on the par value, 10 per cent. of the investment is locked up. The more the profit diminishes, For these reasons, the Commission has recommended that so long as bonds are required as security for notes (10 years) they should be reduced to a basis of 3 per cent., thereby lessening the gap between the market value and the amount of notes which can be issued on their deposit. And in all cases where bonds are authorized to be sold by the Secretary to replenish the reserves of the Treasury, it is urged that they be issued for short periods, and at as low a rate of interest as the market will warrant. HISTORY OF THE NATIONAL BANKING SYSTEM. III. The origin of the national banking system is to be attributed to two distinct causes: (1) The desire to extend and improve the market for government bonds; (2) to provide a safe national currency of uniform value. In consequence of the banks' locking up their funds in unsalable bonds in 1861, and of other circumstances which will be discussed at a later point, the banks and the Treasury had been forced to suspend specie payments at the end of that year. In order to obtain revenue for war purposes, there were three courses open to the government: (a) To resort to increased taxation; (b) to sell bonds or other government obligations; (c) to issue government notes of some sort. Of these three means of raising revenue, the first was not much relied upon by Mr. Chase, while the second had from the beginning been that on which he intended to place most dependence. Nor had he desired to issue legaltender notes. Thus it was of the first importance that, if bonds were to be the government's chief resource, the market for them should be improved. There was also, from the very first, the desire for a sound and uniform currency. The existing bank-notes were issued by 1600 different institutions operating under State laws possessing little similarity. Currency which was perfectly good in certain portions of the country would not pass at all in others, while there was in many sections an immense volume of worthless paper in circulation. Both the need of a better market for bonds and the demand for a suitable note-currency were intensified by the issue of the legal-tender notes. The government had drifted into this means of obtaining funds without consideration. The issue of the legal tenders weakened the credit of the government, drove out of circulation what gold remained, and left the country without any universal currency save the legal tenders themselves. These, however, it was no part of the government's policy to retain permanently in circulation. They had been issued only as a temporary forced loan, without interest, and the danger of increasing them, or even of retaining them in circulation, was constantly in the minds of the legislators of the time. It was desired to replace these issues by a note-circulation which, as hinted in the title of the National Bank Act itself, should furnish a "national currency." At the same time the shock to the government's credit resulting from the issue of the legal tenders had unfavorably affected the sale of bonds and, with other events, made it important to devise some means of stimulating the market for them. The National Bank Act was intended, therefore, to meet the want of a currency and to increase the demand for bonds. 112. The plan for a national banking system had been early advanced. All through the first stages of the war it had been Secretary Chase's favorite measure. He had thought of it at least as early as the summer of 1861; and it had at that time been strongly opposed by the New York banks. Nevertheless he had recommended it in his report for that year,' and the bill was in preparation before the first issue of legal-tender notes, but, inasmuch as it demanded much time for its completion, it had been delayed. The Secretary's report for 1861 stated the essential feature of the plan to be "the preparation and delivery to institutions and associations of notes prepared for circulation under national direction," etc., "secured as to prompt convertibility into coin by the pledge of United States bonds and other needful regulations."3 Mr. Chase recurred to the subject in his report for 1862. A bill embodying a plan somewhat similar to his had already been brought before the House in July, but had received no attention. The Secretary urged that "no very early day will probably witness the reduction of the public debt to the amount required as a basis for secured circulation." When that time should arrive the debt might be 4 Report of Secretary of the Treasury, 1861, p. 18-19. 2 BOLLES' Financial History of the United States, III, p. 43. 3It had been Mr. Chase's original plan to'force state banks to secure their issues by basing them upon United States bonds. 4 Finance Report, 1862, p. 20. retained at low interest, or some other security could be provided. For the present, the new plan would furnish a suitable currency and assist in the negotiation of bonds. At first the operations of associations organized under the new act were "to be restricted to investing United States notes in bonds, issuing a circulation based on these bonds and transacting ordinary business." Thus the price of bonds would be enhanced, and thereby great relief to the government was anticipated from the measure. 113. Several bills embodying in different forms the idea thus recommended by Mr. Chase were introduced into the Senate during January and February 1862, but all failed of passage Finally a bill was introduced by Mr. Sherman January 26, 1863, which was sent to the House February 12, and became a law on the 25th. The characteristic point in the new system was the requirement that the banks should buy national bonds, deposit them with the government, and receive back circulating notes for issue. Although the plan had already been tried in New York, and had given tolerable satisfaction, yet it was found to be obnoxious at the outset. The unfortunate experiences of several Western states, which had tried the system with disastrous results, overcame any favorable impression which the experience of New York may have made. Some time, moreover, was lost in elaborating the new system and in preparing the circulating notes Opposition had time to mature, and when Mr. McCulloch, the first Comptroller of the Currency, was finally ready to proceed with the organization of the system, he found the state banks almost united in opposing it. It was feared that the working of the new national system would be a repetition of the disastrous experience with earlier bond-deposit systems; that the national banks might be ruined in case of the success of the rebellion; that Congress might interfere with the banks, and that they would suffer by the change of name. The last point was finally For an account of the debate on the National Bank Act of 1863, see Journal Pol. Econ., Chicago, 1894, p. 250 et seq. 2 MCCULLOCH's Men and Measures of Half a Century, p. 168. conceded by Mr. Chase. He agreed to allow the organization. of banks, without a further change of name than the addition of the word "national" to their titles. Still the banks were not willing to enter the system. Not until July 20, 1863, was the first charter granted and authorization given to the First National Bank of Philadelphia to begin business. Several Western banks received charters within the succeeding month, but very few charters were asked for by banks in New York. In August 1863, twenty-six banks were reported in process of organization. During the year 1863-4 the process of organizing new banks and reorganizing old ones proceeded with painful slowness. On December 5, 1863, at a meeting of bank officers in New York, a committee which had been ordered to "take into consideration the National Bank Currency Act as to its prospective effects upon the currency of the nation and the national credit, and what action, if any, devolves upon the banks in the premises," reported that, as the banks applying for charters were mostly of small capitals and located in the West and South, it was plain that the act would foster a system of "wild-cat" banking. It was said that the notes, not being a legal tender, would depreciate, and that their use would involve a loss to the government of the interest on an equal amount of legal-tender notes. This report was accepted by the New York Clearing-House, and had some effect in deterring state banks from entering the system. The slowness with which the extension of the system proceeded, however, was, at least in part, due to the defects in the law itself. They were too grave to be overlooked, and to ensure the success of the system immediate action was needed. A bill for the improvement of the act of 1863 was reported in the Committee of Ways and Means on March 1, but did not become a law until June 3, 1864. 114. The new act retained most of the features of the act of 1863, but changed it in several respects and added various new 2 I HUNT'S Merchants' Magazine, Vol. 49, p. 139. Compare KNOx's History of Banking in the United States; (Rhodes's Journal of Banking, 1892, p. 630.) |