Soft Banks

This passage describes "soft banks," and their use in investments in early years of America.

Lexile Level: 1270L

Categories: History

One of the cornerstones of Western expansion in the United States was the "soft bank." The formation of a new mining town was a risky undertaking. Perhaps large sums of precious metal would be harvested, and the inhabitants of the town would prosper. On the other hand, it was not rare for entire towns to vanish only months after being founded when the surrounding land refused to offer up gold. Because mining towns had such uncertain futures, established and insured commercial banks seldom loaned the capital required to establish new mining townships. Soft banks were privately owned ventures that issued their own bank notes. They were backed by a very limited supply of a given commodity, usually silver. The bank notes were of no use outside the township in which they were offered, but if gold was found and the town was successful, the loans were eventually repaid in gold or U.S. currency, and the soft banks were rewarded for their willingness to invest in the new town.