This research examines the so-called ôFree Banking Periodö in the United States. This period officially began in 1837, when the first free banking law was enacted in Michigan in the wake of the demise of the Second United States National Bank (Hammond, 1957, p. 572). Free banking had been proposed in New York State as early as 1825, and the concept originated in England at a much earlier date (Hammond, 1957, p. 572). Free banking came to its ultimate end in 1865, when Congress enacted legislation imposing a ten-percent tax on all bank notes issued under state authority (Morison & Commager, 1951, p. 7). Subsequent to that time, no one would accept bank notes other than those issued by the United States government. Tariffs imposed on foreign goods in 1857 had earlier resulted in financial distress in the South, and many free banks in that area failed as a result. Subsequent to the beginning of the Civil War in 1861, Southern banks and firms refused to honor debts to Northern banks and firms. Further, the tariffs of 1857 were increased. The combination of these factors placed severe financial stress on the North, and many free banks in that area failed. The National Bank Act became law in 1863, and its provisions made it more difficult for the remaining free banks to operate (Parkes, 1953, p. 373). The imposition of the ten-percent tax on their bank notes in 1865 put all free banks in their graves.
In this examination of the free banking period, the environment and issues leading to the adoption of the free banking concept are discussed, and the immediate aftermath of the free banking period is discussed briefly. The bulk of this research, however, is devoted to an examination of the events that transpired during the free banking period, and the primary emphasis in this examination is on the functioning of free banking in New York State.
The Environment and the Issues Leading to the Adoption of the Free Banking Concept ...