Wildcat banking
Encyclopedia
Wildcat banking refers to the unusual practices of bank
s charter
ed under state
law during the periods of non-federally regulated state banking between 1816 and 1863 in the United States
, also known as the Free Banking Era. This era, commonly described as an example of free banking
, was not a period of true free banking, as banks were only free of federal regulation, and banking was still left to the states to regulate. The actual regulation of banking during this period varied from state to state.
According to some sources, the term came from a bank in Michigan
that issued private paper currency with the image of a wildcat
. After the bank failed, poorly backed bank notes became known as wildcat currency, and the banks that issued them as wildcat banks. However, according to others, wildcat meant a rash speculator as early as 1812, and by 1838 had been extended to any risky business venture.
backed by questionable security (such as mortgages and bonds
). These actions ended when note circulation by state banks was stopped after the passage of the National Bank Act of 1863. Mark Twain, in his autobiography, refers to the use of such currency in 1853, "The firm paid my wages in wildcat money at its face value" [Autobiography of Mark Twain, Smith, page 460]
Before the establishment of the Federal Reserve System
in 1913, banks extended loans by issuing notes. An individual may take his promissory notes or bills of exchange to the bank for discount. Banks would issue own bank notes to the borrowers.
Bank notes were usually backed by specie
or government bonds. The holder of the bank note had a claim on the bank's assets. The overwhelming determinate of value on a banks notes would be the quality of that bank's assets. Many of the states regulations required for the banks to back their notes with state Bonds. Banks in states that had safe bonds would thrive whereas banks in states that had risky bonds would suffer. Of course other factors could influence the value of a bank note, the major secondary cause would be the likelihood of fraud, either from the bank or from forgery.
Many varieties of money different banks traded at different discounts to their face value. Lists were published to help bankers and others to identify and appraise the bills (and forgeries). One of the major causes of discounting occurred due to the real cost of transferring the notes to the original bank.
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s charter
Charter
A charter is the grant of authority or rights, stating that the granter formally recognizes the prerogative of the recipient to exercise the rights specified...
ed under state
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
law during the periods of non-federally regulated state banking between 1816 and 1863 in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, also known as the Free Banking Era. This era, commonly described as an example of free banking
Free banking
Free banking refers to a monetary arrangement in which banks are subject to no special regulations beyond those applicable to most enterprises, and in which they also are free to issue their own paper currency...
, was not a period of true free banking, as banks were only free of federal regulation, and banking was still left to the states to regulate. The actual regulation of banking during this period varied from state to state.
According to some sources, the term came from a bank in Michigan
Michigan
Michigan is a U.S. state located in the Great Lakes Region of the United States of America. The name Michigan is the French form of the Ojibwa word mishigamaa, meaning "large water" or "large lake"....
that issued private paper currency with the image of a wildcat
Wildcat
Wildcat is a small felid native to Europe, the western part of Asia, and Africa.-Animals:Wildcat may also refer to members of the genus Lynx:...
. After the bank failed, poorly backed bank notes became known as wildcat currency, and the banks that issued them as wildcat banks. However, according to others, wildcat meant a rash speculator as early as 1812, and by 1838 had been extended to any risky business venture.
About
The traditional view of wildcat banks describes them as distributing nearly worthless currencyCurrency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
backed by questionable security (such as mortgages and bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
). These actions ended when note circulation by state banks was stopped after the passage of the National Bank Act of 1863. Mark Twain, in his autobiography, refers to the use of such currency in 1853, "The firm paid my wages in wildcat money at its face value" [Autobiography of Mark Twain, Smith, page 460]
Before the establishment of the Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
in 1913, banks extended loans by issuing notes. An individual may take his promissory notes or bills of exchange to the bank for discount. Banks would issue own bank notes to the borrowers.
Bank notes were usually backed by specie
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
or government bonds. The holder of the bank note had a claim on the bank's assets. The overwhelming determinate of value on a banks notes would be the quality of that bank's assets. Many of the states regulations required for the banks to back their notes with state Bonds. Banks in states that had safe bonds would thrive whereas banks in states that had risky bonds would suffer. Of course other factors could influence the value of a bank note, the major secondary cause would be the likelihood of fraud, either from the bank or from forgery.
Many varieties of money different banks traded at different discounts to their face value. Lists were published to help bankers and others to identify and appraise the bills (and forgeries). One of the major causes of discounting occurred due to the real cost of transferring the notes to the original bank.
External links
- U.S. banks and money Federal Reserve Bank of Atlanta