The first plan suggested by Secretary Chase in his report for 1861, was evidently based upon the assumption that the war was to be of short duration, and while this plan had already been partly adopted by the authorization of the issue of Treasury notes, it soon became manifest to the Secretary that the possibilities of disaster which might result from a continuance of this expedient outweighed any advantage that could be derived therefrom. He therefore renewed in his report for 1862 the recommendation he made in his report of the previous year for the enactment of a national banking law, and recounted the benefits to be derived by the Government and the people from the issue of a banknote currency of uniform design and value, based upon the credit of the nation, setting forth at the same time his objections to the issue of United States notes as a permanent system of circulation.

The Secretary's report was referred by the House of Representatives to the Committee on Ways and Means and by that Committee to a sub-committee composed of Hon. E. G. Spaulding of New York, chairman; Mr. Hooper of Massachusetts, and Mr. Corning of New York.

A national bank bill was drafted by Mr. Spaulding in December, 1861, and reported to the full committee for consideration, but so much opposition to the measure was developed in committee at that time that it failed to receive favorable action. In the first place, it was not believed that a bill of that nature could be passed without a prolonged discussion, and, in the second place, if it did pass, it was not thought that it could be made available quickly enough to afford the Government the relief it so urgently needed to meet the expenses of the war. The attempt, therefore, appears to have been temporarily abandoned by Mr. Spaulding, who introduced instead the Legal Tender Act of February 25, 1862.

On July 11, 1862, Mr. Hooper introduced in the House of Representatives a bill to provide a "National currency secured by a pledge of United States stocks," etc., and received authority by resolution of the House to have printed a limited number of copies of this bill.

On February 2, 1863, a bill was reported to the Senate from the Finance Committee by Senator Sherman, entitled "An Act to provide a national currency, secured by a pledge of United States bonds, and to provide for the circulation and redemption thereof." This was the same bill, with some changes in details, that was introduced in the House of Representatives by Mr. Hooper several months previously.

In reporting this bill to the Senate, Senator John Sherman said:

We are about to choose between a permanent system, designed to establish a uniform national currency based upon the public credit, limited in amount, and guarded by all the restraints which the experience of men has proved necessary, and a system of paper money without limit as to amount, except for the growing necessities of war. In the consideration of such a question, we should surely sacrifice all local interests, all pride of opinion and while acting promptly under the pressure of events, we should bring to our aid all the wisdom of united counsels and all the light which the experience of former generations of men can give us.

Referring at the same time to the expedient previously resorted to, of issuing United States notes, he said:

Another practical objection to these United States notes is, that there is no mode of redemption. They are safe. They are of uniform value, but there is no mode pointed out by which they are to be redeemed. No one is bound to redeem them. They are receivable but not convertible. They are debts of the United States, but they cannot be presented anywhere for redemption. No man can present them, except for the purpose of funding them into the bonds of the United States. They are not convertible. They lack that essential element of any currency. They can only be used during the war. The very moment that peace comes, all this circulation that now fills the channels of commercial operations will be at once banished. They will be converted into bonds, and then the contraction of prices will be as rapid as the inflation has been. The issue of government notes can only be a temporary measure, and is only intended as a temporary measure to provide a national currency.

But, it is asked, why look at all to the interests of the banks? Why not directly issue the notes of the government, and thus save to the people the interest on the debt represented by the notes in circulation?

The only answer to this question is that history teaches us that the public faith of a nation alone is not sufficient to maintain a paper currency. There must be a combination between the interests of private individuals and the government.

After debating this bill for ten days, it passed the Senate by a vote of 23 ayes to 21 nays. And, but for the personal appeals made for the bill by Secretary Chase and Senator Sherman, it undoubtedly would have failed of passage in the Senate, as Senator Anthony was known to be opposed to it, and Senator Sherman says in "John Sherman's Recollections" that "Senator Anthony voted for the bill because Secretary Chase convinced him that it was necessary to carry on the war."

