5 Peppermint Bank

The history of banking and business finance is a very specialized discipline, and the histories produced about them are often heavily freighted with equations and economic analysis. Insights shared in the discipline rarely find their way into mainstream histories and are understood only with difficulty by a public accustomed to living in an era of a single, national currency and federally insured banking. To make matters worse, the discipline has often been saddled with one-sided historical arguments, frequently designed for use in justifying new financial innovations. The histories of Civil War greenbacks, the demonetization of silver in 1873, and the resumption of specie payments in 1879, for example, were hotly contested by historians during the financial panic of 1907 and the debate over establishing the Federal Reserve.^[1] In particular, the reactions of rural people to the elimination of state banking during the Civil War have most frequently been recounted from an urban perspective, using urban sources such as national newspapers, legislative debates, and the literature of trade lobbyists.^[2] By contrast, the experiences of Hotchkiss family members in nineteenth-century upstate New York illuminate some of the attitudes of rural people toward money, credit, and banking.

The Hotchkiss brothers, Hiram and Leman, began their lives as the apprentices and heirs to a wealthy upstate New York merchant. Early in their careers, they became successful merchants and millers in their own rights. By the early 1840s, they operated several stores and mills and had developed a business shipping flour to New York City for urban consumption and export. The addition of peppermint oil to the brothers’ businesses, and International Prize Medal Oil of Peppermint’s success in foreign markets, gave Hiram and Leman an opportunity to dominate a specialty market that was small relative to the flour market but potentially highly profitable. As mentioned previously, however, the vagaries of supply and demand for peppermint oil made it less attractive for traditional commission brokers such as the early Hotchkiss partner Dows and Cary. In order to succeed as essential oil producers, the Hotchkiss brothers needed to secure financing flexible enough to accommodate the new business they were creating. When city commodities brokers and local bankers proved less amenable to their demands than they hoped, the brothers stepped into the financial markets themselves and explored new ways to finance their operations.

As prominent businessmen in Phelps and Lyons, Hiram and Leman were members of a regional elite. Hiram married Mary Ashley, a physician’s daughter, and Leman married Lucretia Oaks, the daughter of wealthy landowner Jonathan Oaks. As mentioned earlier, Hiram, Leman, and their uncle William Hotchkiss had all traveled to Michigan to purchase land in the spring of 1837, within weeks of Samuel Ranney’s visit to the land office. The Hotchkisses had no intention of moving to the frontier, however. Their investments were purely speculative, as were many of their land purchases in western New York. The brothers had watched their mother and uncle manage their father’s estate in the 1820s and 1830s and had become familiar with the practice of buying foreclosures and distressed assets when opportunities arose.

The brothers received valuable experience in the evolving financial sector when the Bank of Lyons failed on September 13, 1842. The bank had a paid-in capital of two hundred thousand dollars and a circulating currency of a hundred thousand, according to newspaper reports.^[3] It was one of ten New York banks established under the 1829 Safety Fund Act to fail in the years following the Panic of 1837. The bank had been incorporated by an act of the legislature in February 1832 and was profitable for several years, paying an 8 percent dividend to its shareholders in May 1838 in spite of a deepening recession.^[4] Early in 1842, the bank vigorously denied reports of its difficulties, but by the year’s end a state-appointed receiver was auctioning bank property.^[5] Using the close connections they had as major stockholders with the bank’s directors, the Hotchkiss brothers determined that the bank’s actual assets were $307,323.40 and its liabilities $692,173.75.^[6] The bank owned $83,999.94 in real estate and had issued $389,204 in circulating bank notes. The Hotchkisses were able to make a four-page list of the debts on the bank’s books, which totaled $222,737.25. Hiram wrote to the state-appointed receiver, offering five hundred dollars for real estate valued at roughly eighty thousand dollars on the bank’s books, slated to be sold the following month at auction.^[7] One of the properties he acquired was the Hecox mansion and farm, which became the Hotchkiss family estate in Lyons. Hiram also bought a portfolio of debts and judgments, which he tried to collect. He paid $560.56 for a debt portfolio worth $173,216.57, or about a third of a penny on the dollar.^[8] Over the next several years, Hiram wrote collection letters to individuals and businesses that had owed the bank money.

In one letter, Hiram informed a debtor’s attorney, “I purchased at the receivers sale a judgment . . . docketed May 4th 1840 for $712.34.” Hiram explained, “I was a large Stock Holder in said bank at the time of its failure, & am in hopes to get a part pay on my stock by purchasing some of the assets of the bank, that is the reason of my purchasing said judgment.” He said he understood from the documents he had received from the bank that the “gentlemen” the attorney represented “have all taken the Bankrupt Law. I supposed they had when I made the purchase, but I am one of those who believe the Bankrupt Law will be declared unconstitutional.” Hiram concluded that he would be willing to take two shillings on the dollar to retire the debt. With interest to the current date, the total came to “882.70. Say pay ¼ for it——$220.67. Yours very Respy. H. G. Hotchkiss.”^[9] There are several blank “waste books” in the Hotchkiss archives, filled with Hiram’s handwritten notes describing conversations with and letters to debtors over the years. Collecting on debts and judgments, for Hiram, became a process of negotiation in which he usually offered to take a fraction of the original debt as settlement, in return for ceasing to dun the debtor or his representatives. In several cases, Hiram pursued the heirs of the original debtors and attempted to convince them to pay their fathers’ obligations.^[10] The experience seems to have taught him that, in contrast to the moralistic approach to credit taken by contemporaries such as Lewis Tappan, financial obligations were negotiable.^[11] Hiram mentioned in his letter to the attorney that he expected the 1841 bankruptcy law to be overturned. It was at the end of 1843, and while as a lifelong Democrat he had probably opposed the Whig-sponsored act, his behavior also suggests that Hiram had little respect for the “application of moral principles to business” that led to the establishment of the Tappan—later called R. G. Dun—agency that would impugn his character throughout his later decades.

Early in their efforts to raise operating capital, the Hotchkiss brothers enlisted the help of their wealthy uncle Calvin Hotchkiss. A brother of their father, Leman, Calvin owned a large farm and invested in real estate around Lewiston, near Niagara Falls. In spring 1845, Leman wrote to his brother regarding notes Hiram was trying to get discounted with the help of Calvin’s endorsement. “I shall be very surprised if you fail to raise the money with such an endorser as Calvin Hotchkiss,” Leman averred. “Certainly no man would refuse to discount such paper if he knew the man.”^[12]

It is important to note that even in the early nineteenth century most commerce was conducted using credit. Early historian of American banking James S. Gibbons (1810–1892) explained in 1858 that “commerce, in its broadest sense, is carried on by promissory notes.” According to Gibbons, the use of promissory notes at every step in the cycle of the production, distribution, and consumption was orders of magnitude greater than the volume suggested by the discounting of commercial paper by banks. He explained that most estimates of economic activity were incomplete because “New York City banks did not discount paper until it was within two or three months of maturity.” But most merchandise, whether agricultural or manufactured, “is sold from first hands to the jobber on a credit of eight months, more or less, for which the latter gives his promissory notes. The jobber sells in smaller quantities (by the piece or single package) to the retailer, on a credit of six months.”^[13] Historian Bray Hammond (1886-1968) explained that “most traders of all classes were heavy borrowers, few having capital enough to pay till paid; and this condition supplied the banks with promissory notes” These promissory were the most common form of commercial currency “and had commonly been transferred already by endorsement from one merchant to another in settlement of debts by the time they came into the bank’s possession.”^[14]

“The market,” Gibbons had concluded, “carries millions of notes for what is already consumed and millions more for what is not yet sprouted in the furrow.” Although Hammond qualified Gibbons’s description, noting that in smaller markets such as Philadelphia it had been customary since the 1830s to discount paper at four to six months, most commercial activities were transacted without the aid of banks until the final stage, when debts that had been carried the better part of the year using commercial paper were finally converted to cash. This final conversion to cash was necessary because the products that had been grown or manufactured and had entered the distribution channel were finally reaching their ultimate retail destinations, where they would be sold to consumers for small-denomination banknotes or specie coins.

