Friday, December 18, 2009

National Banking System

National Banking System
Thomas Allen

[Editor's note: Footnotes in original are omitted.]

In his report to Congress in 1861 on tax increases to finance Lincoln’s war to destroy the Constitution, Salmon P. Chase, the Secretary of the Treasury, suggested a national banking system to provide a safe and uniform bank note.[1]

"In 1863 Congress enacted the National Banking Act. It was promoted as a means to overcome the problem of bank notes fluctuating in value and losing all value by failure of the issuing bank. The ostensible objective was to provide a uniform and safe currency. The act did provide a uniform and safe currency and brought uniformity to banking.”[2]

Some, such as Anthony Sutton[3] and M.W. Walbert,[4] claim that the major banks were behind the National Banking Act. They wanted to gain control of the U.S. government by getting it indebted to them. (If they had enough control of the U.S. government to get the National Banking Act enacted, did they not already have control of the government? )

According to Sutton, Chase was an ally of the banking interest. He presented Congress banking legislation favorable to the banking interest. Senator John Sherman was the front man for the bankers in the Senate and got the Senate to adopt the National Banking Act.

Sutton writes, “What bankers wanted the government to undertake was transfer the right to issue money to banking interests, i.e., to allow bankers to act as agents of the Federal Government. The U.S. Government would then be a perpetual borrower required to borrow funds at interest from a private money monopoly—which had obtained the monopoly power from the government itself.”[5]

Banks issuing bank notes were nothing new. Establishing a system to charter national banks and requiring them to secure their notes with U.S. bonds was new. (The requirement to cover bank notes with bonds was a common practice in most State banking systems.)

Before the enactment of the National Banking Act, States chartered all banks. These State-chartered banks (State banks) could issue bank notes. Thus, no bank had a monopoly to issue bank notes. The National Banking Act created a note-issuing cartel of national banks (banks chartered under the National Banking Act). Even this monopoly was not secured until 1866 when Congress levied a 10 percent tax on notes issued by State banks.

Sutton claims, “The purpose of the National Banking Act was to give control of the money issue to bankers.”[6] Some bankers may have thought or hoped that the National Banking Act would do this. However, if this were its purpose, it was a failure. It did not give bankers monopolistic control of money issuance. Free coinage of gold and silver remained in place after the adoption of the National Banking Act. (Free coinage of silver ended in 1873.) National bank notes were redeemable in gold or silver (later only gold) and U.S. notes, which remained in circulation throughout the life of national bank notes, on demand. (Before 1879, except banks on the West Coast, banks nearly always redeemed bank notes in U.S. notes as a dollar in gold was worth more than a dollar in U.S. notes.) Free coinage and mandatory redemption hampered any monopolistic privileges that the bankers may have wanted—hence, Roosevelt’s ending the gold standard in 1933. Furthermore, national bank notes had to compete with fiat money issued by the U.S. government. With the adoption of the Bland-Allison Act in 1878 until the adoption of the Gold Standard Act of 1900, they competed with fiat money in the form of silver dollars. After the adoption of the Sherman Act, they also competed with Treasury notes of 1890, another form of fiat money issued by the U.S. government.[7] Moreover, throughout their life, they competed with fiat money in the form of U.S. notes. If the bankers wanted a monetary monopoly, they did not get it until 1933. If the bankers had such control over the U.S. government, why did they wait from 1863 to 1933 to secure their monopolistic control of the monetary system?

Sutton supports his argument by citing correspondence between the Rothschild Brothers and Ikleheimer, Morton, and Vandergould of Wall Street about the National Banking Act.[8] As discussed below, the National Banking Act did benefit the Rothschilds and other major international European bankers. It did so to the detriment of U.S. commercial banks. As discussed below, the primary purpose of the National Banking Act other than forcing banks to buy U.S. bonds was to restrict greatly American banks to prevent them from becoming competition for the major European banks. Nevertheless, the National Banking Act did contain provisions to make it acceptable to large commercial bankers by restricting their competition domestically. (Within a decade State banks had discovered away to overcome the advantages that the National Banking Act gave national banks. They successfully promoted the use of checking accounts, checkbook money, instead of bank notes.)

