Wildcat Banking

Definition

Wildcat banking refers to a speculative, high-risk type of banking that was prominent in the United States during the nineteenth century. It was associated with banks chartered under state law during the period 1810–1860, where institutions were only loosely regulated. These banks often issued their own paper currencies, ran unchecked, made unsecured loans, and failed frequently, leading to economic instability.

Phonetic

The phonetic transcription of “Wildcat Banking” is: /ˈwaɪldkæt ˈbæŋkɪŋ/

Key Takeaways

Main Takeaways About Wildcat Banking

1. Wildcat Banking refers to the unregulated banking practices in the U.S. during the 19th century. These banks were usually established in remote or “wildcat” locations, making it difficult for note holders to redeem their notes or check the bank’s legitimacy.
2. Many of these banks were sketchy in their operations and were often associated with fraudulent activities. They would issue banknotes far in excess of their actual capital reserves which often led to widespread bank failures, contributing to financial panics and recessions.
3. The wildcat banking era led to a demand for banking reform and the eventual establishment of the national banking system and the Federal Reserve System, introducing regulation and supervision to the banking industry.

Importance

Wildcat Banking is a significant term in business/finance history due to its impact on the banking system in the United States during the 19th century. The term refers to the practices of state-chartered banks before the establishment of the U.S. Federal Reserve System. These banks were often established in remote or “wildcat” locations, hence the name. Not regulated by any centralized authority, they could issue banknotes without any significant gold or silver reserves, making the money supply unstable and obscure. The high risk and fraudulent operations often associated with these banks resulted in numerous bank failures and economic instability. Understanding Wildcat Banking is essential as it underscores the importance and need for regulation and stability in the banking system.

Explanation

Wildcat banking served a distinct purpose in the American financial landscape during the period of 1837 to 1863, also known as the Free Banking Era. The term refers to the state-chartered, lightly regulated banks that were established across the American frontier during this time. Their main purpose was to address the acute need for local banking facilities in the rapidly growing and spreading America. The demand for credit facilities was increasing at a faster pace than traditional banking institutions could keep up. In response to this, state governments permitted virtually anyone to open a bank given they could meet the initial capital requirements. This unlocked financial opportunities that otherwise might have been out of reach in these underbanked regions. Despite their nickname, wildcat banks were not actually wild or unruly. They offered essential financial services such as issuing banknotes, extending loans and providing safe places for depositing money. Wildcat banks allowed the local communities to participate in the growing American economy by facilitating investments, offering credit to farmers and businesses, and supporting infrastructure development within their territories. These banks also played a significant role in facilitating settlement expansion across the American frontier by providing requisite financial services for those who wished to secure land and cultivate it. However, these banks were often criticized for their risky behaviors and frequent failures, due to the lack of effective regulations and oversight.

Examples

Wildcat Banking is a term used to describe the banking industry’s practices during the pre-civil war era in the United States. It refers to the issuing of banknotes by private banks that were not backed by enough capital or silver/gold reserves and were thus unreliable. Here are three examples:1. Michigan’s Free Banking Era (1837-1863) : Michigan was plagued with unregulated “wildcat” banks that issued banknotes without sufficient capital. They were called wildcat banks because they were said to exist in remote, unpopulated areas (like where wildcats lived in the forest) so that people could not easily redeem their banknotes for gold or silver.2. Free Banking in Minnesota (1858-1865) : Wildcat banking ran rampant in the state of Minnesota during this time. Banks would set up on the outskirts of towns or in remote regions and give out loans and banknotes that were not backed by enough assets, capital or reserves. The extreme case led to the collapse of many of these banks and substantial financial loss for the people of Minnesota.3. The Suffolk Bank System (1825-1858): Even though the Suffolk Bank in Boston, Massachusetts wasn’t a wildcat bank itself, it played a crucial role in controlling and regulating them. The Suffolk Bank created a network allowing rural banks to deposit their reserves and issue bank notes with Suffolk’s guarantee. This practice significantly reduced the risks associated with wildcat banking. Nevertheless, it was a reaction to the widespread occurrence of wildcat banking in the American Northeast during the early 19th century.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Specie Payment: This is hard currency like gold or silver coins. Used as a basis for trade during the era of wildcat banking.
• Bank Notes: These are traditional currency notes issued by a bank, their value is associated with the bank’s reputation and trustworthiness during the era of wildcat banking.
• Fractional Reserve Banking: A system where banks keep a fraction of the deposits as reserves and lend out the remaining amount. This principle was used loosely during wildcat banking periods.
• Unregulated Banking: This refers to a system where banks are not governed by any strict rules or regulations, similar to the banking environment during the wildcat banking period.
• Bank Failures: This refers to the situation where a bank cannot meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. Bank failures were common during the wildcat banking era.

Sources for More Information

• Investopedia
• Encyclopaedia Britannica
• Economics Help
• Federal Reserve History