Civil War and the Rise of National Banks Part II - the Emergence of National Currency

January 23, 2020

Stacked pile of gold bars. 3D illustration.
As trans-continental travel began to grow, so did the transactional headaches.
Rob Hajduch, Principal Credit Analyst

Prior to the National Banking Act of 1864 ("NBA"), all banks in the United States were chartered by the individual states, with local regulations and standards inconsistent and often conflicting. Some states freely granted charters to any applicant meeting the bare minimum conditions, while others required legislative action to approve a single charter. Banks operating in Indiana and Tennessee were state-owned and operated. In other states, banks operated as public-private partnerships. In Ohio, a number of these charters were in simultaneous coexistence. 

In addition to being inherently inefficient, the hodgepodge organization of the state banking systems was characterized by a monetary system that by today's standards was absurdly complex and prone to fraud. Federally-issued money was in the form of coins minted from gold and silver, which had the distinct advantages of durability, consistency and reliability. Its principal shortcoming was in its portability. A standard gold ingot measures 7 inches long, slightly more than 3 ½ inches wide at the base and 1 ¾ inches high - and weighs 25 pounds. Although less dense, a silver bar of similar dimensions still weighs nearly seven pounds. Consequently, any significant amount of "hard money" was innately heavy and its transport was inconvenient. The most common solution to facilitate large money transfers was for banks to hold "hard" currency or bullion on deposit in vaults and to issue paper "bank notes". In theory, holders could present said notes to the issuing bank and receive its face value in gold or silver coins, or equivalent value in bullion (ingots or bars). 

In practice however, the thousands of issuing banks and non-standardized note denominations limited the fungibility of bank notes across even moderate distances, causing an impediment to interstate commerce and travel which inhibited integration of the national economy. A person traveling across state lines not wanting to lug hefty sacks of coins along would have to convert a note drawn on their home bank into local money in order to buy anything. The individual would pay the local bank an exchange fee for the privilege - if the bank would agree to the transaction at all - and monetary losses would accumulate in proportion to the distance a person travelled as the number of conversions mounted. 

Additionally, the simple movement of currency required reliable and relatively secure methods for transporting larger sums of gold and silver. American Express (1850) and Wells Fargo (1852) were created for the specific purpose of safely conveying financial documents, hard currency, and gold and silver bullion. During their first 50-odd years of operation, delivery services were the dominant revenue driver in both companies' businesses. This circumstance naturally layered another expense on top of any associated transaction.

Under the NBA, the U.S. government bonds purchased by the national banks to obtain their charter were deposited with the Treasury where they served as collateral for a new form of paper money. National banks were permitted to issue "national bank notes" in proportion to the amount of government bonds held in its Treasury account. Aside from the name of the issuing bank and the signatures of its officers, the notes were identical with respect to color, size and design and were issued in standard denominations. Anyone holding a national bank note could redeem it for equivalent gold and silver coins at either the issuing bank, or at one of the U.S. government currency reserve banks in major cities around the country.  If the issuing bank was unable to redeem its notes for cash, a mechanism was in place for the Treasury to sell its bonds and pay noteholders directly. As the public gained confidence that the new currency eliminated value ambiguity, its circulation spread across the country and national banks largely supplanted those with state charters - by 1866 only 300 of the roughly 1,600 state banks operating in 1860 still existed. National bank notes remained the prevailing form of currency circulating in the United States until they were replaced by Federal Reserve notes in 1914.

While the NBA laid the foundation for a less fragmented and more stable banking system and imposed order in the circulation of paper currency, it proved incapable of eliminating the counterfeiting poltergeist that has haunted all money for ages. In 1865, Hugh McCulloch replaced Salmon P. Chase as Secretary of the Treasury after Chase was elevated to Chief Justice of the Supreme Court. As Treasury Secretary, McCulloch advocated for the creation of a federal law enforcement agency within the Treasury to investigate and, if possible, eradicate counterfeiting of the national currency. 

On April 14, 1865 in one his very last official acts, Abraham Lincoln signed the bill establishing McCulloch's agency and the U.S. Secret Service was born. Officially formed the following July, the Secret Service's sole mandate for its first two years focused on counterfeiting. The agency's responsibilities were gradually expanded over the subsequent four decades although they were still largely related to financial fraud and crimes against the Federal government. The agency was delegated responsibility for protection of the President in 1902 and the investigation and prevention of counterfeiting has since been distributed among a number of Federal agencies.


History, Office of the Comptroller of the Currency,

National Bank Act of 1863,, December 2019

National Banking Acts of 1863 and 1864, American History From Revolution to Reconstruction and Beyond

National Bank Notes, Bureau of Engraving and Printing U.S. Department of the Treasury, April 2013

Ray, Michael, U.S. Secret Service United States Government Agency, Encyclopedia Britannica