National Bank Act

• 1. Antebellum Banking Chaos

  ›

  In 1836, the Second Bank of the United States closed its doors. Control over banking regimes devolved mostly to individual states. Wisconsin adopted a total ban on banking. Indiana and Illinois allowed only a single state-chartered bank. Ohio limited chartering to specific instances. New York permitted free entry for any applicant who met basic requirements. This fragmentation meant that while all banknotes were denominated in dollars, they circulated at steep discounts outside their home states. A note from Michigan might be worth less than face value when used in Pennsylvania. Well-publicized frauds arose in states like Michigan which had adopted free entry regimes but did not require redeemability for specie. The perception of dangerous wildcat banking grew alongside poor integration across state lines. Public support for a uniform national banking regime increased as these issues became known.

  7

• 2. Civil War Financial Crisis

  ›

  Lincoln and Congress struggled to finance war efforts without a national mechanism for issuing currency other than metal coinage. The administration could not exploit powers available to Britain's central bank to cover high expenses. In early days of the Civil War, Congress approved the Legal Tender Act of 1862 allowing issuance of $150 million in national notes known as greenbacks. These bills were fiat money backed only by the government's promise to redeem them. Their value depended on public confidence and future ability to provide gold or silver exchange. Many thought this backing was about as good as the green ink printed on one side. The Second Legal Tender Act enacted the 11th of July 1862 expanded limits to $450 million. The largest amount outstanding at any time reached $447,300,203.10. Using the war crisis allowed Lincoln to expand national bank chartering despite previous damage that would be done to state banks.

  125

• 3. Legislative Passage And Structure

  ›

  The National Bank Act passed the 25th of February 1863 received Senate approval by a 23, 21 vote. Originally called the National Currency Act it established national banks chartered at federal level. A year later the National Banking Act of 1864 supplemented these provisions. Goals included creating single national currency and nationalized bank chartering system while raising Union war funds. National banks could issue National Bank Notes backed by United States Treasury and printed by government itself. Quantity of notes allowed proportional to capital deposited with Comptroller of the Currency at Treasury. No less than one-third of bank capital had to take form of US Government bonds held in vaults. First bank receiving national charter became First National Bank of Philadelphia Pennsylvania designated Charter #1. First new national bank opening was The First National Bank of Davenport Iowa marked as Charter #15. More than 1,500 state banks converted themselves to national charters following implementation.

  12415

• 4. Comptrollers Office Creation

  ›

  Hugh McCulloch originally opposed the National Banking Act but eventually organized the Currency Bureau. He personally evaluated applications for bank charters and consoled prospective bankers during process. McCulloch assisted in design of new national bank notes arranging engraving printing and distribution. His hands-on approach created resistance among many banks unwilling to conform to his operational system. Congress responded by passing a 10 percent tax on notes of state banks signaling determination that national banks would triumph. This office established federal supervision over commercial banking operations previously managed locally. The Office of the Comptroller of the Currency became part of Department of Treasury responsible for administration and supervision of national banks. It continues significance in modern economy through Gramm-Leach-Bliley Act provisions regarding certain activities of bank subsidiaries.

  713

• 5. State Bank Suppression Tactics

  ›

  A later act passed the 3rd of March 1865 imposed 10 percent tax on state bank notes effective the 1st of July 1866. Similar previous taxes effectively forced all non-federal currency from circulation entirely. State banks declined sharply until 1870s when growing popularity of checks caused resurgence. Constitutionality challenged before Supreme Court in Veazie Bank v. Fenno case involving state-chartered Maine bank. Court ruled 7, 2 in favor of government allowing continued suppression tactics. Local bankers took advantage of less strict capital requirements setting minimum at $10,000 versus $50,000 to $200,000 for national banks. They opened new branches en masse creating competition against national banks. These new state banks grew to 15,526 number by 1913 despite earlier decline from 1,466 in 1863 down to 247 in 1868. The high tax rate intentionally set so high as to prohibit further circulation of private notes.

  615

• 6. Post-War Banking Resurgence

  ›

  Number of national banks rose from 66 immediately after Act implementation to 7,473 in 1913. Initially this rise came at expense of state banking which dwindled significantly during early years. Though state banks no longer allowed issuing notes local bankers exploited lower capital thresholds. Demand deposit accounts created as result of these regulatory changes encouraged joining national system. Growing popularity of checks combined with declining profitability of national bank currency issues caused resurgence starting in 1870s. State banks increased substantially reaching 15,526 total by century end. This dual structure became defining characteristic of US banking system and economy today. Many blame resulting lack of oversight and regulation for late-2000s recession and subprime mortgage crisis following Supreme Court decisions like Cuomo v. Clearing House Ass'n L.L.C.

  1016