The National Currency Act was a response to the mishmash of local banks, local money, and conflicting regulatory standards that prevailed before the Civil War. Banking systems varied from state to state. Some states required a special act of the legislature before prospective bankers could obtain an operating charter. Other states adopted "free banking," under which charters were granted to all applicants that met established conditions. In such states as Indiana and Tennessee, banks were state-operated and -owned; elsewhere, ownership was vested in public-private partnerships. And in states like Ohio, several of these institutional arrangements were in use at the same time.
The pre-Civil War money supply consisted of various types of gold and silver coins along with paper notes issued in multiple denominations by each of the thousands of individual banks. In theory, holders of notes could return them to the issuer and receive their face value in precious metal. However, especially where state supervision and oversight were weak, banks tended to issue notes beyond their redemption capabilities, which led to bank runs and failures.
The disorderly pre-Civil War money supply, based on state bank notes, contributed to periodic "panics" and economic hardship (Library of Congress Prints and Photographs Division).