Wildcat banking

Based on Wikipedia: Wildcat banking

The Great American Money Scam

Imagine walking into a store with a twenty-dollar bill, only to have the shopkeeper squint at it, pull out a thick reference book, and inform you that your money is worth maybe twelve dollars—if he'll take it at all. Now imagine this wasn't counterfeit currency. It was perfectly legal tender, issued by a perfectly legal bank. Welcome to America before the Civil War.

For roughly three decades in the mid-1800s, the United States conducted one of the strangest monetary experiments in history. There was no national currency. No Federal Reserve. Instead, hundreds of independent banks—chartered by state governments with varying degrees of competence and honesty—each printed their own paper money. Some of these banks were legitimate institutions run by careful businessmen. Others were elaborate frauds designed to separate frontier farmers from their hard-earned gold and silver coins.

The fraudulent ones earned a colorful name: wildcat banks.

Where Wild Cats Roam

The term itself has a delightfully disputed origin. One theory points to a Michigan bank that decorated its notes with an image of a panther—which locals called a "wild cat." Another traces it to counterfeit notes featuring a mountain lion from the Catskill Bank of New York. But the most evocative explanation relates to location.

These banks deliberately established themselves in the most remote, inaccessible places imaginable. Deep in the wilderness. Far from roads. In territories where, as the saying went, only wild cats lived.

Why? Because the whole scheme depended on distance.

Here's how it worked. A bank would issue paper notes—essentially IOUs promising to pay the bearer in gold or silver coins on demand. In theory, you could walk into the bank and exchange your paper for precious metal. In practice, if the bank sat three hundred miles into trackless forest, most people would never make the journey. The notes would circulate as money, the bank would collect interest on loans, and the actual coins backing the currency could be astonishingly small—or nonexistent entirely.

The Mathematics of Fraud

The technical definition of a wildcat bank is one that issues more currency than it can continuously redeem in specie—the lovely old term for gold and silver coins. Some banks pushed this to absurd extremes.

When regulators finally examined one Michigan institution, they discovered that its "cash reserves" consisted of boxes filled with nails and broken glass, with a thin layer of silver coins artfully arranged on top. It looked impressive until you dug an inch deep.

State banking commissioners were supposed to prevent such frauds. But the wildcatters developed countermeasures. In some cases, banks would literally transport the same chest of coins from location to location, staying one step ahead of the visiting inspector. By the time the commissioner arrived at Bank A, the coins had already departed for Bank B.

A Scheme as Old as the Republic

Wildcat banking didn't emerge from nowhere. Its roots stretch back to the 1790s, when ambitious country bankers in New England discovered an interesting loophole in the monetary system.

Boston's established banks refused to accept currency from rural competitors. This created a two-tier system: city money for city commerce, country money for everything else. Rural bankers quickly realized that distance was their friend. Notes issued in Boston returned promptly for payment. Notes issued in some village fifty miles away might circulate for months—or years—before anyone tried to redeem them.

A businessman named Andrew Dexter Jr. took this logic to its extreme. In the early 1800s, he acquired interests in several remote banks and used them to finance construction of a grand central money exchange in Boston. He borrowed extravagantly from his own banks, flooding the city with freshly printed notes.

His empire included the Farmers' Exchange Bank, located in the isolated village of Chepachet, Rhode Island. It included the Berkshire Bank, tucked away at the far western end of Massachusetts. And it included the Detroit Bank, which Dexter's associates established more than six hundred miles away in the newly organized Michigan Territory.

The scheme collapsed in 1809. When creditors finally descended on the Berkshire Bank, they presented more notes for payment in a single day than the bank's entire recorded outstanding currency. The Farmers' Exchange Bank achieved a grimmer distinction: it became the first American bank to fail outright, with exactly eighty-six dollars in its vault to cover five hundred and eighty thousand dollars in circulating notes.

The Government Tries to Help (It Makes Things Worse)

The early American republic lacked any consistent approach to banking regulation. The first attempt at order came with the First Bank of the United States, chartered in 1791. This quasi-governmental institution performed a crucial if unglamorous function: it collected state bank notes and regularly presented them for payment, forcing smaller banks to maintain adequate reserves.