Leman and Hiram Hotchkiss spent a great deal of their time traveling from bank to bank in western New York trying to raise money for their business. They had accounts at more than a dozen banks, ranging from local operations in Phelps, Lyons, Geneva, Newark, and Lewiston to large institutions in Buffalo, Albany, and New York City. As the years passed, much of the responsibility for raising money fell to Leman. In the summer of 1845, he sent Hiram a packet containing $1,660.31 in cash, which he said were the proceeds of a draft drawn on the “Seneca County Bank at 4 months predicated upon our recpt for 2200 bushels wheat at Newark.”^[15] Leman warned Hiram to try to keep the cash from reaching the Bank of Geneva, “because Cook may think we are skimming.” The brothers were operating on a larger scale than some local bankers found comfortable, but there was also already a degree of distrust between some of the more conservative bankers and the Hotchkisses. Leman concluded his note by saying he had tried to get yet another banker, Mr. Mercer, to discount three thousand dollars at ten days or at six months but had been refused the longer duration note. In the late fall, Leman sent Hiram five hundred dollars, which, he wrote “[is] all I can possibly spare today. You must be aware that we are about out of funds. I drew our draft yesterday at 10 days through the Seneca Co. Bank to pay our note. . . . I also drew our draft yesterday through Bank of Geneva for $2250 at 4 months on our recpt of 1831# Peppt Oil which is all we have except the old oil. It is impossible to get our note discounted at this time. You must hold onto all the money you can.”^[16] A week later, Leman wrote again to warn Hiram: “I went to Bank of Geneva yesterday and made out to get our draft discounted for $3300 at 6 months. Mr. Cook hesitated some and said this would carry us through. . . . Cook evidently does not want us to have any more—even on shorter paper I think.”^[17]

As time passed, the brothers developed a division of labor in their partnership, in which Hiram negotiated with farmers and New York merchants while Leman handled the bankers. The archive is filled with hundreds of letters between the brothers regarding Leman’s efforts to raise funds to support Hiram’s deals. When they tried to end their partnership and separate their businesses in 1855 (unsuccessfully, as we will see in the next chapter), Hiram was forced to seek other financial partners. His first choice was his uncle Calvin Hotchkiss. In late 1855, Hiram wrote to Calvin, promising to be “as moderate as I can in respect to money calls as requested.” Hiram assured him, “When once you get acquainted with the Superior Mercantile & Banking houses with whom my drafts (predicated on actual shipments of property) are drawn on, I think you will be pleased with doing my Banking business & I am now (at the prospect of you doing it) as happy as a Lark.”^[18]

Although by 1855 Hiram was doing a substantial business in peppermint oil, he described his operation to his uncle in the more familiar and comfortable terms of mercantile banking. Historian Horace White, in an essay describing George Smith, a Chicago-based contemporary of the Hotchkisses, illustrated the typical situation of a buyer of agricultural products raising operating funds. The buyer “makes his note at the bank and offers for discount a draft . . . secured by a bill of lading. The bank discounts his paper and the amount is immediately credited to him as a deposit, and will be drawn mostly in the form of bank notes to be disbursed among the farmers.^[19] In his illustration, “each deposit is a discount,” and White notes that it is an efficient way to expand the money supply as needed because “as this is what the bank exists for and derives its income from, it will, in ordinary times, discount all of such paper that is offered to it by its regular customers.” This arrangement worked fairly well in the early stages of Hotchkiss’s career. The merchant (Hotchkiss) in White’s example would receive credit from his “correspondent” (Dows and Cary) when customers bought his flour. Customers’ cash payments in New York City would be used to offset the drafts Hotchkiss had written to draw on Dows and Cary at western New York banks. As mentioned earlier, David Dows and Hiram Hotchkiss differed on how long Dows was willing to wait for his ultimate reimbursement. Dows preferred to have Hiram pay his notes when they matured, usually in sixty days. Hiram believed that the flour in Dows and Cary’s warehouse was Dows’s responsibility. It was up to Dows to turn that flour into cash to repay the note Hiram had written. There was a certain logic to the argument, from Hiram’s perspective. In any case, Hiram would have long since spent the money he had drawn at the Lyons banks, paying local farmers for the wheat he had ground into flour and shipped to New York in the first place.

From his own perspective, Hiram had monetized the flour. Once his barrels were on flatboats bound for the city, fully insured against accidents along the way, the transaction was complete in his mind. Hiram could turn his attention to the next wagonload of wheat arriving at his mills. He considered himself a sort of Rumpelstiltskin in this story, spinning western New York’s harvests into gold. This is also an accurate depiction of how Calvin and Leman operated on behalf of Hiram. The difficulty arose for them, and for Hiram, when he became a banker himself, when the chain of payments broke because the product he was monetizing failed to become cash as automatically as flour.

Calvin was less than impressed with Hiram’s claims, and he responded a couple of days after receiving his nephew’s effusive letter: “You appear to rush ahead as if my funds was inexhaustible. I would simply inquire the necessity of crowding every thing to such a pitch as formerly, in the flour business.” Although Hiram had presented the opportunity presented by peppermint oil to his uncle as if it would follow the same logic as the flour business, Calvin apparently saw through Hiram’s bravado. “You say you have this oil business under your control,” he commented; “if so, why the necessity of pressing it to the greatest extent. It only goes to show you want to get rich at once.” Calvin warned, “It is an old proverb, light comes, light goes . . . your over anxiety has tendency to keep up the price at home & lessen it abroad.”^[20] Calvin concluded by calling Hiram’s attention back to the present: a protested note enclosed with the letter. “Two or three protests of the same kind,” he wrote, “& how would your drafts stand in Buffalo, about (X No. 24) instead of (A No. 1).”

A few weeks later, another of Hiram’s forty-five-day drafts for two thousand dollars was returned for nonpayment, and the protest was sent to Calvin, who had endorsed the paper.^[21] Hiram turned once again to his brother for help, but Leman responded: “I cannot get the note discounted to pay your note.” Leman had more traditional ideas about credit than his brother, believing “it is no use to attempt continually of renewing paper—the only way is to pay up and then get fresh discounts. Now send the note to Buffalo & get discounted and pay your note and do not rely on me to meet your paper for I cannot do it.”^[22] Calvin wrote to Leman about the issue, reminding his nephew, “Above all other things, endorsed paper ought to be attended to in time, not to be neglected a day. It operates against my feelings to be subjected to this annoyance for bestowing favors, but it appears Hiram feels rather indifferent to such matters of late.”^[23] Although Hiram had learned from his experience of collecting defaulted loans and foreclosed properties that debts were fluid and negotiable, his opinion was not shared by his uncle, his brother, or most of the local bankers he looked to for credit.

When money failed to flow as wide and fast as he desired from local banks, Hiram decided he would be better off doing their business himself. He would open a bank of his own. Deliberately ignoring Calvin’s expressions of frustration at Hiram’s lack of attention to the details of his business, Hiram asked his uncle to be a principal in his new bank. Hiram believed he could avoid the difficulties he continually had with local bankers by opening his own Peppermint Bank. He asked Calvin to lend his name and reputation to the new venture—and also to lend him fifty thousand dollars in government bonds, which Hiram would need to deposit with the state regulator. Calvin responded, “I have only to say that I have so many objections to make on this subject that I have not time to enumerate them all at this time.” Calvin’s main objection was that he wanted nothing to do with Hiram’s bank. “Did you think it would please me to be named President,” Calvin asked. “If you did you are greatly mistaken. Such type of Butterflys does not take a deep root in my mind.”^[24]

Free banking, the dominant regulatory system for antebellum banks, has taken too much of the blame for economic instability before the Civil War.^[25] Free banking refers to the ability of banks to be established without legislative charters, but the lack of state charters does not imply that the banks were allowed to print money indiscriminately. In states like New York with strict regulations, bankers were required to deposit government bonds with the state banking authority to back all the banknotes they issued. This allowed the banks to hold fractional reserves, issuing notes in greater quantities than their reserves of specie, but still maintain a level of security if “runs” or mass redemptions of notes for specie raised the danger of default. Banking historian Fritz Redlich highlighted the identity of currency, deposits, and credit when he explained that through issuing banknotes and taking deposits, “American banks relied for their profit on the creation of purchasing power (the creation of credit).”^[26] But, of course, the state banks did not create purchasing power and credit from nothing. The notes they issued were, as mentioned earlier, tied intimately to a chain of agricultural and other production that was actually creating value. The firm foundation of most state bank currency on the economic activity of the regions the bank served was generally ignored by nineteenth-century critics of state banking and has been mostly forgotten by history.

