[E]very prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.
— Adam Smith, The Wealth of Nations (1776)
Looking into the Past.
The most thrilling recent developments in astrophysics (at least to me, as a lay person) are those in which technology has given us the ability to look into the distant past. The Hubble Telescope and other wonders have enabled astronomers to witness, as they unfolded, cosmic events from billions of years ago, because they occurred such staggering distances from earth that the light from those events is only now reaching us.
Once in a while, historical documents give us a chance to do something of the same sort in other disciplines. During my research into economic history, I have had the good fortune to witness a series of events that give insight into one of the deep questions in economics: how do money and banking arise?
I can’t claim to have seen the emergence of some primitive ur-money from the primordial ooze of a barter economy a half-step up from the State of Nature. What I can show, however, is the process by which a certain form of money arose in a particular time and place. As a bonus, we will also be able to see the early signs of the appearance of banking there.
Our core economic mythos includes a series of conventional fables about the origins of money. Many of us first encountered these fables in Chapter IV of Adam Smith’s Wealth of Nations. In that stiff Enlightenment prose beloved by undergraduates, Smith vaguely suggests a progression from barter, through successive experiments using as money commodities ranging from cattle to shells, and finally arriving at precious metals. But on a closer reading, even Smith’s fable doesn’t really say that gold and silver form the basis for money. Smith’s argument, whether he intended it this way or not, points to the needs of commerce, rather than to any particular commodity, as that basis.
We also have a parallel set of fables about the origins of banking. They usually start with goldsmiths. The idea is that since these craftspeople had in their shops the means to keep precious metals secure, customers soon began bringing them their own stock of precious metals for safekeeping. Naturally, the smiths provided receipts for these deposits, and the customers realized that when they needed to make large payments, they could simply hand over those receipts. They could also post the receipts as collateral for loans, and soon the amount of paper circulating exceeded the amount of gold and silver on deposit.
The fables about money and banking contain a good deal of truth. Adam Smith cites examples of the use of various commodities as money. One venerable London private bank, C. Hoare & Co., started in business as goldsmiths in Cheapside in 1672, developed into bankers, and moved into new premises in Fleet Street in 1690, where they still have their principal office. Brasenose College, Oxford, still keeps track of the silver items they loaned to Charles I during the civil war of the 1640s. Charles presumably melted them down for coin. But none of those stories really show how money and banking emerge in an economy. For that, we need to come a little closer to home, to California in the 1830s and 40s.
The “Fat and Skins” Trade.
In the 1820s, after Mexico had gained its independence from Spain, California was still a remote, sparsely-populated province. Its most important centers were the string of Franciscan Missions extending from San Diego to Sonoma; Presidios at San Diego, Santa Barbara, Monterey, and San Francisco; and pueblos, or towns, at Los Angeles and San Jose. The Missions were mostly self-sufficient, and they supported the Presidios and, to a lesser extent, the pueblos. Spain’s policy toward California had been passive neglect. They seem to have regarded the province mostly as a geographic buffer protecting the silver mines scattered through what is now Mexico from encroachment by the Russians, French, British, and Americans.
Mexico’s policy toward California was a little more active. In the 1830s, feeling that Spain may still have been using the Church to meddle in what were now their domestic affairs, Mexico enacted legislation secularizing the Missions. Mexican Governors distributed the vast Mission lands through a series of land grants, creating the California ranchos characteristic of the period.
Like the Missions before them, the ranchos were self-sufficient, but they also produced an important surplus product for trade: cattle. In those days before refrigeration, most of the value of these animals was not in their meat, but in their hides, for tanning into leather, and their fat, for rendering into tallow, largely for candles and soap. The major buyers of California hides and tallow were Yankee traders, who arrived with some regularity on the California coast to acquire them for markets in New England, chiefly Boston.
The breakup of the Mission lands fragmented the production of hides and tallow. The Yankee traders lacked the time and resources to trade directly with enough different rancheros to assemble worthwhile cargoes during their visits to California. This created an opportunity for a handful of American merchants, who took up residence in California and intermediated the “fat and skins” trade in the 1830s and 40s. Prominent among these were Abel Stearns in Pueblo de Los Angeles, Alpheus B. Thompson in Santa Barbara, and Thomas O. Larkin in Monterey. William A. Leidesdorff, who operated in Yerba Buena (San Francisco), arrived in around 1843.
