Country Facts and Folklore
By Andy Reddick

FREE BANKING 1837-1863

Alexander Hamilton, Secretary of the Treasury, convinced the new government of a need for a federal bank that would fund the national debt and issue credit to the government. The first, chartered by Congress in 1791, modeled the Bank of England.

Thomas Jefferson and James Madison accused the new bank of being an engine for speculation, manipulation, and corruption. Many joined this band wagon, so Congress refused to extend its charter in 1811.

After a five year period, the 2nd Bank of the US was chartered (1816-1836,) basically as a duplicate, or revival of the first.

Democratic-Republican Andrew Jackson, and the Democrats basically opposed the banks; Whigs supported them. Keeping the currency uniform was good in urbanized areas, but it often meant that bartering was the only method of trade in rural areas, where the established currency was rare, and other currencies could not be exchanged.

From 1837 to 1863, the US was in what has been labeled "the Free Banking Era," during which time state-chartered banks existed without a national bank and without federal control over the currency. In many ways it brought about a mess.

Each state-chartered bank could print currency and issue bank notes against gold or silver coin. The states regulated the reserve requirements and interest rates on loans and deposits, and pretty much set the standard for capital ratio. But their control system often failed.

Compared to today’s insured institutions, the banks during the period were very unstable. And, if this was happening in established cities, you can imagine how risky banks were on the frontier. Because of inconsistent currency and fluctuation of currency values, many pioneers hid their money in secret places somewhere on their person or property.

Many of the banks were involved in speculation schemes themselves. They issued their own paper currency, then sent representatives to widespread regions where they circulated the bills, bringing back money from other parts that hopefully was solvent. It might take months or even years for the bills to get back to the issuing bank, and by that time it was assumed that there would be plenty of money on deposit to cover the wayward notes.

Today banks do not issue their own certificates, and clearinghouses balance liquid assets back and forth between banking institutions. It is illegal for banks to operate by "kiting" as they did during the free banking period.

Stop in Bentonsport sometime and look at the town currency on display at the Mason House. This is a good example of state-chartered certificates of currency that survived the wild banking era, and is the only currency known to have originated within the county.

Some of the currency issued were forerunners of coupons or vouchers. For example, the Ladies Furnishing Store in Salem, Massachusetts issued notes worth three cents on redemption, as an advertising gimmick to get people into the store. The Delaware Bridge Company of Lambertville, New Jersey issued one cent notes that (I assume) allowed passage over their bridge. (For what else could they be redeemed?)

Millions of dollars were in circulation from the State Bank of Indiana. I have also seen photos of a ten-dollar note from the Merchants Bank of Memphis, a five-dollar exchange note from the State of Louisiana and notes from banks in Des Moines, St. Louis and Dubuque. The State Bank of Indiana was a standard bearer. Their certificates were as good as gold anywhere in America.

In 1863 the banking system was once again nationalized and began issuing uniform currency. This solved many problems that had developed during the previous twenty-five years. 1,500 national banks popped up within two years, with the number rapidly growing.

By the 1880s the creation and adoption of checking accounts became popular. As early as the 1950s, many banks experimented with offering their preferred customers plastic Credit Cards.

(From the on-line History of Central Banking in the United States)

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Contributed to the Van Buren Co. IAGenWeb Project by Andy Reddick