Early banking in New York was conducted on the same general plan as in the first banks of New England - that is, without any specific security behind the notes. Charters were granted on a somewhat political basis by the legislature during the early years of the state, but a considerable number of defects appeared, just as was the case in New England prior to the development of more uniform legislation there and the institution of the Suffolk system of redemption. As about thirty bank charters were to expire between 1829 and 1833, it was considered a favorable opportunity for introducing a change. The result was the adoption of what was called the "safety-fund plan," the banks being rechartered under this system. By the plan proposed, each bank had to pay to the Treasurer of the state an amount equivalent to one-half of one per cent of its capital stock until it had paid in 3 per cent of its capital. This then was treated as a joint fund to make good the liabilities of any insolvent bank if its assets were inadequate.

The fund proved to be insufficient during the difficult years after 1837, and, consequently, in 1842, the money was made applicable simply to the notes of insolvent banks, the other liabilities being left to be paid out of the assets. This brought the liabilities that might become a charge against the safety fund more nearly within the control of the fund itself. There had been some opposition to the safety-fund plan; and, as a result of a campaign for "free banking," the New York Legislature passed the "Free Banking Act" on April 18, 1838.

Under this Act any group of individuals might establish a bank and issue notes, but they could get the notes only from the state Comptroller after depositing with him bonds of the United States or the state of New York or of any other state approved by the Comptroller, while, under certain circumstances, they could also issue notes secured by bonds and mortgages upon improved productive real estate. There was a considerable development of banking under this law, but the note issues had very little elasticity, and were not as satisfactory as those of the safety-fund banks. The system was gradually perfected, however, until the notes protected by special deposits of securities were very safe.