Bill of Exchange. Personal Photograph. Catalog Number INDE 4632. Collection of Independence National Historical Park, Philadelphia
Despite a lengthy literature, few financial historians in my mind have been able to successfully explain how money worked in the early American republic. To the average reader, scholarly explanations tend to lack clear prose, contain unnecessary jargon, and use complex examples that are technical and abstract. Even fellow historians share my frustration. Part of the reason is that the issue itself is rather arcane. Today we have a standard Federal Reserve note, but money in the antebellum era was a confusing array of credit instruments--bills, notes, drafts--issued by numerous financial institutions and whose value depended on many factors like current economic conditions, confidence, reputation, and supply and demand. Almost all of the concepts that applied then do not exist today. At the same time, many academic writers, particularly in the more distant past like fifty years ago or more, have not made things easier. If academics are to overcome the trite generalization that they are "elite" professors, relaxing comfortably in the "ivory tower," cut off from any contact with the "real world," they need to write clearly. So it is within this spirit that I have put together this blog post.
Merchants, factors, planters, and other actors engaged in long-distance trade developed a system of paying for goods so that they did not have to constantly send specie back and forth over long distances. Shipping precious metal to pay for goods was costly (both in time and money), risky (sometimes gold shipments could be lost or stolen), subject to wear and tear, and just generally a big hassle. Therefore, they used credit instruments. One instrument, in particular, the bill of exchange, appears commonly in the literature and warrants some explanation. Bills of exchange were written orders to pay a given amount of money after a stated period of time. In this way, you might think of them like promises to pay, or IOUs. Typically short-term (60-90 days) and highly liquid (easily convertible to hard cash), bills had been around since the late Middle Ages, and by the early-19th century, they had become fixtures of commerce throughout the Mississippi Valley and Atlantic World. The value of a bill of exchange depended on some commodity; usually the price of cotton on consignment. When one looks at a bill of exchange online or at an archive, one will see numerous signatures, or endorsements. Just as you might sign a rent check today as a promise that there are sufficient funds in your checking account, historical actors centuries ago signed bills. I will leave aside the legal ramifications of endorsements for the time being so as not to burden the reader with too many details.
Again, the point of a bill of exchange was to connect buyer and seller in an efficient manner. Let's come up with an example so we can see how bills passed from hand to hand in practice. A Mississippi planter in 1830 wishes to buy manufactured goods for his plantation. Once his slaves have finished harvesting the cotton, the planter gives his cotton to a factor, or middle man. The value of the cotton is $1,000 and the factor will ship the crop to New Orleans. Next, the factor draws up a bill of exchange for $1,000 and gives it to the planter. The bill would be "drawn on" the BUS branch in New Orleans, payable in 90 days. In the accounting parlance of the times, “drawn on” or “drawn against” meant that the credit instrument, once negotiated, or cashed, would deduct funds from that particular locale. A bill “drawn on New Orleans” would deduct funds from a financial institution in New Orleans. After the 90 days, the planter, with bill in hand, walks into the Natchez office of the Second Bank of the United States. In a process called discounting, the Bank takes possession of the bill, deducts interest up front, and gives him $985 in bank notes--a circulating medium that functioned as cash. The planter then has money to pay for manufactured goods at a local store.
I deliberately left out a few other details in this transaction so as to not overwhelm the reader. Virtually everyone who participated in a market economy relied to some degree or another on credit, mostly because there was a delay between the time a product was produced and when it was consumed. Bills of exchange were one way of providing this credit. In effect, the planter received payment several months before his cotton shipped from New Orleans to New York and then on to Great Britain. Rather than waiting long periods of time for the transportation of specie, BUS branch officers in New Orleans and Natchez merely made entries in their account books, shipping specie only when necessary or when exchange rates made it more profitable.
The Second Bank of the United States was the country's largest dealer in domestic and foreign bills of exchange, which facilitated commerce between the United States and Great Britain. It was through cotton sales (and the bills founded upon them) that American merchants settled foreign debts with Great Britain. Americans were unable to use bank notes to pay foreign debts, but foreign bills of exchange in pound sterling, whose value was based upon the price of cotton, helped Americans secure British credit, buy British manufactured goods, and make payments to the British bondholders who owned American securities. Access to British capital, thus, depended in large part on Americans’ ability to grow and export cotton, the crucial ingredient without which England’s workshop of the world, its textile mills, would have been unable to function.
