Sec. 3. #National Banking Associations, 1863-1913#.  The next step in federal legislation was taken in 1863 in the midst of the Civil War by chartering local “national banking associations.”  The purpose was in part to provide banks under national charters for banking purposes (both of deposit and of issue), and in part it was to make a wider market for United States bonds at a time when government credit was at low ebb.  The plan adopted followed the experience of New York state (1829 on) with a system of bond-secured bank notes.  Congress provided that every bank taking out a national charter must purchase bonds of the United States and deposit them with the treasurer of the United States, in return for which it would receive bank notes to the amount of 90 per cent of the denomination or of the market value of the bonds.[1] Bank notes issued on this plan, being secured by the bonds, rest ultimately on the credit of the government, not on the credit of the bank.  They are not promptly sent back for redemption to the banks issuing them, as should be done if they were typical bank notes.  They may circulate thousands of miles away from the bank that issued them, and for years after the bank has gone out of business.  They are not an “elastic currency,” increasing or diminishing with the needs of business.  The changes in their amount depend upon the chance of the banks to make more or less in this way than by any other use of their capital, and this in turn depends largely on the price of bonds and on the rate of interest they bear.  From 1864 to 1870, fortunes were made from this source, but thereafter banks could make little more from note issues than they could by investing the same amount in other ways.  Many banks for a long period did not avail themselves in the least of their privilege of issue.  The notes were subject to a tax.[2]

A national bank (as the law now stands) may be organized, with $25,000 capital in towns not exceeding three thousand population, with $50,000 in towns not exceeding six thousand, with $100,000 in cities not exceeding fifty thousand, and with $200,000 in large cities.  Three cities, New York, Chicago, and St. Louis, have long been designated as central reserve cities, and some 47 other cities as reserve cities, in which the reserves of banks were required to bear a considerably larger proportion to their deposits than in other cities.[3] Other banks might count as part of their legal reserves their deposits in reserve city banks, up to a certain proportion.  The national banks in the larger cities thus became the great capital reservoirs of cash for the whole country.

National banks have been subject to stricter inspection than have been the banks in most of the states, a fact which has strengthened public confidence in their stability.  Except in this and the other respects above mentioned, a national charter offered few, if any, attractions to small banks, a majority of which have found it more advantageous to operate under state charters because of less stringent regulations as to amount of capital, reserves, and supervision.