NATIONAL BANKING UNDER THE FEDERAL RESERVE SYSTEM 
thoroughly established by 1870, at the close of which year there were 
1648 national banks in the United States. In that year, national bank 
notes comprised 40.3%, of the money in circulation in the country; in 
1920, national bank notes aggregated less than 9% of the stock of 
money in the United States, despite the fact that the total volume 
of these notes was more than double what it had been in 1870. 
Measured by the country’s total volume of money, therefore, these 
figures indicate that national bank note circulation was nearly five- 
fold as important in 1870 as it is today. 
In the year that the National Bank Act was passed, there were 
in the United States 1466 state banks, capitalized at $405,000,000. 
Bank circulation the same year was $239,000,000, or 59 cents bank 
circulation for every $1 of bank capitalization, which was the highest 
point state bank circulation ever reached. 
From the earliest years of the country’s history, the banks had 
assumed the right of note issue, and this right was supported, but in 
only a few cases adequately regulated, by the various states. There 
was no Federal legislation governing banking practices or bank note 
issue. Because state supervision was generally lax, and reserves 
against bank notes were not infrequently wholly insufficient, notes of 
numerous banks were at varying degrees of discount throughout the 
country. Some of them were entirely worthless. Counterfeiting was 
extensive. Thus, with the bank’s cash capital and deposits small, 
with checks and drafts in quite uncommon use, with note issue the 
chief function of the banks, and with this function in more or less dis- 
repute because of the discount at which many bank notes passed, it 
is not surprising that the country was ready for a new banking system 
at the time the National Bank Act went into effect. 
Salmon P. Chase, Secretary of the Treasury, aggressively advo- 
cated the establishment of the national banking system because he 
believed that, as it had been planned, it would accomplish two out- 
standing results: (1) Provide a market for government bonds; 
(2) Give the country a unified currency system. Therefore, one of 
the fundamental requirements of national banks was that they 
should deposit with the Treasury Department a certain quantity of 
government bonds which they should be required to own. As some- 
thing in the nature of an exchange for this requirement, the national 
banks were given the privilege of note issue based upon Government 
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