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.
See also:
References:
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.