A . How did the National Bank Act of 1864 tighten the money supply? b. What was the weakness of the National Bank Act of 1864?

a . This act tightened the money supply by developing a national banking system and by creating a new
office, comptroller of the currency, that chartered national banks. These national banks had to buy
Treasury bonds equal to one third of their capital, and could issue notes only in proportion to their
Treasury holdings. It also prohibited banks from accepting real estate as loan collateral, and from
lending more than 10 percent of the value of their capital stock to any single borrower. Additionally,
this act required banks to provide financial reports to the government, and subjected banks to periodic
audits. Finally, to encourage state banks to switch to the national system, it levied a steep tax on state-
chartered bank-note issues.
b. It could not stem the credit expansion that banks generated by holding each other's deposits, a practice
that heightened the banking system's volatility.