'The only coin received from the Boston, New York and Philadelphia banks, in payment of their subscription to the government loans, to the amount of nearly $150,000,000,_ had to be sent to every point in the United States to meet public obligations, and when thus scattered was not readily returnable to the banks, thus exhausting their resources and their ability to loan again." Mr. Sherman is very positive regarding the necessity of the legal tenders as a war measure. In his 'Recollections' (p. 281), he makes this statement: ((The Legal-Tender Act, with its provision for coin receipts to pay interest on bonds, whatever may be said to the contrary by theorists, was the only measure that could have enabled the government to carry on suc cessfully the vast operations of the war." Hugh McCulloch, the first Comptroller of the Currency and twice Secretary of the Treas ury, in his 'Men and Measures of Half a Century' (p. 135), has this to say of the failure of Secretary Chase to make use of bank checks in disbursing government funds: (For a considerable time, even after the war had begun, the specie standard was main tained, and hopes were indulged that the war might be prosecuted on a specie basis. These hopes were dissipated by the action of Secre tary Chase in his dealings with the New York, Philadelphia and Boston banks, which had agreed to advance to the government on its 7.3 notes $150,000,000 ($50,000,000 in August, $50,000,000 in October and $50,000,000 in Novem ber, 1861) under the expectation that the Treas ury drafts for the money would be presented through the clearing-houses and be paid with out large reductions of their coin. The Secre tary did not, however, feel at liberty to meet their ercpectations, and the drain upon their coin reserve soon became so heavy that the:y were forced to suspend specie yments. Their suspension was soon followed by the suspen sion of nearly all the banks in the country.) When Chase, as Spaulding said, broke the banks and the sub-Treasury at the same time and discredited both, an urgent necessity arose for strengthening the weakened credit of the cotmtry. It soon became apparent that the issue of legal-tender notes alone would not suffice, as the frightful depreciation of these forced instrinnents of credit foreshadowed a time when they would approximate the same degree of worthlessness reached by the Con tinental currency in the struggle for indepead ence, and made it incumbent upon Mr. Lin coln's financial advisers to devise some efficient means for holding this depreciation in check by a resort to the borrowing powers of the government. The precarious sttuation in which the country was involved injuriously affected its credit abroad, and made it desirable, if bonds were to be sold in large volume without ruinous depreciation, to create a home demand for them. The device of using the public debt as a basis for currency issued through banks was an old one. It had been proposed by Ham ilton who when asked by Washington, ((What is to be done with our terrible debt?"' answered, °Bank on it as our only available capital, and the best in the world.* Many of the States had tried the experiment of chartering banIcs to issue currency against a pledge of State stocks, often with disastrous results. There were other States—of which New York was a con spicuous example—where the banlcing laws were good and the banlcing system sound. It is well known that the law of the State named was relied on largely in framing the act creat ing the national banking system.
More than two years before the bill provid ing for the organization of national banlcs be came a law, the banks of the country had sus pended specie_payment, not to be restored again until 1879. The effect of this suspension was to link the national bank notes to the legal tenders, in which they were redeemable rather than to gold. Of course, the bank notes were no better and no worse than the money in which they were payable. They were not as good as gold, but neither were the legal-tender notes, the latter and the bank bills substan tially keeping together as compared with gold.
In reality, though nominally issued by banks and bearing on their face the name of the bank emitting them, the national bank notes are government paper money. They are secured
by bonds of the United States, deposited with the Treasurer at Washington, in which city they are redeemed in lawful money, and though the law provides for redemption of the notes at the counters of the issuing banks this is almost totally unknown in practice. They are not redeemed through the clearings as are the notes of the Canadian banks. The govern ment guarantees the payment of the notes, running no risk whatever in so doing, since it always has in hand an amount of its own se curities equal to the face of the notes issued.
Devised as the national banking system to give the country sound and uniform cur rency and to aid in replenishing the Treas ury, it hardly succeeded in either of these aims. The national bank currency has been of uni form value and a vast improvement on a great deal of the State bank circulation which it dis placed, but it has through its inelasticity de veloped serious defects. In so far as the new banking system was relied on to furnish cur rency during the Civil War, the result was not very satisfactory. When the war closed the national bank notes were in the neighborhood of $100,000,000 in amount—only a small frac tion of the loans placed to carry on the war. Had the channels of circulation not been so well supplied by legal-tender notes, the national bank notes at the close of the war would have been much greater in volume. After the war, when the government was still for a long time heavily in debt, the national banks were of immense help in sustaining the public credit.
But it is as a system of discount and deposit banks that the national associations have won their greatest success and established them selves firmly in the public confidence. It was, of course, one of the aims of Secretary Chase to supplement the somewhat inharmonious State banking systems then existing with some thing having at least uniform laws to govern them and all watched over from Washington, yet he could hardly have foreseen how surpris ingly large proportions the national banks were to attain through discount and deposit opera tions in the first half-century of their existence.
Marvelous as has been the record of na tional banking growth, it might easily have been much greater had Congress earlier en larged the functions of the banks, thus fore stalling the rapid rise of the trust company and the tremendous accretions of deposits in savings banks.
The history of the national banking system contains few important dates—points that mark any striking growth. There are two ex ceptions to this statement, however. After the original act was passed in 1863, the growth of the banks was slow until. the 10 per cent tax was imposed on State bank notes in 1865. But the real impetus to national banking was given in 1900, when the minimum capital was reduced from $50,000 to $25,000, and the issue of circu lation placed upon a somewhat more liberal basis.
Another landmark in the history of the sys tem was the passage of the Federal Reserve Act (q.v.), 23 Dec. 1913. This act changed completely the method of redepositing reserves, provided for rediscounting and accepting and for a system of note issues based on coin and commercial paper. It also made other import ant changes in the Banking Law. Perhaps the strongest feature of the new law was in link ing all the national banks together for their common defense; that is, a centralization of the reserves whereby they become, in a sense, the common property of all the banks so far as relates to their use.
Elements of safety in the national banking system have been the requirement in regard to the actual paying in of capital, the supervision exercised by the government and the admirable features of the law with regard to loans, and the double liability of shareholders. Compared to the colossal sums handled by these banks, their losses have been trifling, and they are growing proportionally smaller year by year.
The national banks have furnished a re markably safe and efficient system of banking, and have been factors of immense benefit in local development and in the augmentation of the national wealth and prosperity. If they have fallen short, it has been due to the slow ness of the national legislature in adapting the law to meet changing conditions.