The American merchants gathered hides and tallow from the rancheros for sale to the Yankee traders. They also intermediated the other side of the trade, distributing to the rancheros the goods, mostly New England manufactures, the Yankee captains had brought to trade for hides and tallow. This was an active, vibrant trade, and some manufactured household goods from New England became markers of status among the Californian rancheros.
The Yankee traders and the Californian rancheros were willing buyers and sellers, with the ability to agree on mutually-advantageous exchanges of goods they regarded as being of equivalent value. But because of the geographic dispersion of the ranchos, the trade was not straight-up barter. Both sides needed the American merchants to wholesale hides as they moved from the ranchos to the ships, and New England goods as they moved the other direction.
Decades of official indifference and lack of opportunities for trade in the late Mission era had drained California of nearly all of its Spanish silver. Faxon Atherton, who spent three years working for Thompson in the mid-1830s, recorded in his diary that while a generation earlier cash had been plentiful in California, even though “goods were not to be had”, “Now (I speak from experience) there is probably not 10$000.00 to be found on the whole coast.”[1] But with such a valuable trade at stake, the rancheros, visiting New Englanders, and American merchants found a way to do business. They used the hides themselves as money instead.
Cattle Hides as Money.
Richard Henry Dana, Jr., in his 1840 classic, Two Years Before the Mast, wryly observed that a merchant in California might pay three or four hides for a pair of shoes made in Boston – most likely from California hides. Dana’s example was apposite, but the use of hides as money in California was not quite so simple as he may have imagined it. Finished hides acted as a workable ersatz currency because they were available, durable, and reasonably close to uniform. Most important, they were convertible, in the sense that anyone holding hides of market quality could expect that one of those New England ships would soon arrive, its captain willing to buy them in exchange for other things of value.
Hides had some important deficiencies as money, though. The merchants and rancheros arranged to transport finished hides from the ranchos to the ocean, and the New England captains sent crews ashore to load the hides onto their ships, but hides were not portable in the way we ordinarily want money to be. They also were not divisible – cutting a hide in half would have impaired its value, and we have no evidence of the use of fractional hides in commerce. Even though Californians sometimes facetiously referred to hides as “California bank notes,” the available evidence indicates that hides really only functioned as money in commercial transactions, merchant-to-Yankee trader, merchant-to-ranchero, or merchant-to-merchant.
The trading among the merchants was seldom quite so simple as direct trading of hides for manufactured goods. They were constantly trading in commodities, too, imputing prices in pesos and rials. In one November, 1833 letter, Larkin proposed to Stearns, “I think I can supply you next spring in flour, payable one half in cash & half in Rum, wine or hides. But if your offer for it is no more than what I can get here all cash next spring on delivery you will not blame me for taking the offer as in the fall it does not sell well here for Cash.”[2]
When the Boston ships arrived to buy cattle hides for the New England market, the merchants’ dealings more often took on the character of financial transactions, but in hides. Because of Dana’s book, the best-known of the Boston ships ever to call in California during this era was the Pilgrim, which spent much of the spring of 1835 off Santa Barbara. Dana describes the job of loading cattle hides as cargo onto the Pilgrim. But what about the other side of the transaction? The Pilgrim’s main contact at Santa Barbara would have been Thompson. One source of the hides was apparently someone named Requeno, who evidently either owed Thompson a quantity of hides, or was willing to make him an advance in hides. Either way, Thompson wrote Stearns, “I shall draw for Mr. Requeno’s hides per the Pilgrim.”[3] In other words, Thompson planned to execute a paper instrument, which would place the hides on the Pilgrim that had come from Requeño’s inventory to Thompson’s credit.
Thompson to Stearns, May 22, 1835. See footnote 3.
Banking Emerges.
In the early 1840s, even before the American takeover of California at the start of the Mexican-American War, an increasing stream of foreign immigrants to California, mostly Americans arriving overland, brought with them an increase in both the volume and complexity of commerce. What they didn’t bring was much cash, and so hides continued to play a vital role in California’s economy. As the population north and east of San Francisco Bay grew, Yerba Buena, the village that would become San Francisco, also grew in importance. One of the merchants best-positioned to profit from this growing trade was an African-American man named William A. Leidesdorff.[4]
The Oxford case at the link tells much more of Leidesdorff’s story, but for this note I’ll concentrate on just two transactions. The first involves A.B. Thompson, whom we’ve already met. On June 24, 1843, Thompson drew a check against Leidesdorff, for payment of 200 hides to a James Watson. Watson, in turn, endorsed the check to a third party, a Captain Clapp, who acknowledged, again on the back of the document, receipt of the hides. Clapp, presumably, bought the hides to take to the Boston market in the usual way.[5] Leidesdorff was a merchant, not a banker, but he performed this basic banking function, processing and paying a third-party check, for one of the merchants with whom he did business.
