The Dual Banking System of the United States of America

Master's Thesis, 2015

129 Pages








Part 1: Foundation of the Dual Banking System
Chapter 1: Origins of the Dual Banking System
Section 1: National Banking Experience
Paragraph 1: The First National Bank
Paragraph 2: The Second National Bank
Section2: Effects of Federal Reserve Act on Banking
Paragraph 1: Competitiveness Status of National and State Banks prior to 1913
Paragraph 2: Spirit of the Dual banking System since the Passage of the Federal Reserve Act
Chapter 2: Banking Industry between Stakeholders and Activities
Section 1: Federal Intervenient
Paragraph 1: The Office of the Comptroller of the Currency
Paragraph 2: Federal Reserve System
Section 2: American Banks Activities: National and International
Paragraph 1: American Banks Activities
Paragraph 2: International Activities of US Banks

Part 2: The Soul of Duality
Chapter 1: Accompanying Banks within Duality
Section 1: Banks Chartering
Paragraph 1: National Chartering
Paragraph 2: State Chartering Process
Section 2: Banks Regulation: Supervising and Control
Paragraph 1: National Banks Supervision
Paragraph 2: States Banks Supervision
Chapter 2: Duality between Internal Synergies and External Joints
Section 1: Duality Issues
Paragraph 1: Covered Benefits of the Dual Banking System
Paragraph 2: Purported Benefits of the Dual Banking System
Section2: Preventive Measures to the Success of US Banking industry
Paragraph1: Anti-Money Laundering: Customer Due Diligence Program
Paragraph 2: Banks Governance






I cannot express enough thanks to my professor and mentor Dr. Chaker Mzoughi for his continued guidance, encouragement and patience during the previous months.

My completion of this thesis could not have been accomplished without the never-ending love and support of my caring loving parents Mohamed Ali and Latifa , to whom I owe everything I have achieved .

To my older brother Mehdi - I know; you are not that old J -, thank you for all the books you have been sending me. I could not have come so far without your support and encouragement.

To my other two brothers Ayoub and Bayerem, thank you for being there for me when the times got rough.

My deepest gratitude to my friends Slim, Mohamed, Ghazi, Imen, Ahmed, Bilel and Fatma. It is a great comfort and joy to have such great friends on whom I can always rely.

I also offer my sincere thanks and appreciation to Dr. Majdi Hassen, the Executive Counselor of the Arab Institute of Business Leaders, for the guidance and the assistance he has provided me whenever I needed. His mentorship has been very valuable and much appreciated


USA: United States of America

OCC: Office of the Comptroller of the Currency CD: Certificate of Deposit

ABA: American Bankers Association FED: Federal Reserve

NBA: National Banking Act

IBA: International Banking Act

FSOC: Federal Stability Oversight Committee OFS: Office of Financial Stability

BHC: Bank Holding Company

PCA: Preliminary Conditional Approval CEO: Chief Executive Officer

TFC: Texas Code of Finance

NMC: National Monetary Commission BSA: Bank Secrecy Act

MLSA: Money Laundering Suppression Act SAR: Suspicious Activity Report

AMLL: Anti Money Laundering Law CDD: Customer Due Diligence CIP: Customer Identification Program EDD: Enhanced Due Diligence


Part 1: foundation of the dual banking system Chapter 1: Origins of dual banking system

Section 1: National Banking Experiences

Section 2: Effects of Federal Reserve act on banking:

Chapter 2: dual banking specificities

Section 1: banking regulators

Section 2: banking activities within the United States

Part 2: The soul of duality

Chapter 1: Accompanying banks within duality

Section 1: Banks chartering

Section 2: supervision and control

Chapter 2: duality between internal synergies and external joints:

Section 1: duality issues:

Section 2: Preventive Measures to the Success of US banking:

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

Henry Ford


The bank notion had existed for the first time in Italy1, hundreds of years ago. Compared to the known notion of bank in its origins, it has nothing to do with nowadays business of banking.

At that time, Italy was engaged in war, and felt the need to fund it, thus they founded the “Chamber of loansˮ in order to oblige citizens to grant loans that were known as “Compara, Mintuo, ect...ˮ to the government with sums of interest of 5 % annually2, in course of business. The chamber of loans had the occasion to buy and sell bills of exchange3.

Through history the chamber had the investment spirit especially with the huge amounts of money that were deposed, thus it started buying and selling the exchanges.