Murray Rothbard describes the role of Jay Cooke and his brother Henry in establishing the national banking system. Jay Cooke was a banker. Henry Cooke was the editor of the leading Republican newspaper in Ohio and a close friend of Senator Chase. The Cookes successfully lobbied Lincoln to appoint Chase as Secretary of the Treasury. Then the Cookes used their relationship with Chase to get a monopoly on selling U.S. bonds through Jay Cooke’s investment bank. Except one year, he maintained this monopoly from 1862 to 1873 when his company went bankrupt. The Cookes and Chase promoted the national banking system as a means to create a market for U.S. bonds.[9]

As noted above, the National Banking Act was promoted as a means to provide a uniform and safe currency. “However, the primary reason for establishing the national banking system was to finance the U.S. government. It created a market for U.S. government bonds. Under this system, bank notes of national banks were required to be backed by U.S. government securities. Any bank that wanted to issue bank notes had to buy U.S. government bonds.”[10]

Originally, Secretary Chase wanted “to make a market for [U.S.] government bonds by requiring State banks to secure their circulating notes with such bonds, imposing a tax on all notes not so secured.”[11] This proposal evidences that elements of the U.S. government pushed the National Banking Act as a means to create a market for government bonds instead of a move by bankers to create a banking cartel. However, some bankers could have ceased the opportunity to create a banking cartel at least in note issuance in exchange for guaranteeing a market for U.S. bonds.

When the revised National Banking Act passed in 1864 (it replaced the flawed 1863 National Banking Act), some also promoted it as a means to end U.S. notes. Congress would redraw U.S. notes, and national bank notes would replace them as the sole paper money. Bankers must have liked this plan. Unfortunately for them, only a fraction of the U.S. notes was ever withdrawn. Moreover, Congress invented additional competing paper money in the form of gold certificates, silver certificates, and Treasury notes of 1890.

“The law did give the country a uniform paper currency, the national bank note, so that bank notes issued on the east coast were acceptable on the west coast. National bank notes were not legal tender. Even so, they could be used to pay taxes except tariffs on imports.”[12] All tariffs, which were a major source of governmental revenue, had to be paid in gold.

Dunbar remarks, “There is no doubt that, in adopting the national bank system, Congress understood that it was establishing the agency by which the sole paper currency of the country should be issued in the future.”[13] This goal was never achieved because the U.S. government issued too much paper money in the form of U.S. notes (which stabilized at $347 million), gold certificates, silver certificates, and Treasury notes of 1890. If national bank notes were to become the sole paper currency, how and when did the bankers lose control of Congress? If bankers had enough control over the U.S. government to get it to enact a cartel that was to give banks absolute control over money issuance, why did they not prevent the U.S. government from issuing paper money of all kinds? Why did they not get the U.S. government to phase out all paper money and make bank notes legal tender, which they eventually achieved under the Federal Reserve System?

Bankers were wrong if they thought that the National Banking Act was giving them control of the monetary system in the United States. The National Banking Act was highly ineffective at giving them such control. They would have to wait until 1933 for this control.

Now let’s review some features of the National Banking Act.

The National Banking Act provided for a system of free banking. That is, any association that met the minimum statutory requirements to establish a national bank could do so without a special charter from Congress. The Comptroller of the Currency had general supervision of chartering national banks.

The Comptroller was not compelled to grant a charter to any association that met the statutory requirement for forming a national bank. He could reject a request for a charter without giving any reason. Such power did offer the established banks the opportunity to limit their competition by corrupting the Comptroller.

