Wildcat Banks...

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... All Things  Wildcat!

In our study of stock and currency scams the term 'wildcat' is frequently used - what is the origin of this term?  


Numismatists and US historians frequently refer to wildcat mines, banks and oil when referring to those investments and institutions that did not have a business model consistent with sound investments, or where the existence of the mine, bank or oil well was fictional or intended to defraud the investor. Of great interest is the origin of this term, which has several unique historical associations.  We will concentrate on wildcat banking because it is first in relation to banking that the term 'wildcat' originated.


Prior to 1836 a State government was the sole authority with regard to authorizing banks to print currency and it took an act of a State Legislature to commission or de-commission a bank's printing operations. This meant that only certain banks with particular resources as mandated by the state could print money, therefore creating a virtual monopoly for these banks when it came to placement of coin and circulation of currency.  With the "Free Banking" system any bank could print currency with the qualification that it possess sufficient specie to back-up the circulation of it's notes.  While this situation seems bizarre today the situation was not so by 1836 when the US economy was severely constricted due to a coin shortage, and due to the existing monetary system in place at that time.  However the 'cure' of the Free Banking system was more painful than the illness and while the free banking system temporarily relieved stress on the monetary supply of this country, the solution ultimately introduced many more problems than it solved. So let us briefly outline the idea of the "wildcat bank", from which the term 'wildcat' originated:

  1. Setup a bank in the most remote geographic area imaginable.

  2. Print notes.

  3. Sell the notes to distributors far away with favorable discounts.

  4. Selectively back up the notes with coin as necessary. 

  5. Close the bank.

  6. Disappear.

This simple scenario was common, and the 'broken bank' syndrome occurred frequently enough that good bankers separated their notes according to classification, based upon the issuing bank's reliability.  Bank reporting publications updated banks on note status and all reputable banks refused notes from "broken banks".  Interestingly, it seems that certain brokers actually specialized in purchasing broken bank notes at a huge discount with a view to recovering the coin in person, the success of such enterprises being unknown.  


The origin of the term 'wildcat' therefore relates to at least two aspects of this banking business. In point one above we have seen that these banks were located in very remote regions, usually in a forest or logging camp. Here is an interesting excerpt from Howard Preston's most interesting work from 1922, History of Banking in Iowa:


"I visited one of these banks once, it was in a logging camp in the thick woods near the east shore of Lake Michigan.  It was about eight feet high, made of rough boards, flat roof, with one sliding window, a plain board shelf, on which the notes were signed, a small door, over which in red chalk was written the name of the bank. I never saw it occupied more than once and when I last saw it the bank had closed."


In some cases these banks were so remote that the printing operation can be considered analogous to the operation of an illegal whiskey still and it took special knowledge of the lay of the land, usually by way of an Indian guide, to actually visit the locality of the bank and in some cases these banks were located within an Indian reservation, or even a swamp.  


Understanding the remote nature of these banks is one clue to understanding the origin of the term 'wildcat' because during these times wildlife was quite common in the Eastern US and Midwest so that mountain lions, lynxes and bobcats were plentiful in those days,  especially in remote areas where wildcat banks were located. In fact locals and frontiersmen assigned colorful names to the big cats in those times,  for example,  'brindle pup',  'rag tag',  'stump tail',  and 'bob tail'. So it is not surprising that these banks became associated with wildcats, and notes took on colorful names like 'brindle pup' and 'bob tail'.     


Another Association      

Another logical explanation for the association of the term 'wildcat' with dubious banknotes is a Missouri Territory Act of 1816, "To encourage the killing of wolves, panthers, and wildcats."  This led to the state issuing a type of promissory note that was decorated with a panther vignette and it was passed as currency but could not be redeemed in coin.  These notes developed a very bad reputation when particular counties would not honor the notes in settlement for debts, probably due to the state's failure to honor the notes with coin. So with time "wildcat notes" were dishonored for all debts and considered worthless.


