During the twenty-two months of McCulloch's incumbency of the office of Comptroller of the Currency, he made two annual reports to Congress. The first report was devoted almost entirely to a review in detail of the National Bank Act passed in 1863. He pointed out its numerous defects, recommended the repeal of a number of its provisions, the amendment of others, and the enactment of additional legislation to supply omissions which the practical operation and administration of the law had shown to be necessary. These suggestions were largely adopted in the 1864 revision of the act.
The second report of Mr. McCulloch was devoted principally to a discussion of the paper issues of the Government, and the note-issuing function of the national banks.
While defending the course of the Government in resorting to the issue of United States notes, endowed with lawful money qualities, as a great public necessity at that time, he expressed the view that when the Civil War ended and the necessities which led to the issue of this form of money had ceased to exist, these notes should be promptly retired.
His objections to such Government issues were stated with great clearness and force. Paper money, he said, had been found to be useful and an absolute necessity in all commercial countries in the transaction of business, and as a substitute for coin, but that all such money should be convertible into coin. Its issue should be regulated by, and should not exceed in volume the legitimate demands of healthy trade.
While admitting the imperfections of the circulation furnished by the national banks, he contended that all of the objections that were raised to banknote circulation applied with equal, if not greater, force to Government note issues, as the volume of the former is restricted by law, and is liable for redemption, while the latter is regulated only by the necessities of the Government or the interests of the political party in power, having no relation to the needs of trade and commerce.
He contended that no kind of paper money is without its objections. While its use may be and is a commercial necessity, no form of paper currency that has yet been contrived is as unobjectionable as national bank circulation.
Mr. McCulloch expressed his regret that so many national banks were being organized in states in which before the passage of the National Bank Act there was no deficiency in banking facilities.
The purpose of the National Bank Act, he said, was not to destroy State banks, but to absorb them, and he expressed the hope that other states would follow the example of Massachusetts, Connecticut and Pennsylvania and adopt laws granting authority to State banks to convert into national associations, without any disturbance or discontinuance of their business.
It appears from this that Mr. McCulloch, like many others at that time, was under the impression that although the National Bank Act authorized the conversion of State banks issuing circulation into national associations, without the formality of liquidation and reorganization, the authority of the state was also necessary. While in many instances this contention was not maintained by state authorities and no objection was interposed to such conversions, the question does not seem to have been judicially determined until 1876, when, in the case of Casey v. Galli, 94? U. S., 673, the Supreme Court of the United States held that "No authority other than that conferred by Act of Congress is necessary to enable a State bank to become a national banking association."
In April, 1867, an act was passed by the Legislature of the State of New York authorizing any national bank in the state to become a state banking institution by conversion and by virtue of such conversion be absolved from all allegiance to the Federal authorities and responsibility as a national bank.
The question of the power of a national bank to convert into a state institution under authority of this act was referred to the Attorney General of the United States, who, in an opinion rendered May 19, 1869, held that it is not within the power of the Legislature of a state to alter, modify, add to, or diminish the powers, duties or liabilities created or conferred upon a banking association established under an Act of Congress. National banks, he said, are distinct bodies corporate, deriving their existence from the United States, and they cannot be merged or in any manner identified with a state institution without authority of Congress, except by liquidating and winding up their affairs and incorporating anew under the state laws.
A State bank may under authority of a provision in the National Bank Act convert into a national association, but a national association cannot convert into a State bank.
Mr. McCulloch recommended an enactment fixing a uniform rate of interest for national banks, and a tax on State bank circulation, at such a rate as would make it unprofitable for such banks to issue circulation, and thereby contribute toward making national bank circulation what the bank act intended it should be - a uniform currency for the whole country.
In concluding his report for 1864, Mr. McCulloch suggested the removal of the Currency Bureau from Washington to Philadelphia or New York. He stated that it was of the greatest importance that the national currency system should be independent of politics and freed from political influences. He expressed the opinion that the bureau should be an independent department of the Government, and he believed that this could best be accomplished by separating it entirely from the Treasury Department, and locating it in one of the principal financial centers of the country.
It is exceedingly doubtful, however, in the light of later events, whether the bureau would have been as free from political and financial influences, or at least from the suspicion of such influences, if this suggestion of Mr. McCulloch had been adopted, as it has been by remaining a bureau of the Treasury Department, located in Washington, and operating in harmony with that department, especially if the point of location had been New York City, with the environment of Wall Street.
The only conceivable advantage to be derived from a change of location of the Currency Bureau from Washington to New York was the increased facilities that might be afforded for the redemption of circulation. As about fifty per cent. of the national bank notes sent to Washington for redemption come from New York City, the expense and delay of transportation back and forth would be avoided. But at the time Mr. McCulloch made this suggestion a change of location of the bureau did not have •even this consideration to commend it, as New York City was then a redemption city.