In process of time, the chamber started exercising more banking activities similar to those exercised currently. This fact was implemented in a high manner especially when the Italians “Venetiansˮ4 became used to putting money in the chamber of loans in order to save them in a secure way and having gains on them.

Merchants played a big role at this stage in raising the chamber funds, because of the daily monetary transactions. This latter activity or service provided by the chamber is similar to one of the modern banking activities, which is “Deposit “.

Another service that was offered by the chamber and similar to the modern services is the fact of providing the clients with the possibility of making money around the country from a city to another especially coins due to weight.

The chamber of loans offered the transactions of money from the account of the payer to the account of the receiver5. The “Circulationˮ is the common concept of this latter service nowadays.

Starting from that date, the banking industry had spread and developed all over the world starting from Genoa passing by Amsterdam, which inspired the foundation of the bank of Amsterdam from the Italian model.

However, the specificity of this bank was that it did not grant any loans to people compared to modern banking but it issued Bank Money “The original subscribers to the bank paid into its vaults certain sums in the current coin, for which they received a credit on its books equivalent to the intrinsic value of the depositˮ6. Which can be used in order to make any high payments.

England also had its specific role in building the current image of banking around the world, because it gave the modern image of banking. In 1694, the Bank of England was chartered and had a capital of 1.200.000 Sterling7, that is composed not of money but in government stocks, that are delivered to private people who contributed in the capital of the bank. 8

In a very diverse way depending on each country needs and ideologies, history led to the foundation of pillars of banking systems around the world each has its long history, advantages and disadvantages.

A glance over these banking systems, from a private law perspective, would definitely lead lawyers to deal with a strange system that existed for decades which is the dual banking system. This system differs from a country to another depending on facts and basis of duality. For example, within the Indonesian system, duality is essentially based on the co-existence of conventional banks as universally adopted and AL SHARIA9 banks known also as Islamic banks. The same case is applied in Malaysia too. Whereas in the Unites States of America this duality is based on the coexistence of federal and state banks10.

In order to get a better understanding of the meaning of dual banking system it is worthy to first explain the meaning of each word and then define the whole notion as a totality. On the one hand, dual is defined in the Oxford Dictionary as “Consisting of two parts, elements, or aspectsˮ11. This means that there are two basic notions, which go in a parallel way.

Besides, banking means in its large definition “In general terms, the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profitˮ12, and here banking seems to be that activity related to savings and loaning money with keeping a margin of profit to both sides. This fact is true but still does not encompass other activities that banks are allowed to do and is actually doing.

working together as parts of a mechanism or an interconnecting network; a complex whole “. 13

These three definitions as a unit constitute the dual banking system as two elements “state and federal banksˮ exercising banking within a specified mechanism.

On the other hand, a glance over terminology would automatically lead to define dual banking system as the regulatory situation in which state banking departments regulate and control state banks, and national banks chartered and regulated by the office of the Comptroller of the Currency known as “OCCˮ. Another definition that gives a precise idea about the dual banking system would be “A banking system in the United States in which banks can be chartered either by the federal government or by a state government.ˮ14

These two definitions are widely adopted while trying to define this term, especially from the private law perspective, but a quick look over these two ways of defining the dual banking system as a strange term to non-common lawyers would be confusing.

As in the first definition, there have been that separation between the two levels federal and state, whereas the second one gives a superficial idea about the whole system and leads to think that state and federal bank could be chartered, regulated, and supervised by the federal or the state department as a matter of choice.

Thus and in order to not misunderstand the meaning, lawyers can adopt this definition “The system of banking that exists in the United States in which state banks and national banks are chartered and supervised at different levels. Under the dual

standards, and supervised by a federal agency. State banks are chartered and regulated under state laws and standards, which includes supervision by a state supervisorˮ15.

This definition could be used, because it gives an overview of the totality of the system and presents a universal16 meaning of the dual banking system. Besides it can be used even if the relevant agencies or departments are changed, that is the reason to adopt neither the first definition nor the second one, although they can be both used in other contexts.

Another definition that was also adopted by scholars is the definition of Professor Kenneth Scott “The very core of the dual banking system is the simultaneous existence of different regulatory options that are not alike in terms of statutory provisions, regulatory implementation and administrative policy.ˮ17.

This means that Federal banks are federally chartered, regulated, operated and supervised while state banks are chartered by state authorities, regulated, operated and controlled by states.

The experience of a national bank similar to the British bank was the first step in the creation of the dual banking system in the United States of America, this latter system was enforced through history.

The government felt the need to a national bank “The First National Bankˮ because of some debt from a Revolutionary War, and due to the diversity of currency forms. Up to the time of the bank's charter, coins and bills were issued by state banks.