How Wildcat Notes were Distributed: The Carpet-Baggers   

The term 'carpet-bagger' does not refer to Northerners migrating south after the civil war but refers to the fact that circulators of wildcat notes traveled with a carpet bag full of their dubious offerings. The idea was to transport notes from inaccessible Town A to inaccessible Town B where the distributor purchased whatever goods and livestock that he could, assuming that anyone from Town B accepted the notes.  


When the notes get to Town B's bank the bank happily takes the notes for debt - but not for coin - and the bank pays the notes out to their unsuspecting customers in lieu of coin whenever and wherever possible. This way of business carries on until all of the carpet-bagger's currency is in circulation in Town B.  [A reverse of this very situation is likely played out in the reverse direction, eg a Town B carpet-bagger distributes Bank B's dubious notes in Town A.]   


While the business of the town is carried on in this way quite legitimately for some period of time, eventually it becomes worthwhile for Town B's bank to replenish it's specie simply to ensure it's own liquidity when Town B customers begin to demand coin, for example with a tightening of credit.  In this case the Town B bank opts for the very simple expedient of refusing to honor Town A's bank notes and forces holders to sell the notes at a significant discount to a local broker for specie.  The local broker and the bank then split the difference with regard to these transactions and the bank then replenishes it's coin. 


While the scenario described above seems complex, the underlying principle is quite simple and can be reduced in money terms to a usurious form of interest charged on the bank's customers, where usury is an exorbitant or unlawful rate of interest. Usury was illegal in all states until the Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp's supreme court decision reinstated the abuse in 1976; the modern analogy concerns credit swaps and is not illegal.  The old credit swap system was very common during coin shortages when banks and their customers were forced to exercise their wits amidst an improvised local monetary crisis, and useful when paper notes could be exchanged for real goods and services, until credit tightening created demand for coin.


A simpler but riskier proposition worked in larger metropolitan areas in the East, this idea was simply to transport notes from a far-off bank to a broker in another state who was willing to accept the notes at a significant discount. The risk here involved acceptance of the notes, as this was never guaranteed.  As technology improved we can see how counterfeiting evolved into a significant industry by 1860, but it was not counterfeiting alone that constricted the economy of the United States. The major impediment to financial progress was greed and self-interest within a developing capitalist society which was largely unregulated, and incapable of policing itself in order to ensure the ascendance of the common financial good, the problem addressed beginning with the Treasury Act of 1863.    


Counterfeiting was a big problem by the middle of the nineteenth century, especially in the Eastern states. (Note: Counterfeiting today is nearly irrelevant because 96% of all financial transactions are electronic. In addition, Post civil war to the present day the Federal government has effectively increased it's policing powers to gradually introduce a semi-police state, which has resulted in reduction of counterfeiting but not ended the practice.) The Treasury Act of 1863 coincided with treasury initiatives designed to relegate counterfeiting to history, largely based on the Federal government's improved capacity to coerce it's citizens after the Civil War. By 1860 Lincoln himself did not need to be a visionary when the Treasury and other Federal arms proposed that their new-found ability to coerce common citizens would coincide with a heretofore unknown stability in Federal government; a direction that would ultimately and ironically promulgate the Civil War, and lead to a drastic reduction in State's Rights, a condition which is still manifest today. A return to the principles of State's Rights could be disastrous in comparison to the imperfect Federal Reserve system we live with today, however the matter is still the subject of much debate, especially since states like South Dakota have had great success wresting control of their debt away from the Feds, via the South Dakota Banking Commission.


In conclusion we see that the term 'wildcat' began with highly dubious banking practices engendered by coin shortages, poor communications and bad roads characteristic of the early nineteenth century.  The end of the Civil War, telegraphic communication and railroad development all occurred at approximately the same time, along with the beginning of the Industrial Revolution, and even though wildcat banks would disappear, dubious banking practices did not and wildcat mines, oil, and many other types of questionable investments would take the wildcat bank's place in history with significant modern examples easily identifiable today.



Panic of 1907!