Background to Interstate Banking: Early Federal and State Interstate Banking Laws
For much of the eighteenth and nineteenth centuries, where American banks were located and how far they could go in branching and entering new markets was not an issue for debate. Until the 1860s, banks in the United States were generally allowed free reign in setting up, moving, or closing their branch offices. States that did impose restrictions on banks creating branch offices were primarily motivated by a desire to stop poorly managed banks from overissuing currency, contributing to a loss of public confidence in government and the banking system.
At that time banking firms made loans to their customers by issuing their own bank notes that circulated as currency but could be redeemed for gold and silver bullion upon public demand. This ever present threat of being able to convert paper bank notes into gold and silver coinage compelled banks to be more prudent in their lending activities; otherwise, overlending could lead the public to lose confidence in a particular bank and demand payment in gold or silver, thereby exhausting the bank's precious metal reserves. Many poorly managed banks set up branch offices ("redemption centers") in remote locations in an effort to frustrate the public's efforts to convert paper notes into a form of money more stable in value. Thus, the purpose of many of the early bank branch offices was not convenience for the public but to discourage currency conversions and protect bank profits.
Still, a few states outlawed branching even in the nineteenth century. When the U.S. Congress made its first foray into banking by chartering the