The National Banking Acts of 1863 and 1864 were two United States federal banking acts that established a system of
national bank
In banking, the term national bank carries several meanings:
* a bank owned by the state
* an ordinary private bank which operates nationally (as opposed to regionally or locally or even internationally)
* in the United States, an ordinary p ...
s, and created the United States National Banking System. They encouraged development of a national currency backed by bank holdings of U.S. Treasury securities and established the
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency (OCC) is an independent bureau within the United States Department of the Treasury that was established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all nation ...
as part of the
United States Department of the Treasury
The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and t ...
and a system of nationally chartered banks. The Act shaped today's national banking system and its support of a uniform U.S. banking policy.
Background
At the end of the
Second Bank of the United States
The Second Bank of the United States was the second federally authorized Hamiltonian national bank in the United States. Located in Philadelphia, Pennsylvania, the bank was chartered from February 1816 to January 1836.. The Bank's formal name, ac ...
in 1836, the control of banking regimes devolved mostly to the states. Different states adopted policies including a total ban on banking (as in Wisconsin), a single state-chartered bank (as in Indiana and Illinois), limited chartering of banks (as in Ohio), and free entry (as in New York).
While the relative success of New York's "free banking" laws led a number of states to also adopt a free-entry banking regime, the system remained poorly integrated across state lines. Though all banknotes were uniformly denominated in dollars, notes would often circulate at a steep discount in states beyond their issue.
In the end, there were well-publicized frauds arising in states like Michigan, which had adopted free entry regimes but did not require redeemability of bank issues for specie. The perception of dangerous "
wildcat bank
Wildcat banking was the issuance of paper currency in the United States by poorly capitalized state-chartered banks. These wildcat banks existed alongside more stable state banks during the Free Banking Era from 1836 to 1865, when the country ha ...
ing”, along with the poor integration of the U.S. banking system, led to increasing public support for a uniform national banking regime.
The United States Government, on the other hand, still had limited taxation capabilities, and so had an interest in the
seigniorage
Seigniorage , also spelled seignorage or seigneurage (from the Old French ''seigneuriage'', "right of the lord (''seigneur'') to mint money"), is the difference between the value of money and the cost to produce and distribute it. The term can be ...
potential of a national bank. In 1846, the
Polk Administration
The presidency of James K. Polk began on March 4, 1845, when James K. Polk was United States presidential inauguration, inaugurated as President of the United States, and ended on March 4, 1849. He was a Democratic Party (United States), Democrat, ...
created a United States Treasury system that moved public funds from private banks to Treasury branches in order to fund the
Mexican–American War
The Mexican–American War, also known in the United States as the Mexican War and in Mexico as the (''United States intervention in Mexico''), was an armed conflict between the United States and Mexico from 1846 to 1848. It followed the 1 ...
. However, without a national currency, the revenue generated this way was limited.
This became more urgent during the Civil War, when Congress and Lincoln were struggling to finance the war efforts. Without a national mechanism for issuing currency, the Lincoln administration could not exploit the powers and loopholes that, for example, Britain could with its central bank, in order to finance the high expenses involved. Previously, the damage that would be done to state banks by national competition was sufficient to prevent significant national bank chartering. But using the war crisis, Lincoln was able to expand this effort.
One of the first attempts to issue a national currency came in the early days of the Civil War when Congress approved the
Legal Tender Act of 1862
The ''Legal Tender Cases'' were two 1871 United States Supreme Court cases that affirmed the constitutionality of paper money. The two cases were ''Knox v. Lee'' and '' Parker v. Davis''.
The U.S. federal government had issued paper money known a ...
, allowing the issue of $150 million in national notes known as
greenbacks and mandating that paper money be issued and accepted in lieu of gold and silver coins. The bills were backed only by the national government's promise to redeem them and their value was dependent on public confidence in the government as well as the ability of the government to give out specie in exchange for the bills in the future. Many thought this promise backing the bills was about as good as the green ink printed on one side, hence the name "greenbacks."
[''Gale Encyclopedia of U.S. Economic History''. Detroit: Gale, 2000.]
