People nowadays take banking for granted. They do not take the time to really understand how banking works or learn the history of banking. Banking is one of the most fundamental aspects of anything financial. Without a banking system, there isn’t much of a currency to be had. The United States did not have a truly national banking system until its founding in 1863 due to the National Banking Act of 1863.
Before
Before the civil war, banking varied from state to state where each state had their own rules and even own currencies. Travelers would have to exchange their state’s currencies for another’s whenever they crossed state lines and wanted to purchase something. This was because money mostly consisted of gold and silver coins along with some paper notes that were circulating due to individual banks.
Prospective bankers also had to deal with different laws depending on their state. Some states required special legislation before a possible bank could receive an operating charter. However, other states were running a free banking system in which anyone who met the established requirements could become a banker.
Reasons for the change
It pretty much goes without saying, but wars are very expensive. Due to the civil war, the U.S. government had to raise a lot of money to pay all the troops, supplies, and other war related things. So, in 1862, the government passed the Legal Tender Act which issued $150 million greenbacks. Greenbacks are the national paper notes that were issued and received their name due to the back of the bill literally being green.
It certainly did not help that the previous December in 1861, banks suspended specie payments. This means that the paper money that the banks issued could no longer be redeemed for the precious metals that were backing them. This was similar to what Nixon did when closing the gold exchange window in 1971, but on the level of individual banks within states.
All of the greenbacks, the suspended specie payments and a raging civil war induced a financial crisis. This caused the passage of the National Banking Act of 1863, also known as the National Currency Act of 1863. The act was intended to create a market for war bonds so aid the government in financing the war, reestablish the central banking system that was destroyed by Andrew Jackson, and develop a “stable bank note currency” according to the U.S. senate’s website that will be linked to the bottom of this post. The act also established the Office of the Comptroller of the Currency (OCC) whose purpose is to “provide fair access to financial services” in a “safe and sound manner”.
The National Currency Act of 1863
The National Currency Act of 1863 essentially re-instated the central bank and created the national banking system as well as establish the OCC. President Abraham Lincoln, Secretary of the Treasury Samuel P. Chase, and Ohio senator John Sherman, all believed this legislation would strengthen the future of the United States. Even though it was narrowly passed, there wasn’t excessive negotiation to change the terms of the act, so the first comptroller Hugh McColloch of Indiana presented some modifications to congress. Congress passed his revisions with the National Banking Act of 1864.
This new law allowed new charters for national banks but also gave the option for state banks to convert to national ones if they completed the requirements. The national banks were required to purchase government bonds to obtain an operating charter. Once the charter was obtained, the banks could issue their own notes to up to 90% of the market value of their government bond holdings. Keeping in mind that one of the reasons for this act was to create a market for war bonds to fund the civil war. By forcing the national banks to own government bonds, the government guaranteed they would get funding from major banks.
The revised act that was passed in 1864 also prevented states from issuing their own bank charters with the argument that the state governments were easier to corrupt and bribe than the federal government.
Bully the private banks
At first, the state banks did not want to convert to the national status because under the new law they would have to increase their capital requirements. It only cost about $10,000 to charter a state bank, but for a national one it could be $50,000 to $200,000. This caused state banks to open en masse due to the longer capital requirement.
This led to congress passing a law in March of 1865 that put a 10% tax the notes of the state banks. This took away the advantage of individual state banks using their own currency and basically drove them out of business. But the federal government is worried about monopolies pricing competitors out of markets…
This tax either forced the banks to close their doors or convert to be a national bank. Those that converted had to deal with tougher federal oversight and restrictions on the activities in which they could partake.
OCC
The Office of the Comptroller of the Currency writes uniform regulations that apply to all national banks and send examiners to the banks to ensure the following of their regulations. The purpose of the OCC is to ensure a “safe and sound” banking system according to their website. Now, for people who pay attention and truly study how the banking system works, they aren’t doing too great of a job. I have linked their website below if you want to learn more about the OCC.
Conclusions
The banking system is large and very complicated. There are massive books and movies written and made about the topic. In terms of your financial well-being, the health of the banking system is rather important. If the banking system fails, the “money” in your bank account doesn’t really mean much anymore. However, there are so many things to account for that it is unreasonable to think that average people care about how it works. By this I mean understanding the in depth plumbing of the banking system, and not just what a checking account is.
Unless you are wanting to become a very successful investor or businessperson, there is not much reason to study it very in depth. On the other hand, if you do want to become some investing tycoon, then understanding the intricacies of the banking system is pivotal to your life.
If you are curious about how the banking system works and other macroeconomic topics, look up George Gammon on YouTube. He might not have all the answers, but he interviews a wide array of experts that come very close in if you listen to all of them. Either way, he still posts amazing content.
To your wealth and future,
James Forsythe
For more info in the United States Banking System and its history
https://jamesdforsythe.com/category/banking-system/
References
https://www.moaf.org/exhibits/checks_balances/abraham-lincoln/greenback
OCC website
https://www.occ.gov/about/who-we-are/history/1863-1865/index-occ-history-1863-1865.html
PDF with lots of info
https://www.proeducate.com/courses/Finance/NationalBankAct.pdf
U.S. senate’s website
https://www.senate.gov/artandhistory/history/common/civil_war/NationalBankActs.htm
