The national banking system established in 1863 grew out of the financial difficulties of the Civil War. It will be remembered that after the adoption of the independent treasury system in 1846 the Government had no relation with the banks of the country, keeping its funds with the various sub-treasuries established in several leading cities. When the war broke out the Government was compelled to turn to the banks for help. Instead of meeting the war expenses by taxation, it resorted to loans, which could be obtained quickly only from the banks. The banks of New York, Philadelphia and Boston agreed to advance $150,000,000 in gold on three-year notes bearing interest at 7.30 per cent to be reimbursed from the proceeds of bond sales, and they also undertook to market the bonds when they were issued.

In August of 1861 the Government began to issue non-interest bearing notes payable on demand at the sub-treasuries. The banks objected to the issue of these notes because it threatened their own circulation and also the permanence of redemption in specie. When later in the year heavy issues of these notes were made the banks found that their specie reserves were falling rapidly and on December 31, 1861, they suspended specie payment. The Government having no adequate fund of specie to sustain the mass of paper issued was likewise compelled to suspend. Early in 1862 the Government resorted to the issue of "legal-tender" notes without interest and with no provision for redemption. The result was a general disappearance of coin, a great depreciation of the whole paper currency, and a heavy increase in the cost of carrying on the war.

In this emergency, Congress was ready to accept a plan for a national banking system which Secretary of the Treasury Chase had proposed as early as 1861. He urged its adoption, first, to provide a market for government bonds so as to replenish the public Treasury; and second, to provide a safe and uniform national currency. The latter purpose was finally accomplished, but the adoption of the national system brought little aid to the Treasury during the war. The organization of national banks proceeded so slowly during the war that the Government received from this source only about $100,000,000, which was less than 4 per cent of its borrowings during the war.

The original act was defective in many respects, so in 1864 it was completely revised. Even then the state banks which were expected to reincorporate under the new law did not do so in large numbers. In 1865, however, Cor-gress passed a law imposing a tax of 10 per cent on all notes issued by state banks. As this provision practically made it impossible for state banks to issue notes their conversion into national banks soon became general. A national currency, safe and uniform, was thus insured; safe because protected by government bonds, and uniform because issued by a government bureau to all banks, in the same form and under similar conditions. The chief previsions of the national bank law, as amended from time to time, will now be briefly reviewed.