New York’s 1838 Free Banking Act imposed a minimum capital requirement of a hundred thousand dollars, later reduced to fifty thousand. New York banks secured their circulating notes with government bonds, which added a degree of safety but did not guarantee liquidity. The failure of the Bank of Lyons in 1842, which had an authorized circulating currency of a hundred thousand dollars but had issued $389,204 in circulating banknotes, illustrates the potential for trouble in a mismanaged bank. To combat abuse, New York law later required banknotes to be printed by the state comptroller’s office, which retained possession of the printing plates. Later, however, banks were also allowed to secure half their note issues with real estate mortgages rather than government bonds, which gave them more flexibility but also made them more susceptible to market conditions. By the end of 1859, New York had “274 free banks with an aggregate paid-in capital of $100.6 million [that] secured their note issues with $26.5 million in bonds and $7.6 million in mortgages,” according to Howard Bodenhorn, the one historian who has recently focused on state banks.^[27]

Free Banks were highly leveraged, and it should have been easy for the H. G. Hotchkiss and Co. Bank to make money. Hiram deposited fifty thousand dollars in bonds (borrowed from his uncle Calvin) and received forty thousand dollars in circulating banknotes, which differed from promissory notes in that they were of small denominations (one dollar, three dollars, five dollars, and so on) and typically carried no interest. Hiram used ten thousand dollars of his initial borrowed stake to buy specie to cover note redemptions, leaving forty thousand dollars to lend. If Hotchkiss had made loans in the local market, the proceeds of these loans would have been used to pay for purchases and labor, ultimately finding their way back into the bank in the form of deposits. The banknotes would then have reentered the market in the form of new loans, and the bank’s assets would have grown, since on bank balance sheets loans were counted as assets, banknotes and equity as liabilities. This was the type of banking Leman and his son Thaddeus did very successfully, several years later, in Phelps. Hiram, however, used his Peppermint Bank primarily as a payment mechanism for his essential oil business. Rather than loaning his notes into the local market, he spent them in western New York and in Michigan to pay for oil. In effect, he loaned all his funds to himself.

Recently, monetary historians Charles M. Kahn and William Roberds have observed that in today’s economy “by value, most marketplace transactions in the United States are not paid for with government-issued currency or coin, but with privately-issued payments media,” such as “checks drawn on bank deposits . . . credit and debit cards.”^[28] They suggest that transacting business without cash was equally common in the past, and that historically the easy transferability of payments made in the form of drafts or promissory notes reduced “the incentive for monitoring by the original debtholders.” In addition to state-printed currency, Hiram used engraved promissory notes to pay for his oil purchases. They looked like Hotchkiss’s banknotes but provided spaces into which Hiram could enter amounts, like checks. He often sent packets of these notes, written in twenty-five-dollar denominations, to his agents in Michigan to be used for paying peppermint farmers for oil. He intended that both the denominated banknotes and the engraved promissory “checks” would be considered as cash and used by farmers to transact their business, rather than being returned immediately to Lyons for payment in the bank’s limited specie. Hiram regularly urged his agents to get the notes “a good circulation,” hoping that they would be used as money in Michigan for a long while rather than being immediately returned to the Hotchkiss Bank in New York State for redemption.^[29] The circulation of currency did not end in local markets when banknotes were returned to the issuing bank for redemption into coin, since specie would typically be used to buy goods in the local market and then deposited by merchants and immediately returned to circulation in the form of new loans. If, however, specie was removed from the bank and sent to Michigan, the cycle would be broken.

Silver and gold coins were not the most convenient form of money for trading at a distance, however, since they were heavy and bulky and would need to be carried to home to Michigan and often might subsequently be sent to distant cities for purchasing items that couldn’t be obtained in the local market. When Michigan farmers sent Hotchkiss’s notes back to New York for redemption, the notes were often converted into drafts that could be presented to other bankers or to merchants in places such as New York City where the farmers might want to spend their money. When Michigan residents or western New Yorkers wanted to buy products in New York City, credit or banknotes could be redeemed in their local banks for drafts on city merchants or banks that could be used to purchase goods or exchanged for cash in the city. The local banker often collected a fee for facilitating this exchange and was then able to put the banknotes back into circulation immediately in the local market—or, in Hotchkiss’s case, send the notes to Michigan again. Clearing these credits and debits between banks, of course, required trust and a stable relationship between the banks involved.

Bank money (defined as circulation plus deposits minus the notes of other banks) in New York grew from $4.62 per capita in 1830 to $9.35 in 1840, $20.73 in 1850, and $33.95 in 1860.^[30] The money held by Michigan banks, however, peaked in 1840 at $2.36 per capita and then declined. Michigan residents may have been less economically active than New Yorkers, but they were also using money from eastern banks instead of their own. Similarly, while bank credit (defined as loans and discounts plus bills of exchange) in New York increased from $6.61 per capita in 1830 to $21.73 in 1840, $30.88 in 1850, and $51.63 in 1860, like bank money credit peaked in Michigan in 1840 at $10.14 per capita before falling precipitously. Although Michigan, like New York, had instituted free banking in the 1830s, by the 1850s and 1860s the state’s banks were becoming less relevant as more Michigan residents became dependent not only on currency but also on credit and exchange services of eastern banks. In addition, a great deal of western money found its way into the vaults of New York City banks, where it was held as interest-earning bankers’ balances to facilitate the settlement of commercial transactions in the city. These balances were the source of highly profitable “call loans” that New York banks made to brokers on the stock market, making “the deposits of rural organizations in New York City banks . . . the major source of profits for New York bankers.”^[31]

Western New York banks were probably only a small factor in the growth of New York bank money and credit, and western New Yorkers may have experienced changes similar to those seen in Michigan. Hiram Hotchkiss, however, seems to have fought this trend. He wanted his own bank and its notes to be a circulating currency in Michigan’s peppermint-growing region. In a sense, Hiram seems to have recognized the growing center-periphery dualism of banking, and he wanted a piece of that action. This is not unlike the way Hiram touted the superiority of British Mitcham peppermint oil and then claimed that his own Prize Medal Oil of Peppermint was the next best thing. A rural entrepreneur, aware of a changing economy that would tend to reduce his agency, rejected that outcome and was determined to use the changes to his advantage by any means necessary. These means would not be comfortable for his allies and creditors.

A few months after declining to join Hiram’s new banking venture, Calvin wrote his nephew again to complain at being asked by the sheriff to pay for a judgment against the brothers on an unpaid note. “So you see what I have been subjected to in consequence of your inattention to this business,” Calvin wrote, noting that the charges and interest that had accumulated on the note since its due date probably amounted to more than a hundred dollars. “A man who suffers his endorsers to be sued & executions issued,” Calvin concluded, “is something I did not calculate on when I endorsed your note. Such a man as will do this is deserving of no credit.”^[32] Soon after, Leman wrote to Hiram: “[I] recd the $1300 note this morning and I observe a protest attached to it. This is mortifying to me and causes me a good deal of trouble and I have got to spend my time now in writing an explanation to Uncle Calvin. It is just as easy to be a little ahead as a little behind if you will get accustomed to it. I fear you will never be a good Peppt Banker.”^[33]

In mid-1856, Hiram wrote to Abraham Bell and Sons, New York City merchants to whom he had been consigning flour and peppermint oil, and whom he had hoped to use as his “banker” in the city. Hiram complained, “It appears I have entirely misunderstood my arrangement with you. I supposed I was at liberty to draw any amount under $2000 if my business required . . . by leaving with you as collateral security my brothers paper endorsed by Calvin Hotchkiss, but it appears otherwise.”^[34] The Quaker merchant politely explained to Hiram, “The arrangement for keeping of thy account was based on accepting thy drafts (expected to remain out two or three months) drawn against cash or business paper (of which we now hold none) in our hands.” Because the duration of these drafts was expected to be short, merely to facilitate transactions, Bell wrote, “such drafts to thee [are] considered cash when accepted and the interest not to be charged till drafts were paid.” Hiram had not honored the standard operating procedure, however; he had “changed the mode of drawing,” Bell continued, “and . . . we have since kept thy account to the usual way debiting and crediting all money received and paid for thy account and charging thee 1% on all time collections advising thee when overdrawn.^[35] To Hiram’s disappointment, Bell and Sons wanted to remain merchants and avoid being drawn into loaning Hiram money to operate his business.

