A Brief History of the U.S. National Banking system

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Original Series $1 bank note issued by the Moniteau National Bank of California, Missouri. Courtesy of Heritage Currency Auctions, www.ha.com

A Brief History of the U.S. National Banking system (1863-1935)

The following article provides a brief historical background on the U.S. National Banking system and National Bank Notes during the National Bank Note Era (1863-1935).

Origin of the National Banking system

On February 25, 1863, in the midst of the Civil War, President Abraham Lincoln signed the National Currency Act, which established the National banking system. Under this system, federally chartered National Banks, with a minimum capitalization of $50,000 were required to purchase U.S. government bonds to be deposited with the U.S. Treasury to back the currency (National Bank Notes) issued by the banks. The banks also had to maintain a gold redemption fund with the Treasury worth 5% of the value of their outstanding notes. The National Banks would collect interest on the bonds they had purchased, and also collect interest on the loans they made with their National Bank Notes.

This helped solve two major problems:

  • It provided sorely needed funding for the Civil War.
  • It also provided for a stable national currency to replace the existing bank notes of thousands of state-chartered and private banks. These banks often failed, with disastrous results for the people left holding worthless bank notes. If a National Bank failed, its circulating notes were guaranteed by the U.S. Government, which held the bonds that backed the notes. All National Banks were required to accept the bank notes of all other National Banks at par, even if that bank had failed.

Corporate Life of National Banks

Series 1882 Brown Back $5 bank note issued by the German National Bank of Beaver Dam, WI. Courtesy of Lyn Knight Currency Auctions, www.lynknight.com

National Banks received 20-year charters that were extended upon expiration by legislation enacted in 1882 and 1902, which also stipulated that a new series of National Bank Notes be issued by those banks being extended, as well as newly formed National Banks. This resulted in the Series of 1882 and Series of 1902 National Bank Notes. In 1922 all National Banks were given 99-year charters. This was superseded by legislation in 1927 that finally granted National Banks perpetual charters.

There were three ways that a National Bank could cease operation:

  • Receivership: If a bank became insolvent or violated some other provision of the National Currency Act, it was placed in charge of a Receiver, who assumed control of the bank. If the bank could prove it was sound, it was allowed to reopen. If not, the assets of the bank would be liquidated to (hopefully) cover most of the liabilities of the bank, including customer deposits.
  • (Voluntary) Liquidation: A bank could go into voluntary liquidation based on the vote of two-thirds of the capital stockholders. This was usually done to allow the bank to be absorbed by, or consolidate with, a national or state bank. Other reasons included getting rid of certain stockholders, or if business was poor, they might decide to liquidate to wrap up the bank's financial affairs and cease operation.
  • Consolidation without Liquidation: The Act of November 7, 1918 allowed a National Bank to consolidate with another National Bank without the closing bank being required to liquidate its assets.

National Gold Banks (1870-1884)

$5 Gold Bank Note issued by National Gold Bank of D.O. Mills of Sacramento, CA. Courtesy of Heritage Auctions, www.ha.com

Prior to 1880 in the United States, the western states were 'hard money' regions, where gold and silver coins were the primary circulating medium. All paper money in these areas was suspect and heavily discounted relative to gold and silver, especially after banks and the U.S. Treasury suspended specie payments during and after the Civil War.

To help address this situation, Congress amended the National Bank Act on July 12, 1870 to allow for the creation of National Gold Banks, which would issue notes that were redeemable at par in gold or silver coin at any National Gold Bank. The costs to the bank for this issue privilege were substantial compared to regular National Banks which were only obligated to redeem their notes at par in 'lawful money' (specifically U.S. Demand notes). Due to these higher costs of operation only ten National Gold Banks were ever chartered, nine in California, and one (briefly) in Boston, MA. (The Kidder National Gold Bank of Boston was chartered in 1870 and liquidated in 1872, never having issued any Gold Bank Notes).

As public confidence in U.S. paper money gradually increased over the next several years, the viability of the National Gold Banks decreased. On January 14, 1875 Congress passed an act that required the resumption of specie payments on January 1, 1879. As a result, on that date, all legal tender notes became fully convertible into gold or silver coin, and all classes of currency circulated at par.

With the resumption of specie payments, the end was in sight for the National Gold Banks. In 1880, Congress passed legislation allowing National Gold Banks to convert to regular National Banks, and by April of 1884, all nine of the National Gold Banks had either liquidated or converted to regular National Banks.

National Bank Notes

All National Bank Notes show the town and name of the issuing bank and were signed by the local bank officers. All National Banks were required to have the word 'National' in their bank name, to clearly distinguish them from State-chartered banks. (The one exception to this rule is the Bank of North America in Philadelphia, which was granted an exception when it converted to a National Bank in 1864 and allowed to keep their original bank name by virtue of their being the first bank chartered in the country in 1782).

