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State Bank Notes

State Bank notes flourished during the Free Banking Era (1837-1863). During these years, there was no federal regulation of banking, an experiment that met with mixed success. In some areas State Bank notes were relatively safe and exchanged close to par or face value. However, in other areas there were too many kinds of paper money in circulation, and depreciated and fraudulent currency was common.

Special publications known as bank note reporters and counterfeit detectors sprang up to help people learn the value of various notes and determine which were good. However, even some of these publications had a poor reputation and many contemporary writers and latter-day historians were critical of them.

One historian describes a merchant trying to determine if a bill was good after checking in one of the publications described above. "He scrutinized the worn and dirty scrap for two or three minutes, regarding it as more probably 'good' if it was worn and dirty than if it was clean, because those features were proof of long and successful circulation. He turned it up to the light and looked through it, because it was the custom of the banks to file the notes on slender pins which made holes through them. If there were many such holes the note had been often in bank and its genuiness was ratified."

State Bank notes, however, did not originate with the Free Banking Era. They had been in circulation since shortly after the end of the Revolutionary War, and were first issued following the opening of the first bank in this country in 1782. But, until 1836, much of the paper currency in circulation consisted of issues of the two U. S. banks established by Congress, the First Bank of the United States (1791-1811) and the Second Bank of the United States (1816-1836).

It was after the closing of the Second Bank in 1836 that the United States entered the Free Banking Era and State Bank notes became the chief form of paper currency. This era came at a time when widespread bank failures caused the public to turn against banking and bankers. Objecting to the monopolistic organization of banks under special charters, the people demanded that banking be operated as free enterprise, subject to special government regulation. By 1860, the banking business was conducted by more than 1,500 state banks.

The Free Banking Era was also the era of wildcat banking and wildcat bank notes. Wildcat banks were opened in mountainous and other inaccessible regions making it difficult or impossible for people to redeem their notes. Some say these banks got their name from the fact that it would have taken a wildcat to locate them.

The National Bank Act of 1863 provided for a uniform national currency and resulted in the elimination of State Bank paper through taxation. A 2 percent tax was levied on State Bank notes in 1862, a tax that was increased to 10 percent in 1866. At this latter rate, there was no more profit in the issue of State Bank notes.