National Bank Act

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The National Banking Acts of 1863 and 1864 were two United States federal banking acts that established a system of national banks for banks, 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 as part of the United States Department of the Treasury and authorized the Comptroller to examine and regulate nationally chartered banks. The Act shaped today's national banking system and its support of a uniform U.S. banking policy.


For most of the nineteenth century, the American banking system consisted of state-chartered banks. The paper currency issued by state-chartered banks had to be redeemable. Depending on the state, the capital requirements for banks, set forth in the bank charter, differed. If a bank could not redeem its bank notes for money (gold or silver), the bank had committed fraud and was subject to prosecution. Most of the state-chartered banks in the North and East created redeemable currency against Bills of Exchange (Real Bills) under the real bills doctrine set forth by Adam Smith. (See "The Wealth of Nations", 1776 by Adam Smith). Real Bills were negotiable instruments, payable in 90 days, which banks discounted. Real Bills were a means of financing production of consumer items moving to market. Banks created uniformly denominated redeemable bank notes against the value of the Real Bills in their inventory.

If redemption demands exhausted their gold or silver reserves, these banks could rediscount the Real Bills to obtain gold or silver. The discounting of Real Bills by banks was particularly suited to the banking business in the industrial states of the north and the east of the country. Real Bills were secured by future production, primarily in agriculture, mining and lumber. Later they were adapted to meet the short term demands of an expanding industrial sector. Real Bills were generally short term notes of 60 to 90 days duration. The term of the notes was determined by the length of the productive cycle on farms, mines and timber operations.

As to the state-chartered banks, predominantly located in the West and South, many practiced fractional reserve lending for lack of availability of specie (gold and silver) to secure accounts. Fractional reserve lending depended on low demand to redeem the paper currency. Fractional reserve lending amounted to the issuance of multiple demand receipts for the same amount of gold and silver held by the banks. Holders of this kind of paper currency could redeem it only at the bank's branch office.

Though each and every state chartered bank issued its own redeemable currency, because of its denomination in US dollars, each bank's currency was nominally the same as any other. The difficulty lay in judging the ability of an issuing bank to be able to promptly redeem their currency for gold or silver. It was therefore extremely difficult for currency to serve as a means of exchange for inter-regional parties.[1] In 1816, the Second Bank of the United States was chartered by the U.S. Congress for a twenty-year period to create irredeemable currency with which to pay for the costs of the War of 1812. The creation of congressionally authorized irredeemable currency by the Second Bank of the United States amounted to taxation by inflation. The Congress did not want state-chartered banks as competition in the inflation of currency.

Because fractional reserve banking does amount to inflating a currency, the states agreed to curtail fractional reserve banking engaged in by the "wildcat" banks by tying the amount of currency these banks could issue to the amount of gold and silver coin they held. When the charter for the Second Bank of the United States expired in 1836, "wildcat" banks resumed unsound and unregulated lending. As Americans began to head west, these institutions began to issue more and more currency as a means of facilitating land speculation. This at-will adjustment of the money supply caused all forms of currency to fluctuate wildly in value. The issuance of currency by multiple banks also led to a nationwide counterfeiting problem that left the public wondering not only how much their money was worth but whether it was real. To solve the problem, the Jackson administration passed an order that voided paper currency in the eyes of the national government: agents of the government were allowed to accept gold or silver alone as a means of payment for land. Note holders ran to banks to redeem their currency only to find that banks' stocks of gold and silver were depleted and banks were no longer extending credit.

Currency notes could be redeemed for only a fraction of their nominal value and land investors began to rely on loans from abroad. A wave of bank failures ensued, eventually leading to the Financial Panic of 1837, which included a six-year depression. Some banks remained open and continued to issue notes, signaling no distinct end to the paper currency problem.[1] Notes issued by solvent institutions circulated along with currency of insolvent institutions and notes of some smaller, unknown banks even traded at a discount. The currency problem eventually became so bad that a magazine was issued that included photos and descriptions of the various bank notes and information about whether the issuing bank was sound.[1]


A "greenback" note issued by the U.S. during the Civil War

In 1846, the Polk Administration created a United States Treasury system that moved public funds from private banks to Treasury branches in an effort to stabilize the economy. However, there remained no national currency, a problem of increasing urgency to a wartime government strapped for cash. One of the first attempts of the nation to issue a national currency came in the early days of the Civil War when Congress approved the Legal Tender Act of 1862, 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." [1]

In 1863, the Second Legal Tender Act,[2] enacted July 11, 1862, a Joint Resolution of Congress,[3] and the Third Legal Tender Act,[4] 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.[5]

The National Banking Act (ch. 58, 12 Stat. 665; February 25, 1863), originally known as the National Currency Act, and was passed in the Senate by a narrow 23–21 vote. The main goal of this act was to create a single national currency and to eradicate the problem of notes from multiple banks circulating all at once. 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.[6]

