Anne Mayhew asked why I thought the Philadelphian in the quote about Ricardo was wrong. I guess I have to amend that statement. First, it depends on WHEN the statement may have been made. The nature of banks, and bank notes, changed substantially in the period between the mid-1780s, when the first Philadelphia banks were in full operation, and Ricardo's death in 1823. The late 18th century banks functioned mainly as financial intermediaries between fairly wealthy individuals and merchants in need of short loans. The 3-month or 6-month note was common in the Philadelphia merchant community by the mid-1700s; the primary function of the Bank of North America and the Bank of Pennsylvania appeared to have been to institutionalize and broaden (and hence lower costs of risk) this process. It is something I am aware of because I was VERY disappointed to discover that bank notes played zippo role in Pennsylvania as a circulating currency that could replace the issues from the state-run "land bank", which was called "Pennsylvania currency" and circulated widely in the mid-Atlantic and backcountry from the 1720s through the 1790s. I had rather hoped to find that one replaced the other, and the complete absence of bank notes in the account books of Philadelphians torpedoed what I had thought might be a promising explanation for the relative ease with which the money clause in the Constitution was accepted. (I'm still trying to figure it out, BTW; my best guess right now is that the proponents of state paper currency, a VERY hot political issue at the time, must not have fully understood what that clause meant, but since it is a SEPARATE hypothesis of mine that they generally DID know what these things meant, I am experiencing some cognitive dissonance. Phooey.) So -- Had the statement been made between 1785 and perhaps 1815, I would believe it was not an apocryphal tale. I have seen similar statements by PA federalist politicians. But keep in mind that public statements to that effect would be met with counter- statements from the political and ideological opposition. However, it might have been accurate to explain that the early "banks" were not full-throttle -- we all know now that the 1st (and 2nd) Bank of the United States was unable to function as a true central bank; as more research is done on this period, I think it will also become pretty clear that the early state banks did not fully function as did those of the Jacksonian Period. And that was one of the main criticiques of the banks. The commonwealth-run (I say commonwealth to bridge the activities of the colonial legislature with that of the state legislature) "land bank" had a far wider direct impact in the state than these private merchant banks (for want of a better term). Anyone with a valid deed showing sufficient land to use as collateral could borrow a small sum from the "land bank" at a low interest rate. It had been wildly popular in SE Pennsylvania during the colonial period, and by the end of the 1700s the farmers of central and western Pennsylvania wanted access to the same developmental subsidy. If the author used this out of context -- that is, while it is possible that it really was a valid quote, and it is possible that such really was the case, but the statement had to be representative of a very small segment of the population -- I would find that very frustrating. Now -- AFTER about 1815 or so, there was a tremendous expansion in the number of private banks throughout the nation. These banks began to issue bank notes for deposits (as described by Temin), and it is in THIS period that bank notes truly become an important component of the American money supply. I think. <g> I am operating once again on evidence from account books. I do not think we are anywhere NEAR getting a good handle on the size of the money stock in this period, or the relative size of its components. So I find it more helpful to look at the transactions as measured by day books. Everyone from merchants to shopkeepers to farmers kept day books, and was familiar with, and used to, dealing with a number of currencies. There's usually one listed as the unit of account -- state currencies until just after 1800, then dollars -- and anything else is noted. Bank notes were sufficiently unusual in many places that they got a separate listing. The issue of redeeming bank notes for specie takes on a separate meaning once banks began issuing notes for deposits in sufficient amounts that they circulated as currency. The 30- to 60-day commercial paper circulated only within a narrow circle of merchants, and were always tied to the specific borrower with specific endorsements and transfers. When we think of bank notes as currency, however -- the type of currency that transformed the American economy in the antebellum period -- we really mean notes ON THE BANK ITSELF. The proliferation of banks in urban areas meant that urban residents had lots of circulating bank notes on institutions in suffiicently close proximity they could judge the stability with reasonable success. As all students of this period have noted, however, uncertainty as to the ultimate value of a particular bank note increased with distance. How could someone in Philadelphia accurately judge the quality of a bank note issued on a bank in Charleston? Well, if you were a merchant, chances are you not only had business contacts there, but you were also likely to have relatives. I apologize for covering ground that some already know -- it appears that the history of banking in the U.S. is not nearly as well-known as I would have thought; my students keep coming in from their Money and Banking classes spouting Bray Hammond, a path- breaker but today EXTREMELY outdated. As one might surmise, there was a Gresham's Law of bank notes in the hinterland and as payment for services by the relatively powerless. I don't know when they first appeared, but by the 1830s newsletters were easily available (at a price) that kept running tabs on the appropriate discount for specific banks' notes. A shopkeeper, merchant, anyone who did a lot of trading, would probably be subscribed to one of these -- not to mention that the more bank notes