Antebellum Period

At the end of the Second Bank of the United States in 1836, the control of banking regimes devolved mostly to the states. Different states adopted policies including a total ban on banking (as in Wisconsin), a single state-chartered bank (as in Indiana and Illinois), limited chartering of banks (as in Ohio), and free entry (as in New York).^[1] While the relative success of New York's "free banking" laws led several states also to adopt a free-entry banking regime, the system remained poorly integrated across state lines. Though all banknotes were uniformly denominated in dollars, notes would often circulate at a steep discount in states beyond their issue.

In the end, well-publicized frauds arose in states like Michigan, which had adopted free entry regimes but did not require the redeemability of bank issues for specie. The perception of dangerous "wildcat banking”, along with the poor integration of the U.S. banking system, led to increasing public support for a uniform national banking regime.

The United States Government, on the other hand, still had limited taxation capabilities and so had an interest in the seigniorage potential of a national bank. In 1846, the Polk Administration created a United States Treasury system that moved public funds from private banks to Treasury branches to fund the Mexican–American War. However, the revenue generated this way was limited without a national currency.

Civil War

This became more urgent during the Civil War, when Congress and Lincoln were struggling to finance the war efforts.^[2] Without a national mechanism for issuing currency, the Lincoln administration could not exploit the powers and loopholes that, for example, Britain could with its central bank, in order to finance the high expenses involved. Previously, the damage that would be done to state banks by national competition was sufficient to prevent significant national bank chartering. But using the war crisis, Lincoln was able to expand this effort.

A "greenback" note issued during the Civil War

One of the first attempts to issue a national currency came in the early days of the Civil War when Congress approved the Legal Tender Act of 1862, allowing the issue of $150 million in national notes known as greenbacks and mandating 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."^[3]

The Second Legal Tender Act,^[4] enacted July 11, 1862, a Joint Resolution of Congress,^[5] and the Third Legal Tender Act,^[6] enacted March 3, 1863, expanded the limit to $450 million. The largest amount of greenbacks outstanding at any one time was calculated as $447,300,203.10.^[7]

The National Bank Act (ch. 58, 12 Stat. 665; February 25, 1863), originally known as the National Currency Act, was passed in the Senate by a 23–21 vote, and was supplemented a year later by the National Banking Act of 1864. The goals of these acts was to create a single national currency, a nationalized bank chartering system, and to raise money for the Union war effort. 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.^[8]

The First National Bank in Philadelphia

Since the establishment of the Republic, state governments had held authority to regulate banks. Before the act, state legislatures typically issued bank charters on a case-by-case basis, taking into consideration whether the area needed a new bank, and if the applicant was of good moral standing. As this system could be subject to corruption, states began passing "free banking" laws in 1837, which meant that any applicant who filled out the correct paperwork and deposited an in-kind payment to the state would be granted a charter. By the 1860s, over half of states had such a law on the books. However, the National Banking Act of 1864 (ch. 106, 13 Stat. 99; June 3, 1864) brought a close to the issue by establishing federally-issued bank charters, which took banking out of the hands of state governments.^[3][8] The first bank to receive a national charter was the First National Bank of Philadelphia, Pennsylvania (Charter #1).^[9] 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.

National Bank Act of 1863

The National Bank Act of 1863 was passed on February 25, 1863, and was the first attempt to establish a federal banking system after the failures of the First and Second Banks of the United States, and served as the predecessor to the Federal Reserve Act of 1913.^[10][11] The act allowed the creation of national banks, set out a plan for establishing a national currency backed by government securities held by other banks, and gave the federal government the ability to sell war bonds and securities (in order to help the war effort). National banks were chartered by the federal government, and were subject to stricter regulation; they had higher capital requirements and were not allowed to loan more than 10% of their holdings. A high tax on state banks was levied to discourage competition, and by 1865 most state banks had either received national charters or collapsed. ^[10]

National Bank Act of 1864

$1000 National Bank Note

The 1864 act, based on a New York State law, brought the federal government into active supervision of commercial banks.

National Bank Acts of 1865 and 1866

Further acts passed in 1865 and 1866 imposed a tax to speed the adoption of the system. All banks (national or otherwise) had to pay a 10 percent tax on payments that they made in currency notes other than national bank notes. The tax rate was intentionally set so high as to effectively prohibit further circulation of state bank and private notes. By this time the conversion from state banks to national banks was well underway. The constitutionality of the tax came before the Supreme Court in Veazie Bank v. Fenno, a case by a state-chartered Maine bank and the collector of internal revenue. The Court ruled 7–2 in favor of the government. State banks declined until the 1870s, when the growing popularity of checks and the declining profitability of national bank currency issues caused a resurgence.