Oct. 19 (Bloomberg) -- In 2012, it isn’t unusual to go days without using actual money: Lunch goes on the debit card, a clothing purchase goes on the credit card and in some cities even parking meters take plastic. As the Internet and instruments of credit continue to transform our relationship with money, it is worth reflecting on the forms that money has taken in the past.

Before the institution of federally backed paper currency in 1862, the government didn’t see issuing paper money as its responsibility. Although it coined gold and silver, there was never enough in circulation to provide an effective medium of exchange. Because the Constitution prohibited states from printing money, banks became the primary suppliers of paper money in the U.S.

From 1791 to 1811, and then again from 1817 to 1836, the First Bank of the United States and the Second Bank of the United States brought a degree of order to this system, both regulating the issue of bank notes and issuing their own trusted notes. But when Andrew Jackson failed to renew the second bank’s charter in 1836, private bank notes proliferated unchecked. By the 1850s, U.S. banks had issued more than 10,000 kinds of bank notes, varying in size, denomination, design and value. (Many of them are now on display at the Museum of the City of New York.)

Bank Notes

There were significant problems with this system, in which money often wasn’t worth the paper it was printed on. In theory, a bank note derived its value from its ability to be redeemed for gold or silver at the issuing bank, but what banks could live up to that promise? Those that were poorly capitalized went to great lengths to ensure that their notes weren’t redeemed. For example, the Union Bank of Tennessee issued notes only redeemable in New Orleans. In the small town of Versailles, Kentucky, an agent who came to redeem notes at the local bank was hanged in effigy by local citizens. Banks also suspended redemptions during financial panics, and when a bank failed, its notes became worthless.

When banks couldn’t provide an adequate supply of money, other institutions stepped in. In particular, there was demand for small-denomination bank notes and coins. (In 1840, per-capita annual income in the U.S. was about $65, so a $1 bank note was a lot of money.) Hotels, restaurants and bars that didn’t have enough coins and bank notes to make change issued their own money in small denominations. A note issued by one hotel promised “to pay on demand twenty five cents in current funds when presented in sums of $1 & upwards.”

A note worth 25 cents in the hotel lobby would have changed hands at a steep discount just a few blocks away. Meanwhile, small towns issued bank notes of a few cents to support local commerce. In Virginia, people were reduced to cutting apart large bank notes and circulating them in pieces.

In this unpredictable environment, spending a dollar required some serious thinking. A wallet might have three, five or a dozen different bank notes -- a bull’s head staring back at you from a Bull’s Head Bank note, or a Marine Bank bill illustrated with ships -- not to mention foreign coins from around the world and personal checks, which also circulated as money. Most bank notes traded at a discount based on the reputation of the bank and how far the note was from where it originated.

A shop owner had even more variables to consider. When a consumer opened his wallet to pay, the proprietor turned to his local edition of “Bicknell’s Counterfeit Detector and Bank Note Reporter,” or to “Van Court’s Counterfeit Detector and Bank Note List.”

Counterfeit Guides

These guides not only identified counterfeits, they also reported the prices of bank notes on the local market. (As professional note brokers traded and speculated, prices rose and fell.) Thumbing through a counterfeit detector, the store owner would try to assess the value of the bank notes at hand. He took a hard look at the person handing over the bills, judging value based on the person’s race, class, dress, comportment and reputation.

Counterfeiters exploited this feature of the system, and passed themselves in addition to their notes, dressing and acting as proper ladies and gentlemen. And with so many bank notes from so many banks, counterfeiters flourished. Some simply invented whole banks. Others erased the name of a failed bank and replaced it with that of a reputable one.

Of course, as 19th-century observers frequently noted, a poorly capitalized bank that printed notes it couldn’t redeem was, in the end, little different from a counterfeiting operation.

(Jessica Lautin is the Andrew W. Mellon postdoctoral curatorial fellow at the Museum of the City of New York. B.J. Lillis is a curatorial intern at the museum. The exhibit “Capital of Capital: New York’s Banks and the Creation of a Global Economy” will be running at the museum through Oct. 21. The opinions expressed are those of the authors.)

Read more Echoes columns online.

To contact the writers of this article: Jessica Lautin at jlautin@mcny.org; B.J. Lillis at blillis@mcny.org

To contact the editor responsible for this post: Timothy Lavin at tlavin1@bloomberg.net