I wish to thank Robert Wright and Richard Kilbourne for patiently explaining the intricacies of this labyrinthine credit system. In the hypothetical transaction stated above, the BUS lent to the planter at 6% interest, which was the price the planter paid for the risk that he would be unable to pay back the loan. At the end of the ninety days, when the bill came to maturity, or fell due, the factor paid back the full $1,000 to the bank. This example is a simplified version demonstrating only one component of a complex network of trade and credit instruments involving several financial institutions. For each transaction recorded in New Orleans, there was likely a corresponding trade involving other credit instruments from New York banks and London mercantile houses. Even two hundred years ago, the number of different actors and occupations brought together for a seemingly simple transaction such as transferring Mississippi cotton to Manchester textile factories was surprisingly complex. For a useful primary source on this topic, see Condy Raguet, A Treatise on Currency and Banking (Philadelphia: Crigg & Elliot, 1840). Nathan Appleton, William Gouge, and George Tucker were among the early political economists who wrote about bills of exchange and other topics. Numerous historians, including Robert Wright, Jessica Lepler, Howard Bodenhorn, Joshua Greenberg, and Sharon Ann Murphy, have published important works that address the financial system.
Merchants, factors, planters, and other actors engaged in long-distance trade developed a system of paying for goods so that they did not have to constantly send specie back and forth over long distances. Shipping precious metal to pay for goods was costly (both in time and money), risky (sometimes gold shipments could be lost or stolen), subject to wear and tear, and just generally a big hassle. Therefore, they used credit instruments. One instrument, in particular, the bill of exchange, appears commonly in the literature and warrants some explanation. Bills of exchange were written orders to pay a given amount of money after a stated period of time. In this way, you might think of them like promises to pay, or IOUs. Typically short-term (60-90 days) and highly liquid (easily convertible to hard cash), bills had been around since the late Middle Ages, and by the early-19th century, they had become fixtures of commerce throughout the Mississippi Valley and Atlantic World. The value of a bill of exchange depended on some commodity; usually the price of cotton on consignment. When one looks at a bill of exchange online or at an archive, one will see numerous signatures, or endorsements. Just as you might sign a rent check today as a promise that there are sufficient funds in your checking account, historical actors centuries ago signed bills. I will leave aside the legal ramifications of endorsements for the time being so as not to burden the reader with too many details.
Again, the point of a bill of exchange was to connect buyer and seller in an efficient manner. Let's come up with an example so we can see how bills passed from hand to hand in practice. A Mississippi planter in 1830 wishes to buy manufactured goods for his plantation. Once his slaves have finished harvesting the cotton, the planter gives his cotton to a factor, or middle man. The value of the cotton is $1,000 and the factor will ship the crop to New Orleans. Next, the factor draws up a bill of exchange for $1,000 and gives it to the planter. The bill would be "drawn on" the BUS branch in New Orleans, payable in 90 days. In the accounting parlance of the times, “drawn on” or “drawn against” meant that the credit instrument, once negotiated, or cashed, would deduct funds from that particular locale. A bill “drawn on New Orleans” would deduct funds from a financial institution in New Orleans. After the 90 days, the planter, with bill in hand, walks into the Natchez office of the Second Bank of the United States. In a process called discounting, the Bank takes possession of the bill, deducts interest up front, and gives him $985 in bank notes--a circulating medium that functioned as cash. The planter then has money to pay for manufactured goods at a local store.
I deliberately left out a few other details in this transaction so as to not overwhelm the reader. Virtually everyone who participated in a market economy relied to some degree or another on credit, mostly because there was a delay between the time a product was produced and when it was consumed. Bills of exchange were one way of providing this credit. In effect, the planter received payment several months before his cotton shipped from New Orleans to New York and then on to Great Britain. Rather than waiting long periods of time for the transportation of specie, BUS branch officers in New Orleans and Natchez merely made entries in their account books, shipping specie only when necessary or when exchange rates made it more profitable.
The Second Bank of the United States was the country's largest dealer in domestic and foreign bills of exchange, which facilitated commerce between the United States and Great Britain. It was through cotton sales (and the bills founded upon them) that American merchants settled foreign debts with Great Britain. Americans were unable to use bank notes to pay foreign debts, but foreign bills of exchange in pound sterling, whose value was based upon the price of cotton, helped Americans secure British credit, buy British manufactured goods, and make payments to the British bondholders who owned American securities. Access to British capital, thus, depended in large part on Americans’ ability to grow and export cotton, the crucial ingredient without which England’s workshop of the world, its textile mills, would have been unable to function.
