Despite these private or state-sponsored efforts at reform,the state banking system still exhibited the undesirableproperties enumerated earlier. The National Banking Acts of 1863and 1864 were attempts to assert some degree of federal controlover the banking system without the formation of another centralbank. The Act had three primary purposes: (1) create a systemof national banks, (2) to create a uniform national currency, and(3) to create an active secondary market for Treasury securitiesto help finance the Civil War (for the Union's side).
The first provision of the Acts was to allow for theincorporation of national banks. These banks were essentiallythe same as state banks, except national banks received theircharter from the federal government and not a state government.This arrangement gave the federal government regulatoryjurisdiction over the national banks it created, whereas itasserted no control over state-chartered banks. Nationalbanks had higher capital requirements and higher reserverequirements than their state bank counterparts. To improveliquidity and safety they were restricted from making real estateloans and could not lend to any single person an amount exceedingten percent of the bank's capital. The National Banking Actsalso created under the Treasury Department the office ofComptroller of the Currency which occasionally inspected thebooks of the national banks to insure compliance with the aboveregulations, held Treasury securities deposited there by nationalbanks, and, via the Bureau of Engraving, was responsible forprinting all national banknotes.
The second goal of the National Banking Acts was to create auniform national currency. Rather than have several hundred, orseveral thousand, forms of currency circulating in the states,conducting transactions could be greatly simplified if there werea uniform currency. To achieve this all national banks wererequired to accept at par the banknotes of other national banks.This insured that national banknotes would not suffer from thesame discounting problem with which state banknotes wereafflicted. In addition, all national banknotes were printed bythe Comptroller of the Currency on behalf of the national banksto guarantee standardization in appearance and quality. Thisreduced the possibility of counterfeiting, an understandablewartime concern.
National Bank Note
This 1929 note was issued by the Atlanta and Lowry National Bank.The writing over the red seal reads, "Redeemable in lawful money ofthe United States at United States Treasury or at the bank of issue."At the time, lawful money referred to gold coin, silvercoin, gold or silver certificates, or United States notes. The reverseis the same as modern $20 Federal Reserve notes.
The writing over theportrait of Andrew Jackson reads, "National currency secured by UnitedStates bonds deposited with the Treasurer of the United States of America."This refers to the requirement of the National Banking Acts that theamount of currency a national bank could issue be based on the marketvalue of Treasury bonds on deposit with the Comptroller of theCurrency.
Who knows? Perhaps this very bill was used to buy a ticket tothe premeir of Gone With the Wind.
The third goal of the Acts was to help finance the CivilWar. The volume of notes which a national bank issued was basedon the market value of the U.S. Treasury securities the bankheld. A national bank was required to keep on deposit with theComptroller of the Currency a sizeable volume of Treasurysecurities. In exchange the bank received banknotes worth 90percent, and later 100 percent, of the market value of thedeposited bonds. If the bank wished to extend additional loansto generate more profits, then the bank had to increase itsholdings of Treasury bonds. This provision had its roots in theMichigan Act, and it was designed to create a more activesecondary market for Treasury bonds and thus lower the cost ofborrowing for the federal government.
It was the hope of Secretary of the Treasury Chase thatnational banks would replace state banks, and that this wouldcreate the uniform currency he desired and ease the financing ofthe Civil War. By 1865 there were 1,500 national banks, about800 of which had converted from state banking charters. Theremainder were new banks. However, this still meant that statebanknotes were dominating the currency because most of them werediscounted. Accordingly, the public hoarded the nationalbanknotes. To reduced the proliferation of state banking and thenotes it generated, Congress imposed a ten percent tax on alloutstanding state banknotes. There was no corresponding tax ofnational banknotes. Many state banks decided to convert tonational bank charters because the tax made state bankingunprofitable. By 1870 there were 1,638 national banks and only325 state banks.
While the tax eventually eliminated the circulation of statebanknotes, it did not entirely kill state banking because statebanks began to use checking accounts as a substitute forbanknotes. Checking accounts became so popular that by 1890 theComptroller of the Currency estimated that only ten percent ofthe nation's money supply was in the form of currency. Combinedwith lower capital and reserve requirements, as well as the easewith which states issued banking charters, state banks againbecame the dominant banking structure by the late 1880's.Consequently, the improvements to safety that the nationalbanking system offered were mitigated somewhat by the return ofstate banking.
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