"full-faith" bank notes left in its possession were ceremoniously burned at the public square. Another bank was formed in 1835 and collapsed in 1842. So devastating were these experiences that the Illinois Constitution of 1848 stipulated that, henceforth, the state should never again create a bank or own banking stock.
In Arkansas, even real estate was tried as a magic wand.
Subscribers to the state bank, instead of putting up cash, were allowed merely to pledge their real estate holdings as collateral.
The bank notes rapidly plummeted in value to only twenty-five per cent of their face amount, and within four years, the bank was gone.
THE MIRAGE OF FREE BANKING
There was a parallel development at this time called "free banking." The name is an insult to truth. What was called free banking was merely the conversion of banks from corporations to private associations. Aside from no longer receiving a charter from the state, practically every other aspect of the system remained the same, including a multitude of government controls, regulations, supports, and other blocks against the free market. George Selgin reminds us that "permission to set up a bank was usually accompanied by numerous restrictions, including especially required loans to the state."2
1. Henry V. Poor,
2. George A. Selgin,
LOAVES AND FISHES AND CIVIL WAR
367
The free banks were no less fraudulent than the chartered banks. The old custom was revived of rushing gold coins from one bank to another just ahead of the bank examiners, and of "putting a ballast of lead, broken glass and (appropriately) ten-penny nails in the box under a thinner covering of gold coins."1 When one such free bank collapsed in Massachusetts, it was discovered that its bank note circulation of $500,000 was backed by exactly $86.48.2
Professor Hans Sennholz writes:
Although economists disagree on many things, most see eye to eye on their acceptance of political control... These economists invariably point at American money and banking before the Civil War which, in their judgment, confirms their belief. In particular, they cite the "Free Banking Era" of 1838-1860 as a frightening example of turbulent banking and, therefore, applaud the legislation that strengthened the role of government.
In reality, the instability experienced during the Free Banking Era was not caused by anything inherent in banking, but resulted from extensive political intervention.... "Free banking" acts ... did not repeal burdensome statutory provisions and regulatory directives. In fact they added a few.3
For banking to have been truly free, the states would have had to do only two things: (1) enforce banking contracts the same as any other contract, and then (2) step out of the picture. By enforcing banking contracts, the executives of any bank which failed to redeem its currency in specie would have been sent to prison, an eventuality which soon would have put a halt to currency overis-sue. By stepping out of the picture and dropping the pretense of protecting the public with a barrage of rules, regulations, safety funds, and guarantees, people would have realized that it was
In short, throughout this entire period of bank failures, economic chaos, and fleecing of both investors and taxpayers, America 1- Galbraith, p. 87.
2. Charles Beard,
3. "Old Banking Myths," by Hans F. Sennholz,
368 THE CREATURE FROM JEKYLL ISLAND
tried everything
Not all banks were corrupt, and certainly not all bankers were conspirators against the public. There were many examples of honest men striving to act in an ethical manner in the discharge of their fiduciary responsibilities. But they were severely hampered by the system within which they labored, a system which, as previously illustrated, punished prudence and rewarded recklessness. In balance, the prudent banker was pushed aside by the mainstream and became but a footnote to the history of that period.
INDUSTRIAL EXPANSION IN SPITE OF DISHONEST
BANKING
