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US banking in the "free banking" period

One of the most notable political issues for Andrew Jackson's presidency was the fight against the second bank and its attempts to get re-chartered once its charter had expired in 1836. The bill was vetoed and a period of free-banking would follow.

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In New York in 1825 a report to the state senate was issued suggesting the repeal of restrictions against non-chartered banks into the banking system seeing as chartering process for banks was seen as scandolous.(Dowd) However, noteholder safety became a serious concern. A law was proposed that would require every non-chartered bank to deposit a designated amount of approved bonds to the state authoritiesin case the banks fail. If the banks do fail then all noteholders of that bank would be repaid with those deposits. The free entry and bond deposit propositions were the two central aspects of the 'free banking' Act, which was pass in April of 1838.

There were regulations still for permitting entry to banks. They must have at least $1000,000 in captial, they must maintain a 12.5 per cent specie reserve requirement against notes, and these notes must be redeemable upon demand. Within two years of act being passed the amount of banks had grown to nearly 120.

Almost 18 states had passed acts that were similar to the New York Act. "Apart from New York, 'freebanking' laws were passed in Michigan(1837), Alabama(1849), New Jersey (1850), Illinois, Massachusetts, Ohio, and Vermont (1850), Connecticut, Indiana, Tennessee and Wisconsin (1852), Florida and Louisiana (1853), Michigan again (1857), Iowa and Minnesota (1858), and Pennsylvania (1860)." (Dowd, 153)

Failures of free banking In Michigan there was much dissatisfaction over the monopoly on the banking system, and so a free banking law was passed in 1837. The law that was passed was an order to stop the specie payment that was layed out in the New York free banking act. Prior to the issuance of this law, a bank was limited by state law from over issuing convertible notes. Any note that is issued must be redeemable by the bank upon demand for specie. After this, wildcats were permitted to issue notes with no risk to themselves because the state was not checking if the notes were redeemable or not.

Free Banking System of Scotland

One of the longer examples of an effective free banking system can be seen in Scotland, which lasted from 1716 all the way until 1845. Through the free banking system, Scotland was able to go from a small agricultural and household economy to an industrialed one that that focused on iron production, shipbuilding, and engineering. (Crook)