At the beginning of the Nineteenth Century, traditional banks did not exist, while business activities in Kentucky were conducted between sole proprietorships and partnerships. Trade was “on account” that was usually settled in the fall after harvest or after a trip to New Orleans on a riverboat. Currency was unavailable, with gold and silver coinage the principal form of monetary instruments.
Merchandise and trade goods were shipped from the Eastern markets, down the Oho River to Limestone (now Maysville) and transported across early roads into Lexington. In Lexington, these goods demanded a high price. Despite these limitations that severely restricted commerce, Lexington soon became the commercial center of Kentucky.
Whiskey, hemp and tobacco were the three main exports from Kentucky at this time. These articles were usually shipped down the Ohio and Mississippi Rivers to New Orleans (which was a Spanish and then French possession). These items were shipped on riverboats or keelboats made of native timber. Once in New Orleans the trade goods were sold, then the riverboat broken up and sold for lumber. Payment was in gold or Bills of Exchange drawn on New Orleans banking houses. To collect on a bill of exchange, the bill would be forwarded to Philadelphia or New York and then by sea to New Orleans. When presented for payment, the process would be reversed and the funds eventually credited to the seller. A sideline for a number of early businesses was to facilitate for a fee, this collection process.
The first banking institution in Lexington was indirectly established during 1802 as an insurance company. The Kentucky Insurance Company was granted a charter by the General Assembly to insure riverboats and barges on the state's rivers. Allegedly, by mistake, its charter also authorized the issuance of notes (depository receipts payable on presentment at the counters of the company). These receipts were backed by gold and silver reserves in the company’s vaults. The insurance company's notes were soon accepted as a convenient form of currency and began to circulate in Lexington and the surrounding towns.
Following the War of 1812, the nation’s economy remained constricted and in 1819 a general depression occurred. A number of banking houses, lacking government oversight, had issued notes without sufficient reserves. As depositors attempted to redeem these notes, a number of banking houses were forced to close and their notes became worthless. This recession became known as the Panic of 1819.
During the 1820s, the Kentucky Legislature in Frankfort responded to the number of bank failures by passing a number of acts limiting banking activities. These restrictions gradually forced the remaining banks out of existence. By 1830, all Kentucky banks had ceased operations and the only circulating mediums of exchange in Kentucky were banknotes issued by the Bank of the United States. The Bank of the United States operated under a Federal charter and was not restricted by the acts passed in Frankfort. With the reelection of President Andrew Jackson in 1832, the charter of the Bank of the United States was allowed to expire and its branches closed. The limited supply of hard currency available after the closure significantly restricted commerce in the upcoming years.
