Proposed Advantages of National Bank Note Issue In his finance report of 1861, Secretary Chase first stated the advantages to be derived from "the preparation and delivery to institutions and associations of notes prepared for circulation under national direction and secured as to prompt convertibility into coin by the pledge of United States bonds." The advantages claimed were: 1. Uniformity in currency.
2. Uniformity in security.
3. Effectual safeguard, if effectual safeguard is possible, against depreciation.
4. Protection from losses on discounts and exchanges.
5. A large demand for government securities.
6. Increased facilities for obtaining war loans.
7. Some alleviation of the burdens on industry, through a diminution of the rate of interest or a participation in the profit of circulation without risking the peril of a great money monopoly.
8. Increased security to the Union, springing from the com mon interest in its preservation, created by the distribu tion of its stocks to associations throughout the country as the basis of circulation.
9. Easy and desirable method of accomplishment through voluntary action of existing institutions.
In 1862 Chase drew attention to the further advantage that the note-issuing banks would provide the government with safe and convenient agencies for the deposit of government moneys. His two fundamental motives were: to create a safe uniform cur rency, and to secure a market for government bonds. He opposed making the greenbacks legal tender and objected to their issue, suggesting as an alternative the issue of bond-secured bank notes. The plan necessitated the nationalization of the banks, a step which the banks strongly opposed in Congress on the grounds that: (r) nationalization would force the state bonds already de posited against circulation on the market in competition with United States bonds; (2) the total note circulation was but $200, 000,000, and the market created for bonds would therefore be ligible; (3) nationalization would take place slowly and the ment would secure no considerable relief for two or three years.
The National Banking Act The National Banking Act became a law on February 25, 1863. On October i the Secretary reported the organization of but 66 national banks, and these were small institutions with the foundation of which the leading financiers had nothing to do.
During the early part of 1864 Chase urged a prohibitive tax on state bank notes as a means of forcing the state banks to national ize, the argument being based on: i. The desirability of an exclusive national currency.
2. The support which the bond sales would afford to the credit of the government.
3. The convenience and utility of the national banks to the government.
On June 3, 1864, the act was amended, the new act constitut ing what is commonly called the National Banking Act. On March 3, 1865, an act was passed imposing a tax of io per cent on the amount of notes issued by state banks after July 1, 1866. Up to November 15, 1864, only 584 national banks had been or ganized, with $81,961,450 capital. The effect of the tax by Octo ber 1, 1865, was to raise the number of banks to 1,566, with $276, 219,450 capital. Though during the Civil War the national bank system failed to provide either a uniform currency (which seems to have been Chase's main motive), or a market for government bonds, after the amendment of March 3, 1865, the plan quickly established a safe and uniform note circulation and a permanent market for government bonds.
The Growth of the National Banking System The nationalization of those state banks which desired to con tinue to issue bank notes was rapidly consummated during the years 1865 and 1866. Since that time the number of banks has increased eightfold, with periods of growth between 1871 and 1875, 1880 and 1892, and 190o and 1919, and periods of contraction be tween 1867 and 1869, 1876 and 1879, 1894 and 1898, and in 1916. The most rapid expansion occurred after 1900, at which date the minimum required capitalization, as well as the tax on circula tion, was reduced.
The volume of national bank notes is not an adequate index to the growth of the banks. The rapid growth between the dates 1877 and 1882 was due to the expansion of the country; their growth between 1895 and 1914 was also due to the expansion of the country, but more particularly, after 1900, to the lower capital requirements for national banks. The two periods of their decline were between the years 1883 and 1891, when the government debt was being paid off, and between 1915 and 1917 when the Aldrich-Vreeland currency was being con tracted.