Paper Change

After the outbreak of hostilities, banks throughout the country suspended specie payments. In other words, they no longer exchanged their notes or deposits for gold and silver coins on demand. At the same time, people hoarded most of the coins in circulation. A dearth of small change was a common occurrence in antebellum America, so cash-reliant businesses knew that they could profit from the situation by issuing their own small denomination promissory notes, derisively known as “shinplasters,” as change. Soon, “hotels, business houses and dealers generally” began issuing notes to earn seigniorage. (Seigniorage is profit from the issuance of money. The notes in circulation were essentially zero interest loans and inevitably some notes would never be returned to the issuer for payment.)

Fearing “the most serious inconveniences and evils” from the proliferation of small, unregulated notes, the government in July 1862 outlawed shinplasters and authorized in their place a federal fractional paper currency in the form of stamps, which were already in widespread use as a means of making small payments. After the Post Office refused to supply additional stamps, the government issued small denomination notes that resembled stamps. In 1864, it outlawed private coins issued in lieu of the rapidly shrinking supply of pennies.
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