When the First Bank's charter expired in 1811, that discipline vanished.

What followed was chaos. The War of 1812 produced panics and bank runs. When British forces burned Washington in 1814, banks across the eastern seaboard suspended payments in coin. City governments and businesses began paying their bills with hastily printed notes and "shinplasters"—essentially private IOUs that functioned as small-denomination currency. The money supply ballooned.

Senator Samuel Smith, arguing for a new national bank, called the backcountry banks "caterpillars of the nation"—pests devouring the credible money supply.

Congress established the Second Bank of the United States in 1816, hoping to restore order. For a while, it worked. The Second Bank collected state bank notes and presented them for payment, just as the First Bank had done. State banks had to maintain reserves or face immediate reckoning.

Then President Andrew Jackson decided to destroy the Second Bank.

Jackson's War on Banks

Andrew Jackson harbored a deep, almost visceral hatred of centralized banking. As a young man, he had lost money in a land speculation scheme and blamed the financial establishment. As president, he saw the Second Bank as a tool of wealthy Eastern elites—which, to be fair, it partly was.

In 1833, Jackson ordered federal funds removed from the Second Bank and deposited in favored state institutions, mockingly called "pet banks." He followed this with the Deposit Act of 1836, which stripped the Treasury Department of any power to regulate credit expansion by state banks. He also issued the Specie Circular, requiring that federal land purchases be paid exclusively in gold or silver coin.

The combination proved catastrophic.

The Specie Circular drained hard money from eastern cities toward the western frontier, where most land sales occurred. The pet banks, suddenly flush with federal deposits and freed from oversight, expanded credit recklessly. When cotton prices collapsed in 1836 and the Bank of England restricted money flows to America, the whole system imploded.

The Panic of 1837 produced a depression lasting roughly five years. Businesses across the country—especially in the west—found themselves desperate for any functioning currency. Many turned to creative, frequently disastrous alternatives.

The Free Banking Era Begins

The years from 1836 to 1865 are known as the Free Banking Era, though "free" is perhaps too generous a word. "Chaotic" might be more accurate. "Terrifying" might be even better.

With no national banking system and state legislatures eager to encourage economic development, almost anyone could open a bank. Requirements varied wildly. Some states demanded substantial capital. Others accepted bonds or real estate as backing for currency. A few states—including Arkansas and Iowa—responded to the chaos by prohibiting banks entirely.

The experience of Michigan became notorious. In 1837, the very year it achieved statehood, Michigan passed the General Banking Act. Any group of landowners could form a bank by raising fifty thousand dollars in capital stock and depositing notes secured by real estate.

This was unprecedented. Every other state chartered banks individually, through specific legislative acts. Michigan had created a general framework for anyone to enter the business.

Forty-nine banks promptly materialized—a remarkable number for a frontier state with limited population. Investigators eventually discovered how many had met the capital requirements: they hadn't. Some watered their stock with worthless contributions. Others passed the same cache of coins from institution to institution, staying ahead of regulators.

First Quality: Red Dog

The currency issued by these institutions presented a constant puzzle for anyone trying to conduct business. A contemporary newspaper classified Michigan money into three grades:

First quality, Red Dog; second quality, Wild Cat; third quality, Catamount. Of the best quality, it is said, it takes five pecks to make a bushel.

In other words, even the most reputable Michigan currency was worth only a fraction of its face value. The worst might be worthless entirely.

This was the daily reality of commerce in Free Banking Era America. Every transaction required evaluating the currency involved. Merchants kept thick reference books listing hundreds of banks and the current discount on their notes. A dollar from Bank A might be worth ninety cents. A dollar from Bank B might be worth seventy cents. A dollar from Bank C might be worth the paper it was printed on—and not a cent more.

Railroads Join the Party

If wildcat banking sounds reckless enough, consider that it eventually merged with another speculative fever: railroads.