Proposed by Alexander Hamilton, the Bank of the First United States was chartered government‘s fiscal agent18.

The creation of a national bank seemed unconstitutional at that time for many members of the congress. They argued that such an institution would be implementing a monetary monopoly within the United States especially that one of the reasons of this creation is to unify the currency, which means that the National Bank will be the only authorized party that can issue money notes.19

As a private institution, shares were sold to private parties, and after few years of the creation of the bank, 70 percent of the shares were owned by foreigners20. This fact was not strange to the American financial system, but politicians had worries about it. Thus, in 1811 after 20 years of the first charter, the re-chartering process failed and did not pass in the congress.

The second relevant fact that enforced the dual banking system was the two national banking acts in 1863 and in 186421, The National Bank Acts were two United States federal laws that established a system of national charters for banks, the United States national banks22.

The first act passed with very narrow votes 23/21 in order to find equivalent funds during the Civil War in order to face the Confederacy, but there are many other reasons for which this act was proposed and passed.

First, creating a national banking system without creating a national bank, the first provision of the Act constituted a legal frame to found national bank. Both state banks and national banks should be granted a charter in order to work, but national banks should get charter from federal government and not state authorities23. This arrangement allowed the federal government to have a regulatory jurisdiction over the created national banks, but no control over state banks.

National banks had higher requirements than state banks especially in capital and reserve. Within the process of improvement of both safety and liquidity, federally chartered national banks were not allowed to make real estate loans and could not grant loans whose amount exceeds 10 % of the bank's total capital.

The National Banking Act 24 created under the Treasury Department “The office of Comptroller of the Currencyˮ widely known as “OCCˮ which controlled the books of the national banks to insure compliance with the regulations, held Treasury securities deposited there by national banks, and, via the Bureau of Engraving, printed all the national banknotes .25

Moreover, the National Banking Acts aimed to unify the national currency. Instead of having a mishmash of currencies that circulate in the state, unifying currencies would facilitate transactions. In addition, banknotes printing was the mission of the Comptroller of the Currency on behalf of the national banks to such as counterfeiting.

It is worthy to mention that the dual banking system was the “unintended byproduct of the national banking act ˮ 26, and drafters of the legislation thought that state banks will convert into national bank - federally chartered- but this was not the case because instead of state banks converted into national banks, newly chartered national banks were founded.

This fact constituted the national side within the dual banking system. Thus, scholars admitted that the system is “a historical accident “.27 Even though the congress went further and passed a law that contained prohibitive taxes on state bank notes in 1865, these banks avoided the law by developing checking accounts and eliminated the need for bank notes.

Thus, from an interest group and historical perspective, the federal government began chartering banks as a willingness to regulate them. If Congress had thought that it could accomplish its objectives by directly regulating state banks, there is every indication that it would have done so.28

Starting from the ratification of the national banking acts, the dual system has been existing until these days. In addition, one may ask: why would we study such a system? The answer would be first that each lawyer, economist and politician due to the importance of this system that can be deduced from the great success, innovative banking services that were created, and the regulations that are arranging it soul should know that dual banking system as a notion.

Second, it is worthy to get knowledge of this system as a successful example within the banking industry that has been proved efficient and stable through history. Such a study would help non-dual banking system nations to enlarge their point of view about banking and get a comparative experience of banking that may be helpful practically and theoretically.

Within the same process, the dual banking system has been existing for a long time and did not fail until nowadays. Such a system would certainly have a lot of specificities and procedures different to the banking sector or system in other countries such as “France, Tunisiaˮ

Thus, one may ask, how does the dual banking system function in the United States of America?

As mentioned above, the dual banking system has been existing for many decades now and has passed by a long path to attend the actual structure that will be discussed in the next parts. Consequently the foundation of the dual banking system (part one) should be discussed, before passing to the soul of the duality (second part), in order to get a clear view of the dual banking system in the United States of America.

Part one: Foundation of The Dual Banking System

The most attractive phase, from a historical perspective while dealing with the dual banking system, is that this system is unintentional, that is to say that the treasury secretary while trying to convince the congress to pass the law, it did not intend the completely dual banking system.

Even though many other factors got together and facilitated the foundation of such a system, that is the reason that leads to go through the history of the banking in the United States in order to a better understand.

Thus, it is worthy to demonstrate the first and second national banks in the USA, which have played a decisive role that influenced the process of the banking industry in the country, without forgetting one of the most important acts that participated in drawing the features of the system.

