Here's my 3rd thread on the history of private currency systems, on the 1863-1914 "National Currency" system. Previous threads at and
To understand the National Currency system, the 1st thing you must do is to disabuse yourself of any thought that its designers set-out to give the U.S. a more stable and efficient currency system. The timing of the National Banking Acts (1863, 1864) alone ought to be a warning.
Instead, the new laws, authorizing a new set of federally-chartered banks, were inspired by the Union's desperate quest for means to pay for the war. As such they supplemented the law authorizing the Treasury to issue greenbacks for the purpose.
The new "National" banks would be able to issue circulating paper notes. But like the notes of state "free" banks, they had to be backed by specified bonds: $100 face-value in bonds for every $90 in National bank notes. Can you guess which bonds were required?
The Union's bonds, of course! (If you said "Confederate," go to the corner and put on a dunce cap!). As a wartime fundraising devise this was perhaps justified. As the basis for a post-bellum banking and currency system, it would prove disastrous.
But the plan also ran into an early hitch: state bankers, who were expected to line-up to switch to National charters, for the most part didn't: they liked their state charters fine. This wasn't because state laws were more lax, as if often claimed.
Nor does this explanation make sense: had the public wanted National banknotes, banks would have switched over despite stiffer reg's to avoid seeing their notes driven from the market. The plain truth is that by 1863 many state banks had good reputations.
But the Union knew that, unless state banks switched, it's financial plan could only succeed by creating a very substantial inflation. To make room for new National bank notes, state bank notes would have to go. On this again see onlinelibrary.wiley.com/doi/abs/10.111…
At first they tried easing the Nat'l charter requirements, in part by letting state banks incorporate their old names into their National bank names. (Consider!). Didn't work. So in 1866 they passed a prohibitive tax that forced state banks to give up issuing notes.
Because most banks back then depended on notes for funding, most state banks then got national charters. By the war's end, state banks had almost disappeared, and paper currency consisted solely of Nat'l banknotes plus a quantity of greenbacks strictly fixed by statute.
This set-up led to the series of increasingly severe crises that ultimately led to the passage of the Federal Reserve Act. If you think the cause of these was "insufficient regulation" or "lack of a central bank," you are reading too many Fed publications. cato.org/sites/cato.org…
Consider: the U.S. is growing rapidly, so the demand for money is also growing. But the greenback stock is rigidly fixed, while the stock of National banknotes depends on the availability of bonds eligible to back it.
It happens that Treasury revenues exceeded expenditures for most of this period. So the Treasury used the difference to retire its debt. The stock of eligible bonds thus shrank, while their market price rose to a stiff premium--bid up by the national banks that needed them!
As it became less profitable for banks to issue notes, the supply dwindled; and it was altogether unprofitable for them to issue more notes just for seasonal needs, like the autumn harvest. So, ever fall, money would get "tight." State banks were of course unable to help.
There's a lot more to the story than this: the lack of national branch banks (another feature copied from antebellum "free banking" laws) itself aggravated the problem by causing bank reserves to pile-up in a handful of major NYC banks during the off (non-harvest) season.
Nat'l bank laws encouraged this flow of reserves by allowing banks to count balances with correspondent banks in major cities, and in NYC especially, toward their legal reserve requirements. In practice, $1 of gold or greenbacks in a NYC bank could represent $3 of legal reserves!
This meant that the harvest could result in a mad scramble of reserves, with rates spiking in the NYC money market, even those the pressure ultimately came from the countryside. In some years--1884, 1893, and 1907--mere stringency gave way to full-fledged panics.
In short, misguided regulations, not insufficient ones, were at bottom of the notorious "inelasticity" of the pre-Fed currency supply. If you don't believe it--if you think the problem was having many private note-issuing banks instead of a central bank, here's a chart for you:
The grey line (left scale) is for National banknotes. The black line (right scale) is Canadian bank notes. Note how the stock of the former in 1890 is < 1/2 its 1880 level. (After that some adjustments in bond requirements allowed for more growth.) Note also 0 seasonal variation. 
(Stay tuned for thread #4, on Canada's currency system and how we got stuck with something far inferior.)
P.S.: If you want to quickly grasp the absurdity of this set-up, consider that, had the U.S. gov't chosen to entirely pay off its debt, the supply of national bank notes would have shrunk to _zero_.
