Wildcat banking

Wildcat banking refers to the practices of banks chartered 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 free of only federal regulation; banking was regulated by the states. 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.[1] However, according to others, wildcat meant a rash speculator as early as 1812, and by 1838 had been extended to any risky business venture.[2] A common conception of the wildcat bank in Westerns and like stories was of a bank that left its safe somewhat ajar for depositors to see, in which the banker would display a barrel full of nails, grain or flour with a thin sprinkling of cash on top, thus fooling depositors into thinking it was a successful bank.

About

The traditional view of wildcat banks describes them as distributing nearly worthless currency 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".[3]

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 their 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 bank's 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.[4]

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.

Examples

See also

References

  1. ↑ Robert Allen Palmer, Speaking of Animals: A Dictionary of Animal Metaphors, Westport, Conn.: Greenwood Press, 1995, p.414.
  2. ↑ Christine Ammer, It's Raining Cats and Dogs ... and Other Beastly Expressions (New York: Bantam Doubleday Dell, 1989) 152
  3. ↑ Autobiography of Mark Twain, Smith, page 460
  4. ↑ Dwyer, Gerald P. "Wildcat Banking, Banking Panics, and Free Banking in the United States". Economic Review, 1996. p. 2. Retrieved 6 December 2013. "Free banks did not always redeem their notes as promised, and there are fabulous stories of fraudulent activities, stories that appear frequently in histories of free banking and general histories of banking."

External links

This article is issued from Wikipedia - version of the 11/1/2016. The text is available under the Creative Commons Attribution/Share Alike but additional terms may apply for the media files.