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From One Collateral Shortage to the Next

Banking regulators may have made a big mistake, according to a new BIS working paper.

In 1863, with the U.S. still reeling from a bloody civil war, a plan was launched in Washington to simultaneously fund its military loans and strengthen the nascent American banking system. "We cannot maintain our nationality unless we establish a sound and stable financial system; and as the basis of it we must have a uniform national currency," Senator John Sherman urged at the time.

What followed was a program designed to replace the patchwork state rules that had for years allowed the country's banks to sell their own private notes secured by loans or state bonds. Under the National Bank Acts of 1863 and 1864, banks could issue “national bank notes” that would be backed by the government, by depositing certain issues of U.S. debt with the Treasury.