The era of free banking

Prior to 1836, a bank could only be chartered by a legislative act. It has been speculated that this led to many abuses, with proprietors lacking connections in their legislatures being effectively barred from establishing banks.The dissoluting of the Second Bank of the United States in 1836 lead 18 states to establish clear rules for incorporation -- any individual or group that met a certain financial requirement was permitted to issue bills of credit.

This led to many a period of fiscally irresponsible of Wildcat banking in many states, which partially destabilized the system of financial intermediation, and lead in part to the massive panic in 1837-1838 in Michigan.

During this period, bills were not redeemable at face value, but could be cashed according to certain common discount rates, which reflected the reputation and solvency of the issuing banks. These bills were commonly called "scrip."