National Bank Note

The National Banking Act of 1864 (NBA), an overhaul of the National Currency Act of 1863, was the US government’s first foray into banking since the charter of the Second Bank of the United States expired in 1836. Rather than establish a new central bank, the law created a new banking system based on two antebellum innovations, general incorporation and bond security, and regulated by a new Treasury bureau, the Office of the Comptroller of the Currency (OCC).

General incorporation laws allowed people who wanted to charter a business and who met certain legal requirements to do so with minimal effort or expense. They were fairer and more efficient than the older system of special charters because they entailed administrative rather than politicized legislative decisions. The NBA’s requirements were straightforward: five or more incorporators and directors; completion of a simple information certificate (bank name, location, capital stock, etc.); and at least $50,000 (if located in a community with up to 6,000 residents), $100,000 or $200,000 (if located in a community with more than 50,000 residents) in equity capital, half of which had to be paid in before operations could lawfully commence.

Bond security laws mandated that a bank that issued notes back them by depositing bonds with their government regulator for liquidation and payment to note holders should the bank fail. The NBA kept note holders safe, and coincidentally increased demand for Union war bonds, by mandating that national banks deposit with the US Treasurer at least one third of their capital in the form of government bonds. It also required a further deposit if a bank’s note issue exceeded 90% of the lesser of the market value, or par value, of the deposited bonds.

The NBA did not prohibit state banking and a 10% tax on state bank notes, passed in March 1865, failed to drive state banks to convert or close so the nation ended up with a dual banking system inhabited by both federal and state banks.
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