Introduction to Finance

National Banking Act of 1864 
In 1864, the 
National Banking Act
made it possible 
for banks to receive federal charters. This legislation provided the basis for the present national 
banking laws. As in the cases of the First and Second Banks of the United States, the reasons 
for federal interest in the banking system were to provide for a sound banking system and to 
curb the excesses of the state banks. An important additional purpose of the National Banking 
Act was to provide fi nancing for the Civil War. Secretary of the Treasury Salmon P. Chase and 
others believed that government bonds could be sold to the nationally chartered banks, which 
could, in turn, issue their own notes based in part on the government bonds they had purchased.
Through the National Banking Act, various steps were taken to promote safe banking 
practices. Among other things, minimum capital requirements were established for banks with 
federal charters, loans were regulated with respect to safety and liquidity, a system of super-
vision and examination was instituted, and minimum reserve requirements against notes and 
deposits were established. In general, while these reform measures were constructive, they 
also were viewed by some as being too restrictive. For example, loans against real estate were 
not allowed. Much of the criticism of the national banking system, in fact, was caused by the 
infl exibility of its rules.
Federal Reserve Act of 1913 
The 
Federal Reserve Act of 1913
established a central 
banking system in the United States. The Federal Reserve System was designed to eliminate 
many of the weaknesses that had persisted under the National Banking Act and to increase 
the eff ectiveness of commercial banking in general. It included not only strong central dom-
ination of banking practices but also many services for commercial banks. The structure and 
functions of the Federal Reserve System are described in Chapter 4. Implementation and 
management of monetary policy are discussed in Chapter 5.