The present system, known as the National Bank-note System of the United States, was devised - first, to secure in the most effective way a sure market for United States bonds, whose issue was rendered imperative by the continuance of the civil war; and, second, to provide a uniform, safe and convenient monetary system for the promotion of business transactions and the development of trade and industries among the people.
The first act of the National Congress, under which the system was organized, was approved February 25, 1863. The law was extensively revised and re-enacted June 3, 1864. Previous to these dates the system of State banks universally prevailed, of which there were, in the thirty-four States then existing, 1,601, with an aggregate capital of $429,000,000. More than 10,000 different kinds of bank-notes were in use in a total circulation of about $202,000,000.
The act of 1864 provided for the establishment, in the Government Treasury Department at Washington, of a national bank bureau, with a chief officer, to be known as comptroller of the currency. Under the provisions of the law any number of persons, not less than five, might be organized into a national banking association, the capital in no case to be less than $100,000, except that in cities containing a population of not more than 6,000 the capital should not be less than $50,000; and in cities having a population of not less than 50,000 the capital must not be less than $200,000. Not less than one-third of the capital was required to be invested in United States bonds, upon which circulating notes could be issued equal to 90 per cent of the current market value, but not exceeding 9 per cent of the par value of the bonds deposited. These were to be received at par in the United States in all payments to and from the Government, except for duties on imports, interest on the public debt, and in redemption of national currency. As early as March 3, 1865, an important additional act was passed requiring that every banking association should pay a tax of 10 per cent on the notes of any person or State bank used for circulation or paid out by them.
This act virtually resulted in taxing State bank circulation out of existence.
A total issue of $300,000,000 of circulation was authorized by the act of 1864; but an act of May 12, 1870, authorized an increase of circulation to $354,000,000. Another act, that of June 20, 1874, provided that any bank by depositing with the United States Treasury in sums not less than $9,000 at a time, might withdraw a proportionate amount of the bonds on deposit as security for its circulating notes. An act passed January 14, 1875, removed all limitations as to the amount of the circulating notes of the banks, except the restrictions in the provisions in the law then existing, but required the Treasurer to retire legal tender notes to the amount of 80 per cent of the additional bank-notes issued, and to continue such retirement until there should be a reduction of the legal tender notes to the amount of $300,000,000. The provision of the law requiring a reduction of legal tender notes was repealed May 31, 1878.
The National Bank act also required that the national banks in the city of New York, and certain other " redeeming" cities, should hold in lawful money 25 per cent of their deposits and circulation as a reserve fund. Banks in other cities were required to hold a reserve of 15 per cent.
With regard to interest on loans, the national banks were allowed to charge at the rate allowed by the States in which they were located, and in case the State had fixed no rate, the banks were allowed to charge 7 per cent.
Under the national banking law, shareholders are held individually, equally and ratably liable for all the debts of the association to the extent of their amount of stock in addition to the amount invested therein. Also the law required that before declaring a dividend, the bank should carry one-tenth of their net profits of the preceding half year to a surplus fund until the same should amount to 20 per cent of the capital.
Originally the national banks realized a considerable profit from their circulating notes, but the high rate of premium commanded in the market in later years by the interest-bearing bonds of the United States, which the law requires the banks to deposit as security for their circulation, has rendered the issue of circulating notes in most localities unprofitable. Hence the banks rely chiefly on their deposits as their principal source of profit; these deposits are returned to the business public in the shape of loans properly secured, and thus the money is continually kept in circulation among the people.