Four distinct Series of Large Size National Bank Notes (with nine different types) were issued between 1863 and 1929, and one Series of Small Size notes (with two different types) was issued between 1929 and 1935.

Between 1870 and 1883, National Gold Bank Notes were issued by the nine National Gold Banks in California. These notes were printed on yellow/gold paper, and used the Original Series and Series 1875 designs, with 'Redeemable in Gold Coin' printed along the top of the note face.

The Golden Age of National Banking

Series 1902 Red Seal $10 Serial Number 1 bank note issued by the First National Bank of Royalton, MN. Royalton had a population of about 664 in 1903 when this note was issued.

To help with the slow recovery from the Panic of 1893, and increase the number of National banks in operation, Congress was urged to reduce the minimum capital requirements needed to start a National Bank. As a result, the Gold Standard Act of March 14, 1900 included a provision that allowed National banks in towns with a population of 3,000 or less to be organized with a minimum capitalization of $25,000 instead of the previous minimum of $50,000. This act spurred the organization of many small-town National banks, ushering in what John Hickman called the 'Golden Age of National Banking'.

The 1908 Emergency Currency Act (Aldrich-Vreeland Act)

Series 1902 Date Back $20 bank note issued by the First National Bank of Berryville, AR. Notice 'or other securities' has been added to the security clause along the top of the note.

Several financial panics over the years had highlighted the inelastic nature of the bond-backed national currency money supply. It was not possible to quickly increase the amount of national bank notes in circulation to help ease liquidity crises during these panics. The Panic of 1907 finally convinced Congress to act to try to help mitigate such financial emergencies. In 1908, Congress passed the Emergency Currency Act, also known as the Aldrich-Vreeland Act. The purpose of this act was to encourage National Banks to increase their circulation during economic emergencies, and then reduce their circulation when no longer needed. This was done by permitting the banks to use other securities besides U.S. bonds as backing for the additional circulation. This 'other' circulation would then be taxed at a higher rate to incentivize banks to reduce circulation after the emergency had passed. The Act also stipulated a change to the security clause printed on the face of National Bank Notes to indicate that they were secured by U.S. bonds or other securities. This change, along with the addition of dates (1882-1908 or 1902-1908) to the back, resulted in the Date Back type for Series 1882 and Series 1902 notes.

The emergency measures allowed by the Aldrich-Vreeland Act were only put to use one time. The outbreak of World War I in August of 1914, caused a severe liquidity crisis in the America, as Europeans sold U.S. securities to raise capital to support their war efforts. This heavy drain on the U.S. money supply made the emergency measures of the Aldrich-Vreeland Act viable. National Banks soon began to deposit 'other securities' in order to increase their circulation of National Bank Notes. This provided a vitally needed short term bump in the money supply, but the liquidity crisis soon passed, and within one year, all of the emergency circulation had been retired.

The End of the National Bank Note Era

Series 1929 Type 2 $20 note issued by First National Bank of Chillicothe, OH. This note was part of the last shipment of National Bank notes on July 10, 1935.

While the emergency actions included in the Aldrich-Vreeland Act were helpful, further measures were needed to overcome the inherent inelasticity in the National Banking system. On December 23, 1913 Congress passed the Federal Reserve Act, which created the Federal Reserve system. This system of 12 Federal Reserve Banks, and the associated issuance of Federal Reserve Notes, was a cheaper and more efficient means of regulating the money supply, and thus marked the beginning of the end for National Bank Notes.

The Federal Reserve Act also repealed the requirement that National banks deposit bonds to secure circulation. As a result, many newly charted National banks decided not to issue National Bank Notes. Existing National banks were also permitted to sell their bonds to the Federal Reserve, and thereby reduce their circulation of National Bank Notes.

On July 22, 1932, Congress passed the Federal Home Loan Act, which contained a provision that specified that the types of bonds then being used to secure National Bank Note circulation would lose that privilege three years later on July 22, 1935. On July 1 and August 1, 1935, the Treasury officially withdrew the circulation privileges on all bonds used to secure circulation, sold those bonds, and placed the proceeds in the Redemption Fund. This ended the National Bank Note Era.


  • Don C. Kelly, National Bank Notes, A Guide with Prices. 6th Edition (Oxford, OH: The Paper Money Institute, 2008).
  • Dean Oakes and John Hickman, Standard Catalog of National Bank Notes. 2nd Edition (Iola, WI: Krause Publications, 1990).
  • Louis Van Belkum, National Banks of the Note Issuing Period 1863-1935 (Chicago: Hewitt Bros. Numismatic Publications, 1968).
  • A.S. Pratt & Sons, Pratt's Digest of National Banking Laws (1908 Edition) (Washington, D.C.: A.S. Pratt & Sons, 1908).