Interesting and Amusing
The Free Banking Era: More than 30,000 Different Notes in Circulation
Suppose you found a wallet filled with paper money sometime during the Free
Banking Era, which was from 1836 to 1866. This wallet might contain a yellow
two-cent note issued by the New York druggist Matthew's Bros. You also might
find a three-cent note issued by the Peabody Ladies Furnishing Store in
Massachusetts. The most attractive of the bunch might be a pink 25-cent
note issued by the Hyson Tea Company in New York. Imagine using some of
these notes to pay for something at the store! During the Free Banking Era,
consumers could not be sure that merchants would accept their paper money.
Although merchants were able to certify currency as genuine by consulting
registries called Bank Note Reporters, approximately one-third of all paper
money during the Free Banking Era was estimated to be counterfeit.
Before the Free Banking Era went into effect, it was difficult for banks to obtain
a commercial charter. During the Free Banking Era, state authorities were
created with the sole purpose of issuing bank charters. Any private or municipal
authority could operate a bank as long as it could satisfy a minimal set
of conditions. The instability of the Free Banking Era was especially obvious
in the state of Michigan, where the State legislature passed the General
Banking Law of 1837. This law immediately transformed Michigan's banking
industry. More than 55 banks were organized in Michigan within one year
of the liberal banking law--most of them with the sole purpose of issuing
paper money.
Almost all of the banks formed under Michigan's General Banking Law failed
or went broke within two years. Some of these "broken banks" attempted to fool
bank inspectors by keeping a barrel of nails with a top layer of gold coin as
their "reserves." The Bank of Battle Creek, Michigan, had its teller, Tolman
W. Hall, run out the back door whenever a noteholder would enter the bank. Another
unscrupulous tactic was to locate banks' main offices in remote wilderness areas.
These "wildcat banks" would often shuttle the same sack
of coins from one location to another to convince the occasional bank inspector
that the bank was solvent. One wildcat bank, the Farmers Bank of Sandstone,
reportedly offered to redeem its notes in the local merchandise: a sandstone
whetstone for each one-dollar note.
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