Money Substitutes

Money is a lot like oxygen.  Too much of it and prices get high.  Too little and the economy dies.  That is why throughout history, people have proven adept at creating new forms of money when they need to.  That is what the various scrips, shinplasters, tokens and other private media of exchange created during the Recession of 1837-1842, the Civil War and other episodes were ultimately about, providing people with a means of making payments when the prevailing types of money (notes, deposits, coins) were in short supply.

During the Great Depression, the money supply dropped significantly because thousands of banks failed, wiping out deposits.  The remaining banks cut back on loans, not that businesses battered by the unprecedented downturn wanted to borrow much anyway.  And the Federal Reserve was more interested in maintaining the nation’s gold reserves than in replacing the lost deposits by lowering interest rates or buying government bonds.  The result was a large deflation (drop in the price level), over 25% all told, between the beginning of 1930 and the end of 1933.

Private companies, bank clearinghouses and municipalities stepped in to fill some of the monetary void left by the banks and the national government by issuing money substitutes like the ones illustrated here.  While such substitutes were often successfully used to make local payments, most were illiquid or even worthless outside of the limited geographical region where they had been issued.  Moreover, they were also subject to nontrivial default (nonpayment) risk that limited even their local circulation.

Local scrip exist to this day, but none date to the Depression and all are of small circulation.

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