I wish to thank Robert Wright and Richard Kilbourne for patiently explaining the intricacies of this labyrinthine credit system. In the hypothetical transaction stated above, the BUS lent to the planter at 6% interest, which was the price the planter paid for the risk that he would be unable to pay back the loan. At the end of the ninety days, when the bill came to maturity, or fell due, the factor paid back the full $1,000 to the bank. This example is a simplified version demonstrating only one component of a complex network of trade and credit instruments involving several financial institutions. For each transaction recorded in New Orleans, there was likely a corresponding trade involving other credit instruments from New York banks and London mercantile houses. Even two hundred years ago, the number of different actors and occupations brought together for a seemingly simple transaction such as transferring Mississippi cotton to Manchester textile factories was surprisingly complex. For a useful primary source on this topic, see Condy Raguet, A Treatise on Currency and Banking (Philadelphia: Crigg & Elliot, 1840). Nathan Appleton, William Gouge, and George Tucker were among the early political economists who wrote about bills of exchange and other topics. Numerous historians, including Robert Wright, Jessica Lepler, Howard Bodenhorn, Joshua Greenberg, and Sharon Ann Murphy, have published important works that address the financial system.
Foreign Bill of Exchange. Personal Photograph. Catalog Number INDE 2257. Collection of Independence National Historical Park, Philadelphia.
Credit Instrument: Foreign Bill of Exchange
Value: 500 pounds sterling
Duration: Sixty Days After Sight
Date: August 27, 1836
Drawer: The Bank of the United States. This is the person or firm drawing up the bill. It is usually stated at the bottom, right-hand corner of the check. The President of the Bank, Nicholas Biddle, has left a signature, or endorsement, along with the Bank's cashier, Samuel Jaudon.
Drawee: Baring Brothers, London. This is the person or firm upon whom the bill is drawn. The drawee is typically listed on the bottom, left-hand side of the bill. I know, kinda confusing, so let's think of it this way: When the bill is negotiated, or cashed, funds would be deducted from this person or firm. Perhaps another way to think about this transaction is that the drawee is the person or firm putting forth the funds in this transaction. This is the person extending credit.
Payee: N. Robinson, the Second Bank's agent in Great Britain. The person or firm who will eventually receive payment in this transaction. If you've ever written a rent check to your landlord, your landlord is the payee. When the payee receives this bill, s/he will sign the back of the bill.
Explanation: This is a foreign bill of exchange drawn by the Bank of the United States (drawer), drawn upon--or drawn on--Baring Brothers (drawee), in favor of N. Robinson (payee). The duration of "sixty days after sight" means that the payee will have to wait 60 days before he can access the funds. After that 60 days, Robinson (the payee) could go to Barings (drawee) to receive funds, or alternatively, he could pass the bill onto someone else. The Bank of the United States kept an account with Baring Brothers, a merchant banking firm in Great Britain. Barings and the BUS were two of the most significant financial intermediaries that helped facilitate Anglo-American trade. So when American cotton exporters shipped cotton to Great Britain and when the British, in turn, bought American securities and sold manufactured goods to Americans, they relied on Barings, the Bank of the United States, and the Bank of England to keep all of this in motion without too much inconvenience to importers, exporters, producers, and consumers. Barings extended credit to the Bank of the United States. At the time, the pound-to-dollar ratio was about 5:1, so 500 pounds would have been about 2,500 dollars at the time. If you want a modern equivalent, and you want it to be precise, use the MeasuringWorth website and enter in the figures. As a general rule of thumb, multiply by about 40-50 to get the equivalent in modern US dollars. So $2,500 would be about $100,000-125,000, a lot of money! We should regard this not as an exact equivalent, but an estimate with many caveats. At the end of my most recent article in American Nineteenth Century History, I explain all of the reasons why it is so difficult to take a dollar in the 1830s and find an exact equivalent in today's dollar.