A national bank in cities of more than 50,000 inhabitants needed a subscribed capital of $200,000. The minimum capital in cities of less than 50,000 inhabitants, was $100,000. With the approval of the Secretary of the Treasury, a bank needed only $50,000 in capital in towns of less than 6000. At least “one-half of the subscribed capital had to be paid in before beginning business, the remainder to be paid in monthly (or more frequent) installments of 10 per cent of the whole-amount.”[14]

This large capital requirement confined national banks to the large towns and cities. Their absence from rural areas contributed to the financial plight of farmers during the latter part of the nineteenth century. It also fueled the inflationist movement, first the greenback promoters and then the silver promoters of that era.

“The, stockholders were made doubly liable for the debts of the bank in case of the insolvency of the latter.”[15] That is, shareholders were liable for an amount equal to the par value of their stock in addition to the amount invested. If bankers wrote this law or were the power behind its writing, why would they want to subject themselves to this additional liability? (Such a provision was common in State banking laws.)

The Act allowed national banks “to institute suits at law in U.S. courts as courts of original jurisdiction.”[16] According to Walbert, “This provision gave the national banks an advantage over the ordinary citizen, and placed these associations beyond the jurisdiction of the State courts; in other words, these banks could select whatever court their interest dictated.”[17]

When organized, a national bank had to deposit U.S. bonds with the Secretary of the Treasury equal to at least one-third of its capital stock or $30,000, whichever was greater.[18] Why would bankers impose this restriction on themselves? Would not they want to be free to decide the quantity of bonds to deposit?

With the deposit of this security, the bank could obtain circulating national bank notes from the Comptroller of the Currency up to 90 percent of the value of the bonds. It could obtain additional notes by depositing additional bonds. However, the quantity of notes that it obtained could not exceed its paid-in capital. The deposited bonds remained the property of the depositing bank.

Whenever the value of deposited bonds decreased, the bank had to deposit additional bonds. A bank could withdraw its bonds by retiring its circulating notes or by depositing and equal amount of lawful money in the Treasury.

Why would bankers want to restrict the quantity of notes that they issued to 90 percent of the value of U.S. bonds deposited with the Secretary of the Treasury? Would not they want the full amount? (The Act was later amended to allow banks to use the full total of bonds on deposit.) Furthermore, why would they want to tie their note issuance to U.S. bonds? This feature of the National Banking Act was a major contributor to the deflation between 1870 and 1900. Under sound banking, note issuance is tied to real bills of exchange and not to financial bills like U.S. government bonds.

Nevertheless, according to E. Edward Griffin and Sutton, banks did receive at least one benefit from this system. A bank received back 90 percent of the value of the bonds in notes. Thus, a bond cost the bank 10 percent of its value. These notes it could lend at interest. Moreover, it received interest paid in gold on its deposited bonds. By receiving interest on its deposited bonds and interest on lending bank notes received for the deposited bonds, the bank could significantly increase its income without increasing its capital. In essence, bankers conspired with the U.S. government to convert U.S. debt into money. Bankers received a handsome fee for their services.[19] (This double profit argument was a favorite of the critics of the national banking system during the latter part of the nineteenth century.)

Dunbar rebuts this claimed advantage:

Every bank, then, as a consequence of its use of its credit in any form, must receive interest earned by the investment of its capital and also interest earned by what we may call the investment of its credit; and the fact that the national banks, like others, have the opportunity for making credit as well as capital yield a profit, neither springs from the system on which their notes are secured, nor depends upon it. Indeed, it must be manifest that their deposits yield them a profit in precisely the same way as their notes, and usually much greater in amount. The conclusive practical answer to the idea of a supposed extraordinary profit is to be found, however, in the conduct of the banks themselves, especially after the passage of the act of 1874. This, recognizing the desire of many banks to reduce their circulation and secure possession of their bonds, provided that any bank might deposit “lawful money” with the Treasurer of the United States to enable him to redeem its notes, and thereupon withdraw pro tanto the bonds deposited, provided the amount of its bonds left in deposit were not reduced below $50,000. Several important national banks had never chosen to issue notes, although required by the law to maintain a deposit of bonds; under this provision a considerable number of others reduced their notes to the $45,000 which the required minimum deposit of bonds would support.[20]
This feature of securing bank notes with U.S. bonds caused bank notes to expand and contract as the U.S. government debt expanded and contracted. Instead of bank notes expanding and contracting as the needs of the markets for bank notes expanded and contracted, they expanded and contracted with U.S. government debt.

