National Bank Act - Creation

Creation

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. 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 issue of $150 million in national notes known as greenbacks. The government spent a significant amount of money on the war effort which, in turn, drew down its supply of coin. In response, the Legal Tender Act of 1862 was passed. This act mandated 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.”

The original National Banking Act (ch. 58, 12 Stat. 665; February 25, 1863) was 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.

The National Banking Act of 1863 was superseded by the National Banking Act of 1864 (ch. 106, 13 Stat. 99; June 3, 1864) just one year later. The new Act also established federally issued bank charters, which took banking out of the hands of state governments. Prior to 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. 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.