The Free Banking Era coincided exactly with America's first railroad boom. Building railroads required enormous capital. Banks helped finance construction. And then railroad companies discovered they could simply become banks themselves.

The Ohio Railroad company, organized in 1835 to build along the shore of Lake Erie, immediately exploited a permissive clause in its charter to begin issuing credit notes. It redeemed these notes using its state funding—funds meant for actual railroad construction. When the company collapsed, it left hundreds of thousands of dollars in worthless currency and an unusable track built on wooden pilings.

Similar disasters unfolded across the South. Mississippi found itself blanketed with speculative railroad routes and railroad bank paper. Robert Y. Hayne organized the South Western Railroad Bank with stringent rules to protect its capital, yet it still had to suspend payments when the railroad ran out of money.

One institution from this era survived to tell the tale. The Georgia Railroad and Banking Company weathered the Free Banking Era, the Civil War, and decades of subsequent upheaval, eventually merging with First Union bank in 1986. It remains one of the very few wildcats to achieve respectability.

The Panic of 1857 and the Final Wave

The 1850s saw another outbreak of wildcat banking, particularly in western territories where settlement was booming and currency was scarce. Indiana, Wisconsin, Tennessee, and the Nebraska Territory all experienced waves of dubious banks.

The schemes had grown more sophisticated. Some states allowed bankers to use discounted bonds—bonds trading below their face value—as backing for currency, while crediting those bonds at full value. A clever operator could purchase bonds for fifty cents on the dollar, deposit them as if they were worth a dollar, issue currency against them, and pocket the difference. Better yet, he could sometimes pay for the discounted bonds with the very notes they backed, creating money from nothing.

Nebraska's experience was particularly colorful. The territorial legislature declared bank note issuance a crime in its first session of 1855. The following year, it granted several banking charters anyway. The third year, a new criminal code conveniently omitted the anti-banking provision, allowing banks to organize under general business law.

The Panic of 1857 swept most of these institutions away. Of all Nebraska's territorial banks, only one managed to honor all its notes.

The End of the Era

The Civil War finally brought order to American currency—though it took a crisis of national survival to accomplish what decades of financial chaos could not.

In 1863, Congress passed the National Bank Act, creating a uniform national currency based on federal debt. This wasn't another centralized bank like the First or Second Bank of the United States. Local private banks still issued the currency. But they did so under uniform rules, with consistent backing and standardized notes.

A heavy tax on the old state bank notes drove them from circulation. The wildcat era was over.

The Long Shadow of Wildcat Banking

What does it mean that America spent three decades with hundreds of different currencies, many of them fraudulent? The experience left deep marks on American attitudes toward money and banking.

The profound distrust of centralized financial power—the same suspicion that led Andrew Jackson to destroy the Second Bank—persisted long after the wildcat era ended. The Federal Reserve wasn't created until 1913, half a century after the National Bank Act, and it faced fierce opposition. Even today, American banking regulation is notably fragmented compared to other developed nations, with state and federal regulators sharing overlapping jurisdictions.

The era also demonstrates how quickly financial systems can deteriorate without effective oversight. The wildcat banks didn't emerge because Americans were uniquely gullible or corrupt. They emerged because the rules allowed them to emerge. When state legislatures granted charters freely and enforced regulations poorly, enterprising individuals exploited the gaps. The problem was structural, not moral.

Perhaps most striking is how normal the chaos became. For three decades, Americans conducted their daily business with money that might or might not be worth anything. They developed elaborate systems for evaluating currency. They accepted significant losses as routine. They adapted.

The wildcat era offers a reminder that money is, ultimately, a shared fiction. Its value depends entirely on collective belief. When that belief fractures—when different communities trust different institutions to different degrees—the fiction splinters into competing narratives. First quality: Red Dog. Second quality: Wild Cat. Third quality: Catamount. Of the best quality, it takes five pecks to make a bushel.

We've built better systems since then. But the underlying truth remains: money works because we agree it works. The wildcatters understood that perfectly. They just exploited it in ways we've since decided to prohibit.