Country Facts and Folklore
By Andy Reddick
BANKING PRACTICES ON THE IOWA FRONTIER
Modern banking practices have changed dramatically since Iowa was a frontier community. There was no Federal Reserve System, the second attempt at a United States Bank failed in 1836, and government generated paper currency was not yet widespread. Issuing banks, as authorized by state charters, could print paper money for circulation as long as it could be redeemed on demand in either gold or silver.
Although article I Section 10 of the Unites States Constitution clearly forbids any state from coining money it does not specifically disallow the issuance of paper notes or certificates. While Iowa was being settled, United States legal tender consisted of gold and silver coin only. In those days, when people used the term "bank" they usually were referring to an institution that circulated a supply of their own redeemable paper notes for currency.
This early banking system worked fairly well in large cities of the east and in New Orleans. But there was not enough supply of gold and silver to spread across the country.
People obviously needed money of some sort, thus bankers invented ingenious ways to circulate currency and expand their note issuance while avoiding any redemption of their own notes. Bankers used devious and ingenious means to carry on business that sometimes went a little beyond legal limits.
For example, banks were organized on non-existent capital, auditors allowed books to be juggled in terms of capital shares, and notes were put into circulation in far away places. "Saddlebag Banking" was a term for this as messengers were paid to carry notes into other areas where they could be exchanged. While the unsound notes remained in circulation at some distant point, the bank of issue could operate successfully with notes from other banks. Thus many institutions were floating or kiting their assets.
The largest portion of Iowa’s money supply consisted of other state-chartered bank notes brought into Iowa by settlers. However, Iowa banks also sometimes issued notes. Banking in Frontier Iowa by Erling Erickson shows photo copies of bank notes issued from Dubuque, the Agricultural State Bank of Tennessee, the State Bank of Iowa in Des Moines, and a phony counterfeit ten dollar bill from the State Bank of Indiana.
Like several western states, Iowa outlawed banking between 1846 and the mid-1850s. Bankers had to get around this problem by using currency from other states, and one source of notes that became a standard, was the State Bank of Indiana.
It was not unusual to find merchants using a variety of different currencies and coins in their trade and barter, including foreign money. Because of this, a few local communities issued their own paper currency. Thus the example of Bentonsport’s own paper money on display at the Mason House Inn is not actually unique in nature, but finding any of these old bank certificates still in existence is indeed a rare treat.
Contributed to the Van Buren Co. IAGenWeb Project by Andy Reddick