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Panic scrip

I have only just become aware of the 2013 book Panic Scrip of 1893, 1907 and 1914: An Illustrated Catalog of Emergency Monetary Issues. The title refers to the U.S. financial panics of those years. The book is available in paper from the usual sources, and Google has a considerably cheaper e-book edition. Here is a review of the book.

Scrip is a circulating IOU issued by a person or corporation, often redeemable in kind, typically accepted widely within a limited area, and, in the context of panic issues, tolerated by the authorities although perhaps of dubious legality. During the U.S. panics listed in the title of the book, large local employers such as steel mills, companies that offered widely used goods or services such as tram lines, and in smaller towns well known local merchants such as those who owned general stores issued scrip as a substitute for banknotes that became quite scarce. The issuance of scrip can be seen as a kind of free banking: with the most trusted issuers restricted from further issuance of notes by certain provisions of federal law, other issuers stepped into the gap. The service that issuers of scrip performed was large, the losses from failures by issuers were small, and the episodes illustrated that there was no necessity to limit note issue to banks.

Among the economists to have written about the place of scrip in the U.S monetary system are Richard Timberlake, "The Significance of Unaccounted Currencies" (JSTOR, gated); William Roberds, "Lenders of the Next-to-Last Resort: Scrip Issue in Georgia during the Great Depression" (free, article starts on page 16); and Price Fishback, "Did Coal Miners 'Owe Their Soul to the Company Store'?" (JSTOR, gated; an article about the routine use of scrip in company towns; the title is a reference to this hit song of the 1950s).

  • Paul Marks

    If a bank (or any other business) can not meet its contractual obligations it should close – really close (shut its doors and not reopen them).

    In this case the banks had agreed to provide gold (on demand) to the people they had a contractual obligation to – they failed to do so, and (therefore) should have been declared bankrupt.

    There should be no special laws (or special court judgements) for bankers that are different from those for other business enterprises. That and ONLY that is "Free Banking".

    Only the danger of bankruptcy (real bankruptcy – not a phony bankruptcy) will induce businessmen to behave responsibly – the discipline of the market place (government regulations will not do the job).

    • Kurt Schuler

      The big problem during these panics was not that banks were unable to provide gold; it was that laws unnecessarily limited the supply of notes, creating shortages during the peak demand period in the autumn. Had the problem been failure to provide gold on demand and consequent distrust of notes, scrip would not have been issued because it would not have been trusted either. That scrip was issued and extensively used, then quickly retired with little incident when demand for notes fell below the maximum supply allowed by law, indicates that excess demand and not excess supply of notes was the problem.

      • Paul Marks

        Kurt the people were not asking for "notes" they were asking for physical gold, and the banks were contractually obliged to provide it (otherwise the agreements they had made with their customers were broken) as for "scrip" it should not have existed. If the banks did not have the physical gold the they were contractually obliged to provide (when the customers demanded it) then they should have been declared bankrupt.

        Ditto with any other commodity bankers contractually agree to provide on demand to the customers.

        • Kurt Schuler

          The United States remained on the gold standard throughout. There was no suspension like that of 1819 or 1857. It was understood by many observers after the panics of 1893 and 1907 that the problem was an "inelastic currency," which limited the ability of banks and the federal government (which issued notes as well) to increase the supply of notes during the autumn increase in seasonal demand. See for instance the publications of the Sound Currency Committee around the turn of the century, which I referred to in a post quite a while ago.

          This will be my last comment since I will be unable to post again until sometime next week.

  • Steve Horwitz
    • Kurt Schuler

      Thanks, Steve. Now how about posting more often?