The
Second Legal Tender Act,
[ch. 142, ] enacted July 11, 1862, a Joint Resolution of Congress,
[United States Congress. Resolution of January 17, 1863, No. 9. Washington D.C.: 1863](_blank)
/ref> and the Third Legal Tender Act,[ch. 73, ] enacted March 3, 1863, expanded the limit to $450 million. The largest amount of greenbacks outstanding at any one time was calculated as $447,300,203.10.
The National Bank Act (ch. 58, ; February 25, 1863), originally known as the National Currency Act, was passed in the Senate by a 23–21 vote, and was supplemented a year later by the National Banking Act of 1864. The goals of these acts was to create a single national currency, a nationalized bank chartering system, and to raise money for the Union war effort. The Act established national banks that could issue notes which were backed by the United States Treasury and printed by the government itself. The quantity of notes that a bank was allowed to issue was proportional to the bank's level of capital deposited with the Comptroller of the Currency at the Treasury. To further control the currency, the Act taxed notes issued by state and local banks, essentially pushing non-federally issued paper out of circulation.
Since the establishment of the Republic, state governments had held authority to regulate banks. Before the act, state legislatures typically issued bank charters on a case-by-case basis, taking into consideration whether the area needed a new bank, and if the applicant was of good moral standing. As this system could be subject to corruption, states began passing "free banking" laws in 1837, which meant that any applicant who filled out the correct paperwork and deposited an in-kind payment to the state would be granted a charter. By the 1860s, over half of states had such a law on the books. However, the National Banking Act of 1864 (ch. 106, ; June 3, 1864) brought a close to the issue by establishing federally-issued bank charters, which took banking out of the hands of state governments.[ The first bank to receive a national charter was the First National Bank of Philadelphia, Pennsylvania (Charter #1).] The first new national bank to open was The First National Bank of Davenport, Iowa (Charter #15). Additionally, the new Act converted more than 1,500 state banks to national banks.
National Bank Acts
National Bank Act of 1863
The National Bank Act of 1863 was passed on February 25th, 1863, and was the first attempt to establish a federal banking system after the failures of the First and Second Banks of the United States, and served as the predecessor to the Federal Reserve Act
The Federal Reserve Act was passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913. The law created the Federal Reserve System, the central banking system of the United States.
The Panic ...
of 1913. The act allowed the creation of national banks, set out a plan for establishing a national currency backed by government securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
held by other banks, and gave the federal government the ability to sell war bonds and securities (in order to help the war effort
In politics and military planning, a war effort is a coordinated mobilization of society's resources—both industrial and human—towards the support of a military force. Depending on the militarization of the culture, the relative size ...
). National banks were chartered by the federal government, and were subject to stricter regulation; they had higher capital requirements and were not allowed to loan more than 10% of their holdings. A high tax on state banks was levied to discourage competition, and by 1865 most state banks had either received national charters or collapsed.
[
]
National Bank Act of 1864
The 1864 act, based on a New York State law, brought the federal government into active supervision of commercial banks.
National Bank Acts of 1865 and 1866
Further acts passed in 1865 and 1866 imposed a tax to speed the adoption of the system. All banks (national or otherwise) had to pay a 10 percent tax on payments that they made in currency notes other than national bank notes. The tax rate was intentionally set so high as to effectively prohibit further circulation of state bank and private notes. By this time the conversion from state banks to national banks was well underway. The constitutionality of the tax came before the Supreme Court in ''Veazie Bank v. Fenno'', a case by a state-chartered Maine bank and the collector of internal revenue. The Court ruled 7–2 in favor of the government. State banks declined until the 1870s, when the growing popularity of checks
Check or cheque, may refer to:
Places
* Check, Virginia
Arts, entertainment, and media
* ''Check'' (film), a 2021 Indian Telugu-language film
* ''The Checks'' (episode), a 1996 TV episode of ''Seinfeld''
Games and sports
* Check (chess), a thr ...
and the declining profitability of national bank currency issues caused a resurgence.
