Peter Huntoon writes:

A crippling problem with national bank currency was that the supply of money was a fixed percentage of the capitalization of the national banks. Consequently, the volume of notes in circulation did not respond to the varying demands of business cycles. This problem doomed national currency, so the elastic federal reserve currency system was invented to replace it.

The concept that emerged is the following. As the demand for money increases, interest rates rise so banks can charge more interest on new national bank notes that they can draw against short term paper deposited as security. If the emergency increase in national bank note circulation is taxed at a higher rate, businesses can afford to pay the higher interest rates and the banks can in turn afford to pay the higher tax. However as business demand for currency falls, interest rates also fall, so the banks will reduce their emergency national bank note supply to avoid the higher tax.

THE ALDRICH-VREELAND ACT
Congress passed the Emergency Currency Act modeled on these principles, and it was signed into law May 30, 1908. The act is commonly known as the Aldrich-Vreeland Act after its sponsors.

The Aldrich-Vreeland Act provided a mechanism that would permit banks to use securities other than U. S. government bonds to obtain short-term increases in their circulations. Two types of entities could apply for the additional currency: (1) groups of at least 10 banks formed into national currency associations and (2) individual banks.

National currency associations were authorized to accept securities from a member bank and then to apply to the Comptroller of the Currency for additional circulation for that member bank.

The total amount of emergency currency that could be issued under this act was set at $500,000,000. This amount was subsequently raised to over $1 billion by a hastily passed amendment dated August 4, 1914, immediately following the outbreak of World War I in Europe.

DATE BACK NOTES
The Aldrich-Vreeland Act explicitly addressed a number of details pertaining to all national bank note issues. The following denominations were authorized: 5, 10, 20, 50, 100, 500, 1000 and 10,000. The security clause on the faces had to state "secured by United States bonds or other securities." Highly significant was that the Comptroller of the Currency had to create a stockpile of such notes equal to fifty percent of the capital stock of each national bank as soon as practicable. These requirements meant the Bureau of Engraving and Printing had to alter the security clauses on all the existing Series of 1882 and 1902 face plates, design and prepare date back plates, and print the enormous quantity of notes called for.

Very significant to numismatists was the fact that the Aldrich-Vreeland notes heralded the date back designs, most importantly causing the demise of our colorful Series of 1882 brown backs. The Secretary of the Treasury George B. Cortelyou addressed this change in his 1908 annual report, which you will find to be most interesting (Cortelyou, 1908, p. 45-46). The italics are mine.

Work commenced at the Bureau immediately after passage of the act. Nearly 10,000 face plates had to be altered and $500,000,000 in notes printed as soon as possible (Bureau of Engraving and Printing, 1908, p. 4). The first altered face went to press on June 5, 1908, and deliveries to the Comptroller began on June 15 consisting of 5-5-5-5 Series of 1902 blue seal date backs, the first of which was the A1-1-A,B,C,D 5-5-5-5 sheet for The First National Bank of Beaver City, Utah (9119). The first Series of 1882 date back sheets were delivered to the Comptroller on August 1, 1908, including 5-5-5-5 and 10-10-10-20 sheets.

The production of the Series of 1882 and 1902 date backs was accomplished rapidly by altering the existing face plates by adding the "or other securities" clause and advancing the plate letters. For example, a 10-10-10-20 red seal plate with letters A-B-C-A was altered to carry plate letters D-E-F-B along with the revised security clause. The dates, 1902-1908, were added to the backs of the Series of 1902 plates, whereas new Series of 1882 back plates were prepared using only the borders from the previous brown back plates surrounding the 1882-1908 date. Both the treasury and bank sheet serials reverted to 1 for every sheet combination issued by every bank. No $500, $1000 or $10,000 notes were ordered by the banks, so plates for these denominations never were prepared for either the Series of 1882 or 1902.

EMERGENCY CURRENCY
The first national currency association was organized in New York on July 18, 1908 (Comptroller of the Currency, 1936). However, the fact is no use was made of emergency currency before the original life of the Aldrich-Vreeland Act expired on June 30, 1914. When the provisions of the Aldrich-Vreeland Act were extended for another year to June 30, 1915, no one expected the banks to take advantage of it.

World War I broke out in Europe at the beginning of August, 1914, and the situation changed radically. Kane (1922, p. 445-447), who at the time was serving as Deputy Comptroller, provides an insider's view of what transpired.

The net impact of the emergency currency issues in 1914 and 1915 was to drive the total outstanding value of national bank notes to an all-time record number. The national bank note supply ballooned from about $700 million to $1.1 billion by the end of October, 1914. This circulation quickly contracted as the stringency passed owing to the high tax on the emergency issues.

DISCUSSION
Passage of the Aldrich-Vreeland Act on May 30, 1908, provided a mechanism that introduced elasticity into the national currency supply. However, only the gravest financial crises could trigger applications for emergency currency because the tax imposed on the emergency currency was too burdensome.

The result was that the provisions of the act were never invoked by the banks to provide elasticity as needed during the normal annual business cycle or the longer-term recession-inflation cycles that plagued the economy. Consequently, the national currency supply remained inflexible.

The fact was that no currency ever would have been issued under the terms of the Aldrich-Vreeland Act was it not for the extreme financial crisis precipitated by the outbreak of World War I.

Rather than tinker further with national bank currency, Congress established the Federal Reserve System in 1913, with its elastic currency, a move that ultimately rendered national bank currency obsolete.

To read the earlier E-Sylum article, see:
PANIC SCRIP OF 1914 (www.coinbooks.org/esylum_v19n26a28.html)