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The Day That Changed American Banking Forever: Wells Fargo & Company (WFC) and More

These notes are legal tender
In the thick of the Civil War, the Union government took the unprecedented step of decoupling banknotes from gold and silver by passing the Legal Tender Act of Feb. 25, 1862. Not only did this allow the federal government to issue notes by fiat for the first time, but it also marked the first time the United States issued a national currency as opposed to a merely first-among-many currency, as was the case with earlier central banking institutions.

This solved the Union’s problem of paying its bills after the available stores of specie had been exhausted, but the “greenbacks” soon caused inflation. To counteract this problem, the first income tax was signed into law a year later, and excise taxes also increased dramatically. This first act allowed the issuance of $150 million in greenbacks, and by the end of the war two additional measures had swelled the amount of currency in circulation to nearly $450 million. At this point, the greenbacks were worth only about half their nominal value in gold.

The validity of fiat currency was fiercely debated, and a case filed after the end of the war brought the legal battle all the way to the Supreme Court. This case held against the greenback, with Chief Justice Salmon P. Chase taking a position opposite the one he’d held during the war, when he was President Lincoln’s Treasury secretary in charge of the currency. The appointment of two new Supreme Court justices the day that this precedent-setting case was decided led to a reversal in a subsequent case, and the right of the federal government to print money has been broadly upheld ever since.

But we need banks to take these notes …
Exactly a year after the Legal Tender Act became law, the National Banking Act was signed into law on Feb. 25, 1863. This act sought to support the new national currency with a system of national banks, which could gain charters from the federal government rather than states for the first time. The national banks were to be chartered and overseen by a newly created Office of the Comptroller of the Currency and were expected to back their currency reserves with federal government bonds and other securities. This marked the first time that the federal government attempted to enact uniform banking policies nationwide.

Thousands of nationally chartered banks arose in the years between this act’s passage and the creation of the Federal Reserve in 1913. Unfortunately, the lack of a central banking authority during these years led to a system of powerful banks with little control over the stability of their own reserves, which returned to the gold standard following the war. A number of financial panics arose in the latter half of the 19th century and during the early years of the 20th century, particularly as a result of railroad speculation and overinvestment.

Although banks became more stringently regulated with the passage of Glass-Steagall during the Great Depression, national charters continued, and the charters first granted in 1863 are still valid today. The very first such national bank charter was issued to The First National Bank of Philadelphia, which later merged with the Bank of North America, America’s first commercial bank. Today, Wells Fargo & Company (NYSE:WFC) holds Charter No. 1  as a result of several further mergers, granting it nearly as much historical prestige as BNY Mellon.

Wells Fargo’s dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool’s top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.

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