Understanding Economic Equilibrium

CHAPTER 15

Jimmy Stewart, Oz, and the Road to a Federal Reserve

The conclusion of the Civil War found the nation’s banks in as much disarray as the government. In the “free banking” era, which extended from about 1837 to the end of the War, there was no national guidance or control over lenders. Banks were organized at a state level with each state setting its own regulations. Many states and even banks issued their own currencies, much of which earned the nickname “shinplaster,” the value of the notes being so little, their best use might be to cast a broken leg.

Such an unconnected financial system proved flimsy at best. Every four to eight years the nation would get caught up in financial panic. Runs on banks were, in a functional sense, closing ...