Contrary to Walbert’s claim, the Act did not place “in the hands of the money power [the ability] to contract or expand the volume of money at its pleasure, and, therefore, enhance or depreciate the value of stocks, bonds, and all other forms of property in the United States.”[21] At least it did not give them the power to expand and contract bank notes at will. The Act limited their ability to contract, and they could not expand any faster than the U.S. debt expanded. Although the Act did not restrict checkbook money except with the mandatory reserves, national banks had to compete with State banks. This competition thwarted manipulative restriction of checkbook money, which is functionally the same as bank notes.

Walbert also errors when he claims that the Act deprived “greenbacks of their legal tender power.”[22] It did not. Before and after the enactment of the National Banking Act, U.S. notes (greenbacks) remained legal tender for all debts public and private except for payment of tariffs and interest on U.S. bonds. Bank notes could not be used for these payments either. They had to be paid in gold.

Requiring bonds to secure bank notes introduced an investment element. It prevented “banks from issuing notes in response to monetary needs.”[23] Johnson remarks:

National banks in the United States have been issuing notes in accordance with this system ever since the Civil War, and their experience furnishes abundant evidence that notes thus issued perform no useful service. They are elastic enough, but their elasticity is perverse, even vicious, for they expand in volume when contraction is needed and contract when expansion is called for. In dull times, when the supply of currency is already excessive and the rate of discount low, banks are tempted to increase their investments in bonds and to enlarge their circulation. . . . On the other hand, in good times, when banks are able to lend all their credit at high rates of interest, they are prone, no matter what the need for currency, to reduce their circulation and sell their bonds in order to increase their money reserve.[24]
Furthermore, banks could not increase their supply of bank notes to meet seasonal needs (more money was demanded during the fall harvest than during summer) without assuming an investment risk.[25] Thus, requiring bonds to back bank note lead to a flawed monetary system.
Requiring U.S. bonds as security for bank notes was a great benefit to the U.S. government. It gave the government a guaranteed market for its debt. Banks had to buy U.S. bonds if they wanted bank notes to issue.

All national banks had to receive all national bank notes at par. Thus, sound banks could not discount or refuse bank notes of unsound banks. The issuing bank had to redeem its notes in lawful money (nearly always U.S. notes before 1879 except on the West Coast). Except tariffs, the U.S. government accepted them in payment. It could use them for payments except interest on its bonds.

Although the Act required national banks to receive each other’s bank notes at par, it made redeeming them in specie difficult. A person could only force a national bank note to be redeemed in specie at the issuing bank’s home office. Furthermore, the Act limited the quantity of notes that could be contracted (retired) to $3 million per month.

Congress later amended the act to make the U.S. Treasury the sole redeeming agency for all bank notes. It required each bank to maintain funds equal to 5 percent of its circulating notes at the Treasury to redeem its notes. Thus, imprudent bankers could speculate to the point of irrevocable insolvency with little effective check.

Although notes were a liability of the issuing banks, making the Treasury responsible for redemption made them obligations of the U.S. government. The Treasury was responsible for redeeming all bank notes of insolvent banks. It used the bank’s funds and bonds on deposit to redeem the bank’s notes. Also, the Treasury had a first lien on the insolvent bank’s assets and the personal liability of stockholders.

Originally, the Act limited national bank notes to an aggregate of $300 million.[26] Why would bankers want to limit the quantity of notes that they could issue? Congress later raised this restriction and then removed it.

After Congress taxed State bank notes out of existence, State banks had to keep deposits at national banks to obtain bank notes. These deposits gave the national banks more money to lend. Many State banks converted to national banks so that they could continue to issue bank notes.

Banks paid a tax of one percent per year on the average amount of notes in circulation. This tax was to offset the government’s expenses printing the notes, keeping the mandatory deposited bonds, and supervising of the system. This tax was in place of all existing taxes on their notes. Congress also levied taxes on deposits and capital of national banks and allowed States to tax their shares.