After passing the Senate, the bill went to the House of Representatives, where it remained on the Speaker's table from the 12th to the 19th of February, a motion to refer it to the Committee of the Whole having been defeated.

Mr. Spaulding, who is credited with having prepared the original draft of the bill, opened the debate upon it in the House, and in the course of a long speech said:

I shall vote for it, not that it would afford any considerable relief to the treasury in the next two or three years, but because I regard it as the commencement of a permanent system for providing a national currency that would, if wisely administered, be of great benefit to the people and a reliable support to the government in the future.

The bill passed the House of Representatives on February 20th, by a vote of 78 ayes to 64 nays, and became a law on February 25, 1863, with the approval of the President.

This Act, however, while admirable in design, was very crudely constructed, and contained numerous defects. It was, as Hugh McCulloch stated in his book entitled "Men and Measures of a Half Century," very unsymmetrical in arrangement and glaringly inconsistent in many of its provisions. It was full of ambiguities and many words of different significance were used as interchangeable terms, making their meaning uncertain and difficult of interpretation.

To correct these numerous defects and to supply omissions, which the practical operation of the law soon demonstrated to be essential, it became necessary within fourteen months from the date of its passage to revise the entire act by the adoption of the Act approved June 3, 1864, under the same title.

This latter act, with such amendments thereof as have since been enacted, constituted the national banking laws. The title, however, was changed by the Act of June 20, 1874, which provides that the Act entitled "An act to provide a national currency secured by a pledge of United States bonds, and to provide for the circulation and redemption thereof, approved June 3, 1864, shall hereafter be known as 'The National Bank Act.' "

The Act of 1863 authorized the issue of circulation to any State bank existing at the time of its passage, which was the owner and holder of United States bonds, to the amount of fifty per centum of its capital stock, under the same conditions as circulation was issued to national banks, except that the amount of such issues could not exceed fifty per centum of the capital stock of the bank or the market value of the bonds deposited. This privilege was not conferred upon State banks by the Act of 1864, and no circulation ever was issued to State banks under the Act of 1863, as no such bank ever availed itself of this provision.

Fifty-nine years have gone by since the adoption of the National Bank Act, and 12,230 banks have been chartered under its provisions, including 2292 State banks converted into national associations1. It never was a perfect measure. Perfection was not claimed for it at the time of its enactment by any of its most ardent supporters. It was born during a period of internal strife, and necessity was its parent. That it did not develop perfection and improve with age is due altogether to the environment of its birth and want of proper legislative nourishment and attention as it grew to maturity. But notwithstanding its many imperfections, it stood the test of time and furnished to the nation the best banking system it had ever known.

1June 30, 1922.

The National Bank Act was not afflicted with any incurable maladies, as some theoretical financiers represented it to be. Its ailments were from time to time thoroughly diagnosed and were well understood. Its principal weakness was due to a sluggish circulation, which would readily have responded to treatment if the proper legislative remedies had been applied.

The principal remedies necessary to the perfection and perpetuation of the system were (1) the injection of such elasticity into the circulation of the banks as would have enabled it at all times to automatically expand and contract in proportion to the legitimate business demands made upon it; (2) the adoption of such additional safeguards as would have added to the security of depositors and other creditors, increased confidence in the soundness and stability of the banks, and minimized liability to failure, and (3) such an enlargement of the corporate powers of the banks as would have enabled them to transact some of the business which had become necessarily incidental to commercial banking subsequent to the enactment of the original act.

The Federal Reserve Act, approved December 23, 1913, remedied some of these delinquencies by providing a circulating medium sufficiently elastic to readily supply the periodical demands for additional currency for crop moving purposes and increased industrial or commercial activity, and for the automatic retirement of this currency when no longer required for legitimate business.

It provided also for the mobilization of bank reserves and their availability when needed.

These and other provisions of the Federal Reserve Act have immensely improved and strengthened the laws relating to currency issues, and otherwise enlarged the scope of powers of the banks along the lines above suggested.