People & Places

Then Again: For state-owned bank, printing paper money was too easy

Vermont State Bank bills
Branches of the Vermont State Bank issued their own currency during the early 1800s, but ran into trouble when they printed far more money than they could back with gold, silver and copper coins. These bills are in the collection of the Vermont Historical Society. Photo by Mark Bushnell

Editor's note: Mark Bushnell is a Vermont journalist and historian. He is the author of "Hidden History of Vermont" and "It Happened in Vermont.” 

One day in 1808, Jireh Durkee walked into the Woodstock branch of the Vermont State Bank and demanded $9,000. But the bank’s directors acted quickly to keep the man from getting his hands on the cash. They tried to have him hauled into Windsor County Court to answer charges. And they attacked him personally, calling him “an evil-minded person” who by his actions had attempted to “realize a filthy gain” and, worse, “diminish and destroy the resources of the state of Vermont.”

Durkee had entered the bank unarmed except for a stack of paper. But it was those papers that bank directors found so threatening. They were bills issued by the Woodstock bank itself, promising to pay the bearer their face value in hard cash, that is, in copper, silver or gold coins.

In short, Durkee was trying to make a withdrawal.

To understand the bank directors’ hyperventilating response to Durkee’s visit, one has to understand how bad off Vermont banks were in the early 1800s. Historian Kenneth Degree wrote in 2000 about the early days of banking in Vermont for Vermont History, the journal of the Vermont Historical Society.

Institutional banking began in Vermont in 1806, after a long, heated debate over the dangers and advantages they presented. Bank opponents had argued that banks, by encouraging borrowing to promote manufacturing and trade, would be harmful to the character of the people. A pay-as-you-go economy was more compatible with virtue, and the agricultural lifestyle they wanted for their country. Thomas Jefferson, who led the anti-bank movement, wrote, “I hope we shall ... crush in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country.”

Bank supporters argued that the economy was being stifled by the shortage of specie, those valuable coins. Indeed, most transactions were done by the bartering of goods and services. What was needed, they said, was to generate liquidity by creating a paper currency, which represented, and could be exchanged for, the specie that backed it. This sort of promissory note would simplify transactions — buyers would have an alternative to either procuring coins or bartering to complete a deal for goods or services. And banks could now offer loans, by issuing bills worth several times more than the specie they held in their vaults.

While Vermonters were still debating the merits of banks, the surrounding states were creating their own. Vermont was soon flooded with an array of out-of-state bank bills. With so much unfamiliar currency circulating, Vermonters who accepted the bills were in danger of being duped into accepting a forged bill or one issued by a distant bank that might go out of business before the bill could be redeemed.

Vermont’s first banks were chartered in Woodstock and Middlebury. Branches in Burlington and Westminster would follow. The Vermont law allowing banks only permitted banks owned by the state rather than by self-interested businessmen. That way, some argued, the bank would be “in the hands not of a corps of soulless individuals, but of the true friends of the people.”

Lawmakers took a conservative approach with the banks. They allowed each to issue bills totaling no more than three times the deposits it had on hand. The rule was intended to make the banks more stable.

But rules only work if they are enforced. Some Vermonters worried that bank directors would do a poor job using their power wisely if they had no financial stake in the bank.

“Where there is no personal interest or responsibility it will be suspected that the Directors will lend bills as caprice or prejudice may dictate,” warned the editor of the Vermont Journal in 1806, “and as they can lose nothing themselves in the overflowing of their humanity, often lend to needy dependents and favorites, who will never repay their principal or interest. Such is the conduct of [man], where his private interest is not concerned.”

A thriving economy made the bank wildly popular and distracted regulators from their jobs. The bust that followed the boom exposed the regulators’ failings. 

People, wanting a piece of the action, snapped up the bank bills. They lined up at banks to borrow money, promising to repay the loans at an agreed upon time. The paper currency proved so popular that banks began to run out of bills to loan. So they printed more.

By 1808, some banks were circulating bills worth more than seven times as much as the specie on hand, but the Legislature failed to act. The economy was strong, so why get in the way by enforcing regulations?

By printing more bills, banks hoped to make supply meet demand, but they were also devaluing the currency. The boom times, however, masked the economic reality.

President Thomas Jefferson. Wikimedia image

When a rise in international tensions was followed by war, Vermont’s economy went into free fall. The trouble started when President Thomas Jefferson, in response to British provocations, declared an embargo on trade with British-controlled Canada. The Vermont economy, enmeshed with Canada’s, suffered badly. With business drying up, the devaluation of the local currency became clear.

Vermonters, worried about the value of their currency, went to the bank to exchange their bills for hard money, and inevitably the banks found they didn’t have enough coins in their vaults to redeem the bills.

Job Lyman, cashier at the Woodstock branch, was shocked by the negligence of bank officials. At the Woodstock branch, he later wrote, “the monstrous disproportion was clearly seen between the capital of the bank and the amount of its bills in circulation. If, for instance, a bank has at one of its branches (Woodstock’s) one hundred and fifty-one thousand dollars in circulation, and can show only twenty thousand dollars and a little moonshine stored away in its vaults to meet so large an obligation, no wonder its bills fall below par.”

Banks sometimes attracted con artists. In 1809, the Rhode Island Farmers Exchange Bank became the first American bank to fail when a bank official, Andrew Dexter Jr., perpetrated a large-scale fraud. Dexter had his clerk write out stacks of bills, then traveled to distant locations to swap the bills with unwitting speculators. After cashing in his new bills, but before the speculators’ bills could be redeemed at his own bank, Dexter disappeared and Farmers Exchange folded.

Vermonters worried that similar frauds could be committed here. The Legislature heard complaints that the Woodstock and Middlebury branches were refusing to redeem bills at face value. They were instead offering to pay customers a reduced rate or to exchange the local bills with bills from distant banks that were payable in 30 or 60 days. Or, in Jireh Durkee’s case, were equating a simple withdrawal with theft.

Lawmakers tried various tacks to fix the problem. They empowered banks to crack down on customers who were late repaying their loans by threatening to have them jailed or seizing their property. To tighten the paper money supply and increase its value, the Legislature declared that state property taxes could be repaid using bank bills, which would then be taken out of circulation.

By 1810, the state had managed to reduce the paper money supply to a little over $200,000. And lawmakers set a new bills-to-specie ratio at 2 to 1, though that was still a goal, not a reality.

In 1812, with the United States slipping into war with Great Britain, Vermont, a likely invasion route, had to prepare its defenses. But the state had little money to spend. Most of its revenues were in nearly worthless paper.

That year, legislators admitted the obvious, the Vermont State Bank had been a failure, and ordered the branches closed. The state was getting out of the banking business; private ventures would fill the void.

Legislators ordered state bank branches, as one of their final acts, to collect their old bank bills, which had once seemed so vital to the state’s well-being, and burn them.  

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Mark Bushnell

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