Banking was regulated by states. There was no free market. "Free banking" laws passed by various states prevented banks from branching. These "unit banks" lacked the financial diversity that comes from having multiple branches and thus were more subject to collapse in the event of monetary shocks.

After the civil war, the federal government required banks to hold federal bonds as reserves on their deposits at an ordained ratio. Changes in the supply of federal bonds translated to fluctuations of the money supply, which is what caused the national booms and busts.

There were other places in the world that tried free banking, like Canada before it created a central bank, and Scotland during its free banking era, and their financial systems were famously stable.