This section is from the book "A Financial History Of Texas", by Edmund Thornton Miller. Also available from Amazon: A Financial History Of Texas.
The history of paper money has been enriched by the experience of the Republic of Texas Excessive issue, depreciation to the point of worthlessness, old and new tenors, varying tender qualities, and, in fact, every phase, except that of a legal tender between individuals, was illustrated. The notes were of three different kinds: ten per cent interest notes, called "star money"; those not bearing interest, called "red-backs"; and exchequer bills.1
The act of June 9, 1837, started Texas upon her tempestuous experience with paper money. It authorized and required the president to issue the promissory notes of the government to the amount of $500,000, in denominations of not less than $1 nor more than $1,000, payable twelve months after date, and drawing interest at 10%. There were pledged for their redemption one-fourth of the proceeds of the sales of Galveston and Matagorda islands, 500,000 acres of land, all improved forfeited lands, and the faith and credit of the government. The notes were to be paid out only for the expenses of the civil departments of the government, except $100,000 for the purchase of horses and munitions of war, and they were receivable in all payments to the government.2 President Houston's explanation of this issue was that Texas had just come out of a war of independence and, to quote his own words, "the struggle had left us destitute and naked. There were no banks, there was no money; our lands could not be sold, and the public credit was of doubtful character. To avoid the absolute dissolution of the government, it became necessary to resort to some expedient that might furnish temporary relief. This could be only effected by creating a currency that should command some degree of credit abroad, . . . such articles in the market of the United States as were indispensable to the country."3
1 The interest notes were so called because of a five pointed star in the center of the face of the notes. The non-interest notes were called "red-backs" because of their red ground; Crane, Life and Select Literary Remains of Sam Houston, pp. 158, 162.
2 Gammel, op. cit., vol. 1, p. 1309.
3 Message of May 12, 1838; House Journal, 2nd Tex. Cong., p. 119.
The notes were not immediately issued, because the secretary of the treasury, Henry Smith, thought the law authorizing them conflicted, first, with a previous law of June 7, 1837, which in providing for the funding of the public debt pledged the revenues from customs and direct taxation to meet the interest on the same, and, second, with the later tariff act of June 12, 1837, which provided that duties should be paid in specie or such current bank paper as the authorities might direct. As the success of the funding scheme would depend on payment of interest in specie, and as the customs were looked to for this specie, the secretary thought the provision making the notes receivable for all government dues would result simply in the substitution of one form of debt for another. He bowed, however, to the "dictation of the chief executive," and the notes appeared about November l.1
On December 14,1837, there were authorized "change notes,' or treasury notes of small denominations, to an amount not exceeding $10,000, and an additional issue of $150,000 of other treasury notes, if required,2- Also the issue by individuals of printed or lithographed notes was prohibited, and customs duties were made payable only in specie or treasury notes.3
The amount of printed interest notes issued down to January 15, 1838, was $514,510.4 They were not reissued, and they experienced little or no depreciation.5 They were succeeded by the "engraved interest notes," whose issues from January 15 to November 3, 1838, amounted to $436,289, and from No-vember 3, 1838, to January 1, 1839, to $214,340.6 The amount in circulation on September 30, 1838, was $684,069.59, or $34,069.59 above the amount which had been contemplated by the government;1 and on November 3, 1838, the estimated amount in circulation was $812,454.2 A bill to increase the issue to $1,000,000 was vetoed by President Houston on May 12, 1838, on the ground that such an amount would destroy the value of the notes and defeat their original purpose; but he signed on May 18, 1838, a bill that called for the "reissue and continued reissue" of the notes until an appropriation of $450,000 should be met.3
1 Statement of the secretary, November 1.6, 1837, in compliance with a resolution of the house; House Journal, 2nd Tex. Cong., p. 139. After the notes were issued the secretary instructed the collectors of the ports not to receive them, but he was compelled by the president a week later to make the order. The exact date of the appearance of the notes has not been ascertained, but the Telegraph and Texas Register, March 17, 1838, in its chronology of the events of the second year of independence, puts the issue under the date of November 1, 1837.
2 Gammel, op. cit., vol. 1, pp. 1387, 1393.
3 Ibid., pp. 1389, 1309.
4 Gouge, op. cit., p. 268.
5 Report of the Auditor and Comptroller, December 27, 1849.
6 Gouge, op. cit, p. 268.
Depreciation set in soon after the appearance of the engraved notes and by April, 1838, amounted to fifty per cent in New Orleans, while in Texas they were circulating at from 65 cents to 85 cents on the dollar.4 The current prices of commodities at this time were high, but they were scarcity prices rather than inflated ones.5
With the advent of the Lamar administration in December, 1838, a new chapter in the history of the notes began. The interest notes were succeeded by the "red-backs, or non-interest notes, authorized by the act of January 19, 1839.6 Further additions were authorized by the act of February 5, 1840, increasing the amount of "change notes" to $150,000, and by the act of February 5, 1841, which placed no other limit on issues of red-backs than the amount of appropriations to be met.1
1 Report of the Secretary of the Treasury, September 30, 1838. Telegraph and Texas Register, November 17, 1838. The secretary stated "that exigencies of the time demanded their deviation" from the amount the government regarded as expedient, to be kept in cir-culation.
2 Gouge, op. cit., p. 269.
3 Veto message; House Journal, 2nd Tex. Cong., p. 119; Gouge, op. cit., pp. 79, 80. The president stated in the veto message that the outstanding amount up to that time had not exceeded $500,000. Crane (op. cit., p. 162) erroneously says that the act authorizing the increase was passed over the veto. For act of May 18, 1838, see Gammel, op. cit., vol. 1, p. 1492. An act of November 16, 1838, required the issue of $100,000 of notes already authorized to be expended for military purposes exclusively. Ibid., vol. 2, p. 4.
4 Compare (Lester), The Life of Sam Houston, p. 191. Gouge, op. cit., p. 79.
5 See list of prices, Appendix, table 6.
6 Gammel, op. cit., vol. 2, p. 51. The notes first issued under this act bore interest. The non-interest notes did not appear, it seems, until about February 27. See act of February 28, 1840; ibid., p. 310.
 
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