Question

Explain why the National Banking Acts of 1863/1864 were so important.

Answer 1

The first clause of the Acts was to require national banks to be incorporated. Such banks are exactly the same as state banks, except that the federal government and not a state government obtained their charter from national banks. This agreement gave regulatory authority over the national banks it created to the federal government, whereas it did not assert control over state-chartered banks. National banks had higher requirements for capital and reserve requirements than their counterparts in the state bank.They were restricted from making real estate loans in order to improve liquidity and security and could not lend to any single person an amount exceeding ten percent of the bank's capital. The National Banking Acts also created the Currency Control Office under the Treasury Department, which occasionally inspected the national banks ' books to ensure compliance with the above-mentioned regulations, held Treasury securities deposited there by national banks, and was responsible for the printing of all national banknotes through the Engraving Office.

Another objective of the National Banking Acts was to create a national currency that was uniform. Rather than having several hundred or several thousand forms of currency circulating in the states, if there were a uniform currency, conducting transactions could be greatly simplified. To do this, all national banks had to consider other national banknotes at par. This ensured that national banknotes would not be affected by the same discounting problem that afflicted state banknotes. Furthermore, all national banknotes were printed on behalf of the national banks by the Currency Controller to ensure appearance and quality standardization.

While the tax ultimately ended the circulation of state banknotes, it did not completely destroy state banking as state banks continued using banknote checking accounts as a substitute. Checking accounts became so popular that by 1890, the Currency Controller estimated that in the form of currency only ten percent of the nation's money supply. Combined with lower requirements for capital and reserve, as well as the ease with which states issued bank charters, by the late 1880s state banks again became the dominant banking structure. As a result, the improvements in security offered by the national banking system were somewhat mitigated by the return of state banking.