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Wildcat banking refers to the unusual practices of banks chartered under state law during the period of non-Federally regulated state banking (1816–63) in the United States. This era, commonly referred to as free banking, was not a period of true free banking as banks were only free of Federal regulation. Banking was left to the states to regulate. The actual regulation of banking during this period was quite varied state to state.
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The traditional view of Wildcat banks describes them as distributing nearly worthless currency backed by questionable security (such as mortgages and bonds) and were located in inaccessible areas to discourage note redemption. These actions ended when note circulation by state banks was stopped after the passage of the National Bank Act of 1863. The term "wildcat" banking derived from the fact that typically these banks were located in remote countryside; due to such locations, the holder of its notes had a lot of difficulty in redeeming their notes and so the banks could issue notes without actually honoring the obligations.
Work done by Hugh Rockoff, Arthur Rolnick, and Warren Weber, have shown a greater success rate among state banks than previously thought. Though some states produced bad bank notes, generally State regulated banks produced reliable notes that could be expected to trade near par.
Before the permanent 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 of the "Wildcat Banks" were banks that located inside of a State with banking regulation favorable to the bank where on the border of a State with banking regulation not favorable to banks. Even though these banks appeared to be inaccessible, they were often located near a major transportation lane such as rivers or roads.
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 occured due to the real cost of transferring the notes to the original bank.
Wildcat bank
The term Wildcat Bank refers to a particularly unsound and risky bank chartered under state law in the United States. They flourished after the national bank was decommissioned when a bank was started in a small town. When the banks acquired enough assets their owners would leave town with all deposits. The debt, which hurt many people, eventually became a reason for the Panic of 1857.
Wildcat banks were banks that issued money without proper gold in stock to back up the supply. These banks were often short-lived. Unfortunately, since these banks were issuing large amounts of money, many people lost their investment as the worth of their bank note dropped. These banks became a large problem, and were eventually restricted by the US Government. The US Government passed a measure to restrict the ability of people to trade it their bank notes for the gold worth of the currency.
Examples
External links
- U.S. banks and money Federal Reserve Bank of Atlanta
Wikipedia content modification information:
- This page was last modified on 18 October 2008, at 12:00.
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