Prior to the year 1860 the state bank notes consisted of a heterogeneous currency, lacking all uniformity, under diverse systems of issue, with varying degrees of protection and of limitations on issues. The bank notes of the New York banks, where the banking law was rigidly enforced, attained wide circulation; the mutual redemption system in New England also gave currency to the notes of the stronger banks. With these and a few other exceptions, state bank notes enjoyed only a local credit.
As bank notes constituted practically the whole circulating media, the difficulties confronting travelers in procuring acceptable media for their expenses can readily be realized. The currency of the western states was so motley and contained so many doubtful notes that their recipient had to have almost the expert knowledge of a note-detector. The notes issued in one state were accepted at varying rates of discount in others, and the consequent losses were large. Exchange on eastern cities was quoted in the Mid-west at high premiums, ranging from 1 to 10 per cent. After its unfortunate experiences in the panic of 1837, the national government refused to accept bank notes and insisted upon specie in payments to itself. Noteholders, particularly the poorer and more ignorant classes into whose hands the worst notes drifted, lost heavily from failures of the issuing banks. In 1861 a writer in the Chicago Tribune said the "bank nuisance had become unbearable." According to that writer many banks made it their chief business to manufacture and put out as large an amount as they could by any contrivance keep in circulation, regardless of the dearth of reserves. Some were "merely banks of circulation without capital and doing no business at their nominal locations," the notes being issued at goodly distances from the place of redemption so as to delay presentation.
Since the notes circulated some time before redemption, they became dirty, greasy, mutilated, and worn - facts which made them not only unfit for circulation but also facilitated counterfeiting. It was necessary to inspect all bills carefully and the receiving tellers of banks had to be very expert and acute to recognize and reject the spurious notes. Publications, known as "Counterfeit Detectors," with weekly supplements, found a useful place in every counting-room. A writer in 1863, examining these "Detectors," claimed that there were in existence nearly 1,600 banks issuing daily 10,000 different kinds of notes, a large portion having been copied and issued by counterfeiters.
Considering the number of issues, the different forms and pictorial designs, the various denominations, the numerous counterfeits and raised notes, and the notes of fraudulent and failed banks, that formed the currency of the day, it is not surprising that reform was advocated. The poorer and more ignorant classes, who were least able to refuse tendered notes and to detect and reject worthless ones, suffered most and yet could not make their protests heard.
During periods of depression the quantity of note circulation was considerably decreased by failures of issuing banks, but prosperous years gave birth to new issues. The volume in circulation was also summarily increased or decreased by fits of legislative enactments permitting or suppressing note issues.
Another evil of the day inherent in the bank note system was the speculation and traffic in bank notes. Speculators would buy up certain issues at discounts and carry them to redemption points or put them out in regions where they circulated at higher values; they would also speculate in the changes in note values effected by time.
In 1861 the risks and difficulties of note circulation were increased by the suspension of the banks, a suspension which relieved them from the test of redeeming in specie their issues on presentation, but allowed them to redeem with the fluctuating greenbacks, if redeemed at all. A sound, sufficient, and uniform currency was also rendered necessary by the government's suspension of specie payments and by the passage of the Internal Revenue Bill, for the collection of revenues would have been farcical or unequal if the revenues could have been paid in the existing legal tenders or bank notes.