This post is a pretty reflects some common misconception about historical banking. Its only using US experience on historical banking and makes a number of factual errors about that period.

Lets clean up some of the misunderstanding. In pre-Civil War US banks were not unregulated. In fact the opposite, the US from its founding was very much against banks and banks were some of the business that were most heavily regulated. This is often ignored today because the regulation came from states, and were not federal.

In many states, banks were not even allowed to created. The often required an act to be passed threw the state parliament. And you can imagine the bribing and the blocking of competitors once a bank exists. This practice was eventually replaced in most states, and instead 'free banking' laws were adopt. But 'free' in this context didn't mean 'free' as in 'no regulation', but rather 'free' as in 'you can create a bank like any business'. But of course you would still have to follow the necessary regulation, just like you were free to create a mine, as long as you are following the mining law.

These banks were regulated in various ways, let me mention some of the most important.

The US in most places had a unit-banking policy. That basically means you are not allowed to create branches. And that doesn't just go for federal, a bank wasn't allowed to have branches within a state, not even within a city sometimes. This resulted in banks being generally very small, not diversified and with little capital (often the term Wildcat Banking is used). All these banks were at high risk of failing because of local downturns. A local harvest failure would take out local banks too. That was a big source for failures of these banks.

Another huge problem was that these banks were often forced to back all the notes they issued with state government debt. This was a huge problem, as in those days, state governments could default on their own debts and that would simply bust all the banks. How much debt a government issued could also effect money supply in various negative ways.

There were others too that I don't want to get into as this comment is already long. So you don't need a whole book full of 'Basel 3' regulation to have powerful regulations that negatively effect the operations of the banking system.

> If you tried to spend your home bank's notes out of state, you'd get pennies on the dollar.

This is also mostly overestimated. While this is a real problem, even going from the East to the West coast it very unlikely you would ever see more then single digit % differences. But you are correct, this was a real problem some people had to deal with.

> Seems like an incredibly inefficient system to go back to.

Nobody would suggest that. And even back then, anybody that wasn't completely dumb saw these issues. But not unlike with other political issues, to change the situation was hard because so many people had so much invested in keeping the status quo.

And its not hard to see a different situation. Just look to Canada. In Canada banks from early on were not restricted to one 'state' and were allowed to branch.

This lead to a radically different situation. While the US by the 1930s had literally 10000s of banks, Canada only had a few handful, and only like a couple big ones.

The banks were incredibly stable, as they had a diversified portfolio, and downturns in one location didn't kill the bank. These banks were also allowed to back their note issue with any assets, not just government bonds. This led to investment into the local economy and it allowed the bank to issue as many notes needed depending on the situation. It also means that you could go from Toronto to Vancover and all banks took all the notes.

Counterfeiters were not a huge problem in Canada, because you only had a few issue banks, and they had the capital to invest in modern note protection schemes. In fact they were mostly invented by private banks.

Even during the Great Depression (Canada didn't even have central bank back then), Canada didn't have any bank failures. This is despite a serious downturn in the Canadian economy. The US in that period had literally many 1000s of banks failing.

So I don't really think its fair to blame the gold standard for the US banking system. That a self inflicted system that happened for various complex historical reasons.

PS:

The Civil War btw, made the situation much worse in the US not better. For the first time federal banks were allowed, but guess what, the federal government also needed money so those banks also had to back their notes with government debt. And even worse after the Civil War the US was obsessed with paying back debt, creating a deflation and spiral banking crisis from 1880-1912.

This led to serious political problems, like the whole 'Free Silver' movement. The money supply was so restricted that people were desperate for better money. This movement almost carried William Jennings Bryan to the presidency, and it lead to the famous 'Cross of Gold Speech' [1].

This populist movement correctly identified the problem, but their solution wasn't very good. The problem wasn't gold, but rather that banks were not allowed to issue notes because the government debt was almost zero.

And as all populists do, he firmly rejected the actual solution to the problem when it was suggested to him.

System reforms along Canadian lines were promoted multible times. But always rejected because the unit banks didn't want competition and the New York banks profited of their spacial status in the system. And the populist wanted Silver and not some regulatory bank reforms.

Once you understand the cause of this deflation and banking issues, its hard not to totally reevaluate the whole late 1800s century political history.

The only people who were pro reform in this direction, were bankers from the larger cities, specially Chicago. The didn't have the New York spezial privilege and saw great opportunity in expanding. But of course they didn't have nearly the lobbying power to pull it threw.

PSS:

Both the major regulation that caused so much problems very eventually removed. First once the Federal Reserve took over, they allowed for note issue as long as you had any good assets. Second during the great Depression so many 1000s of these small bank failed that it was just untenable, and the unit banking was finally defeated, as all those small banks wanted to partner and merge.

> And one which still wouldn't stop the federal government from borrowing.

That is correct. A well organised banking system does not prevent government from borrowing to much money.

[1] https://en.wikipedia.org/wiki/Cross_of_Gold_speech