At this point, it is admissible that many acts were passed during that period, but the Federal Reserve Act of 1913 remains the most significant one that is still having effects on the current image of the banking industry in the US.

Chapter 1: Origins of the Dual Banking System:

In order to get a better understanding of the dual banking system in the United States, it is worthy to first discuss the historical background, but such a long history could independently constitute a subject of many books, and it did.

Thus going through the most important phases would be sufficient to understand the foundation of the dual banking system. Such an experience essentially consisted in the national banking and the Federal Reserve act of 1913.

Section 1: National Banking Experience:

A glance over the history of the United States would provide scholars with a first note, which is that the US had been for a long time a British colony29.

Moreover, it is widely known that colonization does not only consist in the physical existence of a country on another, but it is also the political, social and economic influence of that country over the other.

Paragraph 1: The First National Bank:

Thus few years after the independence, Americans did inspire many systems from the British such as the banking sector and precisely the national banking experience.

In order to find enough reserves to finance the American Revolution, a new national paper money was printed under the proposal of the Continental Congress30. These papers were known as "continentals," intention was to keep these papers redeemable on demand in specie31. However, the Congress broke its promise and issued many notes, which led to an inflation situation. Eventually, because of the inflation32 the expression of “not worth a Continentalˮ was largely used in the United States to say that something is worthless.33

Just after the end of the Independence War, the country had a new name, which is the United States of America by application of the Articles of Confederation34 “Provided the 13 colonies with a system of government from 1777 until replaced by the U.S. Constitution in 1789. Among other things, the Articles gave Congress the authority to make war and conduct foreign affairs.ˮ 35

The young country left the war with heavy debts and a jumbled economic and financial system, due to the weakness of government to regulate this sector and other sectors that need the actual existence of the state. Thus, leaders of the United States at that time had to deal with many challenges such as “re-establishing commerce and industry, repaying war debt, restoring the value of the currency, and lowering inflation.ˮ36

During that period, people used a mishmash of currencies; federal and state paper money, foreign and domestic coins and bank notes starting from 1781. It is worth noting that two basic payment modalities co-existed and differed, which are species37 and bank notes. Specie is currency with intrinsic value such as gold and silver coins because they have values in themselves, whereas bank notes from an intrinsic point of view are not species as they only consist of paper and ink, but still to be considered as a currency.

The independence from England led automatically the congress to think about drafting a constitution, especially that it had many tasks but no legislative source to start with. Thus, after long discussions and drafts, the 1787 Constitution saw the light of day, and contained several clauses regulating government and all sorts of affairs, especially those designated to regulate the economic and financial sectors from a national standing point. It empowered the government to “coin money, regulate the value “ 38

By 1790, New York and Philadelphia, had their own state chartered banks and a new bank was about to be chartered in Baltimore. Later during the same year, the treasury secretary Alexander Hamilton sent congress his annual report39, proposing the foundation of a national bank, based on the British model from where he got inspired and felt that this would be the perfect way to implement a viable economic system.

After many researches about the way to build a nation such as France and Britain. That means a privately owned bank with public functions. In his report, he argued that such a bank could help with providing a unique currency, assist the treasury to administer public finances and constitute an efficient tool to collect taxes and become a tax agent40.

In his same proposal, secretary Alexander Hamilton proposed that the government become a stakeholder by buying 1/5 of the shares and paying using its own bonds, whereas the rest of the shares would be sold to public through a - smart manner-. He proposed that ¼ of shares could be sold by species to enforce and assure an adequate species reserve and ¾ sold using government bonds to pay in order to increase the public demand on these bonds.41

Such a bank would operate under private management and government oversight, but the most important issue that was discussed while creating the bank was basically granting the bank a charter in order to prohibit it from trading in goods, a charter of 20 years was requested.

As a matter of law and based on the British example which required a legislative approval , Hamilton directed his demand to the congress as being the most powerful authority that reflected the American people willingness42, inside the congress long debates and discussions took place and many points of view arose through the congress members.

James Madison, member of congress and key drafter of the congress, hold that the proposal is unconstitutional and led those who considered the bank to be unconstitutional, he argued that first, congress had limited powers to interfere, second an interest conflict would arise due to the federal system implemented in the United States43. As state sovereignty in deciding whether to establish bank or not in their territories would be violated by establishing such a bank, third that 2 decades charter is too long for a newly created entity under essay.

