Wildcat banking refers to the practices of banks chartered under state law during the period of non-federally regulated state banking 1836 to 1863 in the United States, also known as the Free Banking Era. The many banks of this era were regulated by the states only, and "such restraints were infrequent and ineffective",, indeed law applicable to banks during this period were "those applying to similar firms whether or not they were financial institutions". The few private currency issues still extant after the passing of the National Banking Act rapidly disappeared under further legislation of 1865, and thereafter the US Government held an effective monopoly of the note-issuing function. According to some sources, the term came from a bank in Michigan that issued private paper currency with the image of a wildcat. After the bank failed, poorly backed bank notes became known as wildcat currency, and the banks that issued them as wildcat banks. However, according to others, wildcat meant a rash speculator as early as 1812, and by 1838 had been extended to any risky business venture. A common conception of the wildcat bank in Westerns and like stories was of a bank that left its safe somewhat ajar for depositors to see, in which the banker would display a barrel full of nails, grain or flour with a thin sprinkling of cash on top, thus fooling depositors into thinking it was a successful bank.
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The traditional view of wildcat banks describes them as distributing occasionally worthless currency backed by questionable security. These actions ended when currency issued by state banks was brought to a close through the passage of the National Banking Acts 1863-5. Mark Twain, in his autobiography, refers to the use of such currency in 1853, "The firm paid my wages in wildcat money at its face value". Before the establishment of the Federal Reserve System in 1913, banks extended loans by issuing notes. An individual may take his promissory notes or bills of exchange to the bank for discount. Banks would issue their own bank notes to the borrowers. Bank notes were usually backed by specie or government bonds. The holder of the bank note had a claim on the bank's assets. The overwhelming determinate of value on a bank's notes would be the quality of that bank's assets. Many of the states' regulations required for the banks to back their notes with state bonds. Banks in states that had safe bonds would thrive whereas banks in states that had risky bonds would suffer. Other factors could influence the value of a bank note, the major secondary cause being the likelihood of fraud, either from the bank or from forgery. Many varieties of money different banks traded at different discounts to their face value. Lists were published to help bankers and others to identify and appraise the bills. One of the major causes of discounting occurred due to the real cost of transferring the notes to the original bank,.
