What Occurred During the Free Banking Era?

During the free banking era in 1837 to 1862, there was no federal bank, and America's states, territories and private institutions freely printed and circulated their own currencies. In this era of uncontrolled "wildcat" banking, many banks closed, and the bills that some banks and businesses issued became worthless.

When Andrew Jackson became President of the United States in 1829, the Second Bank of the United States, modeled on Alexander Hamilton's First Bank of the United States, was in the midst of its

20-year charter. The U.S. Supreme Court had deemed it constitutional. However, Andrew Jackson opposed the concept of a central bank, claiming it was dangerous to American liberty. He vetoed the recharter bill and withdrew all federal deposits from the bank. This negated the bank's regulatory power, and it dissolved soon afterwards. The government's funds passed into the hands of private banks, which issued banknotes, supposedly based upon gold and silver reserves.

In 1836, Jackson issued a treasury circular ordering that people could pay for public lands only with gold and silver. This caused a bank run on specie and brought on a recession. Banks began to hoard gold and silver. The states passed free banking acts, which allowed banks to incorporate like businesses, without having to be approved by state legislatures. Any such business could issue its own currency, and many did, causing a free-for-all of banknotes. In response, some states banned banks completely. The situation only stabilized with the outbreak of the Civil War. Facing the need for a common currency with which to pay for munitions and other war needs, the government passed the National Banking Act of 1863 and created the federal currency which became known as the "greenback."