Hiram turned once again to his brother for support, and despite commenting “I think you will make a hell of a banker if you don’t know when your notes fall due,” Leman sent him a two-thousand-dollar note to forward to Bell. Hiram wrote to Bell, “I herewith hand you LB Hotchkiss note at four months for $2000, endorsed by myself and Calvin Hotchkiss Esquire of Lewiston.” Hiram invited Bell to verify Calvin’s credit with officials of the Marine Bank and the Hollister Bank in Buffalo, assuring Bell, “You will find Mr. Calvin Hotchkiss is worth several hundred thousand dollars and entirely free from debt. The note you can rely upon it will be promptly met at maturity.” Hiram assured Bell that Leman would pay the note when it matured and that Calvin’s assets backed Leman’s promise. He asked Bell to send him “$1500 in country currency per express, and balance please place to my credit.”^[36] Hiram was sending Bell a promissory note that would not be payable until after the end of the peppermint harvest season, and requesting cash to use with New York and Michigan farmers, offering a token payment to his account balance as a reward. Bell returned the note to Hiram, noting, “We are not at present discounting and therefore return Leman B Hotchkiss note $2000 which we have no doubt is very good.”^[37] Bell and Sons was willing to extend credit to facilitate deals in New York City, but it did not wish to be Hotchkiss’s bankers.

As antebellum banking expert James S. Gibbons had explained in 1858, “The second common function of banks about 1857—the purchase and sale of exchange in the form of bills drawn for the sale of goods—combined the transfer of funds with lending.” Gibbons elaborated: “Dealing in exchange fetched the banks a fee or discount for the service as well as interest on the credit advanced.”^[38] Interregional exchange, which had begun in international trade and had spread in the domestic market as westward conquest of native peoples increased the distances involved in commerce, entailed not only the lending of money but also its transportation from one city to another. Before the era of telegraphs and trains, the expenses and risks involved in moving money between distant cities had been substantial; even as technology made these transfers easier, the associated fees decreased only slowly. Hiram could have sought the services he expected of Bell at any New York bank, but his credit relationships in the city were already beginning to sour.

The final major function of banks before the Civil War was “the purchase and sale of domestic exchange in the form of bank notes, checks, or drafts.” Dealing in local exchange “involved an enormous and continuous volume of small domestic transactions,” Gibbons concluded, and “the bulk of these dealings were in bank notes, which were bought, sold, or sent back to the issuing banks to be redeemed.”^[39] Thus the four main functions of antebellum banks, in order of importance and profitability, were discounting promissory notes, interregional exchange, local exchange, and lending money in the form of deposit credit. Technological change and legislation during the Civil War eliminated the first three of these functions, leaving the fourth as the remaining “essential function of banks.” To clarify this final function, bank historian Bray Hammond noted: “It is perhaps advisable to repeat that though bank deposits originate mostly in lending, most depositors are not borrowers but receive the money they deposit from others who are; they receive it in payment of wages, salaries, and purchases.”^[40] While Hammond’s description of deposits as credit may seem counterintuitive to those of us among the traditional class of bank depositors, it represents an important insight, which Hotchkiss understood: ultimately, all money is debt. Another way of understanding this is through the relationship between bank deposits, circulation, and the specie that backed them. In 1859, for example, Michigan bank deposits and circulating banknotes totaled $887,671, with the support of only $42,018 in specie (4.73%). Michigan banking was based on the economic activity of the state’s residents rather than on vaults filled with silver and gold coin. Even in New York State, with its financial center in the city and its conservative regulations requiring government bond deposits for note issue, $138,973,788 in deposits and currency were backed by only $28,335,984 in specie (20.39%).^[41] The relationship of bank assets to money in circulation is very complicated, and confusion surrounding its history is exacerbated by the changing public understanding of money resulting from the U.S. government’s creation of greenbacks during the Civil War and by political battles that raged throughout the balance of the nineteenth century over a national currency based on a specie standard. It is important, as we review national changes such as Civil War monetary policy and the return to a gold standard in 1879, to consider the effects of systemic changes on the attitudes and actions of self-interested rural businessmen such as Hiram Hotchkiss.

As noted earlier, for a number of reasons the price of peppermint oil varied much more than the price of flour. Supply factors such as the amount of peppermint harvested and the oil distilled each season were difficult to control, although the Hotchkiss brothers and E. C. Patterson had a significant negative influence when they set their minds to cornering the market. Demand factors, like the premium a customer might pay for a prize medal peppermint oil rather than the product offered by Hotchkiss competitors, were potentially more susceptible to pressure. In his mind, Hiram regarded all the factors as amenable to his influence—especially because, unlike perishable wheat flour, peppermint oil was a storable asset. His ability to bottle his peppermint oil and warehouse it for many years while he waited for the best price broke the simple equivalence of goods to cash described in Horace White’s illustration of how commodity financing could create a stable money supply. Instead of a constant flow of commodities in one direction and money in the other, Hiram felt that peppermint oil might be able to function like the gold and silver specie that supported a bank’s circulating currency, and he may have imagined himself at the center of a fractional reserve system where much more money circulated than the actual value of the commodity that might be called on to redeem it. This point of view caused problems when Hiram negotiated with other brokers and bankers. It became a disaster when he tried to become a banker himself.

Hiram always believed his oil should command a higher price than the market offered at any given time. He had several reasons for this belief, each of which may have been justifiable at different times. He believed that his peppermint oil was purer than the oil offered by his competitors. He regularly accused his enemies (and sometimes even his friends) of adulterating their oil, of buying tainted oils, of mixing good oil with bad, and of putting their labels on inferior products. Like the character in Herman Melville’s novel The Confidence-Man: His Masquerade, Hiram had a complicated relationship with confidence (mostly in himself) and suspicion (of anyone who failed to act in accordance with his wishes).^[42] He also believed that he could use his skills as a marketer to raise the perceived value of his oils, constantly pushing his prices toward the value of the English Mitcham oil he aspired to match. And finally, he believed he could control, or at least anticipate, changes in supply that would allow him to hold oil during periods of surplus and sell it only when scarcity had driven up the price. All these beliefs caused Hiram to regularly break the straightforward flow of goods and cash that typified White’s commodity model.

The difficulties began early in his career, when his peppermint oil didn’t leave Dows and Cary’s warehouses as smoothly as his flour had, causing conflicts over the drafts and notes Hiram had written to draw funds against his shipments. If the essential oil market softened and Hiram’s oil languished in Dows and Cary’s New York warehouse, the commission agent could be forced to carry both the advanced principal and a growing unpaid interest balance for months. Hiram regularly spent beyond his current means, using advances of the proceeds he anticipated receiving from the sale of each batch of peppermint oil to buy the next batch of oil or support his family, saving little or nothing as a reserve. This mode of operating was merely frustrating when Hiram and the agent disagreed on how low a price Dows and Cary should accept to clear its inventory. It became exponentially worse when Hiram entered the international market.

Hiram needed what came to be known at the end of the nineteenth century as an “elastic currency.” An elastic currency is defined as a money supply that “will expand when there is an active demand for it and contract when the demand subsides,” and has been something economists, bankers, and their historians have debated since the nineteenth century. In 1893, for example, when bankers argued over the merits and problems of the national banking system developed since the Civil War, Horace White delivered a lecture to the American Bankers’ Association entitled ‘“George Smith’s Money’ in the Early Northwest.”^[43] George Smith had run an insurance company and an unchartered bank in Illinois. After the Panic of 1837, Smith issued notes redeemable in gold and silver and backed by the solvency of his businesses. By 1854, Smith’s was the only bank in Illinois, and “George Smith’s money” accounted for 75 percent of the currency used in Chicago. White’s lecture on Smith focused on the relationship between trade and currency. An elastic currency was needed, White argued, but: “How can we get this kind of currency? We cannot get it from the Government, because the Government cannot know when the demand for money is increasing and when it is diminishing.”^[44] White noted that both checks and notes were “pieces of paper promising to pay gold [that] came into use in the first place as labor saving machines merely to avoid the trouble of carrying gold.” Smith’s key innovation, White argued, was that his Wisconsin Marine and Fire Insurance Company issued its “certificates of deposit . . . in denominations of $1, $3, $5, and $10.” Occasional “runs on his institution for specie . . . were always met with abundant bags of coin,” and Smith’s money became a trusted currency, eventually reaching a circulation of $1,470,235.^[45] Smith operated a fractional reserve bank without government supervision; the moral of White’s story was that prudent business practices could be relied upon to make such a system more responsive to economic cycles than inefficient government intrusion.

