Gensler’s comparison to wildcat banks is conveniently incomplete

In an interview with the Washington Post, SEC Chairman Gary Gensler compared cryptocurrencies to wildcat banking in the US from the 1830s to the 1860s and argued,

“Public money has a certain place around the globe . . . Private monies usually don’t last long, so I don’t think there’s a long-term viability for 5 or 6,000 private forms of money. History tells us otherwise.”

Does this analogy with wildcat banking in the US hold up? Spoiler: it doesn’t. But what does the analogy tell us about the likely future of cryptocurrencies?

On first pass, the analogy is somewhat apt. Without a strong federal currency during the first half of the 19th Century, private banks issuing hundreds of different currencies sprang up around the country. Many of these currencies proved to have little backing them and indeed there were a series of bank failures. These failures were part of the impetus for establishing a stronger central banking system. As that system came into play, most independent banks disappeared leaving only state and federally chartered banks. So short lived, unsound bank-issued currencies were replaced by a single federal currency — at this superficial level Gensler’s comparison seems valid.

Upon a closer look, however, the analogy breaks down. These banks were not as wild as is often imagined. First, their currency was always dollar denominated and, at least in theory, convertible to gold or silver (the dollar was then a bi-metallic currency). Second, the banks were chartered and regulated by states; they were not truly free banks. State charters and regulations varied greatly, including Wisconsin, which did not allow banks at all.

Not only were these banks not as wild as commonly portrayed, in some cases, bank failures were caused by state regulation itself. For example, some states forced banks to hold state bonds, which they had to buy at inflated prices, and hold on their balance sheets as “assets”. Consequently, those banks that lacked sufficient equity to absorb the imbalance between assets and liabilities that was caused by their regulators’ mandated bond purchase programs, unsurprisingly, often ran into trouble. Obviously, the idea of cryptocurrency, for many, is precisely the opposite of this: that they are not state chartered; that they are not subject to irrational state regulations; and that they are not obligatorily backed by species or bonds of dubious value. The differences far outweigh the similarities.

So what happened to these nominally free banks anyway? Well, firstly, a stronger federal currency undercut some of their inherent value — in fact, when it comes to credit worthiness (at this time in history) sheer size and might were very powerful buttresses supporting a currency model that may have had no other economic or structural merit than the private model competitors which it eventually displaced. Secondly, regulations increased thus causing a reduction in the number of wildcat banks. And despite those headwinds, the demand for wildcat banking services was still so sufficiently persistent that, faced with few other options, the federal government eventually imposed a 10% tax on all independent currencies in 1865 — in essence forcing them out of circulation.

So rather than failing through some intrinsic weakness or lack of public trust, these alternative currencies were legislated and taxed out of existence. The analogy with wildcat banks is clearly weak to the point of being misleading. If anything, the lengths the federal government needed to go to eliminate private currencies suggests not the imminent demise of cryptocurrencies but rather their continued growth and vitality.