A very simple set of figures illustrates this differentiation quite clearly. We may assume that the national banking system had become thoroughly established by 1870; at the close of which year there were 1648 national banks in the United States. In that year, national bank notes comprised 40.3% of the money in circulation in the country; in 1920, national bank notes aggregated less than 9% of the stock of money in the United States, despite the fact that the total volume of these notes was more than double what it had been in 1870. Measured by the country's total volume of money, therefore, these figures indicate that national bank note circulation was nearly fivefold as important in 1870 as it is today.

In the year that the National Bank Act was passed, there were in the United States 1466 state banks, capitalized at $405,000,000. Bank circulation the same year was $239,000,000, or 59 cents bank circulation for every $1 of bank capitalization, which was the highest point state bank circulation ever reached.

From the earliest years of the country's history, the banks had assumed the right of note issue, and this right was supported, but in only a few cases adequately regulated, by the various states. There was no Federal legislation governing banking practices or bank note issue. Because state supervision was generally lax, and reserves against bank notes were not infrequently wholly insufficient, notes of numerous banks were at varying degrees of discount throughout the country. Some of them were entirely worthless. Counterfeiting was extensive. Thus, with the banks' cash capital and deposits small, with checks and drafts in quite uncommon use, with note issue the chief function of the banks, and with this function in more or less disrepute because of the discount at which many bank notes passed, it is not surprising that the country was ready for a new banking system at the time the National Bank Act went into effect.

Salmon P. Chase, Secretary of the Treasury, aggressively advocated the establishment of the national banking system because he believed that, as it had been planned, it would accomplish two outstanding results: (1) Provide a market for government bonds; (2) Give the country a unified currency system. Therefore, one of the fundamental requirements of national banks was that they should deposit with the Treasury Department a certain quantity of

government bonds which they should be required to own. As something in the nature of an exchange for this requirement, the national banks were given the privilege of note issue based upon Government bonds. By 1866, this right had been made exclusive by a 10% tax on state bank note circulation.

The measure providing for the system was introduced in Congress in the winter 1861-1862 but was not acted upon until the following session, in 1863. By the close of 1865-the year marking the end of the Civil War-there were 1582 national banks with total capital of $403,300,000, owning government bonds in excess of that sum, while their circulation was equal to approximately one-half of their total capitalization.

Circulation had been rigidly limited by Congress-first to $300,000,000 then to $354,000,000, and as a result, something of a finarcial injustice had been imposed upon the newer sections of the country. National banks in the East and North, which were either organized or converted soon after the National Bank Act went into effect, had naturally obtained the bulk of the circulation that was available. This left the banks which were organizing in the newer sections of the country-where both capital and currency were urgently needed—at a decided disadvantage. For example, the banks of the Eastern and Middle States, in 1870, had some 80 million dollars' worth of currency in excess of their share on a basis of population and wealth. The banks of the Southern States, on the other hand, were entitled to some 57 million dollars in currency more than they could obtain.

In 1875, Congress coupled with the passage of the Specie Resumption Act, a measure providing for "free banking"-i.e., the removal of all limitations upon the volume of bank currency. Some (although no great), impetus to the organization of new banks was given by this measure. The year 1875 saw the organization of 107 new national banks, capitalized at some 12 million dollars, against 71 with capitalization of 6.7 million dollars for the previous year, 1874. In each of the four years following 1875, however, the total number of national banks in the country decreased by a slight margin.

As originally enacted, the National Bank Act provided for charters extending over a period not exceeding 20 years, so in 1883-84 the

charters granted the first national banks (and extending 20 years) would have automatically expired. As a matter of fact, the charters of 29 banks organized for periods of less than 20 years, expired prior to July 12, 1882. Congress in 1882, in the face of bitter opposition, passed a bill permitting the extension of charters of existing national banks for 20 more years.