Resurgence of state banks
The granting of charters led to the creation of many national banks and a national banking system which grew at a fast pace. The number of national banks rose from 66 immediately after the Act to 7,473 in 1913. Initially, this rise in national banking came at the expense of state banking—the number of state bank
A state bank is generally a financial institution that is chartered by a federated state, as opposed to one regulated at the federal or national level. State banks differ from a reserve bank in that it does not necessarily control monetary policy ...
s dwindled from 1,466 in 1863 to 247 in 1868. Though state banks were no longer allowed to issue notes, local bankers took advantage of less strict capital requirements ($10,000 for state banks vs. $50,000–200,000 for national banks) and opened new branches en masse. These new state banks then served as competition for national banks, growing to 15,526 in number by 1913.
The years leading up to the passing of the 10% tax on banknotes consisted of events surrounding the National Banking Act of 1864. During this time period, Hugh McCulloch was determined to "fight against the national banking legislation, which he rightly perceived as a threat to state-chartered banking. Although he tried to block the system's creation, he cCullochwas not determined to be its champion." Part of his plans to revamp this portion of the banking system included hiring a new staff, being hands-on with several aspects such as "personally evaluating applications for bank charters and consoled prospective bankers", and "assisting in the design of the new national bank notes, and arranged for their engraving, printing, and distribution." As an end result of McCulloch's efforts, many banks were just not willing to conform to his system of operations. This prompted Congress to pass "a 10 percent tax on the notes of state banks, signaling its determination that national banks would triumph and the state banks would fade away."
A later act, passed on March 3, 1865, imposed a tax of 10 percent on the notes of state banks to take effect on July 1, 1866. Similar to previous taxes, this effectively forced all non-federal currency from circulation. It also resulted in the creation of demand deposit account
A transaction account, also called a checking account, chequing account, current account, demand deposit account, or share draft account at credit unions, is a deposit account held at a bank or other financial institution. It is available to the ...
s, and encouraged banks to join the national system, increasing the number of national banks substantially.[
]
Legacy
The National Banking Acts served to create the (federal-state) dual structure that is now a defining characteristic of the U.S. banking system and economy. The Comptroller of the Currency continues to have significance in the U.S. economy and is responsible for administration and supervision of national banks as well as certain activities of bank subsidiaries (per the Gramm-Leach-Bliley Act of 1999).[ In 2004, the Act was used by ]John D. Hawke, Jr.
John D. Hawke Jr. (June 29, 1933 – January 3, 2022) was an American lawyer who served as the United States Under Secretary of the Treasury for Domestic Finance from 1995 to 1998, and was the United States Office of the Comptroller of th ...
, Comptroller of the Currency
The Office of the Comptroller of the Currency (OCC) is an independent bureau within the United States Department of the Treasury that was established by the National Currency Act of 1863 and serves to charter, bank regulation in the United States ...
, to effectively bar state attorneys general from national bank oversight and regulatory roles. Many blame the resulting lack of oversight and regulation for the late-2000s recession
The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At t ...
, the bailout of the U.S. financial system and the subprime mortgage crisis
The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the Financial crisis of 2007–2008, 2007–2008 global financial crisis. It was triggered by a large decline ...
.
See also
*US banking law
Banking in the United States began by the 1780s along with the country's founding and has developed into highly influential and complex system of banking and financial services. Anchored by New York City and Wall Street, it is centered on var ...
*'' Cuomo v. Clearing House Ass'n, L.L.C.''
Notes
Further reading
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External links
National-Bank Act as Amended, the Federal Reserve Act and Other Laws Relating to National Banks. February, 1920
Document compiled under the direction of the Comptroller of the Currency for the use of the Senate, providing dates of acts relating to national banks, 1863–1920, text of the acts and amendments, and indexes.
An Act to Provide a National Currency, Secured by a Pledge of United States Bonds, and to Provide for the Circulation and Redemption Thereof
Act of June 3, 1864, National Bank Act of 1864, National Banking Act of 1864
An Act to Provide for a National Currency, Secured by a Pledge of United States Stocks, and to Provide for the Circulation and Redemption Thereof
Act of February 25, 1863, National Bank Act, National Banking Act, National Currency Act
The Library of Congress
{{Reconstruction Era
1863 in American politics
1863 in law
37th United States Congress
United States federal banking legislation