Unlike U.S. notes, national bank notes were not legal tender. No one had to accept them in payment of debt. Therefore, banks could not count them toward their reserves and could not use them to extend credit. Thus, national bank notes did not have nearly the impact on prices as did an equivalent quantity of U.S. notes. As these bank notes replaced U.S. notes in daily trade, they made more U.S. notes available for use as bank reserves. Consequently, they contributed to price stability.[27]

One argument used by critics of national banks issuing bank notes was that only Congress can issue paper money. The argument used by the proponents of the national banking system to counter this objection was “that national banks do not ‘issue’ notes, but only use such as furnished them in such quantities and under such restriction as are prescribed by Congress.”[28]

People like Walbert error when they claim that with the National Banking Act, the U.S. government gave away “the power to issue legal tender paper money.”[29] It did not. Bank notes were never legal tender although the U.S. government accepted them for payment of taxes and fees. Furthermore, a strict reading of the U.S. Constitution reserves the right to declare legal tender to the States, and it restricts such declaration to gold and silver. The U.S. government has no authority to declare anything legal tender. Thus, it can give no entity the power or ability to issue legal tender currency. Although it can coin money, it cannot issue money or regulate its volume.[30]

A major flaw in the national bank note system was that it prevented the U.S. government from paying off its debts without a significant negative impact on the country’s monetary system. If it were to pay off all its debts, all bank notes would go out of existence.

Banks made little profit from issuing bank notes. They made their profits from buying securities and making loans with their credit. They could buy and lend with demand deposits (checkbook money) or bank notes with equal profitability.[31] To the contrary, the requirements for note issuance might make demand deposits more profitable. Some national banks found note issuance so unprofitable that they ceased issuing them.

In that the National Banking Act established a system where bank notes were tied to U.S. government debt, it followed the example of the first and second Banks of the United States—and which the Federal Reserve System would later follow. Also, to a great degree, it centralized control over banking. Like the two Banks of the United States and the Federal Reserve System, it continued the Hamiltonian philosophy of encouraging governmental indebtedness, especially to banks, and the concentration of power in the U.S. government.

The National Banking Act imposed minimum reserves. The reserves varied with the size or importance of the city in which the bank was located. Central reserve city banks, originally only natural banks in New York City, had to maintain minimum reserves of 25 percent cash in their vaults for their notes and deposits. National banks in reserve cities also had to maintain a 25-percent reserve. However, they could keep up to half their reserves deposited in New York banks as checkable deposits (demand deposits) and the remainder as cash in their own vaults. Country banks had to maintain a 15-percent cash reserve for their notes and deposits. They could keep up to 60 percent of their reserves as demand deposits in central reserve city or reserve city banks. All cash reserves were to be held in lawful money, i.e., U.S. notes, gold, and silver. Reserves restrict lending. Why would bankers want to impose statutory reserves on themselves? Why did they not leave each banker to decide the prudent amount of reserves to keep based on custom and experience? (An answer is that a statutory floor quickly becomes a ceiling. Many banks probably would have maintained higher reserves without the law fixing reserves. Thus, these banks acted less prudently than otherwise and lent more.)

Allowing smaller banks to keep reserves in larger banks did benefit large banks by giving them more money to lend. The way the system was designed, the New York City banks ended up controlling much of the country’s money. It also strained the New York City banks during financial crises as small banks withdrew their money.

When the smaller banks keep reserves in the larger banks, the larger banks became vulnerable to the actions of the smaller banks. Large banks typically lent these reserves as call loans, loans that the banks could call in at anytime. Banks usually made call loans to stock speculators. When a small bank withdrew its reserves, the large bank would call the loans. To raise the money to pay the loans, speculators had to sell their stocks. The result was often a crash in stock prices.