Thus closed what may be described as the formative period of the National Banking System. During the first 20 years of its existence, the system had been subject to attacks first from one side, then from another; one Secretary of the Treasury would be its warm defender; another would view it with apathy. Not infrequently, the issues which brought various phases of the National Banking System up for Congressional action, were not issues of a fundamental banking nature, but were of a strictly political character, and were dealt with accordingly.

But, in the period covered by the first charters of the earliest national banks, the system established itself on a thoroughly firm basis. It proved its great usefulness to the financial organization of the country, and laid a firm foundation for the growth and strength which came to the national banks with each succeeding year. Since the passage of the recharter act in 1882, no effort has been made from any responsible source either to legislate the national banks out of existence, or to restrict the scope of their banking practices. In fact, the more recent tendency of Federal legislation has been to further broaden the national banks' field of operation.

II

NATURAL DEVELOPMENT

THE period 1883-1899 was one of natural development in the history of the National Banking System in that those national banks already in existence were developing normally along the lines of scientific and modern banking principles, and that the new sections of the country were from year to year getting much needed banking facilities through the organization of additional national banks.

National banks during the period were neither disturbed nor

aided to any considerable extent by Federal legislation. The currency phase of the nation's financial problem occupied the major share of attention. Those who wished the country to go on silver basis were pressing their case with unremitting vigor, and were winning some concessions. The old spectre of the greenbacks was still sharing in the government's consideration of currency matters. Bank circulation was measurably reduced during the period, both in total volume and per dollar of national banking capital. Whereas in 1882 there was $.65 bank circulation for every $1.00 of national bank capital, in 1899 there was $.34 bank circulation for every $1.00 national bank capitalization. The chief causes for this reduction were:

1-Three per cent. bonds constituted a large portion of the nation's debt and were redeemable at the pleasure of the government; they were being rapidly retired and were hence undesirable as a basis for note issue.

2-All other issues of government bonds were selling at high premiums. Four per cents reached 130+. Circulation predicated on bonds at this market value was, of course, altogether unprofitable. 3-The Government was purchasing silver, coining dollars and issuing silver certificates at a rate never lower than 2,000,000 per month and was using every means at its command to force these silver certificates into circulation, in direct competition with bank notes.

But while circulation was declining, relatively, the practice of the bank extending its credit through deposits was rapidly gaining headway. The following brief tabulation shows at a glance the relation of deposits and loans to national bank capital at the beginning and the close of the period. The figures are compiled from the Comptroller's Statements taken as near as possible to the ends of the fiscal years 1882 and 1899.

This was a very remarkable stride toward banking principles as we

At the close of 1899 there were in

see them in operation today.

active operation 3602 national banks in the United States as compared with 2308 at the end of 1882. The average yearly increase for the period was 76.

III

DEVELOPMENT OF SMALLER BANKS

PRIOR to 1900, the minimum national bank capitalization permissible under the law was $50,000. This meant that in many of the less populous and less wealthy communities, where capital normally was badly needed for development of natural resources of the country, establishment of a national bank was often extremely difficult. Congress in March, 1900, amended the National Bank Act to provide for the organization of banks with a minimum of $25,000 capital. The same act also provided for the refunding of the national debt, and for issuing 2 per cent. consols, eligible as a basis of national bank circulation.

The effect of this new legislation on the organization of national banks was almost instantaneous. During the five years preceding 1900, the average net yearly decrease in the total number of national banks in active operation had been 28. For the five years 1900-1904 inclusive, the average net yearly increase in the number of national banks of the country was 390. The few years immediately succeeding the passage of the Act of 1900 may be described as the "Golden Age" of national bank organization. No other period in the history of national banking approaches it for the prolific organization of national banking institutions. The net average yearly increase for the period 1900-1913 was 294.

The following tabulation, made on the same basis as that indicated in the preceding section, shows how, during this period, national banks increased still further their ability to extend their credit.

Due to the new provisions that had been made for national bank currency by the Act of 1900, the volume of bank notes increased