Michael P. Malloy In the 1830s the federal charter of the second Bank of the United States expired. Until the early 1860s, the federal government had no direct involvement in regulating U.S. banking. The national crisis of the Civil War pushed the federal government to reenter bank regulation. The war required vast amounts of money and credit, and difficulties in financing the war were draining the nation's gold supply. As a result, the gold standard, which gave value to the national currency, was eventually abandoned. Borrowing from banks created under state laws was one obvious source of needed credit. By 1861 there were approximately 1,600 state-chartered banks, but no central bank system (like the Federal Reserve) to monitor credit, and no banks directly subject to federal supervision. To help finance the war, in 1861 Treasury Secretary Salmon P. Chase recommended the establishment of a national banking system. National banks could be chartered by the federal government and authorized to issue bank notes secured by U.S. government bonds. Chase's plan would have ensured a market for federal debt, since the new national banks would be required to buy the bonds. However, the government first tried to finance the war directly by selling U.S. notes to the public, without creating national banks. By early 1862, Congress had authorized the issuance of $150 million in U.S. notes, the first of several issuances, but these sales did not satisfy wartime credit needs. When Chase's next legislative effort, the 1863 National Currency Act, did not solve the problem, it was amended and reenacted as the National Bank Act (NBA) (13 Stat. 100) in 1864, creating a national banking system on the model originally proposed by Chase. The national bank system, which outlasted the Civil War, became a central feature of the modern U.S. bank regulatory system. It established the federal-state "dual banking system" that has been a characteristic of U.S. commercial banking ever since.
The NBA created the position of the Comptroller of the Currency as an office within the Treasury Department. The comptroller was authorized to issue national bank charters in legislation that has remained unchanged since 1864:
Associations for carrying on the business of banking . may be formed by any number of natural persons, not less in any case than five. They shall enter into articles of association, which shall specify in general terms the object for which the association is formed. These articles shall be signed by the persons uniting to form the association, and a copy of them shall be forwarded to the Comptroller of the Currency, to be filed and preserved in his office.
This language guided the creation of such powerful nationwide banks as Citibank and the Bank of America, as well as thousands of local banks. The system was originally intended to create a mandatory market for U.S. bonds, since each newly chartered national bank was required to deliver to the comptroller government bonds in an amount equal to $30,000 or one-third of its capital, whichever was greater. However, long after this requirement was revoked in 1913, the role of federally chartered national banks administered by the comptroller has continued to be significant in the national economy.
As part of Chase's plan for financing the war, the statutes passed during the early 1860s imposed taxes on the capital and bank notes of commercial banks, both state and national. With the tax on state-chartered banks, Chase was attempting to encourage them to convert to national charters. This plan was challenged in Veazie Bank v. Fenno (1869), in which Chase, by then Chief Justice of the Supreme Court, wrote the majority opinion. The Court upheld the constitutionality of the tax, but it did not directly address the constitutionality of the NBA to grant banking charters. That issue was finally addressed in passing in Farmers' & Mechanics' National Bank v. Dearing (1875). The Supreme Court stated that the constitutionality of the NBA rested "on the same principle as the act creating the second bank of the United States." That principle was upheld under the necessary and proper clause of Article I, section 8 of the Constitution in McCulloch v. Maryland (1819) and Osborn v. Bank of the United States (1824). The validity of the NBA has been unchallenged since then.
Having accepted the constitutionality of the NBA, the Court went on to express the view that the national banks created under the act's authority were to be somewhat favored, and this has largely been their experience ever since. The national banking system now enjoys, in addition to basic banking powers like lending and accepting deposits, flexible power to engage in a broad range of other activities, including data processing services, lease financing of automobiles, municipal bond insurance, securities activities, and selling variable annuities, among many others. The Office of the Comptroller, the oldest existing federal bank regulator, is still a bureau of the Department of the Treasury. The comptroller is responsible for administration of virtually all federal laws applicable to national banks, including all banks operating in the District of Columbia. The approval of the comptroller is required for practically any significant action taken by a national bank, including among other things chartering, establishment of branches, and changes in corporate control or structure. In addition, the comptroller has supervisory authority over the day-to-day activities of national banks, including loan and investment policies, trust activities, issuance of securities, and the like. These supervisory responsibilities are carried out, for the most part, through periodic on-site examinations of the banks by national bank examiners. In addition, the Gramm-Leach-Bliley Act of 1999 requires the comptroller to supervise the "financial services activities" of subsidiaries of national banks, the privacy of nonpublic personal information of customers of national banks, and consumer protection with respect to insurance sales by national banks, among other things. Courts have generally treated the comptroller's decisions under the NBA and other statutes as authoritative. In Camp v. Pitts (1973), the Supreme Court held that the comptroller's actions were subject to a very limited standard of judicial review. This means that a party seeking relief in court faces great difficulty, as that party must meet very specific requirements to obtain a favorable ruling. This limited standard, now the basic approach used in judicial review of all federal bank regulators, has no doubt given the comptroller more flexible power to encourage the growth of the national banking system, without much judicial intervention. See also: Bank of the United States; Federal Reserve Act.
Krooss, H. E., ed. Documentary History of Banking and Currency in the United States. New York: Chelsea House Publishers, 1969. Malloy, Michael P., ed. Banking and Financial Services Law: Cases, Materials, and Problems. Durham, NC: Carolina Academic Press, 1999; suppl., 2002 – 2003. Malloy, Michael P. Banking Law and Regulation. 3 vols. New York: Aspen Law and Business, 1994. Malloy, Michael P. Principals of Bank Regulation. (Concise HornBook Series) 2d ed. St. Paul, MN: West Group, 2003. McCoy, Patricia A., ed. Financial Modernization After Gramm-Leach-Bliley. Newark, NJ: Lexis-Nexis, 2002.
During the nineteenth century, U.S. currency was backed by both gold and silver — in other words, a dollar in silver, nickel, or copper coins or in paper money was guaranteed by the government to be convertible into a dollar's worth of either metal. As a result of this "bimetallic standard," the valuation of U.S. currency fluctuated wildly. Because the value of the two metals on the open market was constantly changing, speculators were able to turn a profit by selling their coins for more than their face value when the value of the metal exceeded its denomination. When the government flooded the market with silver coins, the price of silver dropped, citizens traded in their silver coins for gold, and federal gold reserves were exhausted. At the same time, prices of wholesale and retail goods saw a steady decline from the end of the Civil War through the 1890s, sending farmers and other providers of goods, whose fixed debts did not decline, into crisis. This chronic monetary instability was a large factor in the 1896 election of President William McKinley, who ran on a platform that included a change to a gold standard. In 1900 McKinley signed the Gold Standard Act, making gold reserves the basis of the monetary system. The gold standard remained in effect until 1933, when the economic pressures of the Great Depression — including gold-hoarding by a panicked citizenry — led the United States to abandon it, and legislation was passed that allowed the Federal Reserve to expand the supply of paper money irrespective of gold reserves.