Civil War and the Rise of National Banks - Part I

January 2, 2020

SANBORN, NORTH DAKOTA, August 22, 2018: The Sanborn bank from 1923 is part of the First National Bank created in 1875, one of Forbes Best Banks of America


Lincoln couldn't pass the hat to fund the Civil War, so he passed legislation instead.
Rob Hajduch, Principal Credit Analyst

In 1860, the year Abraham Lincoln first won election to the Presidency, Federal government expenditures totaled $78 million ($2.42 billion in 2019), including $29 million for defense (37% of the total). After the Civil War erupted in April 1861, Federal expenditures to carry out the war ballooned to roughly $440 million in 1862 ($13.6 billion inflation adjusted) and consumed 90% of total Federal spending. To generate the necessary revenue to fund the war effort, Lincoln's administration levied the first Federal income tax, sold government assets (primarily land) and went deeply into debt by issuing bonds both domestically and abroad.  Lincoln's Treasury Secretary, Salmon P. Chase, further advocated for the passage of the Legal Tender Act of 1862 that allowed for the issuance of $150 million in paper money notes called greenbacks because of the colored ink used to print them.

When the piecemeal approach to funding the war proved insufficient, Lincoln and Chase considered creating a "Third Bank of the United States," but shelved the idea in favor of a system that would be less susceptible to shifting political winds. Ultimately, Chase teamed with Senator John Sherman (R-Ohio) to draft what became the National Currency Act of 1863. Introduced in January 1863, the act simultaneously created the Office of the Comptroller of the Currency (OCC) under the Treasury Department and introduced the national bank charter. The OCC was delegated the responsibility of issuing the new charters and regulating the system. After contentious debate, the Senate approved the act by a vote of 23 to 21, the House of Representatives passed the legislation in February, and Lincoln signed it into law on February 25, 1863.

To obtain a national charter, applicant banks were required to purchase interest-bearing U.S. government bonds equivalent in value to one-third of their respective capital bases. The Treasury held the bonds on deposit as collateral in the event that the chartered bank was unable to meet its obligations. The banks also were required to submit to Federal regulations on mandatory capital levels and lending restrictions, as well as oversight that included periodic examinations by OCC agents. The act further required applicants to assume dry, standardized operating brands that - for all intents and purposes - were the assignation of a number (i.e. the First National Bank of, Second National, etc.).  

Hugh McColloch was appointed the first Comptroller of the Currency in May 1863. McCulloch had formerly served as president of the State Bank of Indiana and had originally come to Washington DC to lobby against the National Currency Act which he perceived to be an existential threat to state banks. Under McCulloch's 22-month leadership, the OCC chartered 868 banks and the system saw no failures. He also made recommendations for revisions to the act to Congress, which became known as the National Banking Act of 1864 (NBA) and continues to anchor the current national banking system.

In addition to serving as collateral in the event of insolvency, the purchase of U.S. government bonds had the practical consequence of millions of dollars flowing into the Treasury to fund the war effort.  They also came to function as security for the first truly credible national paper currency, but that is a story for another day.


Cost Of The American Civil War,

Flaherty, Edward, A Brief History of Central Banking in the United States, American History From Revolution to Reconstruction and Beyond

Gordon, John Steele, Paying For The War, American Heritage, March 1990

Government Spending Details for 1860,

History, Office of the Comptroller of the Currency,

How the Civil War Created the Modern Economy, Norwich University Online

National Bank Act of 1863,, November 2019