The national banking system owes its existence to the Civil War. Although in the majority of the States the banks incorporated under State authority were badly organized and insecure, and although even such as were on a solid foundation could enjoy little more than local credit, the current of opinion before the war was by no means favorable to any consolidation of banking interests. Discontent with existing systems more frequently took the form of opposition to the existence of any banks of issue at all; the party then apparently holding permanent control of the national administration cherished with pride the traditions of its victorious struggle with the United States Bank, and of its devotion to a gold currency; and probably neither the friends nor the opponents of banks would have then thought the government of the United States able to reorganize upon a common plan the note-issues of all the States. But in 1863 a system of national banks was established with widespread, although not unanimous, consent, and without solid opposition, except from some existing interests threatened or alarmed by the change.

For effecting the revolution thus brought about in little more than three years, the favoring conditions were the unusual assumption of powers by the United States government then becoming habitual under the pressure of a struggle for existence, and the imperious necessity of finding a market for United States bonds for the supply of a Treasury drained by war. In the great borrowing operations of 1861 the Secretary of the Treasury had sold a large amount of securities to the banks of the Eastern and Middle States, but the banks had found themselves embarrassed by the impossibility of using their own notes or their credit in any form in transactions with the government, and both banks and Treasury had been compelled to suspend specie payments at the end of the year. The Secretary had already laid before Congress his plan for the strengthening of bank circulation by a national system of secured bank issues, urging its adoption chiefly as a reformatory measure which might give to the country a solid currency, preferable, in his opinion, to an increase of government notes which must always involve "the risk of a depreciated, depreciating, and finally worthless paper money."1 Events moved rapidly, and the first resort to legal-tender government notes was authorized by Congress, with the acquiescence of the Secretary, in less than two months after the

1 finance Report, Dec. 9, 1861, p. 18, suspension. The bank proposition, which, considered simply as a reform, would then have had small prospect of success, began to gain ground as affording a possible escape from the final flood of legal-tender paper which seemed to threaten. When the Secretary again urged his plan upon the attention of Congress,1 it had acquired new significance in its bearing upon the finances of the government. Immediate relief to the Treasury by the sale of bonds to the banks to be used as security for their issues was not to be expected, for the organization of banks under the proposed system could not be effected without much delay, and many of the strong banks which the Secretary hoped to see converted into national banks already owned bonds in large amounts. Indeed the Secretary contented himself with saying that "in a very few years" the proposed national banks would require bonds to the amount of $250,000,000, and in fact the war was over before their deposits of bonds had risen much above $100,000,000.2 But the banks were looked upon as important agencies for the government in placing new loans, and their circulation as a medium needed for use in default of specie and likely to facilitate the return to specie payments. In short as the national bank system slowly passed

1 Ibid., Dec. 4, 1862, p. 17.

2 In November, 1863, the Massachusetts banks held United States securities amounting to fifty-three million dollars, and the banks of New York, city and country, probably more than one hundred million dollars, through its successive stages of development from 1863 to 1865, its importance as affording in itself a market for United States bonds pretty well disappeared, and its importance as a valuable part of the commercial organization and as the source of a paper currency of remarkable credit and security came to be more and more fully recognized.

The act authorizing a system of national banks was passed in February, 1863,1 but in many points of detail it proved to be so unsatisfactory and incomplete that only 134 banks were organized under it in the next nine months, and the number had risen to less than 450 in sixteen months. A revised act, making important changes, was therefore passed in June, 1864,2 and ample provision having been made, under which banks chartered by the States could be reorganized as national banks, the extension of the new system went on rapidly. Its adoption was further stimulated by an act laying a tax of ten per cent, on all notes of State banks paid out by any bank after July 1, 1866.3 The certainty of the practical exclusion of all State banks from the field of circulation caused the speedy reorganization of the greater part of them as national banks; and thus the national system, numbering 1634 banks on July 1, 1866, at once assumed the preeminence which it has since maintained.

1 12 Statutes at Large, 665.

2 13 Ibid., 99.

3 13 Statutes at Large, 484.

There is no doubt that, in adopting the national bank system, Congress understood that it was establishing the agency by which the sole paper currency of the country should be issued in the future. The legal-tender issues were still regarded as a temporary expedient, resting upon the overwhelming exigency of the moment for their justification; the bank act is entitled "An act to provide a national currency," emphasizing by its title the permanence of the substitute which was to fill the place left vacant when the legal-tender notes should be paid; and the text of the act plainly looks forward to the return of specie payment, which should leave specie the only tender for debt.1 Establishing a permanent system of banks, Congress surrounded them by many of the safeguards which had been adopted in one or another of the various States, providing minutely for their organization and superintendence, and for the publication of their accounts at rather short intervals,1 and laying down rules, wholesome so far as they go, restricting the kinds of business in which the banks should engage. It was provided also that the shareholders should be responsible ratably for the debts of the banks, each to the amount of his stock in addition to the capital actually invested by him.2