After long debates and despite the large opposition to the proposal, when the congress passed to vote, the national bank was chartered with a 2/3 majority in both houses, and President Washington faced serious problems in signing the charter into law.44

He had two possibilities, whether to sign the bill in law or to use his veto right. For these reasons, he asked Attorney General Edmund Randolph and Secretary State Thomas Jefferson about their opinions; they both advised him to veto it. Consequently, George Washington sent the opinions to Hamilton and asked him to respond within one week, Hamilton worked on that and prepared a counterargument that convinced the President, he finally signed it, and the bank was founded.

Opened in December 12, 1791 with a twenty years charter, the national bank started with a capital of 10 million Dollars, Divided into 2 million as a government participation and 8 million by private investors. Its capital was the highest at those days and made it the largest financial institution and the hugest corporation, such an initial public offering45 was the highest and had a non-intermediate characteristic, each share cost 25 dollars paid by species .

A board of 25 directors oversaw the bank46, with a majority coming from “Philadelphia, New York, Bostonˮ who were initially lawyers, merchants and brokers. The bank president was selected because of his high profile and long experience, Thomas Willing, ex-president of the Bank of North America took the responsibility of heading a 20 years chartered bank.

The national bank acted in a way not only to assist the government in tax collection and constituted their source to get loans, but it also accepted deposits and granted loans to American ordinary citizens. Furthermore, it had the right to give loans to foreigners and states after getting the congress approval, as a matter of law and being chartered by the congress it had to go back to the legislator, which founded it.

Even though, from a legal perspective the charter would be valid until the end of 1811, that is to say 20 years, debates in regard of the renewal of the charter started few years before.

By 1808, the bank stakeholders asked to extend the charter, thus the senates forwarded the request to the secretary of the treasury Albert GALLATIN, and it is true that he was in favor of expanding the charter but he did not comment the request until March 1809.

After 2 years, congress did not respond and simply read the request. Finally, by 1811, both chambers of congress started discussions in the same time Federalists47 went out of the government as being part of the supporters of the bank and renewal and the first national bank and Republicans48 took the power. These facts caused the non-passage of the charter renewal and the first national bank closed its doors, consequently state banks number grew in order to satisfy the customer‘s needs.

Paragraph 2: The Second National Bank:

Few years, later by the closure of the first national bank, the United States found itself in economic conditions similar to those it faced before the chartering of the first national bank. Due to same conditions that pushed Alexander Hamilton to propose national economic reforms and the establishment of a national bank, many people believed that after a long period without having a national bank- added to the economic and political conditions- that such an economic institution could serve to save the country. For example, many experts at that time such as Representative Jhon C, Calhon of South Carolina, supported the idea of the re-establishment of a national bank “these men thought that re-establishing a national bank would solve some country‘s economic woesˮ 49

Experts met together and then met with Albert Gallatin the treasury secretary, who needed funds for the war and were convinced that a national bank would help in raising war finances, stabilizing the currency and increasing the value of the government in debt 50

Consequently, by 1814, a petition was sent the congress signed by a lot of New York businesspersons asking the legislator to create a second bank, by 1815 congress voted on the establishment of a new bank, but the President Madison vetoed it twice before signing the bill into law by the end of 1816.

A charter of twenty years was granted51 similar to the first bank, in the same path, and in a way to build a bank on the ruins of the first bank, the second bank had the same roles such as being the government fiscal agent and regulating the economy, even the locality was kept the same in Philadelphia. Whereas the capital of the second bank was three times and a half the first bank capital -around thirty five million dollars- , shares were initially similar to the first bank and sold with the quota of twenty percent to the government and eighty percent to private investors.

The charter request asked for the foundation of a bank with 35 million dollars, equal to 3.5 times the capital of the first bank was quite hard due the bad experience of the first national bank, especially that 7 million are to be funded by the American government. Thus, while drafting the main roles and functioning of the bank, congress chambers met together to decide that the board of directors is to be composed of twenty member, divided into 15 elected by the private stakeholders, and the president of the US would appoint five52. The soul of this composition is to guaranty the check and balances between the private and public sectors.

Many politicians did not accept this public-private creature, and decisions makers such as DANIEL WEBSTER53 and JHON RANDOLPH54, who opposed the mixture of powers. By April 1816 congress and the president of the US passed the act and the charter was granted for 20 years.

In order to reach its goals, the bank issued its own banknotes and constituted a nightmare to state banks that issued bank notes, because it had larger size and geographic scoop than state banks. Its bank notes were also the only notes accepted by what is known as Fiscal Agent55.

