1 In 1870, when the return to specie payments finally seemed to have been postponed indefinitely, an act was passed authorizing the establishment of gold banks, issuing notes redeemable in gold coin, and secured by the deposit of "United States bonds bearing interest payable in gold" with the treasurer of the United States. The notes were not to exceed eighty per cent. of the value of the bonds, and were not to be subject to those provisions of law which then limited the aggregate circulation of bank-notes. Several gold banks were organized, chiefly in the Pacific States; but after the return to specie payments, the distinction between the gold banks and others ceasing to be of importance, provision was made by the act of 1880 for their conversion into national banks of the usual type, and there are now no national gold banks in existence. 21 Statutes at Large, 66. Comptroller's Report, 1890, P. 53.

A system of banks thus guarded and under the charge of the government itself could hardly be treated by Congress as unworthy of being entrusted with the public funds, as the State banks had been under the Independent Treasury Act of 1846, and provision was therefore made for designating banks as depositories of public money when occasion should require, and for their employment as financial agents of the government, upon their giving satisfactory security, by the deposit of United States bonds and otherwise, for the faithful discharge of these functions. The framers of the measure no doubt looked forward at one time to a more consolidated system of banks, and to a closer intimacy with the government than was in fact established; but their action as it stands marks an extraordinary change of policy, made under the pressure of war, by a government which, hardly more than two years before, trusted no agency whatever with the custody of its funds, recognized no medium of payment except specie, and carefully disclaimed all connection with, or responsibility for, any possible system of banks.

1 A summary statement of the number and condition of the national banks, at five dates in every year, and for every year since the adoption of the system, is given annually in the Report of the Comptroller of the Currency.

2 From this liability to contribution beyond the amount invested, the law made an exception in favor of the stockholders of any existing State bank, having a capital of not less than five millions and a surplus of twenty per cent., in case of its reorganization as a national bank. This exception was made in order to secure the adhesion of the Bank of Commerce of New York City, - the only bank in the United States which could meet these conditions.

The general provisions of the national banking system have for their starting-point the restriction of the right of note-issue to national banks, the other functions of banking being left free for banks chartered by State authority, and for private banks. Any national bank, proposing to issue notes, is required to secure them by a deposit of registered bonds of the United States, the bonds being transferred to and held by the Treasurer at Washington, but the interest thereon collected by the bank, whose property the bonds continue to be. The deposit of bonds under these provisions entitled the bank making such deposit to receive from the Comptroller of the Currency, who has the general charge of the system, notes to the amount of ninety per cent. of the market value of the bonds deposited, but not exceeding ninety per cent. of their par value; a restriction which continued from 1863 to 1900, when the limit on note issue was raised to one hundred per cent. These notes when received are in blank, certifying only the fact that the security for them is in the hands of the government; but when signed by the proper officers of the bank, they become its promises to pay upon demand, and can then be issued for circulation. The effect of this arrangement, it will be seen, is simply that a sufficient amount of the property of the bank, required to be held in the form of bonds, is pledged with proper safeguards to insure the ultimate payment of all notes issued by the bank. The notes are also, of course, to be paid by the issuing bank whenever presented, are to be received in payment by all other national banks, and can be paid to or be used in payments by the government in all cases where specie is not required by law; but they have never been a legal tender as between individuals.

These provisions have secured for the notes a uniform value and give to those of every bank an unimpeded circulation in every part of the Union. If, indeed, the law, as in the act of 1863, still made no further provision for redemption than to require every bank to redeem its own notes when presented at its own counter, the return of notes for payment would rarely take place and their substantial convertibility would be nearly destroyed. But the law of 1864 made provision for redemption by all banks at agencies in the principal cities, and this arrangement continued in force until June, 1874, when the present system was adopted, making the Treasury of the United States the sole redeeming agency for all of the national banks, and requiring every bank to maintain in the Treasury, to be used in redemption of its notes, a reserve equal to five per cent. of its circulation. The chief effect of this system of redemption, except in the case of insolvent banks or of banks reducing their issues, has been the easy removal from circulation of notes which are worn, soiled, or otherwise unfit for use. For the establishment of a system which should test effectively and continuously the power of every bank to convert its notes into specie on demand, it would probably be necessary to require that no national bank should pay out any notes except its own.1 For the general purpose however of maintaining the convertibility of the aggregate note-issue of the banks, the present arrangement is well devised.