Three years later, in 1846, the United States and Mexico were at war, and an American military occupation government controlled most of California. Even so, commerce continued. Leidesdorff’s papers include a ledger summarizing his business with another San Francisco merchant, Henry Mellus.[6] The most striking entries in the ledger are debit entries of $875 for cash and $125 for “discount for cash,” balancing a credit entry of $1000 for “Russian bill.” Since early in the 19th Century, the Russian-American Company, the fur-trading concern with its North American base at present Sitka, Alaska, had sent ships to San Francisco to buy grain, and since the 1830s they had paid for the grain with bills of exchange payable in St. Petersburg. In 1846, they bought grain from Leidesdorff, and evidently gave him such a bill. In the transaction on the ledger, Mellus discounted the bill, which is to say that he paid Leidesdorff cash, at a 12-1/2% discount, for the bill. Mellus most likely sent the bill (through a Yankee trader like Clapp) on to his bankers in Boston, who ultimately sent it to St. Petersburg for payment. In this instance, it was Mellus that performed a banking function for Leidesdorff.
The Appearance of Money and Banking – A Different View.
In our customary economic mythos, money emerges from the needs of a barter economy, finally crystallizing in a form backed by precious metals (I’d argue that we’ve transcended even that, but that’s a story for other notes). One advantage of that fable is that is leads to another one, about the emergence of banking as somehow a logical extension of goldsmithing. Those stories do have some merit. After all, cattle hides stopped performing any of the functions of money in California soon after the discovery of gold. And the London banking house of C. Hoare & Co. highlights their origin as goldsmiths. But California, in that way California has, shows that reality is much richer and more complex than those fables.
When we really look at the fat and skins era of the 1830s and 40s, we see a period in which commerce came first, and the participants in the economy improvised a form of money that met the needs of that commerce. Gold replaced hides in California as the 1840s gave way to the 50s, but it did so primarily because gold became uncommonly abundant overnight. Nothing in that story gives evidence that precious metals are any kind of natural endpoint in the evolution of money. Money simply takes the form that best serves the demands of economic activity in a particular time and place.
Banking, too, does not just emerge from the needs of parties committing their precious metals to goldsmiths and silversmiths for safekeeping. Banking, like money, emerges from the needs of commerce. In pre-Gold Rush California, merchants advanced their business by performing simple banking functions for each other. They drew on one another using paper instruments, paid and processed checks (in cattle hides, no less!), discounted bills, and transacted with distant correspondents. Only after the discovery of gold did population and commerce expand to the point where banking emerged in California as a specialized function.
Thompson’s hides transactions, both with Stearns and with Leidesdorff, show an unusual form of money at the moment of its emergence into the economy of its time and place. And the transactions of Thompson, Leidesdorff, and Mellus show embryonic banking, in the very process of emerging from the increasing demands of commerce.
[1] Nunis, Doyce B., Jr., Ed., The California Diary of Faxon Dean Atherton, 1836-1839 (San Francisco: California Historical Society) 1964, p. 61
[2] T[h]omas O. Larkin to Abel Stearns, Monterrey [Larkin used Spanish spellings both for his given name and for Monterey], Nov 3d 1833, Abel Stearns Collection, SG Box 39, Huntington Library, San Marino, California.
[3] A[lpheus] B[asil] Thompson to Don Abel Stearns, Santa Barbara, May 22, 1835. Abel Stearns Collection, Box 65, Huntington Library.
[4] For much more on Leidesdorff and the transactions I describe in this section, please see my case study, Jonathan Tiemann, Oenone Kubie, and Christopher McKenna, “Money, Cattle Hides, and William A. Leidesdorff: California before the Gold Rush,” Case Study #19, Global History of Capitalism Project, University of Oxford, https://globalcapitalism.history.ox.ac.uk/money-cattle-hides-and-william-leidesdorff-california-gold-rush
[5] “Check payable in hides”, dated on face, Monterey, June 24,1843, William A Leidesdorff Collection, 1834–57, 1928, MS1277, Box 1, Folder 11, California Historical Society, Manuscript Collection, San Francisco. Courtesy California Historical Society, San Francisco
[6] “William A Leidesdorff in Acct Current with Henry Mellus,” October 30, 1846, Leidesdorff Collection, Calif. Hist. Soc.