the Federal Reserve is not an option. Today, we hold the Federal Reserve's useless paper notes for face values that only relate to the Fiat monetary standard relative to values of other currencies around the globe, with the Fiat dollar just hanging on as the world's reserve currency. 

 

In other words, the Fiat Fed paper note in our possession does not relate to anything of tangible value that the note can be  exchanged for in absolute terms, because we will only receive useless debased zinc-plated base metal coins in exchange for that paper note, which are worth far less than one dollar in specie content.... at least for now.

 

In the old days notes were used something like credit cards, and written often.  A bank will pay cash on a note written by a good customer, usually a man or woman of standing with a reliable history with the bank. Notes were far more convenient than formal loans, and notes were quick and easy to process so long as the customer's credit was good.  Most business notes were subject to formal protest if unpaid on time, while most personal notes were not.  In other words the bank's cashier had to be quick and accurate in his judgment with regard to the ability of his/her customer's to pay, and the cashier needed to be well aware of the customer's credit-worthiness. While these banking practices sometimes led to misfortune it is remarkable how well the system actually worked.

 

Today most towns and cities have grown too big with too many people with much greater mobility, and therefore such a system would be impossible to maintain. Notes are most commonly seen by the layperson today in conjunction with home mortgages, however the note itself is a brief and insignificant looking document (usually just one page) in comparison to the tons of other bureaucratic-looking legal docs that usually consist of many pages.

 

In the old days banks would also accept gold, silver, jewelry and belongings including stock under certain circumstances and exchange cash for these items with a note to document the deal.  Personal belongings could be held in a sort of surety by the bank where the goods would be returned when the customer paid the note with interest -- this practice was more common on the frontier and with banks in the Western states until about 1900.  This author knows of no banks today operating in this manner, which is really akin to a pawn shop; however foreclosures and bankruptcies may involve sales of goods where the bank has a direct interest but leaves the haggling to a third party or intermediary. Today the bank wants to keep a low profile and to be seen to participate in the community in a positive role, even if the heart of motivation is profit, a motive which has not changed since banking began.

 

Brokering Stock: Years ago state banks were quite active in buying and selling stocks, and almost all Trust companies partook in stock trading as a major part of their business and Trust companies were really virtual stock brokerages. In 1934 the Glass-Steagall Act prohibited banks from share speculation, however Glass Steagall was partially repealed by the Gramm-Leach-Bliley Act of 1999 with disastrous consequences for the US financial system later on, as we now see.

 

Panic of 1907!