The National Bank Act of 1863 was designed to create a national banking system, float federal war loans, and establish a national currency. Congress passed the act to help resolve the financial crisis that emerged during the early days of the American Civil War (1861–65); the fight with the South was expensive, and no effective tax program had been drawn up to finance it. In December 1861 banks suspended specie payments (payments in gold or silver coins for paper currency)—people could not convert bank notes into coins. The government responded by passing the Legal Tender Act (1862), issuing $150 million in national notes called greenbacks. But bank notes (paper bills issued by state banks) accounted for most of the currency in circulation.

To bring financial stability to the nation and fund the war effort, the National Bank Act of 1863 was introduced in the Senate in January of that year. Secretary of the Treasury Salmon Chase (1808–1873), aided by Senator John Sherman (1823–1900) of Ohio, promoted it to the legislators. The bill was approved in the Senate by a close vote of 23 to 21. The House passed the legislation in February. National banks organized under the act were required to purchase government bonds as a condition of start-up. As soon as those bonds were deposited with the federal government, the bank could issue its own notes up to 90 percent of the market value of the bonds on deposit.

The National Bank Act improved but did not solve the nation’s financial problems: Some of the 1,500 state banks, which had all been issuing bank notes, were converted to national banks by additional legislation (passed June 1864 to amend the original bank act). Other state banks were driven out of business or ceased to issue notes because of the 1865 passage of a 10 percent federal tax on notes they issued, making it unprofitable for them to print their own money. The legislation created $300 million in national currency—in the form of notes issued by the national banks. But since most of this money was distributed in the East, the money supply in other parts of the country remained precarious. The West demanded more money—an issue that would dominate American politics in the years after the American Civil War (1861–65). Nevertheless, the nation’s banking system stayed largely the same—despite the Panic of 1873—until passage of the Federal Reserve Act in 1913.