What was the problem with wildcat banks

This made it difficult for customers to exchange their notes for gold or silver. The need for reliable financing during the Civil War prompted the passage of the National Banking Act in The legislation created a uniform national currency and permitted only nationally chartered banks to issue bank notes. The legislation cleared up the problem of thousands of different bank notes circulating in the U.

Many banks did not keep enough cash on hand to meet customer needs during these periods of heavy demand, and were forced to shut down. News of one bank running out of cash would often cause a panic at other banks, as worried customers rushed to withdraw money before their bank failed. If a large number of banks were unable to meet the sudden demand for cash, it would sometimes trigger a massive series of bank failures. In , a particularly severe panic ended only when a private individual, the financier J.

Morgan, used his personal wealth to arrange emergency loans for banks. The financial panic fueled a reform movement. After several years of negotiation and discussion, Congress established the Federal Reserve System in Each of the key changes highlighted below resulted from periods of instability in the economy.

It explicitly set price stability as a national policy goal for the first time. Stable prices help people and businesses make financial decisions without worrying about where prices are headed. Economies with stable prices tend to be healthier in the long run. The very next year, Congress passed The Full Employment and Balanced Growth Act of , which established the second policy goal as full employment.

It also required the Fed to report to Congress on policy goals twice a year. These consisted, first, of U. Like state Free Banking laws, they allowed banks established by them to issue currency only on the condition that it be amply backed by eligible securities.

The twist was that the eligible securities were to consist exclusively of bonds issued by hang on to your hats! Despite this, Federal officials hoped that the mere availability of national bank charters would suffice to persuade state banks to switch to them.

In fact, very few did so at first. Hence the punitive 10 percent tax. All these measures, you might think, ought to have sufficed to make our currency perfectly uniform.

Most people suppose that national banknotes and greenbacks together made up a uniform currency for the simple reason that they were all, directly or indirectly claims against the Federal government.

Although they all bore similar engravings, national banknotes were like state banknotes in being claims against the particular national banks that issued them.

And until national banks were also unit banks. It followed that returning national banknotes to their sources for redemption was costly. Every national banking association formed or existing under this Title, shall take and receive at par, for any debt or liability to it, any and all notes or bills issued by any lawfully organized national banking association.

But why was the national currency inelastic? To see just how well Canadian banks, of which there were over three dozen for most of the period in question, managed the currency stock in ordinary times, and how much better they were at it than U. The Scottish system was just as noteworthy for its stability as well as its efficiency. Until the Scottish banks were hardly regulated at all, except by Scots contract law.

Besides having been celebrated during their heydays, the Scottish and Canadian systems have gotten plenty of attention in more recent times from various economists and economic historians.

All of which means that, even if central bankers, politicians, and pundits got their U. Then they might appreciate how atypical even the best parts of the fragmented U.

Finally, across the wide Pacific, China, Japan, and Russia barely rise above the horizon. Greenberg gave on the subject of antebellum banknotes. In their more recent assessment of the Michigan episode, John A.

Dove, Gary M. Pecquet, and Clifford F. But that conclusion depends on their decision to apply the term only to those banks that closed within a year of the start of the wildcat period. The size of the innermost red circle in the Venn diagram above reflects this strict definition.

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Public Opinion. Tax and Budget Policy. The first factor was that the stresses of war made a single and stable currency more clearly necessary than ever before. To prosecute the war the federal government had to be able to spend its own currency anywhere in the Union where government operations were necessary. The second factor was that the southern slave states, which had always been the principal objectors to federal banking and national monetary uniformity, were conveniently unrepresented in Congress during the war years—they were trying to secede.

The upshot was that Congress passed a number of pieces of currency reform legislation, culminating in the Legal Tender Act of , the National Currency Act of , and the National Banking Act of , 11 all signed into law by President Lincoln. The banking and currency acts of the s transformed our interlinked banking, financial, and monetary systems. These banks could also sell U. In very little time, wildcat banknotes drained out of circulation. It is almost as if Congress and President Lincoln understood, at least implicitly, that they were establishing a sort of national sovereign money franchise.

The OCC remains to this day one of our principal federal bank regulators. The OCC has rather less to do with the national currency, however, than it had for its first fifty years. That is because, by , we as a nation had come to realize that a healthy economy needed more than a uniform currency. It also needed what is known in the discipline as an elastic currency.

An elastic currency is a currency whose supply can be adjusted a to accommodate, while not over -accommodating, transaction and credit demand, and b to counteract sudden credit expansions or contractions. The Second Bank of the U. The U. They are Citizen Notes, you might say. They are issued and spent in the name of us all. And what is true of Federal Reserve Notes here is true of bank credit extended in Fed Note—that is, dollar—increments, too. The deposits, in other words, are functional equivalents of dollar bills.

Bank lending is just temporary private-public currency swapping. This is the money system we now have—the public-private franchise system. It is the product both of the foundational legislative enactments I have just described, and of sundry fine-tuning enactments and associated practical changes made over the past fifteen decades—especially in the s—as well. We built this up incrementally because we learned its necessity incrementally. Nothing has changed in the past several decades to alter that necessity.

All that has changed are a few of the technological means of carrying out satisfaction of that necessity. Where might we situate digital currency development along this phased sequence? It seems to me perfectly obvious that we are at Stage 1 where digital currency is concerned. For one thing, there are many such currencies—indeed, a bewildering and seemingly all-the-time growing array of them. For another thing, they are all of them issued by private issuers, some of which seem to be more or less reputable, others of which seem to be less so.

And finally, thanks to the factors just mentioned, these currencies fluctuate wildly in value, both relative to what they can trade for and relative to one another. They are essentially digital wildcat banknotes.

This is of course not a sustainable future for crypto. What, then, might change? What might a digital Stage 2, then digital Stage 3 look like? It seems that here, too, the future is obvious. It lies in the past. Note first that, unlike during the late 19 th and early 20 th centuries, there is nothing to prevent what I have called Stage 2 and Stage 3 from being reached simultaneously.

Now, however, we are well familiar with both those necessities, and can accordingly move to uniformity and elasticity in the digital currency space simultaneously.