19th-Century Banking

The value of today's money is assigned and backed by the United States government.  In the 1830s the U.S. government minted coins of copper, silver, and gold, but it did not print any paper money. Since the value of the metal in a coin was worth its face value, even foreign coins were "legal tender." But there were nowhere near enough coins for all the money that people needed to do business.

Privately owned banks were chartered and closely regulated by the state, and allowed to print their own “bank notes.” Like checks and credit cards today, these notes were widely used as money in the 19th century. But they were not legal tender, and no one had to accept them. Bank notes were only as good as the reputation of the bank that issued them. There was not enough cash in early New England for all the business people needed to do. As a result, people frequently purchased things like groceries or furniture, or paid for services, with credit. Instead of a plastic card and electronic record-keeping, such transactions were recorded in writing by the seller IF he thought the purchaser was likely to pay him back someday. If he did not know the buyer or did not trust his ability to pay, there was no sale.
Although these transactions were recorded in terms of dollars and cents, they were agreements between the seller and the buyer alone. Banks were not involved.

Today several government agencies insure that money is genuine and bank deposits are secure.  In the 1830s monthly magazines like "Bicknell’s Counterfeit Detector" alerted subscribers to fake bank notes and to failed or financially shaky banks. But there were no guarantees! If a bank made too many loans that were not repaid, it went out of business and shareholders lost their investment. All its bank notes became worthless.

Banks like the one at Old Sturbridge Village had no savings or checking accounts. Most people in town never came in. It primarily served the needs of businessmen. It used money from its shareholders (prosperous people with money to invest) to make short-term business loans. Renewable 3-month loans at 6 % interest, secured by collateral, were very common. Like any corporation, a successful bank paid its shareholders dividends from its profits. Those who held shares in unsuccessful banks lost their investments, however.

Another, less common kind of bank was gradually coming into being, however. Savings banks encouraged working men and women to save part of their wages, even small sums. Instead of selling expensive shares, savings banks accepted small deposits. Instead of receiving dividends, depositors were paid interest on their account balances. Many savings banks did not have a separate building of their own, but shared space with a commercial bank.

Today banks often make loans to people who want to buy a new car, a house, or even take a vacation.  People in the 1830s who wanted a personal loan or a mortgage usually went to wealthy individuals with money to lend (such as Salem Towne, the prosperous farmer and businessman who owned the large white house on the OSV common), not to a bank.

Most bank loans, called "discounts," were short-term business loans secured by collateral. The borrower signed a pledge to pay a certain amount (usually in three months) but received a smaller sum from which the interest had already been deducted (discounted). Borrowers received the loan in the bank's own notes, not gold or silver coins.

Stores in the 19th century often supplied coins or bank notes to their customers when they needed small amounts of money. This was not a loan, but a purchase of cash. It was recorded in the store's ledger against the customer's account, just like any other purchase.

While swindles, embezzlements, and other thievery did sometimes occur, armed daylight bank robberies were virtually unheard-of in 1830s New England. For one thing, there was no way to make a quick get-away!

Banks in the 1800s had only one employee, a cashier. Usually he was also one of the bank’s principal investors. The cashier transacted business in the mornings, then he locked the doors and spent the afternoons reviewing loan applications, writing business letters, or doing bookkeeping. Sometimes he met with the bank’s president and board of directors to review the bank's business records and make major decisions.

A rural 19th-century bank served the business credit needs of several adjacent communities. Most country towns had no bank at all, although a large commercial city like Boston had several banks. Most bank corporations in the 1830s had only one building, and no branch offices. Before 1836 there was only one bank in the country with offices in more than one state. After 1836 (and until 1975) banks could only operate in a single state.