After the Civil War, the United States entered a period of reconstruction and worked on re-unifying the country. Many areas of the country saw change in the post-war years, including the banking system. State banks issued currency but during the Civil War, a need for a national currency was recognized. The division of the Union made funding the war a priority and caused the government to enact measures to secure financing. The changes made during the war had lasting impact on the postbellum economy. The establishment of a National Bank versus State Banks eventually led to change in the United States including easier access to money for the people and economic growth in rural and urban areas.
Prior to the war, state banks were the norm, despite the attempts to create not only a national bank, but a national currency.[1] The need for a national currency and funding for the war necessitated the National Bank Act of 1863. This measure, among others, were passed during Lincoln’s presidency. Lincoln addressed the nation in 1864 saying:
The national banking system is proving to be acceptable to capitalists and to 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 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 issue not authorized by Congress and no bank-note circulation not secured by the Government. That the Government and the people will derive great benefit from this change in the banking systems of the country can hardly be questioned. The national system will create a reliable and permanent influence in support of the national credit and protect the people against losses in the use of paper money.[2]
Despite Lincoln’s optimism, many state banks had not converted to national banks which led to the imposition of a 10% tax[3] on state issued currency in 1865. The intent of this tax was to stop state currency in part because it was preferred over the national currency. It was also a measure to reduce inflation as G. Selgin notes, “Salmon Chase was fully aware of the likely inflationary impact of greenbacks and national banking and was determined to soften this impact by eliminating the state banking industry.”[4] Effectively, they legislated out state banks in order to usher in the national banks. This proved to be beneficial over time, but was not widely popular in the beginning. Indeed, in the North the banks were successful and grew in post-war America, yet the south suffered in the reconstruction years partly because of the tax. Selgin attributes this to the fact that southern states were unable to produce the capital needed to open banks, the banks could not use land as collateral for loans, and because the money needed to be fully backed by federal bonds.[5] However, time indicates that the national banks proved beneficial for the United States.
In the years after the Civil War the United States continued to grow, now as a reunited union. As Scott L. Fulford states in “How Important Are Banks for Development? National Banks in the United States, 1870-1900” this time was one of rapid growth. He actually writes, “From 1870 to 1900, the United States expanded economically and geographically, settling its vast interior.”[6] His economic study of the banks in this time period shows growth in areas that were able to support a bank. The datasets that he presents do not measure the southern states however as many of them struggled to regain financial prosperity until 1870 when legislation changed that offered easier access to funds. Despite this, Fulford proposes that the banks contributed to the growth and expansion of the United States. He concludes that “The tightly constrained national banks were an important source of growth: for the marginal county close to the line between getting a bank and not, the presence of a national bank increased production per capita by 10%.”[7] In essence, the people were more able to have money when they needed it. The switch from State Banks and state issued currency to a national one proved to be a move that benefitted the people with a reliable currency that was federally backed.
As with most change, the move from state to national banking was hotly contested. Numerous articles in Harpers Weekly railed against corrupt bankers[8] and later demanded that the country choose between the fork in the road.[9] The people in post-war America adapted to the change and were able to prosper following a period of unrest, division, and chaos. The access to stable, guaranteed money allowed for economic growth and prosperity even for the south, though it took longer for them to recover.
Bibliography
“Abraham Lincoln: Annual Message (1864).” In Daily Life through History, ABC-CLIO, 2020. Accessed November 5, 2020. https://dailylife2-abc-clio-com.ezproxy.liberty.edu/Search/Display/1499446.
Fulford, Scott L. “How Important Are Banks for Development? National Banks in the United States, 1870-1900.” Review of Economics and Statistics 97, no. 5 (December 2015): 921–38. doi:http://www.mitpressjournals.org/loi/rest.
Bonner, John, et al. Harper’s Weekly. New York: Harper’s Magazine Co., etc., 1867.
Selgin, G. (2000), “The Suppression of State Banknotes: A Reconsideration.” Economic Inquiry, 38 (2000): 600-615. doi:10.1111/j.1465-7295.2000.tb00039.x
[1] It is understood that paper currency existed, but no single paper currency was federally backed until the National Banking Act of 1863, which sought to create a single paper currency rather than multiple paper currencies issued by individual states with exchange rates similar to foreign currency exchange today. https://www.senate.gov/artandhistory/history/common/civil_war/NationalBankActs.htm
[2] “Abraham Lincoln: Annual Message (1864).” In Daily Life through History, ABC-CLIO, 2020. Accessed November 5, 2020. https://dailylife2-abc-clio-com.ezproxy.liberty.edu/Search/Display/1499446.
[3] The 10% tax is discussed further in this paper https://onlinelibrary-wiley-com.ezproxy.liberty.edu/doi/epdf/10.1111/j.1465-7295.2000.tb00039.x
[4] G. Selgin. “The Suppression of State Banknotes: A Reconsideration.” (Economic Inquiry, 38, 2000), 600-615.
[5] Ibid., 611.
[6] Scott L. Fulford. “How Important Are Banks for Development? National Banks in the United States, 1870-1900.” (Review of Economics and Statistics 97, no. 5, December 2015), 921.
[7] Ibid., 936.
[8] John Bonner, et al. Harper’s Weekly. (New York: Harper’s Magazine Co.,1867), 403. https://app-harpweek-com.ezproxy.liberty.edu/GetPDF.asp?titleID=HW&volumeID=1867&issueID=0629&fileName=0403d.pdf
[9] Bonner, et. al, Harper’s Weekly, 66-67. https://app-harpweek-com.ezproxy.liberty.edu/GetPDF.asp?titleID=HW&volumeID=1870&issueID=0129&fileName=0066d.pdf
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