you used, the lower the consequences if you got stuck with a bad one. Not surprisingly, bank notes made wage laborers REAL nervous. And many farmers wanted nothing to do with them, either. However (perhaps ironically), the spread of banks, the proliferation within urban areas and over large geographical areas, actually made it easier for the average joe to deal with bank notes. The distant farmer could be willing to take bank notes from the nearby bank he trusted, and the bank would be better qualified to judge the riskiness of out-of-town bank notes than the farmer would. In town, the proliferation of banks and bank notes made it much more likely that a wage-earner would be paid in local notes that would not then be discounted by a shopkeeper or landlord. So standing the old wildcatting story on its head (well, it's already been pretty well stood there!), in this case MORE meant stability. You cannot understand the problem of bank runs and panics outside of this historical context. It makes quite a difference which decade you are talking about, because in one of the earlier decades a panic was mostly a crisis for merchants, who were used to a certain amount of flexibility in payment and were more likely to be able to absorb the costs of uncertainty. Discounting would not be that big a problem for them; it happened everywhere in their sector of the economy. But when bank notes became a (if not THE) common currency in the nation, then uncertainty was spread to those less able to absorb the costs, or wait for the market to straighten itself out. And if a bank went belly-up, the small depositor, the small holder of bank notes, were at the bottom of the list to be compensated. A long delay in straightening out assets and debits would be much more costly for the low to middle-income householder. (True also in 1929-1932, despite the scoffing of some academics.) And that is why I said the Philadelphian was wrong. I would assume that he would have been referring to the Panic of 1814, or the crisis of 1819. By this point the banks were not the insular institutions they had been two decades earlier. Those with the wherewithall to arbitrage the discounting, or with enough to be able to sit things out, were hardly damaged and tended to view things as similar to lost shipments -- this stuff happens. The vast majority of Americans (still on farms) had little to do with banks, or bank money, in the first place, so it was nothing except entertainment value, to tsk tsk about those city folk. But the middling and low-income urban residents who got caught holding paper curency that was rapidly diminishing in value were (quite understandably) angry. So -- he may have been speaking for his buddies. He may have been spouting off wishful thinking. He may have been echoing what USED to be the case. Or "he" may never have existed at all. Be that as it may, the majority of Philadelphians (and New YOrkers, and Bostonians, and Baltimorons (heh heh heh)) were not at all sanguine about specie suspensions. And let's have a little sophistication here in explaining WHY they might be just a little bit upset -- the exchange of currency for good and services represents a bargain fulfilled. If the value of the currency shifts wildly between the time the bargain is arranged and fulfilled, then to insist on NOMINAL rather than REAL payment is to some extent reniging on the bargain. So -- took a long while getting there, but here is the final point. Few appreciate the magnitude of the transition in public perception that occurred between the 1750s and the 1820s with regard to the purpose and usefulness of paper currencies of ANY type, and the sudden (and it was sudden) appearance of intense popular hostility to the function of banking in a society. In Pennsylvania, at least, a political faction linked to the FEderalist Party (eventually) tried to kill off the PA land bank through the 1780s -- and finally succeeded by slipping the money clause into the Constitution. The institutions that replaced the Land Bank were intended for the merchant community's needs, period. In many ways, these institutions were simply replacing the private lending practices in the port cities with financial intermediaries that could function far more efficiently. They really were very different from the banks of the 1830s. As for the majority of the population out there living on farms (90% in the census of 1790), the land banks may have been replaced by the private land companies and the public Land Office of the federal government as a means of acquiring farming capital. But I honestly have no idea what they were using for currency. I had to laugh at Chris Clarke's stunning finding that farmers would not take "cash" in New England in the first two decades of the 1800s -- and he was working with WESTERN Massachussets -- n no kidding -- I wouldn't have taken it either! You have to wait for the addition of more local banks and in New England, the formation of the Suffolk System, to find bank notes circulating practically in the economy. Why would the common folk HATE banks, then? 1. Practical experience with the costs of uncertainty when dealing with bank notes. 2. Practical experience with being out-maneuvered by an obvious faction of PA politics that really consisted of merchants and lawyers in Philadelphia, some of whom openly despised the bankcountry farmers. 3. AND, as we move into the second, third, fourth decades of the 1800s, the only theory available with which to explain (1) and (2) did not leave much room for the positive benefits of financial intermediation. The focus of theory in the 1700s was on money and trade and mercantile activities; by the early 1800s it had shifted to factories and products, to THINGS. Theory backed off of flows and into set pieces. Where does financial intermediation fit in the labor theory of value? Which brings us back to the history of economic thought! Wasn't this a fun journey? It's something I would like to see more of -- the interconnectedness between experience, institutions, and theory -- then theory, expectations, behaviors, and policies. Apologies for the length. If I could have made it shorter, I would have. -- Mary Schweitzer