History of central banking in the United States
This history of central banking in the United States encompasses various bank regulations, from early wildcat banking practices through the present Federal Reserve System.
The National Banking Act of 1863, besides providing loans in the Civil War effort of the Union, included provisions:
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 1,500 national banks. In 1870, 1,638 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 requirement to back up the currency with treasuries. When the treasuries fluctuated in value, banks had to recall loans or borrow from other banks or clearinghouses. The second problem was that the system created seasonal liquidity spikes. A rural bank had deposit accounts at a larger bank, that it withdrew from when the need for funds was highest, e.g., in the planting season. When 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.
National banks issued National Bank Notes as currency. Because they were uniformly backed by US government debt, they generally traded at comparable values in contrast to the notes issued during the Free Banking era in which notes from different banks could have significantly different values. National bank notes were not however "lawful tender", and could not be used as bank reserves under the National Bank Act. The Federal government issued greenbacks which fulfilled this role along with gold.[7]
Congress suspended the gold standard in 1861 early in the Civil War and began issuing paper currency (greenbacks). The federally issued greenbacks were gradually supposed to be eliminated in favor of national bank notes after the Specie Payment Resumption Act of 1875 was passed. However, the elimination of the greenbacks was suspended in 1878 and the notes remained in circulation. Federal debt throughout the period continued to be paid in gold. In 1879, the United States had returned to the gold standard, and all currency could be redeemed in gold.[8]