and since they had a large net liability towards the banks in the North the latter lost heavily, but they managed to keep above water by contracting their lending operations and were, in fact, in a very strong position regarding specie reserves. Pressure soon came however, from the side of Governmental financial needs. Secretary of the Treasury Chase experienced excessive difficulty in borrowing from the public, partly as a result of the very bad state of the finances in the preceding administration. Chase called a conference of the New York, Boston and Philadelphia banks, and with him they drew up a plan for
assisting the Government by advancing $50,000,000. Chase insisted on the loan being paid in specie, and at the same time he started the issue of United States notes payable on demand which further weakened the banks, since if they accepted the Government notes they were obliged to redeem them in coin. The result was that at the turn of the year (1861-62) the banks of New York, Boston and Philadelphia suspended payments. The Treasury followed by ceasing likewise to redeem the Treasury notes in coin. This was followed up by a bill for issuing legal tender irredeemable paper to the extent of $150,000,000, a measure which was strongly opposed by the banks, among others. One of the chief arguments for making the Government notes legal tender was to force the banks to accept them. Two further issues, each of $150,000,000, were made within the twelve months following. After that the issue of greenbacks was stopped, and Chase had recourse to a new scheme for obtaining funds by the sale of Government securities, namely, the National Bank system. This was an extension to a National or Federal, instead of a State, basis of the bond deposit system. By an Act of 1864 banks of not less than five associates, and having a capital of not less than $50,000, were allowed to form freely if they secured their notes by the deposit with the United States Treasurer of registered bonds of the United States. The amount of notes must not be more than 90 percent of the market value of the bonds lodged and not more than 100 percent of their par value. In the event of a bank defaulting on its notes, the United States Treasury would sell the bonds and pay the notes itself. The Treasury also had a prior lien on the general assets of the failed bank for any claims that could not be met out of the proceeds of the bond sales, and, further, the shareholders were subject
to double liability. The banks must also keep a certain reserve proportion of their notes plus deposits in the form of legal tender currency, which in the years of their foundation meant of course greenbacks as well as specie. The primary motive for setting up this system was, of course, the creation of a large market for Government bonds, but it was contemplated from the beginning that the new National banks would in time replace the old State banks and much emphasis was placed on the benefits of a uniform currency. Provisions were made in the original Act for State banks to come into the scheme by conforming to the conditions of the Act, and, as they failed to come in voluntarily as fast as the Government had hoped, an Act was passed in 1865 to penalise those not entering the system by the imposition of a tax of 10 percent on their note issues. This was practically the death-blow to a great number of the State banks so far as they were dependent on note issue.
In the first years the notes of the National banks were not far short of being legal tender currency, since, although their acceptance between individuals was not compulsory, the Government was to receive them at par in all revenue collections except customs duties and to pay them at par for salaries, wages and debts, except for interest on the public debt and the redemption of greenbacks. Moreover, since lawful money in which notes were to be redeemable meant greenbacks as well as specie, there was an exceptionally large volume of reserve material available against which the National banks could expand their note issues. In sp