Hiram Hotchkiss’s story offers an important counterexample. Chicagoan George Smith was technically a wildcatter issuing unsanctioned currency, but his money was sound. Hiram, issuing legal banknotes printed by the state comptroller, used them in a way that damaged his own finances and the local economy. Like Smith, Hiram understood that small-denomination banknotes made better circulating currency than randomly denominated promissory notes carrying a string of endorsements on their backs. The main use Hiram had for his currency, however, was as a means to pay his own debts, especially to the large number of farmers who supplied him with peppermint oil. He preferred sending engraved promissory notes, disguised to look like currency, to Michigan, where they would get a “good circulation.” He intended his paper to be used in place of cash for long periods before being returned to the Peppermint Bank for redemption—or ideally, to stay in Michigan forever. And unlike Smith’s, Hotchkiss’s “money” actually depended less on local economic activity and bags of coins kept on hand to redeem banknotes than on the elaborate web of credits and debits in distant towns and cities surrounding his essential oil business. Ultimately, the Hotchkiss bank was based not on gold or even on peppermint oil but on a shell game of credit transactions and relationships Hiram continually abused.

It may seem strange that Hiram managed to convince Michigan farmers to take his notes, New York bankers to take his paper, and his relatives to support his banking venture. He was a leading peppermint oil merchant, so he had leverage when dealing with farmers. And he was not just a miller or a peppermint oil merchant. He was a charismatic regional businessman from a prominent and well-respected family, interested in many of the economic-development schemes pursued by western New Yorkers. For many years, Hiram and Leman had been at the center of a series of legal and lobbying actions aimed at getting a line of the Auburn and Rochester Railroad built through their property in Phelps.^[46] In the fall of 1856, Hiram engineered an opportunity for himself to ride with former governor William H. Seward, from Lyons to Geneva. He used the hours they spent together in a slow-moving coach to lobby for another of the Hotchkiss family’s pet projects of internal improvement: a ship canal they wanted built around Niagara Falls through their uncle William Hotchkiss’s property. Hiram reported his conversation to his uncle Calvin, who responded he believed that Seward “was very much in favor of the construction of the Niagara Ship Canal,[9] but expressed a belief it would not be accomplished until a change in the administration (as much as to say when he became President).”^[47] The Hotchkisses were rural businessmen who considered themselves the peers of the urban magnates and politicians who are the focus of so much history and biography.

The end of 1856 saw credit tighten, and cash became very scarce in western New York. It was bad timing for a canal but good for Hotchkiss banking aspirations. In spite of their disagreements, Calvin gave in to Hiram’s entreaties and endorsed his project. By the end of the year, the Hotchkiss Peppermint Bank was operating, and Calvin wrote Hiram, “If the Peppermint Bank is discounting freely, to send me a good amount, and I will soon put the money in circulation.”^[48] In early 1857, Leman endorsed another two-thousand-dollar note for Hiram, although he again vented his frustration: “I think your way of continually asking for renewals of your paper has a very bad effect on your credit & prevents you getting accommodations when you might other wise get them.” Leman reminded his brother that he had been working hard to repair Hiram’s credit standing and had avoided protests or even renewals on his paper for more than a year. “It is disreputable,” Leman concluded, “for any decent man not to perform his engagements.”^[49] Although Calvin welcomed a new source to inject some cash into the distressed local economy, he remained uncomfortable with the lax way his nephew attended to business. Several weeks later, Calvin wrote to Hiram regarding, he said, “your draft on Abraham Bell & Son for $2000 at four months, which I here return as I am entirely out of all kinds of Banking business or discounting or endorsing.” Failing to convince Bell and Sons to take Leman’s note guaranteed by Calvin, Hiram turned the tables and asked Calvin to advance funds on inventory in the broker’s warehouse. Calvin said he planned to devote himself solely to his own business and chided Hiram sarcastically, “I do consider it is generally bad policy for (a young man like me) to branch out into many kinds of business, it is better for a man to attend to one branch of business well than 1/2 doz. neglected.”^[50]

But as Hiram soon discovered, his uncle Calvin had not really gone out of the banking business—he had just switched partners. Leman returned from a trip to Lewiston a few weeks later and informed his brother in a note, “I can make arrangements with Uncle Calvin to enter into the Banking and Brokers business, but it will be under stringent circumstances.”^[51] Leman would take over the role Calvin had played financing Hiram’s businesses, but he warned Hiram, “You can readily see it will not answer for me to be associated with any man unless he meets his engagements—neither will I be. I speak plain for I know there is but one way for me to sustain a character.” The next letter Hiram received from his brother was on letterhead announcing, “C & LB Hotchkiss, Bankers & Exchange Brokers,” and signed as “LB Hotchkiss, Cashier.^[52]

Later that summer, Calvin wrote to Hiram regarding a letter Hiram had received from William Seward, explaining why a Niagara River survey the Hotchkisses had requested had been delayed.^[53] In early 1858, Calvin wrote again: “If Seward & Douglass would take up this subject my impression is something might be accomplished.”^[54] Like Henry Ranney and Jasper Bement, the Hotchkisses interacted with political figures who would shortly become nationally prominent in the newly formed Republican Party. Unlike the Ashfielders, the Hotchkisses pursued these political connections entirely for personal gain. And despite the Panic of 1857 and the recession that ensued, they were doing quite well. In the spring of 1858, a credit investigator for R. G. Dun reported on Calvin and Leman Hotchkiss’s business, noting that “Calvin H is a bachelor and lives at Lewiston. LB is sole executor of his wife’s estate, which is worth $60 to $70,000. And he is possessed of RE in the amt of nearly $80,000 and would certainly be worth $60,000 clear.” Leman’s wife, Lucretia, had died in the summer of 1855, leaving him with five children to care for, but with a substantial estate he held in trust for them. The credit reporter noted “Calvin H we are advised is worth $300 to $400,000. And LB is a widower and lives at Phelps. They do a lucrative Banking business, but confined to selling Exchange, buying notes, bonds, mtgs, etc.”^[55]

In May 1858, the Eagle Mill that the Hotchkiss brothers’ father had built burned to the ground.^[56] Hiram considered rebuilding but was unable to find an adequate source of capital for the project. This was the beginning of the end of Hiram’s interest in the flour-milling business, though not of his dependence on family members for financing. In late 1859, Hiram again approached his uncle several times seeking financial support. Calvin responded, “I have rec’d your three letters, but did not think proper to answer them; for the reason that you did not mention a syllable in regard to the payments you were to have made me long ago.” Calvin chided his nephew, “I think you have treated me in a most shameful manner, and I am determined not to put up with such treatment any longer. You & Leman have speculated on my capital about long enough.”^[57] When Hiram continued to pursue him, Calvin wrote: “I threw [your letter] down in disgust. The idea of heaping injury upon injury & insult upon insult was more than I could stand. . . . You and Leman ought to be ashamed to treat me in this way, after befriending you in advancing a large amount some 14 years since.”^[58] Several more months passed, and Calvin wrote to remind Hiram, “I do not wish, nor will I consent to have my name engraved as Banker, when in fact I have no immediate interest or supervision in the matter.”^[59] When Hiram went ahead without his uncle’s approval, Calvin protested: “I was surprised & vexed to think you should go on in direct violation of my wishes & instructions.” Calvin said he had expressly forbidden Hiram to engrave his image on banknotes with the title “Banker” and explained “my name should be used only as President and that was merely to give circulation to the notes, where I was known, and it was for your benefit that I consented to that.” If he had been fraudulently described as banker, Calvin warned, “I will not advance one dollar toward forwarding the institution.”^[60]

On the first of September 1860, the New York Bank Department acknowledged receipt of fifty thousand dollars in bonds deposited for “H. G. Hotchkiss & Co. Bank” and the printing of forty thousand dollars in circulating notes.^[61] The banknotes and the preprinted promissory notes Hotchkiss would send to Michigan for circulation were all engraved with Calvin’s likeness on them, rather than Hiram’s, to improve their prestige. Although some historians have argued that the first half of the nineteenth century was a period of “monetary chaos” during which wildcatters and counterfeiters prevented Americans from feeling safe about the nation’s currency and economic prospects, this claim is based on a misunderstanding. Historian Stephen Mihm has suggested that antebellum schoolchildren were taught to discount because so many suspect notes were only accepted at a discount from par value. In fact, the reason children learned to discount in their heads was not because people feared banknotes were counterfeit but because so many promissory notes carried interest or passed from hand to hand at discounts from their face values. Finally, the primary evidence does not support the claim that currency was as widely discounted as Mihm’s sources claimed. Even Hotchkiss banknotes were either accepted at par or rejected altogether until the federal tax imposed in 1866 created a de facto 10 percent discount that ended their circulation. And an 1857 newspaper reported, “It is a favorite maxim with some to to ‘keep bad money in circulation’ for they say it makes no difference whether a bill is counterfeit or not, as long as it will pass around freely.”^[62] A Michigan historian wrote in 1911 that “counterfeiting and issuing worthless ‘bank notes’. . . was not looked upon as a felony as it would be today. Of course it was taken for granted that it was a ‘little crooked,’ but the scarcity of real money, together with the necessity for a medium of exchange, made almost anything that looked like money answer the purpose.”^[63] The relative lack of alternatives was one of the reasons Hotchkiss engraved promissory notes and banknotes could be used in place of cash in Michigan, although detective Allan Pinkerton remarked in his memoir that “they preferred a good counterfeit on a solid bank to any genuine bill upon a shyster institution.”^[64] It took Michigan farmers some time to discover that the attractively engraved currency Hiram sent his agents to pay for peppermint oil came from a shyster institution.

