First Bank of the United States

(First) Bank of the United States was a central bank chartered in 1791 by the U.S. Congress at the urging of Alexander Hamilton and over the objections of Thomas Jefferson. The extended debate over its constitutionality contributed significantly to the evolution of pro- and antibank factions into the first American political parties—the Federalists and the Democratic-Republicans, respectively. Antagonism over the bank issue grew so heated that its charter could not be renewed in 1811.

It was reconstituted in 1816, as the Second Bank of the United States.

History

The first experiment with a central bank in the United States had ended in 1783 with the Bank of North America.

But in 1787–88, Federalist forces pushed through a new Constitution replacing the decentralist Articles of Confederation. The successful Federalists proceeded to put through their cherished program: high tariffs, domestic taxes, public works, and a high public debt. A crucial part of their program was put through in 1791 by their leader, Secretary of the Treasury, Alexander Hamilton, a disciple of Robert Morris.

Hamilton put through Congress the First Bank of the United States, a privately owned central bank, with the federal government owning 1/5 of the shares. Hamilton argued that a "scarcity" of specie had to be overcome by infusions of paper money, to be issued by the new Bank and invested in the public debt and in subsidies of cheap credit to manufacturers. The Bank notes were to be legally redeemable in specie on demand, and they were to be kept at par with specie by the federal government’s accepting its notes in taxes, thus giving it a quasi-legal tender status. The federal government would also confer upon the Bank the privileges of being the depository for its funds. Furthermore, for the 20-year period of its charter, the First Bank of the United States was to be the only bank with the privilege of having a national charter.

The First Bank of the United States was modeled after the old Bank of North America, and in a significant gesture of continuity the latter’s longtime president and former partner of Robert Morris, Thomas Willing of Philadelphia, was made president of the new Bank.

The First Bank of the United States promptly fulfilled its inflationary potential by issuing millions of dollars in paper money and demand deposits, pyramiding on top of $2 million of specie. The BUS invested heavily in $8.2 million of loans to the U.S. government by 1796. As a result, wholesale prices rose from an index of 85 in 1791 to a peak of 146 in 1796, an increase of 72 percent. In addition, speculation mounted in government securities and real estate. Pyramiding on top of BUS expansion, and aggravating the paper money expansion and the inflation, was a flood of newly created commercial banks. Only three commercial banks had existed at the inception of the Constitution, and only four by the time of the establishment of the BUS. But eight new banks were founded shortly thereafter, in 1791 and 1792, and 10 more by 1796. Thus, the BUS and its monetary expansion spurred the creation of 18 new banks in five years, on top of the original four.

Despite the official hostility of the Jeffersonians to commercial as well as central banks, the Democratic-Republicans, under the control of quasi-Federalist moderates rather than militant Old Republicans, made no move to repeal the charter of the BUS before its expiration in 1811. Moreover, they happily multiplied the number of state chartered banks and bank credit during the two decades of the BUS existence. Thus in 1800, there were 28 state banks; by 1811, the number had grown to 117, a fourfold increase.

When the time came for rechartering the BUS in 1811, the recharter bill was defeated by one vote each in the House and Senate. Recharter was fought for by the quasi-Federalist Madison administration, aided by nearly all the Federalists in Congress, but was narrowly defeated by the bulk of the Democratic-Republicans, led by the hard money Old Republican forces.

In view of the widely held misconception among historians that central banks serve, and are looked upon, as restraints on state bank inflation, it is instructive to note that the major forces in favor of recharter were merchants, Chambers of Commerce, and most of the state banks. Merchants found that the BUS had expanded credit at cheap interest rates, and eased the eternal complaints about a “scarcity of money.” Even more suggestive is the support of the state banks, which hailed the BUS as “advantageous” and worried about a contraction of credit should the Bank be forced to liquidate. The Bank of New York, which had been founded by Alexander Hamilton, even lauded the BUS because it had been able "in case of any sudden pressure upon the merchants to step forward to their aid in a degree which the state institutions were unable to do."

Links

• First and Second Banks of the United States – a digital collection of the original documents related to the formation of the First (1791–1811) and Second (1816–1836) Banks of the United States, digitized by the Federal Reserve Bank of St. Louis.
• HABS photos of the First Bank
• Hamilton's opinion as to the Constitutionality of the Bank of the United States
• Jefferson's opinion against the Constitutionality of a National Bank
• Record of the Debate, from the Journal of William Maclay, 1791
• "Life with the Fed: Sunshine and Lollipops?" by Thomas E. Woods, Jr., April 2011
• "A Fake Banking History of the United States" by Thomas J. DiLorenzo, October 2008
• First Bank of the United States at Wikipedia