Within the same organizational process, William Jones was elected president of the second national bank after serving as secretary of the treasury during the war of 181256 and was known by his mismanagement of the finances and there were no sense to admit his success to manage a national bank in such a critical period.

During jones period, the national bank expanded geographically, and opened many branches all around the US, functioned not only as a central bank but also as a commercial bank that granted loans. This functional duality caused damages to state banks, which are not federally supported; consequently, an antitrust violation was detected. As a response to the monopoly that could had been built due to the large scoop of the national bank, state governments took preventive regulations, for example, two states prohibited the branching process of the national bank, whereas others imposed heavy taxes on national branches within their states57.

Such a problem was the subject of many discussions and debates, thus the Supreme Court had to pronounce its decision by a ruling. Chief justice John Marshall ruled in 181958 that the national bank is necessary and the national bank is the unique fiscal agent of the government.

These facts did prove the position of politicians and economists who insisted on how much is the private-public mixture is confusing.

By 1832 Daniel Webster and Henry Clay sent a bill to Congress asking for the renewal of the bank‘s charter. From his side, Clay had a feeling that such a chart would hurt the chances of Jackson for re-election, especially that if he sign the bill into lose the support of wealthy eastern businessmen. Jackson then commented, “The Bank is trying to kill me, but I will kill it! “ 59

Consequently, the bill for renewal passed by congress, but was refused by the executive power, the president of the states argued that the bank is unconstitutional, even though the Supreme Court confirmed the constitutionality of the bank 13 years before in McCulloch v. Maryland60.

Thus late in 1832, the second national bank closed its doors, and powers were transferred to state authorities. This led to the situation of the mishmash of currencies; especially that state bank took the role of issuing bank notes that were supposed to be convertible. Such a case led to the unworthy money papers holding, precisely with the non-sufficiency of bank examiners who controlled the equivalence of issued bank notes and reserve cash.

Few years later, the American situation was getting worse, as the diversity and the unreliable of money caused harmful damages on commerce and banks. Thus the congress had to take a curative decision, by 1863 they passed the National Currency Act61 that was revised one year later by President Lincoln. These laws founded both a new national banking system and an institution controlling periodically the banking called the OCC “Office of the Comptroller of Currencyˮ62

The new system worked well, and banking industry seemed to be getting in the right way, stakeholders affected the sector and government took a strong position the unification of federally notes by 191463.

By the crisis of 190764, the American government recognized that such a financial major power in the world is not holding a central banking system, and asking assistance from Wall Street, should end, in order to avoid relying on wealthy people to save the country.

Congress passed the Aldrich-Vreeland Act on May 30, 1908 as a response to the non-possibility of relying on personal wealth of people. The legislation was created as a tool to implement emergency currency and it did create the eighteen-member National Monetary Commission, chaired by Sen. Nelson Aldrich, in order to recommend what changes should be taken as and that are necessary to the monetary system and laws related to banking and currency.

By 1910, the Commission visited the major capitals of Europe and hosted a number of hearings in the United States to discover the comparative systems. In addition, by 191265, a proposal was given to the congress in order to pass it.

Banks Prior to 1913:

From 1836 until the passage of national bank act in 1863, there were only state chartered banks operating in the banking industry. In addition, even with the passage of the national banking act many private banks continued to operate and took a relevant place within this sector66. It is worthy to know that the principal of the incorporated banks prior to the civil war was issuing bank notes, such a privilege was not general and did not include all of these banks, they only existed and operated but without being implemented in notes issuance process.

Before the civil war there were two categories of state banks; charter banks which got their charter from the legislator and free banks that were established under general enabling legislation and subject to a well-defined set of capital , reserve and control requirements67. Then when the civil war started Lincoln‘s secretary of the treasury, Salmon Chase was responsible for financing the civil war, thus he willed to create a market for national debt and securing bank note issues68.

With the passage of national bank acts of 1863 and 1864 the number of state banks reduced and more than 879 banks 69 converted into national banks, provisions were made to give the privilege of issuing bank notes to national banks and it was hoped that state banks will run to get the national charter.

It is true that this was proved but it was not an expression of willingness from their side, but it was a response to the measures taken on the national level such as the ten per cent that was levied from all state notes paid in any bank.

At this point senator Sherman stated that “The national banks were intended to supersede the state banks. Both cannot exist together “.70 This saying had many meanings at that time; one of the most important is the fact of unintentional characteristic of the dual banking system, which is essentially the soul of the dual banking system.

