The creation of the national banking system was mainly the outcome of the financial necessities of the Federal government in the Civil War. It was found difficult to float government bonds at profitable rates, and Mr Chase, the secretary of the treasury, devised the scheme of creating a compulsory market for the bonds by offering special privileges to banks organized under Federal charters, which would issue circulating notes only when secured by the deposit of government bonds. But this plan, authorized by the act of 25th February 1863 (supplemented by the act of 3rd June 1864), was not sufficient to give predominance to the national banks. The state banking systems in the older states were so firmly entrenched in the confidence of the commercial community that it became necessary to provide for imposing a tax of 10% upon the face-value of the notes of state banks in circulation after the 1st of July 1866. The state banks were thus driven out of the note-issuing business, some being converted into national banks, while others continued their commercial business under state laws without the privilege of note-issue. A remarkable growth in the national banking system took place; in 1864 there were 453 national banks with an aggregate capital of $79,366,950, and in 1865 there were 1014 banks with an aggregate capital of $242,542,982.

The national banking system was specially marked by the issue of circulating notes upon United States bonds. Any national bank desiring to issue notes might by law deposit with the United States treasurer bonds of the United States to an amount not exceeding its capital stock, and upon such bonds it might receive circulation equal to 90% of their par-value. No bank could be established which did not invest one-third of its capital in bonds. This was changed in 1874 so as to reduce the requirement to 25%, with a maximum mandatory requirement of $50,000. Notes were taxed at the rate of 1% per annum. The banks obtained from the provision for circulation the benefit of what was described by critics as "double interest," being credited with the interest on bonds in the custody of the treasury department, and being also able to lend their notes to the public. But several deductions had to be made: notes could not be issued to the full par-value of the bonds; the tax of 1% upon circulation reduced by that amount the profit which would otherwise be earned; and the banks had to set aside in gold or other lawful money what was needed for redemption purposes and for reserves.

As the banks suspended specie payments at the close of 1861 and great masses of government paper-money were issued, gold ceased to be a medium of exchange except in California, and the new banks redeemed their notes in government paper. The gold-value of the bank-notes, therefore, rose and fell with that of government notes until the resumption of payments in specie by the national treasury on the 1st of January 1879.

The amount of bank-notes in circulation proved in practice to be influenced largely by the price of bonds. The maximum originally set for bank circulation was $300,000,000. This was increased in 1870 by $54,000,000, and in 1875 the limit was removed. The circulation reached $362,651,169 on the 1st of January 1883, but afterwards declined materially as bonds became scarce and the price rose. The fact that circulation could be issued to only 90% of the par-value of the bonds greatly reduced the net profits on circulation when the price of 4% bonds rose in 1889 above 129 and other classes of bonds rose in like ratio. The circulation of bank-notes fell as low as $167,927,574 on the 1st of July 1891, but afterwards increased somewhat as the supply of bonds was increased to meet the treasury deficiencies of 1894-1896 and the expenses of the war with Spain.

The national banks supported the government cordially in the measures taken to bring about resumption of gold payments on the 1st of January 1879 under the law of 1875. The banks held more than $125,000,000 in legal tender notes, of which sum nearly one-third was held in New York City. A run upon the treasury for the redemption of these notes would have exhausted the gold funds laboriously accumulated by secretary Sherman and compelled a new suspension. But the banks appointed a committee to co-operate with the treasury, declined to receive gold longer as a special deposit, and resolved to receive and pay balances without discrimination between gold and government notes. Thus resumption was accomplished without jar, and as early as the 17th of December 1878 gold sold at par in paper.

The silver legislation enacted by Congress in 1878 and 1890 caused uneasiness in banking circles, and the banks discriminated against silver dollars and silver certificates in their cash. When the treasury began to lose gold heavily, however, in 1893, a combination of leading bankers in New York, Boston, Philadelphia, Baltimore and Chicago turned over a large part of their holdings to replenish the government reserves. About 150 national banks suspended during the panic of 1893, but 84 of these afterwards resumed business. As in former periods of depression, the system suffered the greatest decline during the years of liquidation following the actual panic, the number of banks falling from 3856 on the 1st of June 1893 to 3585 on the 1st of June 1899, and aggregate capital falling during the same period from $698,454,665 to $610,028,895.

A new extension was given to the national banking system by the provisions of the gold standard law of 14th March 1900. Banks were authorized to issue circulation to the full par-value of bonds deposited, and the tax upon circulation was reduced from 1% to ½ of 1% in the case of circulation which was secured by the 2% refunding bonds, which were authorized by this law. By issuing 2% bonds in exchange for those paying a higher interest, at approximately the market-price, it became possible to obtain a given amount of notes upon a smaller investment in bonds, independent of other provisions of the law. Under these provisions the volume of notes outstanding, secured by bonds, which stood on the 31st of October 1899 at $207,920,774, reached on the same date in 1900, $298,829,064; in 1901, $328,198,613; in 1902, $335,783,189; in 1903, $380,650,821; in 1904, $424,530,581; in 1905, $490,037,806; in 1906, $536,933,169; and in 1907 $562,727,614.