The American Civil War [1861-1865] is not often thought of as a war between the state's banks, but financial reform was a winning tactic employed by President Abraham Lincoln.
When the eleven states that would come to form the Confederate States of America seceded from the Union in the winter of 1861, Lincoln took advantage of the vacancies they left in Congress by passing legislation that had been opposed by Southern delegates. This included both emancipation and national banking.
The battle for state banks has always been an important part of the larger battle for state's rights, going back to the nation’s first Secretary of State Thomas Jefferson. Having witnessed the French Revolution, the author of the Declaration of Independence, a Southerner and a slaveholder, was wary of centralized authority in general. He wasn’t big fan of banks either. Referring to banking as an “infinity of felinous larcinies”, Jefferson argued against national banking from the start, fearing it would centralize control and undermine state banks.
Alexander Hamilton, a New Yorker and abolitionist, was an early advocate for national banking. A leading author of the Federalist Papers, he argued that while the Constitution did not explicitly permit the government to create a corporation, by allowing it to administer laws that were "necessary and proper" to the functioning of the nation, Congressional authority was implied.
“For it is unquestionably incident to sovereign power to erect corporations,” Hamilton told the nation’s first President. Without such authority, “the United States would furnish the singular spectacle of a political society without sovereignty, or of a people governed, without government.”
President Washington eventually sided with Hamilton, and the First Bank of the United States was formed in Philadelphia in February 1791, a charter that lasted until 1811.
Hamilton's victory did not silence opponents of national banking. President Andrew Jackson (another slave-holding Southerner) vetoed the charter of the Second Bank of the United States in 1831, articulating a Jeffersonian opposition:
The powers and privileges possessed by the existing bank are unauthorized by the Constitution, subversive of the rights of the States, and dangerous to the liberties of the people.
Thus from the American Revolution to the Civil War, Congress (dominated by Southern Congressmen thanks to the 3/5th compromise) ensured that all banks were chartered by the state, and that the only paper currency available was through privately-owned state banks. These "banknotes" were redeemable for specie as long as the bank was a going concern. If the bank failed, the banknotes were worthless.
Allegiance to a fractured financial system would contribute to the downfall of the Confederacy.
After the first shots were fired on Fort Sumter in January 1861, Southern soldiers were ready for battle, but the Southern economy was not. The region was home to just thirteen percent of the nation’s banks. With considerable heterogeneity in banking structures and regulation, and no central bank to act as lender of last resort, the South lacked liquidity and was prone to economic shocks.
Lincoln understood that in order to keep the nation together, and prevent future rebellions, the United States would need its own currency. In 1863, just months after issuing the Emancipation Proclamation, the President signed into law the first National Bank Act, followed by a second, refined version in 1864. "It seems quite clear that the Treasury can not be satisfactorily conducted unless the Government can exercise a restraining power over the bank-note circulation of the country,” he told Congress.
These Bank acts created the first Government-sponsored paper currency as well as national banks to issue them. The national notes were called "Greenbacks" as unlike state banknotes they were printed on both sides, the reverse side in green ink. Additionally, they were given full legal tender, meaning they were required to be redeemed at full face value despite the fact that they were not backed by gold or silver.
The Acts also gave the federal government more control over the banking system, whereas it had historically asserted no control over state-chartered banks. Regulatory requirements for National banks were more stringent than state banks, including higher capital and reserve requirements. They also included rules designed to improve liquidity and safety like restricting real estate loans to any single person in an amount exceeding ten percent of the bank's capital.
To ensure compliance with the new rules, Lincoln created a new government department to regulate the institutions, the Office of Comptroller of the Currency. The OCC was given great powers, including the ability inspect the books of the national banks. In his 1864 State of the Union, the President expressed confidence in the progress of his national banks in abolishing state banks.
The national banking system is proving to be acceptable to capitalists and the people. On the 25th day of November , 584 national banks had been organized, a considerable number of which were conversions from state banks. Changes from the State systems to the National system are rapidly taking place, and it is hoped that very soon there will be in the United States no banks of issued not authorized by Congress and no bank-note circulation not secured by the Government.
By 1870, the United States had fewer than 250 state-chartered financial institutions, down from 1,650 a decade earlier. Like Hamilton's victory for national banking, however, Lincoln's would not last. The continued political will for state-run institutions, coupled with the lighter regulatory scrutiny of state-charted banks kept the banks alive after the war ended. With the invention of demand deposits in the late 19th century, state banks found a new source of financing, and charters surged.
President Lincoln succeeded in winning the war, eliminating slavery and unifying our nation. But in his efforts to abolish state banks, he created a divided banking system, and a lasting legacy of the Civil War. The United States continues to be the only economy that requires its banks to have either a State or National charter.
And the controversy over state banking continues. In 2004, John D. Hawke, Jr., the Comptroller of the Currency, effectively barred state attorneys general from national bank oversight and regulatory roles. Many blame the resulting lax oversight of State banks for the late-2000s recession, the bailout of the U.S. financial system and the subprime mortgage crisis. With lighter regulatory scrutiny, and the persistent desire to keep money local, state banks currently outnumber federal 5,035 to 1,554.
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