Calvin Hotchkiss may have allowed himself to be convinced to continue supporting Hiram’s Peppermint Bank because the family was still deeply involved in lobbying for the Niagara Canal project. As the one family member with a personal relationship with Abraham Lincoln’s new secretary of state, Hiram was crucial to this plan. In early 1862 he received a letter from his other uncle, William Hotchkiss, who wrote: “Our Niagara Ship Canal must be built. I hope you have had the desired interview with Seward, altho’ his mind must be taxed heavily by the complication of our national affairs.”^[65] Even though the Democratic-leaning Hotchkiss family presumed their project would be among the most important issues facing the Lincoln administration, William Seward and the Republican government had problems more pressing than building a canal around Niagara Falls to compete with Canada’s Welland Canal. The Civil War, which Republicans had expected to win quickly, dragged on at incredible expense. Foremost among the major projects the Lincoln administration needed to address was an overhaul of the national banking system.

Unable to raise funds in New York’s money market, Republicans claimed they were driven to “emergency legislation when the banks suspended specie payments and destroyed the nation’s money.”^[66] Before the formation of the Republican Party, “some Western Whigs, notably Abraham Lincoln, had called for a new national bank to provide a secure currency.”^[67] Like Lincoln’s interest in railroads, developed while helping the Illinois Central receive the first major grants of public lands to a corporation in 1851, a strong central bank was a priority for the Whig Party, which had merged with abolitionist Free-Soilers to create the Republican Party that had nominated Lincoln in Chicago in 1860. Like the Pacific Railroad Act Lincoln quickly pushed through Congress, the Legal Tender Act of 1862 and the National Banking Act of 1864 achieved this Whig goal by creating a single national currency and a network of nationally chartered banks dominated by a handful of commercial banks in New York City.

The ability of state-chartered banks to issue their own banknotes was effectively eliminated in 1865 by a prohibitive 10 percent tax on state banknote circulation beginning in 1866, forcing a rapid increase in the number of state banks joining the national system. The original National Banking Act had included a section allowing state banks to issue national banknotes; the provision was eliminated only after the legislation had passed on the basis of this promised compromise. In the six months after the tax on state banknotes passed, the number of national banks doubled as many state banks “quickly realized that their future survival depended on allegiance to the national system.”^[68] Bank legislation had not been an apparent priority in the platform of the new Republican Party when it came to power in 1860, leading historians to disagree over the extent to which the government had intended the new laws as gifts to New York City bankers. Some argued the radical reforms had been “designed to accommodate the economic interests of Northeastern businessmen and capitalists, to the detriment of Western and Southern agrarians.” Others countered that, in spite of including a large contingent of Northeastern Whigs, the Republican coalition was really based on a fundamental faith in the “political and social virtues of ‘free labor’ [and that] almost all of the early Republican leaders subordinated differences in economic philosophy to the basically moral question of slavery.”^[69]

What is clear is that as time passed, the new federal laws increasingly favored urban financial interests. For example, the first version of the National Banking Act in 1863 had included apportionment limits that required the three hundred million dollars of new national currency issued under the act to be distributed evenly among the regions of the nation. Since “country banks were the largest issuers of state notes, and conversion to the national system meant the loss of [that] privilege,” there was legitimate worry that without provisions to ensure adequate currency outside the major financial centers like New York City, the economic activity that had been powered by free banking in states like New York and Michigan would be severely curtailed.^[70] This concern was not addressed by the new Banking Act passed in 1864.

The U.S. Treasury suspended specie payments at the end of 1861, and two weeks later gold began to trade on New York commodity markets. Daily quotations were distributed by new telegraphic wire services and printed in newspapers nationwide, giving the value of one hundred gold dollars in United States notes. A quotation of two hundred, for example, meant that it took two hundred dollars in greenbacks to buy one hundred dollars in gold coins or that one dollar in the new, inflationary currency was worth only fifty cents in the old. At its worst, the value of the new greenbacks fell to 35.09 cents relative to the gold-based dollar, on July 11, 1864.^[71] Government officials such as Treasury Secretary Salmon Chase attributed the devaluation of greenbacks not to inflation, however, but rather to “the rise in the value of gold caused by nefarious speculation.”^[72] Shipments of new American gold from California remained relatively stable, even as the destination changed. Gold shipped from California to New York City decreased from $32.6 million in 1861 to $10.3 million in 1863; but at the same time, shipments to England, which remained on a gold standard, increased by $24.4 million.^[73]

Hiram Hotchkiss continued operating his Peppermint Bank in spite of the tax on his state-issued currency and the establishment of competing national banks. As a Democrat, he may have hoped the 1864 presidential election would put an end to his disagreement with federal banking policy. Hiram had benefitted from being a New York banker. In the antebellum currency market, banknotes issued in eastern states “tended to have either the same contemporaneous discount rate, or discount rates that varied within a small band.” During times of financial stress, banks, banknote brokers, and the reporting agencies that published discount-rate data “would advise their customers not to accept western banknotes, or to be wary of them.”^[74] Western banks were considered riskier, because information reaching eastern authorities was often incomplete, inaccurate, and untimely. Although the fear of counterfeiting was almost certainly lower than has recently been portrayed by historians, during periods of economic uncertainty it was safer for western farmers to use eastern banknotes even if they came from a less-than-ideal source like Hotchkiss.

Treasury Secretary Salmon Chase has been described by his contemporaries and by historians as a financial neophyte. Some have suggested that as a former Democrat, he came from a Jacksonian tradition of distrust of central banking. Others such as bank historian Bray Hammond have observed that whatever his initial inclinations, Chase became a principal actor in a “bloody combat” between federal and state authority. Hammond also noted that Chase, who would later take Roger B. Taney’s seat as chief justice of the Supreme Court, disagreed with that court’s decision in the Briscoe case regarding the legality of state banknotes. Chase argued that state banknotes “certainly fall within the spirit if not the letter of the constitutional prohibition of the emission of ‘bills of credit’ by the states and of making by them of anything except gold and silver coin a legal tender in payment of debts.”^[75] Economic historian Gary Gorton has observed that during the antebellum free-banking era “large numbers of firms entered banking and issued debt in the form of perpetual, non-interest-bearing, risky debt claims, offering the right of redemption on demand at par in specie.”^[76] Gorton claims that before the Civil War “there was no domestic coin between the 50-cent piece and the $2.50 gold dollar.” This is not entirely true: the United States minted a wide variety of coins of lesser denominations, including half-cent pieces, several different sizes of pennies, two-cent and three-cent pieces, nickels, half-dimes, dimes, twenty-cent pieces, quarters, half-dollars, and (except for a period from 1804 to 1836) dollars. Gorton has sought to explain why “wildcat banking was not a pervasive problem during this period.” Wildcat banking refers to the practice of issuing more currency than could possibly be redeemed with the securities controlled by the bank. Unfortunately, Gorton has not been able to quantify the significance of note issue in the commerce of the period. “It is not clear,” he has admitted, “whether bank notes circulated across different states and regions in significant amounts.”^[77] In fact, despite the subsequent focus of historians on bank notes, they were far from the center of antebellum business finance.

