Arthur Rolnick and Warren E. Weber notes that bank closures and failures were a known risk in nineteenth-century America.

Date
1982
Type
Academic / Technical Report
Source
Arthur Rolnick
Non-LDS
Hearsay
Secondary
Reference

Arthur Rolnick and Warren E. Weber, “Free Banking, Wildcat Banking, and Shinplasters,” Federal Reserve Bank of Minneapolis Quarterly Review 6 (Fall 1982): 10–19

Scribe/Publisher
Federal Reserve Bank of Minneapolis Quarterly Review
People
Warren E. Weber, Arthur Rolnick
Audience
Reading Public
PDF
Transcription

. . .

When free banking is judged only by the laws' first objective, encouraging more banking, it has to be considered a success. In New York, for example, the total number of banks nearly doubled in the first three years after the law was passed. In less than two years, 120 banks started, and over 50 of these opened very soon after the law was passed (Hammond 1957, p. 596). In Michigan, Indiana, Wisconsin, and Minnesota, respectively, 40, 30, 18, and 16 new banks were established within a year after free banking laws were passed (Hammond 1957, p. 601; Rolnick and Weber 1982b, Appendix).

Free banking, however, must also be judged by the laws' second objective, by how many banks survived and provided their communities with a stable source of banking services, especially a safe currency. Measured by this criterion, free banking is generally considered a failure. Michigan's disastrous experience with free banking is probably the most famous. Early in 1837, the state legislature passed the first free banking law in America, a law that was modeled after New York's proposal, then still being debated. In most ways the two laws were the same. (The major difference was that under Michigan's law, free bank notes were backed by personal bonds and mortgages, not state bonds.) Like New York's law, Michigan's was designed to both encourage banking and promote stability and a safe currency. Unfortunately, something went wrong in Michigan. By the end of 1839, less than two years after the law was passed, all but four of Michigan's free banks closed (Rockoff 1975, p. 96). Although explicit loss data do not exist, it has been estimated that the total loss to Michigan's noteholders was as high as $4 million. This would have been nearly 45 percent of Michigan's annual income in 1840. (See Rockoff 1975, pp. 17-18.)

Minnesota's experience, while not as famous as Michigan's, was almost as bad. Of the 16 free banks that opened under Minnesota's 1858 law, 11 closed by 1863. And many that closed left their noteholders with very little. In 7 of the 11 closings, the state auditor could pay noteholders no more than 35 cents on the dollar. Holders of notes of the Bank of Rochester received less than 17 cents on the dollar. (See Rolnick and Weber 1982b, Appendix, Table D.)

. . .

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