During the pre–Civil War era, wildcat banks, although technically legal, abused the bank note-issuing authority of state banks by issuing bank notes or paper money under circumstances that discouraged or rendered impossible conversion into gold and silver specie. The wildcat banks emerged in a banking system that allowed each bank to issue its own bank notes, which legitimate banks stood ready to redeem into gold and silver specie. As security for outstanding bank notes, state banking laws required banks to own federal or state government bonds, and keep them on file at a state auditor’s office. The First Bank of the United States and the Second Bank of the United States had helped maintain an honest currency by forcing western banks and country banks to redeem their bank notes in specie.
In 1833 the demise of the Second Bank of the United States left the banking system without an important safeguard against the temptation of bankers to issue bank notes in excess of their reserves. Bank notes from distant localities circulated at varying discounts, depending upon the likelihood of redemption into specie. Newspapers published lists of good notes and bad notes, and periodicals appeared that were exclusively devoted to the values of bank notes.
Wildcat banks were usually formed without buildings, offices, or furniture, and required minimal amounts of capital. A group of investors would purchase bonds, often state bonds selling at a discount, and file the bonds with a state auditor, who authorized the investors to start a bank. The investors possessed the engraved plates and dies that were used to print the bank notes, and often printed bank notes equaling two or three times the amount of the bonds filed with the state. In practice, the legal requirement that the state auditor countersign each bill did not act as a brake on the issuance of bank notes.
Investors were known to start up wildcat banks with only enough money to buy engraving plates and dies and pay the cost of printing up the bank notes. Investors arranged through brokers to pay for the bonds after they were delivered to the state auditor’s office. The investors then brought the freshly printed bank notes to the auditor’s office, had them countersigned, and used them to pay for the bonds.
Although bank notes were theoretically convertible into gold and silver specie, wildcat banks were put in places difficult to find. In some cases an Indian guide was necessary to find what was no more than a shanty located on an Indian reservation. The accessibility of a wildcat bank determined the discount at which its bank notes traded. Brokers dispatched agents to find remote banks and demand the redemption of bank notes into specie. Some of the wildcat banks stationed lookouts that threatened and intimidated strangers who might be seeking redemption of bank notes.
In the early days of American capitalism the supply of capital necessarily fell short of what was needed to exploit the virtually endless supply of natural resources. The wildcat banks contributed to mobilizing much-needed capital, but they cost the banking industry a bit of credibility with the public. Understanding the history that the banking industry has had to live down helps explain why it remains highly regulated.
Dillistin, William H. 1949. Bank Note Reporters and Counterfeit Detectors, 1826–1866.
Dowd, Kevin. 1996. Competition and Finance: A Reinterpretation of Financial and Monetary Economics.
Knox, John Jay. 1903. A History of Banking in the United States.
Rockoff, Hugh. 1975. The Free Banking Era: A Reexamination.
Rolnick, Arthur J., and Warren E. Weber. 1983. New Evidence of the Free Banking Era. American Economic Review, 73, no. 5 (December): 1080–1091.