How did the US Monetary System work under the National Banking System (1863-1913) ?

In the midst of the US Civil War, in 1863, the Northern states of the federal Union established the National Banking System. It contributed to financing the war effort and to the circulation of banknotes. Following the civil war, this system was retained and extended across the reunified country, surviving 50 years, coming to an end with the establishment of the Federal Reserve System in 1913. The aim of this article is to analyze the features of this system; its weaknesses, brought into relief during the debates surrounding the US 1907 economic panic, and its strengths, such as the role it gave the federal government of guaranteeing the liquidity of national banknotes. We analyze in particular the types of banks and banknotes that existed at the time. We explain in detail what a “bond-backed currency system” means, as well as the meaning of the alternative proposals for an “asset-backed currency system”. By pointing out the impact of seasonal variations in credit demand made on the US Money Market, and by presenting some accounting illustrations, we bring to light how the system worked and how it regularly incurred liquidity crises.