geeky
As stated several times in this series, Alexander Hamilton tried to give the new United States a well-regulated monetary and banking system. His efforts were attacked by the Jeffersonians in 1811, when the charter of the first Bank of the United States was not renewed. The bank had been the nation's central bank and chief borrowing agent. It also provided some regulation to the growing number of state-chartered banks by deciding whether or not to accept their bank notes. If the Bank of the United States wouldn't accept them, neither would any other bank. With the demise of the Bank of the United States, the number of state banks expanded, and even though a second Bank of the United States was chartered in 1816, it was never able to assert the same degree of control as its predecessor. Andrew Jackson vetoed its charter renewal in 1832, and the U.S. would be the only major country without a central bank for the next 80 years.
The number of state-chartered banks more than doubled in the two years after the first Bank of the United States lost its national charter. Many of them were so poorly capitalized and badly regulated by state governments that half the banks chartered between 1810 and 1820 had failed by 1825. Half of the ones founded in the 1830s failed by 1845. But the net number of banks kept rising as the American economy expanded and the country pushed westward. There were about 1,000 banks in operation in 1840 and twice that many by the beginning of the Civil War. Many of these banks issued bank notes which were only as good as the bank's ability redeem them for specie (gold and silver). By the 1850s there were thousands of issues of bank notes circulating. Some were good and some were from defunct banks, and some were frauds and counterfeits. "Bank-note detectors" were published which tried to identify which notes were good and which were not. But given the technology of the time, this wasn't always accurate.
The Jeffersonians' fear of large banks, and the opposition of many state governments, prevented any serious bank reform. The Civil War changed the political calculus of the problem. Most of the opposition to a strong banking system was in the South and West, and the South was in rebellion. The federal government was desperate for money to finance the war. The problem was addressed by the creation of a national banking system. The National Banking Act of 1861 established the Office of the Comptroller of the Currency and allowed the widespread chartering of national banks. These banks were closely regulated. They had to keep one-third of their capital in federal bonds and deposit these bonds with the Treasury. This arrangement solved two problems: it made banks more secure and it created capital to finance the war.
These federal bonds also served as security for a new national currency. National banks were allowed to issue bank notes in proportion to their capital. But the bank notes were all identical, except for the name of the bank and the signatures of its officers. The first U.S. federal currency, the greenback demand note, was printed in 1861–1862 during Salmon P. Chase's tenure as Secretary of the Treasury. It was Chase's responsibility to design the notes. In an effort to further his political career, his face appeared on a variety of U.S. paper currency, starting with the $1 bill so that the people would recognize him. Thousands of bank-note issued by state banks continued to circulate, but in 1865 these notes were subjected to 10% federal excise tax, quickly driving them out of the marketplace.
For the first time, the United States had a uniform paper currency circulating throughout the country. Because these notes were backed by federal bonds held at the Treasury, they circulated at their face value. They were not discounted like previous bank notes had been subject to.
The National Banking Act intended to create a unified American banking system under a single federal regulatory regime. Many state banks flocked to take national charters, and the number of state banks shrunk from 1,466 in 1863 to a 247 in 1868. (Many of these were too small to meet national-bank capital requirements. The number of state banks began to increase again, most of them poorly capitalized and vulnerable to local economic downturns. The collapse of thousands of these banks beginning in the 1920s was a significant part of the Great Depression.) Today, American paper money (now issued by the Federal Reserve) is accepted around the world.