This 10 per cent tax was considered by many economic historians such as Bray Hammond to be responsible for the cave in of state banking71. Furthermore, authors went to admit that this tax aimed to put an end to the notes issuance on state level such as Gishie who said “the final and conclusive blow to the circulation of state bank notesˮ72.

In addition, for this reason, many banks disappeared and the majority of those, which resisted converted into national banks, liquidated, or vanished during the civil war.

All banks that were founded at that time got national charters. Due to this facts, by 1868 there were 1640 national bank and only 247 state banks, especially the fact of granting the notes issuance to national banks encouraged new banks to get national charter instead of state charter in order to get that advantage.


1 Compiled by Thirteen AUTHORS, A History of Banking in all leading Nations, 1st edition, The Journal of Commerce and Commercial Bulletin,p 153

2 Richard Hildreth, The History of Banks: to which is added a demonstration of the advantages and necessity of free competition in the business of banks, 1st edition, Canada , Batoche books, 1837, p5

3 Ibid P.155

4 Ibid. P.9

5 Compiled by Thirteen AUTHORS, A History of Banking in all leading Nations, op.cit. page 156

6 Richard Hildreth, The History of Banks: to which is added a demonstration of the advantages and necessity of free competition in the business of banks, op.cit. page 8

7 Ibid. Page 9

8 Jeremy Attack and Larry Neal, The Origins and Development of Financial Markets and Institutions, from the Seventeenth century to the Present, 1st edition, Cambridge University, 2009

9 Mahmoud Amine Al Gamal, A basic guide to contemporary Islamic Banks and Finance, 1st edition, Rice, Rice University Press, 2000, p5

10 Richard Hildreth, The History of Banks: to which is added a demonstration of the advantages and necessity of free competition in the business of banks, 1st edition, Canada , Batoche books, 1837, p6


12 Business Dictionary: Available in :


14 Webster's New World Finance and Dictionary Available on :

15 Investopedia Dictionary

16 Vaknin Sam, The definition of definitions,2nd edition, , Tel-Aviv, Limon Publishers ,1990 , p15

17 Kenneth E. Scott, the Dual Banking System: A Model of Competition in Regulation,1st edition, Stanford, 30 Stanford Law Review 1, 1977 , p 9

18 Eric Foner and John A. Garraty ,The Reader‘s Companion to American History, 2nd edition, USA, Editors Houghton Mifflin Harcourt Publishing Company, October 21st, p12

19 Carnell Macey Miller, the law of banking and financial institutions, 4th edition , USA, Walters Kluwer law and business, 2009, p2

20 Thayer Watkins Silicon Valley & Tornado Alley USA, Bankers Trust: The Rise and Decline ,San José State University Department of Economics: Volume1, online since 2000 Available in:

21 Esther L. George, President and Chief Executive Officer, Federal Reserve Bank of Kansas City, Perspectives on 150 Years of Dual Banking, Conference of State Bank Supervisors State Federal Supervisory Forum Savannah, Ga. May 22, 2012 Available on:

22 Online Definitions: Available on :

23 Federal reserve bank of Philadelphia, The first bank of the United States of America, Philadelphia, June 2009, Federal reserve bank of Philadelphia, June 2009, p12

24 Google digitalized books , the national banking act of 1864, Available on:

25 ibid.

26 Apps American Bar Association, FORDHAM Law Review , federal response and the case for preserving the dual banking system :pages 1133/1152 , 1990 , p15 Available on:

27 Carnell Macey Miller, the law of banking and financial institutions, 4th edition , USA, Walters Kluwer law and business, 2009, p 12

28 Henry N. Butlert &Jonathan R. Macey, THE MYTH OF COMPETITION IN THE DUAL BANKING SYSTEM,1st edition, Yale, Yale law School, 1st January 1988, P9

29 A country or area under the full or partial political control of another country and occupied by settlers from that country

30 From 1774 to 1789, the Continental Congress served as the government of the 13 American colonies and later the United States. The First Continental Congress, which was comprised of delegates from the colonies, met in 1774 in reaction to the Coercive Acts, a series of measures imposed by the British government on the colonies in response to their resistance to new taxes. In 1775, the Second Continental Congress convened after the American Revolutionary War (1775-83) had already begun. In 1776, it took the momentous step of declaring merica’s independence from Britain͘ Five years later, the Congress ratified the first national constitution, the Articles of Confederation, under which the country would be governed until 1789, when it was replaced by the current U.S. Constitution.


