History of Central Banking in the United States - 1863-1913: National Banks - Encyclopedia II

Some of the problems of the free banking era were solved with the National Banking Act, besides providing loans in the Civil War effort of the Union. The provisions were To create a system of national banks. They had higher standards concerning reserves and business practices than state banks. The office of Comptroller of the Currency was created to supervise these banks To create a uniform national currency. In order to achieve this, all national banks were required to accept each other's currencies at par value. This ...

History of Central Banking in the United States, History of Central Banking in the United States - 1791-1836: The First and Second Bank of the United States, History of Central Banking in the United States - 1837-1862: Free Banking Era, History of Central Banking in the United States - 1863-1913: National Banks, History of Central Banking in the United States - 1913-present: Recent changes, History of Central Banking in the United States - 1913: Creation of the Federal Reserve System, History of Central Banking in the United States - Source

Some of the problems of the free banking era were solved with the National Banking Act, besides providing loans in the Civil War effort of the Union. The provisions were

To create a system of national banks. They had higher standards concerning reserves and business practices than state banks. The office of Comptroller of the Currency was created to supervise these banks
To create a uniform national currency. In order to achieve this, all national banks were required to accept each other's currencies at par value. This eliminated the risk of loss in case of bank default. The notes were printed by the Comptroller of the Currency to ensure uniform quality and prevent counterfeiting.
To finance the war. National banks were required to back up their notes with Treasury securities, enlarging the market and raising its liquidity.

As described by Gresham's Law, soon bad money from state banks drove out the new, good money; the Government imposed a 10% tax on state bank bills, forcing most banks to convert to national banks. By 1865, there were already 1500 national banks, 1870, 1638 national banks stood against only 325 state banks. The tax led in the 1880s and 1890s to the creation and adoption of checking accounts. By the 1890s, 90% of the money supply was in checking accounts. State banking had made a comeback.

Two problems still remained in the banking sector. The first was the requirements to back the currency up with Treasuries. When they fluctuated in value, banks had to recall loans, or borrow from other banks or clearinghouses. The second were seasonal liquidity spikes. A rural bank would have deposits at a larger bank that it withdrew when the need for funds was highest, e.g. in the planting season. When the combined liquidity demands were too big, the bank again had to find a lender of last resort.

These liquidity crises led to bank runs, causing severe disruptions and depressions, the worst of which was the Panic of 1907

Other related archives1781, 1791, 1797, 1811, 1816, 1836, 1837, 1865, 1870, 1880s, 1890s, 1913, 1929 collapse, Bank of England, Bank of North America,

Adapted from the Wikipedia article "1863-1913: National Banks", under the G.N U Free Docmentation License. Please also see http://en.wikipedia.org/wiki/Main_Page

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