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How Lincoln Reduced Financial Risk with the Creation of a National Banking System

author Michael Berman
3 min read
Feb 11, 2020

President Abraham Lincoln was known as The Great Emancipator and Honest Abe, but he was also a major proponent of a national banking system.

As we celebrate Lincoln’s birthday on February 12 and get ready to enjoy the long Presidents Day weekend, let’s take a minute to reflect on the amazing accomplishment that is our national banking system and the ways it reduced financial risk.

Fighting for A National Bank & Currency

The U.S. dollar is a symbol of financial strength around the world, but for nearly the first 100 years of our country’s founding there was no dollar.

When Lincoln took office in 1861, the U.S. had no central bank. While a national bank was created by George Washington and Alexander Hamilton in 1791 and was succeeded by the second bank in 1816, Andrew Jackson was not a fan. He pulled all the funds out of the bank in 1833, and the bank’s charter was not renewed. It was an act that defied Congress and got Jackson censured for abuse of power in 1834.

Without a national currency Americans relied on gold and silver coins as well as paper bills issued by state banks called “bank notes.”  Some of these banks were state chartered. Some were just founded by citizens to meet the needs of an expanding economy.

As Barron’s describes it, “Many of them issued bank notes, and these were only as good as the ability of the issuing bank to redeem them for specie (gold and silver). By the 1850s there were thousands of issues of bank notes circulating. Some were sound, some were from defunct banks, and not a few were frauds and counterfeits. Publishers began printing ‘bank-note detectors,’ which illustrated the various issues and assessed the worthiness of each. Even bank notes from well-established banks tended to circulate at a discount proportional to the distance at which the transaction took place from the bank's headquarters.”

This system was chaotic and full of risk. Conducting business was challenging, especially when traveling or crossing state lines, because the value and legitimacy of the currency wasn’t easy to verify. As a result, consumers tended to lose funds every time they exchanged bank notes. Inconsistent regulation meant that some banks were free to issue currency even when they didn’t have enough gold or silver in reserves to back them, creating bank runs and failures. It also hindered the formation of a national identity, historians suggest, because it helped Americans identify more with their states than their nation.

Lincoln Loves Banking

Abraham Lincoln was not a fan of Jackson’s actions and believed in a strong banking system, as the OCC notes on its webpage, In His Own Words: Abraham Lincoln on Banking.

Lincoln’s first published speech, given in the Illinois House of Representatives, defended both Illinois’ state bank and the second Bank of the United States as valuable institutions. Later speeches advocating for a national bank emphasized how much more valuable Americans savings were when they were reinvested to promote economic growth through bank lending and the duty of the government to create economic stability with a unified currency.

Lincoln accomplished his goal during the Civil War with the National Currency Act of 1863. This gave us both a national bank as well as the Office of the Comptroller of the Currency to oversee it. The bank had an immediate practical purpose by requiring the new national banks to back their bank notes with U.S. government bonds that would raise funds for the war effort. This currency, backed by the U.S. government’s bonds, were known as “greenbacks”.

Looking at Lincoln’s speeches of the time, the OCC notes Lincoln had a vision for currency that went long past the war:

"The national banking system is proving to be acceptable to capitalists and to the people ... 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."

The system has evolved since Lincoln’s day with the creation of Federal Reserve system, the introduction of and later shift away from the Gold Standard, and added security of federally insured deposits. But in many ways, it began with Lincoln.

To learn more about this fascinating American system and its history, check out the OCC’s page dedicated to the history of the OCC and banking in the U.S. Have a great Presidents Day!

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