Updated: Jun 3, 2018
Prior to 1861 the federal government allowed the states and territories of the U.S. individual regulatory authority over their financial and banking systems. Thus, there was a lack of standardization and widely divergent banking laws & regulations, many of which were often vague or lax. The result was a proliferation of paper money issues, many beautifully designed, but with no guarantee of worth or ability to be redeemed. Paper money issued from 1792 to 1866 is commonly referred to as "Obsolete Currency". These paper money issues were sponsored by private banks, organizations, businesses and individuals in most areas of what was then the United States or its territories. Due to the large number of paper money issuers the problem of which notes were legitimately issued and which were fraudulently issued became acute. Several organizations began issuing weekly registers on relative validity of a long list of circulating bank issues from all over the country, including their percentage of redemption discount, if any. The Civil War changed everything. From the outset of war in 1861 it was apparent the Union would need to find some way of financing its military expenditures. Privately issued paper money continued to be used throughout the Civil War in both the North and South. Eventually the Union government imposed a 10% surtax on all privately issued paper money effectively removing them from circulation by 1866.
The National Currency Act of February 25, 1863 (NCA) provided for the organization of national banks with an initial capital of $50,000 or more and granted them a corporate life of 20 years or less, beginning with the date of the Act. It also established The National Currency Bureau and the position of Comptroller of the Currency. The Bureau was responsible for the regulation of national banks and the issue of national banknotes. National banks were required to purchase U.S. Bonds and 'deposit' them with the U.S. Treasury. By doing this, a national bank could circulate national banknotes in amounts up to 90% of the value of those bonds. NCA had two major purposed goals (1) create a stable currency that would circulate at par (face value) throughout the country and (2) provide for the secure backing of this currency with U.S. bonds purchased by the national banks. Thus, the Union could concurrently finance the Civil War through the bank purchases of bonds and stabilize the chaos within the country's money supply.