They gave Congress the right to issue money and forbade the states from doing so. But the Federal Government hasn’t been the only entity that, has in practice, issued money. Private citizens and private companies have done so in various forms over the years.
Scrip is any substitute for currency which is not legal tender, and is often a form of credit. Scrips were created as company payment of employees and also as a means of payment in times where regular money was/is unavailable, such as remote coal towns, or occupied territories, etc.
Mining and lumber companies relied on scrip going back to Civil War times. Companies used scrip for payroll in lieu of cash, which was usually difficult and dangerous to transport into remote towns and lumber camps where their employees and families lived. The miners and lumberjacks could use the scrip at the company store, usually the only store in town, to purchase their necessities.
Eventually “independent” towns got into the game. These independent towns were not built by a mining or lumber company. Merchants in these towns would accept scrip, also at a sharp discount of 25% to 40%, and then redeem the scrip at full value at the company store for goods they could then resell in their stores.
Needless to say, scrip soon acquired a bad reputation.
However, scrip isn’t without its benefits. Without it, and lacking any form of recognized money, individuals will have to resort to either barter or credit. Bartering has its own obvious downsides. Hauling a sack of spuds around is certainly cumbersome, plus you will have to find someone who has something you want who simultaneously wants or needs your sack of spuds or the deal won’t work. And credit only works if someone is willing to extend it to you.
So who needs private money? The list of those who have issued private money or scrip in the U.S. is long and varied. State and national banks, transportation suppliers such as canal, turnpike, and railroad companies have issued scrip. As previously mentioned, mining and lumber companies have also issued their own private scrip.
Local merchants, farmers, and community groups have created their own private money. Each of these examples of private scrip arose to serve purposes that were not well served by government-provided money. These purposes include having a currency suited for making small purchases, having a suitable medium of exchange in remote areas, and having a means of exchange during financial panics.
In the 1800’s the Treasury issued coins and occasionally a limited number of notes. Many state and national banks issued their own paper currency. One problem was that the banks were prohibited from issuing small denominations by their regulating authority which was either the state legislature or the U.S. Congress. This prohibition made their private notes nearly impossible to use for most daily purchases.
State banks originally could only issue their notes in denominations of $1 or more. National bank notes could only be issued in denominations of $1 or more from 1863 to 1879, and after 1879, only in denominations of $5 or more. By 1882, all smaller-denomination national notes had been taken out of circulation.
During these times, a denomination as little as $1 represented quite a large amount of money. In the 1830’s, a newspaper cost a penny. In the 1880’s, a laborer typically earned $5 a week. In 1890, a family paid about six cents for a pound of bacon. Trying to buy everyday items was cumbersome with these state and national private bank notes.
To fill this gap, many private individuals and companies stepped forward to supply the market. They issued both paper money and tokens. From 1820 to 1875. private transportation companies, merchants, and farmers issued a significant amount of small-denomination currency. This money was denominated in dollars, or in good or services rendered. For a period of time, the small-denomination problem was solved.
Then the Civil War came. The inflation associated with the war naturally led to a dramatic increase in the prices of precious metals, causing metallic coins to disappear from circulation.
Once again many private enterprises stepped in and created small-denomination currencies. The Treasury also issued fractional paper currency from 1862 to 1876. This fractional currency was issued in denominations of a dollar, half-dollar, quarter, dime, and half-dime.
The privately issued money did not go unnoticed by government officials, as Congress passed legislation that forbid private citizens or companies from issuing paper currency in denominations of less than $1. To avoid legal problems, many private issuers of paper money began denominating their currency in services instead of in dollars.
In the last quarter of the nineteenth century, mining and lumber companies flourished. Most of these companies were located in remote areas far from the nearest bank. These remote locations encouraged these companies to issue their own money or scrip. Originally, the scrip took the form of paper, but eventually durable metal tokens became widely used.
Although the use of this scrip was often criticized, the courts typically ruled that mining and lumber companies were not violating the law of the land by issuing it, since the scrip was not intended to circulate as “real” money.
Financial panics have also contributed to the use of scrip. For example the Great Depression of the early 1930’s saw the use of scrip in one form or another. Bank runs were quite common in the early stages of the Depression. Depositors would arrive in mass at a bank and attempt to convert their deposits into currency.
Banks often responded to these runs by limiting or suspending payment temporarily. This meant that they refused to allow their customers to withdraw cash from their bank accounts. Bank runs became so severe the President Roosevelt declared a four-day “bank” holiday across the nation in March of 1933. In some places the closure was extended to a week.
These suspension of payments caused the public to hoard money of any form. Currency hoarding, suspension of payments, and bank failures created severe shortages of cash that made it difficult for people and companies to make payments.
In response to the currency shortage, school districts, merchants, local relief organizations, and private individuals issued private money in the form of scrip. Many state and local governments got into the act and issued their own local scrip as well.
Companies, unable to make their payrolls due to currency shortages, paid their workers in scrip. This scrip was often redeemable in official currency after banks once again allowed deposit withdrawals.
Much of the scrip issued during the Great Depression was only used in the locality where it was issued. The success of a particular scrip depended heavily on its backing and the credibility of its issuer.
The success of the scrip issued by municipal and state governments typically depended on whether it could be used to pay taxes. The value of privately issued scrip depended on whether the user viewed the private issuer’s assts, reputation, or productive capacity was sufficient to honor the scrip.
Surprisingly, local currencies or scrips seem to be making a comeback. Traverse City, Mich. Has its “Bay Bucks.” Ithaca, New York has its “Ithaca Hours.” Then there is the “Burlington Bread” in Burlington, Vermont. The point of local currencies is to boost the value of local resources that are generally undervalued such as labor.
As we have seen private scrips have often had beneficial effects. However, its use has also caused problems. Many private issues of money were unsuccessful because people did not believe that the issuer would be able to honor their intentions to redeem the scrip in dollars, goods, or services. Most forms of scrip were and are highly localized, which means that they did not or would not circulate widely. Generally this isn’t a problem in itself. Most scrip was never intended to replace the real legal tender or currency.
The localized nature of most scrip arises mainly from a problem of recognizability. The holder of the scrip can’t be sure of how much a note might be worth if he or she doesn’t know the issuer of the scrip. Local citizens have a greater awareness of the credibility of a local issuer than would someone who lives a great distance from that local.
The acceptance of any currency whether it is private or government issued is largely dependent by how easy it is to redeem it for goods or services. Money that is hard to redeem will be greatly discounted or not accepted at all.
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