THE NATIONAL BANKING SYSTEM 1. Origin of the national banking system.—The establishment of the national banking system was the result of the unsatisfactory financial conditions which obtained during the Civil War. Partly thru incom petency and partly thru fear of political consequences, Congress did not attempt to secure revenue by raising taxes in sufficient amounts. The only recourse left was to borrow. Bond issues sold slowly in the United States, and hardly at all abroad. Mr. Chase, Secre tary of the Treasury, then issued interest-bearing demand notes in denominations under fifty dollars. These were followed in 1862 by the greenbacks—legal tender notes not payable on demand and bearing no interest. The greenbacks soon drove gold out of the country or into private hoards, and took the place of gold as the standard of value. All promises to pay were redeemable in depreciated government paper. Foreign capitalists refused to advance a farthing to a government that was plunging so reck lessly into inflation. At home, bonds had to be sold for depreciated greenbacks. The Union was in a sorry plight. If the bankers of New York, Boston and Philadelphia had not come to the rescue with a superb spirit of patriotism, the financing of the war would have been an almost hopeless problem.
The difficulty of the situation was augmented by a general derangement of all the currency as well as of the greenbacks. After gold disappeared, the cir culation was composed of greenbacks, notes issued by over 15,000 state banks and some subsidiary coins. A large amount of the state bank issue was worthless and almost all of it circulated at a discount when it was at any distance from its place of redemption. The discounts on different notes varied so widely that business men found it necessary to keep a huge bank note register or directory always at hand in order to determine the value of notes received in the course of business.
Two problems stood out before Congress. The first was how to improve the market for government bonds. The second was how to provide a uniform and stable currency.
2. Secretary Chase's plan.—Secretary Chase de vised a plan for improving the situation by the estab lishment of a national banking system. Bank char
ters were to be granted by the Federal government. The chief feature of the plan was the requirement that all banks which desired to incorporate under the national law should buy government bonds, deposit them with the Treasury and receive permission to issue circulating notes to the extent of 90 per cent of their bond deposits. No bank notes could be is sued by them except against bond deposits, and they were to buy a certain quantity of bonds even if they did not want to issue notes at all. Thus all these notes would be uniform because they were to be printed by the government, and they would always be secure because the deposited bonds were pledged to their redemption. Furthermore, a new demand for government bonds would result, and this increase the nation's borrowing power.
In Mr. Chase's own words, the principal features of the plan were : First, a circulation of notes bearing a common impression, and authenticated by a common authority ; second, the re demption of these notes by the associations and institutions to which they may be delivered for issue; and, third, the security of that redemption by the pledge of United States stocks, and an adequate provision of specie.
In this plan the people in their ordinary business would find the advantages of uniformity in currency ; of uniformity in security ; of effectual safeguard, if effectual safeguard is possible, against depreciation, and of protection from losses in discounts and exchanges ; while in the operations of the government the people would find the further advantages of a large demand for government securities, and of increased facilities for obtaining the loans required by the war. . . .
3. Early history of the Act.—The plan was rec ommended as early as 1861, but it was not until 1863 that it became a law. When it was adopted it did not result in as great a benefit to the finances of the Union as had been expected. There was a decided prejudice against the issue of notes secured by the deposit of bonds. This was the result of the failure of several state systems which operated on that plan.