Rufus Folorunso Akinyooye - St Clements University

Money was in gold or silver coin according to Article 1, Section 10 of the United States
constitution. Under the U. S. Statute Code the terms “lawful money” is to be construed
as gold or silver coin of the United States.
The United States Coinage Act of 1792 provides in Section 11
that the “proportional value of gold to silver in all coins which shall by law be current as
money within the United States”. In effect up till today in the United States constitution
gold and silver coins are the legitimate money of that country (McCarthy 2004). As
individuals took possession of these coins through commerce however they deposited
them in banks that gave them their notes promising to redeem the note for the value of
gold or silver deposited. The banks however could and they did go a little further by
issuing these same notes representing loans to individuals that came to them asking for
funds. Problem would come when news, true or false circulates that the bank was
having problem redeeming its notes. Holders of notes of the bank would rush to it (a
run) and demand redemption and with all the specie on deposit gone, a bank would
have to close its doors for good.
Central banking came slowly to the United States as Congress
chartered the first Bank of the United States in 1791 to engage in general commercial
banking and act as the fiscal agent of the U. S. government. Its charter was not renewed
in 1811. A similar fate befell the Second Bank of the United States chartered in 1816 and
closed in 1836. In 1838 the State of New York adopted the Free Banking Act, which
permitted anyone to engage in banking, upon compliance with certain charter
conditions. Free banking spread rapidly to other states, and from 1840 – 1863 all
banking business was done by State – chartered institutions. In many Western States
according to the Encyclopedias it degenerated into “wildcat” banking because of the
laxity and abuse of state laws. Bank notes were issued against little or no security, and
credit was over expanded; depressions brought waves of bank failures especially the
multiplicity of State bank notes, which caused great confusion and loss. The congress of
the United States had to pass the National Bank Act of 1863, which provided for a
system of banks to be chartered by the United States government.