Free Banking

Abstract

Free banking is the term applied in the United States to a system under which (1) banking powers are granted to all applicants under certain prescribed conditions, and (2) bank-notes issued under such authority are protected by a deposit of security held by the government which establishes the system. The earlier banks in the United States, whether established by congress or by the state legislatures, were organized under special charters. Various expedients were resorted to for the prevention of unsound issues, with various degrees of success, but without arriving at any generally acceptable method. The suspension of specie payments in May 1837, and the extraordinary confusion of the paper currency which ensued, finally brought the general discontent to a climax in New York, and the legislature of that state, in June 1838, passed an act for the free organization of banks issuing a secured currency. Under this act, as amended and revised, any group of persons proposing to form a banking association, and contributing a capital in no case less than $25,000, say £5000, can be incorporated with full banking powers, subject to uniform regulations as to the conduct of their business, its supervision by the state, and their corporate liabilities and duties. Individual bankers and firms, who use the name ‘bank’, are also required to conform to the system, although they may remain unincorporated. The right of issue is given to any association or individual coming under the system. The notes are prepared and registered by a public officer, are delivered to the issuing bank only after the deposit of security of a prescribed kind and amount, and must be signed by the officers of the bank before issue. Banks organized upon such a system are called free banks.