the invention of national banks -- 11/14/22

Today's selection -- from Ways and Means by Roger Lowenstein. At the time of the Civil War, the country had only state-chartered banks, and these were the issuers of more than 8,000 different types of currency (typically issued as proceeds of loans) in the economy. There had been no national currency in the country, other than the brand-new 'greenbacks' first issued by the Treasury in 1861 as an expedient to help finance the war -- and which were expected to be removed from the system after the war (which did not happen until 1878). But Treasury Secretary Salmon Chase had a revolutionary idea to bring the system under more national control and at the same time help finance the war: The country would authorize the creation of national banks, which would be required to buy Treasury securities in an amount equal to a portion of their capital. State bank currency would soon come to be taxed, which effectively put them out of the currency-issuing business. Suddenly, banking in America had become a creature of the federal government:
"While Lincoln praised legal tender (his first public comment on the greenback), he nonetheless looked to a return to a gold basis at the earliest possible moment, presumably after the war. Paper money had proved a brilliant expedient, but it was still an expedient. Some more permanent currency was needed. Yet Lincoln, like Chase, knew there was no going back to the old mix of gold and silver coins plus Treasury and assorted state bank notes. With the postwar world coming into view, the President recommended Chase's long delayed banking reform. Indeed, Lincoln said, 'I know of none which promises so certain results [of] a safe and uniform currency.'

Salmon P. Chase

"The Annual Report of the Secretary of the Treasury on the State of the Finances, typically released after the President's Annual Message, was usually a dry document, a run of figures and projections. Chase had those, as well as a request that Congress authorize the breathtaking sum of $900 million in borrowings over the next eighteen months. But the heart of his thirty-page report was a treatise reimagining the Amer­ican system of currency. Chase's scheme was revolutionary, yet it re­flected his innate conservatism. It was clear to him that the country needed more currency, to buy his bonds and to conduct its business. Yet his instincts remained Jacksonian, colored by an undying affection for gold. Congress could not simply undam the river of greenbacks -- 'as injurious as it would be easy.' Nor could the source of the new money be the 1600 state-chartered banks (1400 in the loyal states), each of which issued at least six bills, making eight thousand bills in circulation. They were too numerous and cacophonous, too dissimilar in value and in the differing state regulations to which they were subject. Their dis­parate physical appearance even gave rise to widespread counterfeiting. And Chase unfairly blamed these bank notes for inflation.

"The Treasury secretary was just modern enough to adopt the heresy that government, as distinct from private banks, should control the cir­culation. Yet he was too much a Jacksonian to countenance a central bank. That left the possibility of a hybrid, a new note regulated by the federal government yet issued by a private source, a collection of newly organized national banks. These banks would be 'national' in the sense that Washington would grant their charters, but they would operate as independent, for-profit associations. Their notes would be backed by their private assets, commercial loans as well as gold. Thus the new cur­rency, Chase hastened to add, would be 'no mere paper money scheme.'

"Finally, the national banks would be required to invest a portion of their capital in U.S. bonds, furnishing Chase with a market for the government's credit. The private banks would thus forge a vital connec­tion to the federal purse. Every national bank, and every individual who held a dollar of the new circulation, would feel a shared interest with the government. This was a very Republican and un-Jacksonian idea­ promoting the authority of the central state. War begat an itch to cen­tralize and Chase was not immune. In time, he envisioned that the national notes would displace those of the state banks, giving rise to a single currency under federal control.

"Chase insisted that this was the 'central idea' -- to establish 'one sound, uniform circulation, of equal value throughout the country.' Yet it was a complicated scheme, with overlapping objectives. Moreover, as Chase acknowledged, his banking reform was unlikely to bear fruit right away -- perhaps not even during the remainder of the war. For these and other reasons, enacting it would not be easy. The nation's bankers, who ran the state banks that Chase was hoping to displace, were naturally opposed. And bankers were well represented in the House of Representatives.

"Chase did have the support of Lincoln."



Roger Lowenstein


Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War


Penguin Press


Copyright 2022 by Roger Lowenstein


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