If you look at the back of the bill, shown below, you will see "Pay Malcolm & Co. or order" and then an endorsement of an agent below. To wrap up, the BUS is drawing on its foreign funds to pay Malcolm & Co (most likely) for British manufactured goods that will be imported to the United States. Bills of Exchange did not have to be cashed right away. In fact, they could pass from hand to hand, almost in the same way that cash would circulate from hand to hand (except that with a bill of exchange one would deduct interest).
Value: 500 pounds sterling
Duration: Sixty Days After Sight
Date: August 27, 1836
Drawer: The Bank of the United States. This is the person or firm drawing up the bill. It is usually stated at the bottom, right-hand corner of the check. The President of the Bank, Nicholas Biddle, has left a signature, or endorsement, along with the Bank's cashier, Samuel Jaudon.
Drawee: Baring Brothers, London. This is the person or firm upon whom the bill is drawn. The drawee is typically listed on the bottom, left-hand side of the bill. I know, kinda confusing, so let's think of it this way: When the bill is negotiated, or cashed, funds would be deducted from this person or firm. Perhaps another way to think about this transaction is that the drawee is the person or firm putting forth the funds in this transaction. This is the person extending credit.
Payee: N. Robinson, the Second Bank's agent in Great Britain. The person or firm who will eventually receive payment in this transaction. If you've ever written a rent check to your landlord, your landlord is the payee. When the payee receives this bill, s/he will sign the back of the bill.
Explanation: This is a foreign bill of exchange drawn by the Bank of the United States (drawer), drawn upon--or drawn on--Baring Brothers (drawee), in favor of N. Robinson (payee). The duration of "sixty days after sight" means that the payee will have to wait 60 days before he can access the funds. After that 60 days, Robinson (the payee) could go to Barings (drawee) to receive funds, or alternatively, he could pass the bill onto someone else. The Bank of the United States kept an account with Baring Brothers, a merchant banking firm in Great Britain. Barings and the BUS were two of the most significant financial intermediaries that helped facilitate Anglo-American trade. So when American cotton exporters shipped cotton to Great Britain and when the British, in turn, bought American securities and sold manufactured goods to Americans, they relied on Barings, the Bank of the United States, and the Bank of England to keep all of this in motion without too much inconvenience to importers, exporters, producers, and consumers. Barings extended credit to the Bank of the United States. At the time, the pound-to-dollar ratio was about 5:1, so 500 pounds would have been about 2,500 dollars at the time. If you want a modern equivalent, and you want it to be precise, use the MeasuringWorth website and enter in the figures. As a general rule of thumb, multiply by about 40-50 to get the equivalent in modern US dollars. So $2,500 would be about $100,000-125,000, a lot of money! We should regard this not as an exact equivalent, but an estimate with many caveats. At the end of my most recent article in American Nineteenth Century History, I explain all of the reasons why it is so difficult to take a dollar in the 1830s and find an exact equivalent in today's dollar.
If you look at the back of the bill, shown below, you will see "Pay Malcolm & Co. or order" and then an endorsement of an agent below. To wrap up, the BUS is drawing on its foreign funds to pay Malcolm & Co (most likely) for British manufactured goods that will be imported to the United States. Bills of Exchange did not have to be cashed right away. In fact, they could pass from hand to hand, almost in the same way that cash would circulate from hand to hand (except that with a bill of exchange one would deduct interest).
Reverse Side of BUS bill of exchange. Personal Photograph. Catalog Number INDE 2257. Collection of Independence National Historical Park, Philadelphia
Using the MeasuringWorth website, we see that in 1836, the dollar-to-pound exchange rate was 1 pound = $4.82. So 500 pounds sterling would have been $2,410. The website gives you the option of measuring this in terms of a commodity, income, or project. I'd say commodity is probably the best--the bill could be treated as a commodity in that it could be bought and sold in money and exchange markets. For commodities, the website gives the "real price" as $63,300.00. The site uses the Consumer Price Index and its own formula. Interestingly, 1 pound today is about $1.24, an exchange rate that is more favorable to the dollar than in the past, at least partially because of the recent "Brexit," or exit of Great Britain from the European Union. When I visited Great Britain in 2000, I remember the exchange rate was about 1 pound to 1.6 dollars.
To see how bills of exchange can be contextualized within the broader history of capitalism, see my article in the Oxford Research Encyclopedia of Latin American History.
To see how bills of exchange can be contextualized within the broader history of capitalism, see my article in the Oxford Research Encyclopedia of Latin American History.
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