America Without the Dollar

New York Stock Exchange
A couple months ago, when discussing why a currency union worked so much better for American states than European countries, I questioned Paul Krugman’s assumption that our current dollar monopoly on currency was necessarily the best thing. Subsequently I did some research on the free banking era in the US, a time when in fact there was no federal monopoly on money and states differed wildly in monetary policy. It’s a fascinating and bizarre period, an era stretching from Andrew Jackson’s presidency until the Civil War, when banks issued their own money and some states were officially bankless. These various systems represent a number of fascinating case studies for historians and economists, who down the years have debated the various results from the so-called “wildcat” banks in free banking states as well as states which by law had no banking at all. Below the fold is the first paragraph of the paper I wrote on the subject:

In the early- to mid-19th century United States, banking was widely viewed as a noxious and predatory profession, given to manufacturing booms and busts. “The Banking system,” one 1833 polemic declared, “must be regarded as the principal social evil in the United States…” After the fall of the Second Bank of the United States, however, many states needed to create a lot of capital to make up the shortfall. The result was a hodgepodge of free banking, banking prohibitions, and state monopolies. This era ended with the unification of the banking system under the federal government in 1863.# This paper will focus on historians’ understanding of free banking in the West, from contemporaneous accounts to modern economic surveys. The consensus of the early histories held that free banking was a catastrophe for consumers, who were fleeced of their hard-earned money by fraudulent “wildcat” banks that took their gold and gave them rapidly depreciating bank notes. The theme since the early 20th century, however, has been one of decreasing anti-bank fervor and increased interest in the empirical financial data.

The traditional history was somewhat hampered by the seminal tome on American Banking, Bray Hammond’s Banks and Politics in America, which noted that the effects of wildcat banking had been exaggerated, though still responsible for the collapse of free banking. It wasn’t until the mid-1970s that the free banking period was subjected to rigorous empirical work. When it was, by Hugh Rockoff in his 1972 dissertation, the results completely overturned the traditional narrative. Rockoff found that, while free banking had suffered some major panics, it often worked astonishingly well: the majority of banks redeemed their notes, and over time notes traded closer and closer to their face value. Rockoff still ended up concluding that, where there were major bank failures, they resulted from wildcat banking.

In the 1980s, however, a pair of economists at the Minneapolis Federal Reserve reexamined the bank data, and, in an influential series of papers, rejected wildcatting as an accurate explanation for most free bank failures. Instead, they argued that the poorly structured system forced banks to redeem notes at their nominal price for gold, while backing them with volatile assets such as state bonds. Under this structure, any panic about the solvency of the state could spark a run on all free banks, and force them out of business.

The histories of Western free banking, then, began by considering scheming businessmen the source of bank failures, and has reached a point where the institutions that surrounded these banks are considered to have doomed them before they issued a single note.

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One Response to America Without the Dollar

  1. Pingback: What does “harm” mean? Or, the importance of baselines | Morton and George

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