On the other hand, the larger banks could engage in inflationary speculative lending with little concern about other banks checking the expansion. Thus, the system enabled the banks “to inflate uniformly and relatively unchecked by pyramiding on top of a few New York City banks.”[32]

Later, Congress removed the reserve requirement for bank notes in circulation. (Banks still had to maintain reserves for deposits. Money deposited with the Treasury counted toward these reserves.) It replaced this requirement with a requirement to keep a redemption fund in lawful money with the Treasury equal to 5 percent of the notes in circulation. This change benefitted bankers as it removed $20 million from reserves and made it available for loans.[33]

The reserve requirements were probably less than what most banks would have kept if the banks were freely competing. Thus, the National Banking Act allowed banks to operate with fewer reserves.[34]

The National Banking Act allowed national banks to conduct general commercial banking business. They could accept deposits and make loans on personal securities and discounts for promissory notes, drafts, bills of exchange, and other evidence of debt. However, they could not make loans for real estate and deal in real estate. They could not lend on the securities of their own stock.

A bank could not buy or hold its own stock unless taken as security on a failed loan; such stock had to be sold within six months. The Act also imposed several other restrictions including a prohibition against opening savings departments.[35]

The maximum amount that a bank could lend to a single borrower was restricted. This restriction forced industrial corporations to borrow from many lenders, finance their own growth by borrowing from themselves or from other industrial companies (which banks did not like as it decreased their power), or turn to the great investment banks. Two of the major investment banks were J.P. Morgan and Co. and Kuhn, Loeb and Co. Both were associated with the Rothschild banking empire. Again restrictions in the National Banking Act benefitted the Rothschilds and their associates at the expense of the American commercial banks.

Most important of these other restrictions was that national banks could not accept drafts drawn on themselves by foreign or domestic merchants. This prohibition prevented national banks from financing American exporters and importers. Importers and exporters had to use London banks to finance their trade.[36] Why would bankers deny themselves such a lucrative market? This prohibition was highly beneficial to the London bankers, Rothschild being the dominant London banker. This restriction does suggest the involvement of the Rothschilds and other European international bankers in the National Banking Act.

The Act made the merger of national banks difficult. To control other banks, the big banks often had to resort to the unreliable method of interlocking directorates.

Why would bankers want to place these restrictions on themselves? To get around some of these restrictions, such as the real estate restrictions, many national banks formed affiliated State banks.

The Act also prohibited branch banking. Prohibiting branch banking did reduce competition. But why would bankers want to lock themselves out of new and potentially lucrative markets? Prohibiting branch banking also reduced the redemption of bank notes. Note holders did not have many locations where they could redeem notes issued by non-local banks. Thus, notes circulated longer than they otherwise would. As notes spend more time in circulation, the bank’s potential for profit rises.

Later to entice State banks with branches to join the national banking system, Congress allowed them to keep their branches if they became natural banks.

With the enactment of the National Banking Act, the independent treasury system that President Van Buren had established ended. (Under the independent treasury system, the U.S. government kept its money solely in specie in its own Treasury vaults.[37]) Now the U.S. government deposited its money in selected national banks. These banks were depositories for all government revenue except customs. They also served the U.S. government as financial agents. To be a chosen bank was a great benefit. These banks received large sums of money, which they could lend. Their influence in Washington also rose.

The National Banking Act provided for, according to Rothbard, “governmental control and sponsorship of inflationary banking.”[38] Consequently, “the Republican Party was able to use the wartime emergency to fulfill the Whig-Republican dream of a federally-controlled centralized banking system able to inflate the supply of money and credit in a uniform manner.”[39] Along with the greenback, it implanted a desire for soft money.

A major defect of the National Banking System was the lack of elasticity of bank note issuance. Bank notes were not and could not be issued and contracted as the needs of commerce demanded more or fewer bank notes.

The National Banking Act failed to satisfy both the currency principle and banking principle of note issuance. Under the currency principle, bank notes above a statutory fixed amount have to be fully backed by specie. Above this fixed amount, bank notes are merely warehouse receipts for gold or silver, i.e., they are the same as gold or silver certificates. Under the banking principle, banks convert bills of exchange into bank notes. Although bank notes are redeemable in specie, bills of exchange back them. Bank notes expand and contract as bills of exchange expand or contract. Bills of exchange expand and contract as new goods offered for sale expand and contract. Bank note issuance responds directly to the needs of commerce.

