In the ensuing legal troubles many people might lose their savings and the bank’s notes would become worthless, which could be a serious economic blow to both individuals and communities. If the slow and steady income from loans and mortgages no longer satisfied those holding notes, then the bank could become bankrupt. Of course, the bank would be holding valuable interest-bearing debts in the form of loans and mortgages, but these were payable in the future, often over many years, while the bank was obligated to redeem its banknotes for coin money on demand. Consequently, a bank would have not only the original depositor’s receipts circulating as money but also the banknotes it had loaned, resulting in more banknotes circulating than it had coins to cover them. When a bank made a loan it generally issued banknotes, again redeemable for coin, to the borrower.
Since most of this gold and silver never left the vault, banks would loan out a portion of it for a fee in interest, defraying their costs for operating the bank, while making a profit for themselves. Thus banknotes circulated from hand to hand while the gold and silver that backed them, or guaranteed their value, remained in the bank.īanks often accumulated very large deposits of gold and silver from many individual depositors. People did not always have to withdraw their money to make purchases, because often sellers would accept the banknotes as payment. When depositors wanted to withdraw money, they would take the banknote to the bank and exchange it for coins.
The bank would give the depositor a receipt, or banknote, as a claim against the gold or silver that had been deposited. People wanted a safe place to keep their savings of gold and silver coins, so they stored them in banks, which had strong vaults and other measures of security. The value of these coins was determined by the value of the metal in the coins themselves. In the early 1800s, the United States government did not print paper money but instead minted gold and silver coins called specie.
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