Wildcat Banking

Wildcat banking refers to the banking industry in parts of the United States from 1837 to 1865, when banks were established in remote and inaccessible locations. During this period, banks were chartered by state law without any federal oversight. Less stringent regulations on the banking industry at the time led to this period also being referred to as the Free Banking Era.

Wildcat banks were not fully free of regulation; they were only free of federal regulation. Wildcat banks were chartered under applicable state laws and regulated on the state level. Banking regulations, therefore, varied from one state to the next during the Free Banking Era. The Free Banking Era came to an end with the passage of the National Bank Act of 1863, which implemented federal regulations governing banks, established the United States National Banking System, and encouraged the development of a national currency backed by the holdings of the U.S. Treasury and issued by the Office of the Comptroller of the Currency.

The term "wildcat banking" supposedly had its genesis in 1830s banking in Michigan, where bankers were believed to have set up banks in areas so remote that wildcats roamed there. Others say the term originated with an early bank that issued currency bearing an image of a wildcat.

As early as 1812, wildcat was used to refer to an impetuous or foolhardy speculator. By 1838, the term was applied to any business venture considered unsound or perilous. The term "wildcat" then, when applied to a bank, came to mean an unstable bank at risk of failure, and it’s for this reason that wildcat banks have been portrayed as such in Westerns. For example, some Westerns portray wildcat bankers as leaving their vaults open for depositors to see barrels of cash therein. However, the barrels are actually full of nails, flour or other similarly worthless items, with a layer of cash on top to fool depositors.

Regardless of the origins of the term, wildcat banks issued their own currency until the National Bank Act of 1863 forbade this practice. These bank locations were sometimes the only places where the bank's notes could be redeemed, thereby creating a formidable obstacle for their redemption by note holders and providing an unfair advantage to unscrupulous bankers.

Traditionally, the currency issued by wildcat bankers has been viewed as of worthless, and the securities used to back wildcat currencies have historically been questionable. While some wildcat banks used specie to back their issued currencies, others used bonds or mortgages. Different currencies issued by different banks traded at different discounts as compared to their face values. Published lists were used to distinguish legitimate bills from forgeries, and to help bankers and currency traders appraise wildcat currencies.

Before the Federal Reserve System was established in 1913, banks issued notes to extend loans to their customers. An individual could take his or her own bank notes or bills of exchange to the issuing bank and trade them in for a discount of the cash value. Borrowers would obtain bank notes backed by government bonds or specie. Such a note gave its holder a claim on assets held by the bank, which, during the Free Banking Era, were required to be backed by state bonds in many states.