Under the National Banking Act, bank note issuance responded to the expansion and contraction of U.S. government debt. They were essentially government debt cut into small pieces.[40] The national banking system monetized U.S. government debt.

The currency school considers bank notes as a form of money—a substitute for metallic money. They are merely a warehouse receipt for gold, i.e., paper gold. The banking school correctly considers bank notes as credit instruments that are functionally the same as checks and bills of exchange. They are not gold substitutes; they facilitate the movement of gold and enable one ounce of gold to do the work of several ounces of gold without fractionalizing gold. In this respect, the National Banking Act followed the currency school and considered bank notes as money proper like U.S. notes instead of credit instruments like bills of exchange. Bank notes were to be covered by gold, U.S. notes, or U.S. bonds, but not by bills of exchange. Thus, they lost their flexibility (elasticity) to respond to the needs of trade.

Furthermore, the Act demanded that the U.S. government remain indebted to bankers, which bankers may like, to maintain a supply of bank notes. The system prevented the U.S. government from paying off its debt. If it did so, the supply of money in circulation would contract unnecessarily.

The restrictions in the National Banking Act did lead to the growth of State banks. During the decade following its enactment, State banks appeared on their way to extinction. However, by the end of the century, more than 60 percent of the banks were State banks. State banks contributed more than half the total banking reserves.[41]

The flaws inherent in the national banking system were so great that the United States were given one of two choices. They could return to decentral banking, which was beginning to reassert itself, or move onward to full central banking. The big bankers (the money interest) deceived and tricked the people into central banking with the Federal Reserve Act.

Regardless of any conspiracy by the bankers, the underlying force behind the adoption of the National Banking Act was the desire of Republicans to destroy States’ rights and sovereignty and to consolidate all power in Washington. (The Republicans came out of the nationalist Whigs, who come out of the nationalists Federalists.) It epitomized Lincoln’s successful war to destroy the Constitution. Such a mood played into the hands of the international financiers like the Rothschilds.

Once power was centralized and consolidated in Washington, these bankers and their associates, through bribery and extortion, could and did gain control of it. Dewey remarks that having the U.S. government chartering banks instead of States:
appealed to the growing feeling of nationalism in all departments of political action; it appealed to those who were jealous of the power of private corporations; it appealed to those who wished to relieve the government from distressing bargains, and who hoped the government would thus gain the ascendancy in the control capital; and finally it appealed to those who feared that further issues of United States notes would ultimately ruin both government and private credit.[42]
Senator Sherman, who rammed the National Banking Act through the Senate, saw the national banking system, especially the national bank note, as achieving the major goal of Lincoln’s war: the destruction of States’ rights. States’ rights were the bulwarks that prevented those who really controlled the U.S. government from absolute despotic control of the country and its people.

The National Banking Act did destroy the decentralized banking system of State banks. It replaced that system with one that was highly centralized. Bureaucrats in Washington and the major banks in New York gained a great deal of control over the U.S. banking system. It greatly increased the power and influence of the New York City banks (the Wall Street banks). However, with the growth of State banks, decentralized banking was again beginning to reassert itself.

The many defects that the National Banking Act created in the banking system lead to the Federal Reserve Act of 1913. “With the National Banking Act, the currency had lost much of its elasticity because the quantity of bank notes was based on the quantity of U.S. securities and not on market demand. Because of the shortage of bank notes, depositors often had to withdraw gold coins or gold certificates, which served as reserves. Thus, banks had to maintain a higher level of reserves. To overcome the problems caused by the National Banking Act, the big bankers and their politicians decided further to concentrate and centralize control over the banking system. They created the Federal Reserve to manage the gold standard, which it did until 1933, after which it managed the fiat-federal-reserve-dollar standard.”[43] Furthermore, the major banks needed to do something to stifle the growth of State banks and to bring them under their control.
To the extent that a conspiracy involving the big bankers was behind the development and enactment of the National Banking Act, it was by major foreign bankers. If leading American commercial bankers were conspiring to get the Act enacted to receive special privileges, they failed. The Act did not really benefit them and gave them no great privileges. They would have to wait until the Federal Reserve System was established.