The activities of the Hotchkisses in their flour and essential oil businesses during this period suggest that interest-bearing promissory notes and drafts written against inventories in transit or warehouses were much more common tools of trade than small-denomination banknotes. Another reason the practice of overprinting currency may have been less prevalent is that, unlike wildcatters such as Chicago’s George Smith, many free bankers in western New York and the Yankee West considered themselves more as facilitators of business than as printers of money. Calvin and Leman Hotchkiss, for example, focused on exchange. Even Hiram, who was motivated by a desire to see his notes get a good circulation in Michigan, focused more on business credit for his own operation than he did on issuing notes. As economic historian Willford King remarked in 1920, “To the average citizen bank deposits seem entirely different from bank notes, but in fact they are very similar. Both are promises to pay on demand. . . . As a matter of fact, bank deposits are the principal circulating medium of the United States, nearly all important purchases being made through their use.” This is the point missed by Gorton and many later historians. Even for bankers such as the Hotchkisses, the compounding of credit operations was more significant than the issuing of new notes. “The right,” King argued, “to loan and reloan a million dollars for an endless period is practically equivalent to the ownership of a million dollars.”^[78]

Introducing the National Banking Act in January 1863, Senate Finance Committee Chairman John Sherman said: “All private interests, all local interests, all banking interests, the interests of individuals, everything, should be subordinate now to the interest of the government.”^[79] The federal government’s consolidation of power using national banking and the destruction of state banks became a regional issue. In committee, “John Henderson of Missouri tried to set the minimum capital stock of a national bank at $300,000 in order to prevent the establishment of national institutions in rural areas at all” and to preserve some role for regional banking that reflected and facilitated rural economic activity. When the bill came to a vote, twenty-three Republicans from New England, New York, and New Jersey joined the Democrats to oppose national banking.^[80] Harper’s Weekly celebrated the law’s passage, announcing that national banking would “institute such a connection between the public credit and the banking interest as shall, on the one hand, give the President virtual control over all the banks in the country, and, on the other, make every stockholder and banknote holder in the land an underwriter, so to speak, of the Government bonds.”^[81] A shift to centralized national banking did help the Union win the Civil War, but it did so by denying rural people a significant role in the national economy.

Arguing for the prohibitive 10 percent federal tax on state bank circulation the following year, John Sherman declared: “The power of taxation cannot be more wisely exercised than in harmonizing and nationalizing and placing on the secure basis of national credit all the money of the country.”^[82] Sherman did not explain why the national credit would be a more secure basis for currency than the regional economic activity that up until that time had been its basis throughout the United States. But it was clear to many observers that the banking legislation’s goal was not to secure America’s currency, which had been sufficient to the needs of commerce without government intervention, but to put the nation’s financial system to work funding the war effort. Although all Democrats and even some Republicans worried about the “centralization of power and force here in the Federal Government . . . to destroy all the rights of the States . . . [and] to wield this as an empire,” it became an accepted political truth that “Congress must either repeal the banking law or contract the circulation of state banks” to pay for the war.^[83]

The federal government established national banks, suspended specie payments, and made greenbacks legal tender; but it did not immediately succeed in eliminating state banking. Government spokesmen mounted a media campaign to discredit the previous system, and “by April 1864 state banking had become identified with disloyalty . . . and gold speculation had become the Treasury’s most pressing problem.”^[84] On April 15, Sherman introduced a bill to outlaw trading in gold “under penalty of a fine or a prison term or both.” To support the federal government’s control over the currency and the banking system, “the bill stipulated that only greenbacks or national currency, not state bank notes, could be exchanged for gold.”^[85] The government hoped that by outlawing the exchangeability of anything but the inflationary greenbacks with gold, they might halt inflation. Lincoln signed the bill into law in June 1864, but trading in gold continued, and the value of greenbacks relative to gold continued to drop. Embarrassed by the market’s flagrant disregard of its authority, the government repealed the law two weeks later. Angry newspaper articles and congressional speeches identified defenders of state banking with the hated gold speculators. Lincoln replaced Treasury Secretary Chase with William Pitt Fessenden. Although Fessenden had at first opposed the Legal Tender Act, he now argued for “discriminating legislation” to shore up the national currency by forcibly eliminating state banknotes. In January 1865, he endorsed a currency bill that would make it illegal for national banks to circulate state bank notes. New York’s Democratic senator Francis Kernan objected: “If the national banks, with the great advantages they enjoy, cannot compete successfully with the State banks, it simply shows that the latter serve the interests of the business community, and should not be destroyed.”^[86]

The senator did not bother stating the obvious: that state banks served the interests of the business community, especially the portion of it that operated outside the banking center of New York City. Kernan’s fellow New York Democrat Hiram Hotchkiss not only continued operating his Peppermint Bank in defiance of the new federal banking policies, he took advantage of every opportunity to profit from the inflation caused by the Legal Tender Act. When New York banks and the federal government suspended specie payments, Hiram began redeeming his notes in greenbacks. As inflation drove the value of the federal notes down to thirty-five cents on the gold dollar, he profited from paying out greenbacks worth only thirty-five cents on each dollar he owed. Although peppermint farmers were also aware that the changing value of money required them to ask more for their oil, he managed to stay a step ahead. In early November 1864, he received a letter from his sons, in which they suggested: “The way gold is this morning we had better buy all the oil we can at $4.50 and $4.75.”^[87] The day after the 1864 presidential election, he telegrammed his sons: “Uncle Abe is elected & Gold is up to 258 at 1 o’clock PM. . . . I greatly fear that you are both asleep & do not try to secure the oil.”^[88] The sons responded that they would be happy to buy all the oil in Wayne County, if he would only send funds.^[89] A week later, he wrote his sons again: “As gold is falling 235 today at 1 o’clock I should think farmers would sell a little . . . now at a fair price.”^[90] The next day, he observed: “Gold has declined as low as 218 today & Peppt Oil buyers are holding off. I guess I done well to sell ahead. So hurry up the packing as fast as possible.”^[91]

Although Hiram used his understanding of currency fluctuations to profit on inflation in the oil market, his attention to the details of his banking operation had not improved. Calvin wrote an angry letter to his nephew at 2:30 A.M. on the morning of March 9, 1864, complaining of five protested notes and one returned certificate of deposit, “which met me like the shock of an Earthquake and you may well Judge why I write you at this unseasonable Hour. The reason is that I could not sleep . . . this is something I never drempt of, when I went into this Banking business merely for your benefit.” Calvin lamented, “As to giving you any advice, it would be like a feather in the wind, and you would perhaps consider it an insult.”^[92] The banking relationship was further damaged when Calvin sent Hiram notice of a “Sheriff Sale at which the county sheriff announced, By virtue of two Executions issued out of the Supreme Court . . . I have seized & Taken . . . about 60 acres of wheat on the ground, Five Horses, seven Oxen, four cows and fifty tons hay, the Property of Calvin Hotchkiss, which I shall expose for sale.”^[93] Calvin wrote that the sale of his property was “a transaction which never happened to me before,” and warned Hiram: “If you do nothing to stop this sale, then my property must go for what it will bring. My health is quite poor, so that I am not able to travel, otherwise, I should be out to see you.” A few months later, Calvin wrote again to “H. G. Hotchkiss Esqr., Banker &c.”: “In six days my farm will be sold by the Sherriff of this County, to Pay Your debt you owe to DeWitt Parshall.” Parshall was an attorney and rival banker who had converted the Lyons Bank he had established in 1857 into a national bank in 1864. Parshall’s son William Henry had married Hiram’s daughter Lissette in 1860, but the union of their families apparently did not reduce their animosity or increase the willingness of Hiram to pay his debt. Calvin urged his nephew, “Write me on the receipt of this whether You are ready to pay the debt to the Sherriff, or whether you intend to let him sell my farm. I want an immediate answer.”^[94]

At the end of 1865, Hiram received a final letter from Calvin, who told his nephew: “I will never write to Strong & Mumford to delay proceeding agt H. G. Hotchkiss & Co.s Bank another day. I have been humbugged about your damd Bank . . . I do not want to hear any thing more about that cursed Bank which has given me so much trouble.” Calvin complained of the destruction of his own reputation through association with Hiram’s business. He added, “I wish you not to write to me again on this Bank subject, as I heard enough of such damned trash.”^[95] Calvin also ridiculed the suggestion by Hiram that he was planning to convert his Peppermint Bank under the new National Banking law, telling his nephew: “The time has passed for such a business.”^[96] Calvin died on June 28, 1866, and with him went any hope Hiram might have had of borrowing the bonds he would need to securitize a new banking venture. The Peppermint Bank carried on its business for another year, despite the devaluation of state banknotes caused by the implementation of the federal government’s 10 percent tax. In January 1867, the Syracuse Journal reprinted a story from the Lyons Republican stating the “rumor of the failure of H. G. Hotchkiss & Co.’s Bank of Lyons, which has found its way into some of the newspapers, has no foundation.” The apparent cause of the rumor was that “for some reason the Metropolitan Bank of New York has latterly thrown out its notes, and that they are only taken at ten per cent discount on deposit at the banks.” But that was only because all state bank notes were subject to a 10 percent  tax, the newspaper assured its readers. Hotchkiss’s notes “are, however, current about town at par, as heretofore, and are being redeemed in greenbacks at the Hotchkiss Bank.”^[97] It is unclear exactly when Hiram’s Peppermint Bank shut its doors, but local histories record that its end corresponded with the destruction of state banking.

