National Bank Act of 1864 (United States)

National Bank Act of 1864 (United States)

The National Bank Act of 1864 gave the United States a uniform currency, universally accepted at par,  sparing merchants the necessity to consult bank note detectors to appraise the value of various bank notes received from customers. Bank note detectors were regularly published booklets showing the discount on each bank note.

Before the National Bank Act of 1864 the United States had no permanent and uniform national currency but only a confusing medley of state bank notes trading at various discounts, usually depending upon the distance from the issuing bank. The National Bank Act established a system of note-issuing national banks, with national charters, to compete with the state banking system, which was regulated by separate banking regulations in individual states.

The National Bank Act bore a striking similarity to much of the states’ free banking regulations, allowing any group of five or more persons meeting certain capitalization requirements to obtain a national charter. Capital requirements varied from $50,000 to $200,000, depending upon the size of the city the bank proposed to serve. Larger cities required larger capitalization. A third of the capital, or $30,000, whichever was smaller, had to be held as United States government bonds deposited with the comptroller of the currency, a new position created to supervise the national banking system. In exchange for the government bonds, the bank received national bank notes. Aside from other advantages, the new national banking system created a market for United States government debt.

The act provided for a hierarchy of reserve banks that led to a pyramiding of reserves in New York, creating an unstable link between the banking system and Wall Street financial markets. Country banks had to meet a 15 percent reserve requirement, three-fifths of which could be deposited in banks located in 18 large cities designated as redemption centers. The act subjected banks in the redemption centers to a 25 percent reserve requirement, half of which could be deposited with New York banks. The reserve requirement was the fraction of outstanding checking accounts or other deposits that a bank had to keep as reserves—vault cash or a reserve deposit at an acceptable institution.

Separate legislation effectively gave national banks a monopoly on the privilege to issue bank notes. In 1862 Congress put a 2 percent tax on the issuance of state bank notes. In 1866 Congress increased the tax to 10 percent, putting an end to the profits of state bank notes, and leaving only national bank notes in circulation. About one-fourth of the state banks in northern states survived the National Bank Act and the tax on state bank notes. In the later 1800s the substitution of the personal check for bank notes brought a resurgence of the more gently regulated state banks.

The National Bank Act significantly advanced the monetary system in the United States, but it made no provision for a lender of last resort to act as a safety net during financial crises. Concern over recurring financial crises led the United States to further centralize its monetary system with the establishment of the Federal Reserve System in 1913.