Endnotes1. Davis Rich Dewey, Financial History of the United States (1922; rpt. Adamant Media Corp., 2005), pp. 280-281. Robert P. Sharkey, Money, Class, and Party: An Economic Study of Civil War and Reconstruction (Baltimore, Maryland: The Johns Hopkins Press, 1959), p. 224.

2. Thomas Coley Allen, Reconstruction of America’s Monetary System: A Return to Constitutional Money (Franklinton, North Carolina: TC Allen Company, 2009), p. 144.

3. Antony C. Sutton, The Federal Reserve Conspiracy (Boring, Oregon: CPA Book Publishers, 1995), pp. 49-59.

4. M.W. Walbert, The Coming Battle: A Complete History of the National Banking Money Power in the United States (1899; rpt. Merlin, Oregon: Walter Publishing & Research, 1997), pp. 35ff.

5. Sutton, p. 51.

6. Ibid., p. 51.

7. Allen, pp. 86-89.

8. Sutton, pp. 52-56.

9. Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II (Auburn, Alabama: Ludwig von Mises Institute, 2005), pp. 132-135, 145-147. Murray N. Rothbard, The Mystery of Banking (Second Ed. Auburn, Alabama: Ludwig von Mises Institute, 2008), pp. 220-224, 228-230.

10. Allen, p. 144.

11. Horace White, Money and Banking (Boston, Massachusetts: Ginn and Company, 1896), p. 408.

12. Allen, p. 145.

13. Charles F. Dunbar and Oliver M.W. Sprague. The Theory and History of Banking (Fifth ed. New York, New York: G.P. Putman’s Sons. 1929), pp. 238-239.

14. Frederick A. Bradford, Money and Banking (Fourth ed. New York, New York: Longmans, Green and Company, 1938),p. 288.

15. Bradford, p. 288.

16. Walbert, p. 37.

17. Ibid.

18. Bradford, p. 288.

19. G. Edward Griffin, The Creature from Jekyll Island: A Second Look at the Federal Reserve (Fourth ed. Westlake Village, California: American Media, 2002), pp. 386-387.

20. Dunbar, pp. 245-246.

21. Walbert, p. 38.

22. Ibid., p. 44.

23. Joseph French Johnson, Money and Currency: In Relation to Industry, Prices, and the Rate of Interest. (Revised ed. Boston, Massachusetts: Ginn and Company, 1905), p. 334.

24. Ibid.

25. Ibid.

26. Bradford, p. 226.

27. Johnson, p. 275.

28. Dewey, p. 325.

29. Walbert, p. 41.

30. Allen, pp. 72-81.

31. J. Laurence Laughlin, The Elements of Political Economy (New York, New York: American Book Company, 1887), p. 342.

32. Rothbard, History, p. 138.

33. Rothbard, History, p. 141. Rothbard, Mysteries, p. 227.

34. Rothbard, History, pp. 143-144. Rothbard, Mysteries, p. 227.

35. Bradford, p. 345-346. Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916. (Paperback ed. Chicago, Illinois: Quadrangle Books, Inc., 1967), p. 140.

36. Bradford, pp. 325-326.

37. Rothbard, Mysteries, p. 214.

38. Rothbard, History, p. 122.

39. Ibid., p. 135.

40. White, p. 416.

41. Kolko, p. 140. Rothbard, History, p. 144.

42. Dewey, p. 321.

43. Allen, p. 148.

[Editor note: The original contains an appendix that shows the quantities of various types of paper money for the years between 1865 abd 1912 and a list of references. These are omitted.]
Copyright © 2009 by Thomas Coley Allen.

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