1800s Wildcat Banking
US believed in the 1800s firmly in independence. It had no governmental currency, so residents used whatever they wished. People utilized the few gold coins and banknotes legally issued by the mint, although they were in short supply. In the Americas, foreign and private currencies dominated commerce. These notes were all separately printed, and some had presidents’ faces, just like the dollar does now. One bill featured Santa. Wildcat banking ruled. Customers could exchange the note for gold or silver at the bank. Only the printing bank accepted the note. The notes could be exchanged for other banks’ private notes at varying rates for local and limited national commerce. The Bank of Indiana might use a $5 note that the Bank of Kentucky would honor for $4 and vice versa. Over eight thousand banknotes and coins existed in 1859. This vast network of arbitrage opportunities required businesses and exchangers to keep current currency records, as they do today. Out-of-control private money generation generated a fraud-friendly environment, as in France’s Mississippi Bubble. Banks issued notes above gold reserves. Banks can construct extremely leveraged notes against minimal precious metals, unlike now. State-by-state laws and municipal commissioners oversaw banks’ reserves, and banks often moved gold between banks to seem solvent. Frequent bank runs and defaults. Even the copper and zinc in these institutions’ coins were worth more than face value. A Michigan bank commissioner wrote in 1839: By the dishonesty and cupidity of a few, a law based on well-researched and accepted notions became a deceit machine. The North developed its own currency in 1861 to pay for war expenses. This note is lawful currency for all public and private debts, excluding import tariffs and public debt interest, and is receivable for all U.S. loans. Greenbacks sped up wartime business. Market dynamics, not legal order, favored national notes over private ones. Relying on the U.S. Treasury to pay obligations was safer than a private company. Banks funded the Civil War. The National Bank Act of 1863 gave the federal government the power to control banking activities by issuing national banking licenses. These chartered banks had capital, reserve, and private-money penalties. The Bank Act discourages private money and promotes a single national dollar. Wildcat banking shows private money’s failures. Private entities use a money printer as a “fraud machine” when given access by the public, as in 1839. Wildcat generated commercial friction, rampant fraud, and financial insecurity. Wildcat banking taught us that bank deposits aren’t money without control and government insurance. Private money bank runs, and defaults are unavoidable, delivering excessive and unwanted shocks to financial markets. This makes it harder for courts to clear up financial issues. This undermines faith in government. A mature economy needs a sovereign currency supported by the state. Free market investing is risky. Wildcat banking is a critical lesson to learn from the past given recent initiatives to return to digital private money with stable coins and crypto assets.