First National Bank, Philadelphia

The National Banking Act of 1863 was superseded by the National Banking Act of 1864 (ch. 106, 13 Stat. 99; June 3, 1864) just one year later.[1] The new act also established federally issued bank charters, which took banking out of the hands of state governments. Before the act, charters were granted by state legislatures who were under an immense amount of political pressure and could be influenced by bribes. This problem was resolved to some degree by free banking laws in some states but it was not until this act was passed that free banking was established on a uniform, national level and charter issuance was taken out of the hands of discriminating and corrupt state legislatures.[6] The first bank to receive a national charter was the First National Bank of Philadelphia, Pennsylvania (Charter #1).[7] The first new national bank to open was The First National Bank of Davenport, Iowa (Charter #15).[citation needed] Additionally, the new Act converted more than 1,500 state banks to national banks.[citation needed]

National Bank Act of 1863[edit]

The National Bank Act of 1863 was designed to create a national banking system, float federal war loans, and establish a national currency. Congress passed the act to help resolve the financial crisis that emerged during the early days of the American Civil War (1861–1865). The fight with the South was expensive and no effective tax program had been drawn up to finance it. In December 1861 banks suspended specie payments (payments in gold or silver coins for paper currency called notes or bills). People could no longer convert bank notes into coins. Government responded by passing the Legal Tender Act (1862), issuing $150 million in national notes called greenbacks. However, bank notes (paper bills issued by state banks) accounted for most of the currency in circulation.

• a nationwide banking system that loaned money to the Government to pay for the war • a national system of paper money and coins

National Bank Act of 1864[edit]

• Brought the federal government into active supervision of commercial banks. • Established the Office of the Comptroller of the Currency with the responsibility of chartering, examining and supervising all national banks. • In 1865, Congress followed up on this act by imposing a 10 percent tax on state bank notes to encourage them to join the national banking system – it worked as most state banks flipped charters to avoid the tax - it was not until the 1870s and 80s when the growing popularity of checks developed by state banks and the declining importance and profitability of bank notes issued by national banks caused a resurgence in chartering of state banks. • The Act was originally based on New York State Law

National Bank Act of 1865-1866[edit]

On July 13, 1866, the banking Act of 1865 was extended beyond requiring every national banking association, state bank, or state banking association to pay a 10% tax on any notes paid out by them. The act of 1866 added that any persons, as well as of state banks and state banking associations used for circulation to also be taxed 10%. This act was considered enforced by the court case Veazie bank v. Fenno, supra. The official enactment by congress read, “That every national banking association, state bank, or state banking association shall pay a tax of ten percentum on the amount of notes of any person, state bank, or state banking association used for circulation and paid out by them after the 1st day of August, 1866, and such tax shall be assessed and paid in such manner as shall be prescribed by the Commissioner of Internal Revenue.” The Veazie Bank v. Fenno was a case between a state chartered Maine bank and the collector of internal revenue. The bank declined to pay the new 10% tax on notes when Fenno tried to collect, saying the tax imposed was unconstitutional. The question posed to the court was, “Whether the second clause of the 9th section of the Act of Congress of the 13th of July, 1866, under which the tax in his case was levied and collected, is a valid and constitutional law." The Chief Justices ruling over the case sided with congress, in effect ending any resistance by state banks to the acts of 1865 or 1866.

Resurgence of State Banks[edit]

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 7473 in 1913.[citation needed] Initially, this rise in national banking came at the expense of state banking—the number of state banks dwindled from 1466 in 1863 to 247 in 1868.[citation needed] 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.[citation needed]

The years leading up to the passing of the 10 % tax on bank notes 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 [McCulloch] was 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 accounts, and encouraged banks to join the national system, increasing the number of national banks substantially.[1]


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).[1] In 2004 the Act was used by John D. Hawke, Jr., Comptroller of the Currency, 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 bailout of the U.S. financial system and the subprime mortgage crisis.[8]

See also[edit]


  1. ^ a b c d e f g Gale Encyclopedia of U.S. Economic History. Detroit: Gale, 2000.
  2. ^ ch. 142, 12 Stat. 532
  3. ^ United States Congress. Resolution of January 17, 1863, No. 9. Washington D.C.: 1863
  4. ^ ch. 73, 12 Stat. 709
  5. ^ Backus, Charles K., "The Contraction of the Currency", The Honest Money League of the Northwest, Chicago, Ill., 1878.
  6. ^ a b Grossman, Richard S. "U.S. Banking History, Civil War to WWII." Economic History Services. 2010. <>
  7. ^ The North American (1891). Philadelphia and Popular Philadelphians. Philadelphia: The American Printing House. p. 67. 
  8. ^ "They Warned Us About the Mortgage Crisis," by Robert Berner and Brian Grow, Business Week, Oct. 9, 2008.

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