The elimination of state banking produced the rural problems the Banking Act’s opponents had feared. Not only was there inadequate money in the hinterlands to support business growth, there simply were not enough banks. The number of national banks grew slowly: by 1890 there were fewer than thirty-five hundred.^[98] By 1897, after thirty-three years of national banking, Midwestern businessmen attending the Indianapolis Monetary Convention complained about the lack of adequate banking facilities in their states and lobbied for decreases in the capital required to start a bank, as well as for the establishment of branch banks, which were illegal under federal law. Branch banking, which critics argued would increase the power of the central banks allowed to open branches, was not expanded. Instead, the demand for rural and small-town banking services was met by a new wave of free-banking laws passed by the states in the 1880s and 1890s. Like antebellum free-banking laws, they allowed new banks to be established without legislative charters; they also reduced the restrictions imposed by national banking regulations. The states set much lower capital requirements, allowed their banks to make mortgage loans on real estate restricted by national banking law, and established very low or nonexistent reserve requirements. By 1900, there were nearly forty-five hundred state-chartered banks, mostly serving rural hinterlands.^[99]

Sociologists Bruce G. Carruthers and Sarah Babb have observed that “money works best when it can be taken for granted, when its value, negotiability, and neutrality can simply be assumed.”^[100] Their observation applies, ironically, to the historians studying money—especially those who focus on a period when the value, negotiability, and neutrality of currency was less stable than it is today. Banking historian Howard Bodenhorn has suggested, “To most historians, the lessons of free banking were clear. Banking, left to its own devices, was inherently unstable. Unless banks were closely supervised, banking and financial markets degenerated into chaos, causing substantial losses to the public, and eventually slowed real economic activity.”^[101] This is an incorrect assessment, Bodenhorn has argued, because both state banks and national banks habitually issued fewer notes than the market required for optimal growth. Ohio senator John Sherman had told the Senate in February 1865, “The national banks were intended to supersede the state banks. Both cannot exist together.” He meant that the national banks would never survive while state banks were permitted to “carefully keep out their state circulation.”^[102] For the new federal currency and the banks using it to succeed, state banks and their circulating notes had to disappear. The tax on state banknotes enacted in 1865 drastically reduced the number of state banks but failed to eliminate them. Four years later, Chief Justice Chase read a Supreme Court opinion (Veazie Bank v. Fenno) acknowledging that the legislation had been designed to eliminate state banks. Although the Court’s decision to uphold the tax on banknotes damaged the cause of free state banking, the banks could not be eliminated as long as they could fulfill the remaining function of banking in the postbellum era, deposit, the importance of which even Bodenhorn underestimated in his focus on banknotes.

The state bank that Hiram Hotchkiss owned, however, had always been more focused on financing his own business operations than on taking deposits and lending funds in the local market. Although frustrated by changing regulations, his adventure in banking ended with the death of his uncle Calvin, whose wealth had guaranteed Hiram’s obligations in spite of extreme stresses that may have shortened Calvin’s life (he died at the age of seventy-four). In later years, Hiram’s financial woes increased. The approach Hiram had to financing, especially his belief that debt was negotiable, was increasingly unpopular in a period when businessmen sought to operate on more objective, rational terms. A comparison of R. G. Dun credit bureau reports on Hiram and on his brother, Leman, are revealing. The entry in the credit company’s ledger begins in 1858, noting: “HG and LB Hotchkiss & Co. are not in partnership. LB resides at Vienna [Phelps] and is said to be well off. HG has a large amt of RE in his hands but I am informed he owes a good deal of money. He pays many of his debts at the end of execution. No one can tell me what he is worth.”^[103]

A few years later, another Dun entry on Hiram states: “Cannot say how good he is. Has large amt of property in his hands. Appears to owe considerable. Is sued quite frequently.”^[104] In 1869, the reporter commented: “Cannot say what his respons[ibility] is. He owes a great deal of money and has been sued a great many times and many executions have been returned unpaid and are still unpaid. He has considerable property in his hands but he never pays I believe until the end of an execution. Difficult to tell whether he is worth anything or not. I cannot say.”^[105] In 1873 another reporter added, “Has considerable property in his hands but very much encumbered, and doubt collection could be enforced vs. him. Is not regarded reliable and has no credit here.”^[106] In 1877, the reporter noted that Hiram had tried to divest himself of his property to avoid attachment: “The firm is now HG Hotchkiss and Sons. HGH swears that he has nothing . . . neither his word nor note passes current here. . . . All the RE is in the hands of Mrs. HGH and daughters.” The reporter concluded, “[Hotchkiss] owes largely and would like to owe more, but he is too well known here.”^[107] A final entry at the end of 1889 concluded the story on a note altogether unlike the heroic tale told by local histories and Hotchkiss company memorials: “He declines to make any showing whatever. The firm is composed of Leman, Calvin, and Hiram G. Hotchkiss Jr., the three sons of Hiram G. Hotchkiss.” The reporter notes that the sons had worked in the business since 1873, and that the business shipped peppermint and other essential oils worldwide, especially to London and Paris. Their reputation for quality peppermint oil was intact and the Hotchkiss company had won several prize medals; the family company’s credit “standing however is at the lowest point. They have plenty of property however in the family but keep transferring it from one to another, so that it is utterly out of reach. As a firm [they] are considered thoroughly irresponsible, never known to pay anything they can get out of, will beat everyone they can, have absolutely no credit, and should be dealt with accordingly by outsiders. They are a hard lot, do not ever pay debts for living expenses around town, and are not trusted here out of sight.”^[108]

In contrast, Leman prospered, especially once he managed to break free of his brother. In 1867, Leman was reported in the R. G. Dun ledgers “to be good for anything he agrees to pay, and [says] that he pays a larger tax than any three men or firms in Phelps. Considered good.”^[109] Two years later, the reporter wrote: “Owns $100,000 or more RE in and around the village of Phelps, has $40,000 in the Air Cure at Clifton, has $50,000 in the bank, he is a shrewd and careful manager and deals largely in peppermint oil and makes money. He is considered very sound and all right.”^[110] In 1879, the reporter added: “Owns large amt RE and his children also have some inherited from their mother. This RE is free and clear. He has cash to purchase oil and is supposed to be worth $250 to $300,000.”^[111]

Hiram operated his business using a code of ethics that seemed disconnected from any moral norms. His treatment of partners, especially relatives such as Leman and Calvin, was deplorable. Cultural historian Warren Susman has noted that Ralph Waldo Emerson’s seminal definition of character, “Moral order through the medium of individual nature,” was challenged at the end of the nineteenth century by a growing interest in personality and performance.^[112] The differences between the business practices of Hiram and those of his brother Leman and uncle Calvin may be an early example of a shift from character to personality as a determinant of success, as Susman has suggested. I consider these differences in more detail in the next chapter. Hiram’s behavior was based not on ignorance but rather on early experience as a businessman in western New York. Hiram understood how business was traditionally conducted, but he felt free to bend or break the rules whenever it pleased him, relying on his charm and on personal relationships to win people to his point of view or retain their support in spite of his actions. He understood the principles of banking as they were developing during his lifetime but had no respect for them. He used his bank almost exclusively to finance his own business. He considered anybody who presented his notes at the counter of his bank for specie to be an adversary, and he developed strategies to delay payment or meet demands for payment with new requests for credit. Ultimately, his interest in banking was completely subordinated to his obsession with being the peppermint king. It is ironic that Hiram is remembered as the peppermint king of western New York, while his brother, Leman, who was ultimately much more successful and left a valuable inheritance to his children—and who had probably sold as much peppermint oil as Hiram in his lifetime—is all but forgotten.