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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