32 A rise in the general level of prices over a sustained period of time

33 A HISTORY OF CENTRAL BANKING IN THE UNITED STATES, the federal reserve bank of Minneapolis, student resources : Available on:

34 The Continental Congress adopted the Articles of Confederation, the first constitution of the United States, on November 15, 1777. However, ratification of the Articles of Confederation by all thirteen states did not occur until March 1, 1781. The Articles created a loose confederation of sovereign states and a weak central government, leaving most of the power with the state governments. The need for a stronger Federal government soon became apparent and eventually led to the Constitutional Convention in 1787. The present United States Constitution replaced the Articles of Confederation on March 4, 1789. Available on:

35 Federal reserve bank of Philadelphia, The first bank of the United States of America, Philadelphia, June 2009, Federal reserve bank of Philadelphia, June 2009, p12

36 Ibid.

37 Money in the form of gold or silver in the colonial period and in the early years of US species often referred to gold or silver coin.

38 Carnell Macey Miller, the law of banking and financial institutions, 4th edition , USA, Walters Kluwer law and business, 2009, p2

39 US History: Available on:

40 VAN HORNE Jhon, A chapter in the history of central banking, economic education, published on December 2011. Available on : consulted on January, 13th 2015

41 Federal reserve bank of Philadelphia, The first bank of the United States of America, op.cit p11

42 Carnell Macey Miller, the law of banking and financial institutions, op.cit. p2

43 MASTON CATHY , The economy of early America: historical perspective and new directions ,1st edition, Pennsylvania, Pennsylvania state university press, University park PA, 1999, p12


45 IPO: “ is the first sale of company’s shares to the public, leading to a stock market listing”

46 Carnell Macey Miller, the law of banking and financial institutions, op. cit. p.12

47 Federalists: Generally advocated a strong central government, were often accused of being elitist or acting in favor of the wealthy.

48 Republicans: in early US history, opposed strong central government; generally wanted to keep the US a nation of farmers. Originally called the Anti-Federalist Party and led by Jefferson. The party later became known as the democratic- republicans, the predecessor of today’s Democratic party

49 Federal reserve bank of Philadelphia, The second bank of the United States of America, Philadelphia, June 2010, Federal reserve bank of Philadelphia, December , p8

50 Ibid, p9

51 Idem.

52 Idem

53 Daniel WEBSTER: (January 1782- October 1852), an American orator and politician known as an enthusiastic nationalist and an advocate of business interest.

54 John Randolph: ( June 1773- May 1833) , American political leader who was an important proponent of the doctrine of state’s rights in opposition to a strong centralized government͘

the government to pay federal taxes, that is to say that it played the tax agent role or

55 An organization that handles finances for another organization. The second bank (like the first bank) acted as the government’s fiscal agent͘

56 Carnell Macey Miller, the law of banking and financial institutions, op. cit. p.15

57 Idem

58 Ibid. p19

59 Federal reserve bank of Philadelphia, The second bank of the United States of America, op. cit. p 12

60 Lawnix (online), 2008-2013. Available on :

61 CRANSTON Ross, Principles of Banking Law, Second edition , UK, Oxford University Press, 2002, p4

62 OCC GOV, OCC, 1998.2013 , Available on :

63 Carney Macey Miller, the Law of Banking and Financial Institutions, op. cit.

64 Ibid

65 Ibid

66 Kenneth Spong, Banking Regulation,5th edition , Division of Supervision and Risk Management Federal Reserve Bank of Kansas City 2000, page 6

67 Matthew Jaremski, State Banks and the National Banking Acts: A Tale of Creative Destruction,1st edition, Nashville, department of economics Vanderbilt University, November 2010, page 20

68 Matthew S͘ Jaremski, thesis “FREE B NKING: RE SSESSMENT USING B NKLEVEL D T ” online, dissertation, Faculty of the Graduate School of Vanderbilt University, 2010, p62

69 Ibid

70 Ira Harris and Edwen D Morgan, Congressional Globe, 38th congress , 2nd session, February 27,page 1139 Available on:

71 Bray Hammond, Banks and Politics in America from the Revolution to the Civil War, op. cit. p45

72 John A. James, Towards a More Perfect American Payments Union: The Civil War as a Political Economic Watershed; 1st edition, Virginia, Virginia law school,2005, p3

Excerpt out of 129 pages


The Dual Banking System of the United States of America
University of Carthage  (Faculty of Legal, Political and Social Sciences)
Common Law
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Houssem Eddine Bahi (Author), 2015, The Dual Banking System of the United States of America, Munich, GRIN Verlag,


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