December 12, 1791, was a red-letter day in the financial history of theyoung United States. That day a bank unlike any previously seen inAmerica opened for business in Carpenters’ Hall in Philadelphia, thenthe seat of the federal government. The new bank was a national bank,authorized by Congress to hold $10 million in capital—an astronomicalsum at the time—and operate across state borders. And it was aquasi-public institution, owned mostly by businessmen and lawyersmotivated by profit, but also intended to serve the public interest byimproving the financial standing of the federal government and fosteringeconomic growth.
Businessmen and investors across the nation had anticipated the openingof the Bank of the United States with mounting excitement for almost ayear. In July 1791, a public offering of bank stock sold out in lessthan an hour, setting off frenzied speculation in bank shares.Stockholders had chosen directors hailing from eight states to run thebank. By December, it was ready to begin accepting deposits, makingloans, selling U.S. Treasury bonds and issuing paper currency backed bygold and silver coin stored in its vaults. The following year, bankbranches would be established in Boston, New York, Baltimore andCharleston, S.C., to facilitate the flow of money and credit to variousregions of the country; four more branches would follow by 1805.
The intellectual architect of the bank—known today as the First Bank ofthe United States—was Alexander Hamilton, the founding father who mostprofoundly influenced the economic development of this country. As theRepublic’s first Treasury secretary, Hamilton championed the idea of anational bank, proposing its establishment to Congress and convincingPresident George Washington—over the strenuous objections of ThomasJefferson—that the bank would not violate the Constitution.
The man on the $10 bill, whom biographer Ron Chernow describes as “theclear-eyed apostle of America’s economic future,”1 believed that the newnation needed a national bank if it was to prosper. After theRevolutionary War, the economy was in tatters: Crushing war debt weigheddown the federal government, and a shortage of sound currency and bankcredit stifled commercial growth. Hamilton designed the First Bank tohelp the government get on its financial feet and to galvanize Americancommerce by providing currency and loans to businesses and individuals.The bank was a vital part of a national financial infrastructure thatHamilton created during his short but prodigious career, the templatefor today’s monetary economy based on a stable currency and access tocredit.
A statesman with a natural genius for economics, Hamilton was far aheadof his contemporaries in perceiving how the country’s fortunes and thoseof free markets were intertwined, says Thomas M. Humphrey, a formersenior economist with the Federal Reserve Bank of Richmond who haswritten extensively about the history of economic thought. “Hamilton sawa system of sound, secure and resilient financial institutions as beingnecessary for the real economy to function efficiently,” Humphrey saidin a telephone interview. “He also had this vision that America wouldone day become a huge, thriving economic success around the world, andhe thought of these institutions as being necessary to promote thatvision.”
The First Bank worked in consort with Hamilton’s other financialreforms—paying off war debt and establishing a stable monetarystandard—to put the government’s finances in order and stoke the firesof enterprise at the beginning of the industrial revolution. By aidingin revenue collection, lending to the Treasury and marketing governmentdebt to private investors, the bank served as a financial bulwark forthe federal government. And its operations invigorated markets byproviding a sizable, trustworthy currency and extending credit tobusinesses.
Hamilton’s bank was destined not to endure; constitutional challengesand opposition from state banks forced it to close after 20 years ofoperation. But the institution he created laid the foundation for asecond national bank and, almost a century later, for the establishmentof the Federal Reserve System. Although the First Bank was not a truecentral bank—the concept of centralized monetary control didn’t developuntil the 20th century—its powers and operational scope presage theFed’s stabilizing influence on the nation’s money supply.
The economic ideas that sprang from Hamilton’s fertile, industrious mindhave informed financial practice and monetary policy in this country formore than two centuries. This article examines how those ideas becamemanifest in the First Bank of the United States—and transcended thedeath of the bank and Hamilton himself.
War and peace
The plan for the First Bank wasn’t cut from whole cloth, the product ofan individual flash of inspiration or a snuff-fueled brainstormingsession in Washington’s cabinet room. Hamilton mulled over the notion ofa national bank for more than a decade before making his formal proposalin 1790.
During the Revolutionary War, as an aide-de-camp to General Washington,Hamilton saw firsthand how financial disorder undermined the patrioticcause. Because the Continental Congress had little power to tax, it wasforced to finance the war by borrowing and issuing paper money, known as“continentals.” However, without collateral to back them, millions ofdollars in this currency had become nearly worthless. Government debtwas mounting by the day.
The cure for these ills, Hamilton believed, was a national bank. In a1779 letter to a congressional delegate, Hamilton described a largebanking and trading corporation owned by wealthy individuals, but partlycontrolled by the government. The institution would invest in war debt,converting deflated continentals into new currency and credit that wouldpromote industry and trade.
Colonel Hamilton was just 24, but versed far beyond his years in mattersof political economy. As a teenager, he had received a crash course ininternational commerce as a clerk for a trading firm on the island ofSt. Croix in the British West Indies. While studying at King’s College(now Columbia University) in New York and during the war years, Hamiltonread extensively on economics and finance, absorbing the mercantilisttheories of James Steuart and Malachy Postlethwayt as well as theclassical, free-market teachings of Adam Smith and David Hume. “Hamiltonwas just a genius,” Humphrey says, “and he somehow managed to put it alltogether, although his style was not completely pro–free market, likethe classical economists.”
In 1781, Hamilton again broached the idea of a national bank, outlininghis vision in a letter to Robert Morris, superintendent of finance forCongress. The bank would issue pound notes backed in part by realestate, redeem the government’s outstanding paper money obligations andlend to both government and private businesses. Such an institutionwould furnish the needed capital to win the war and “be a source ofnational strength and wealth,”2 Hamilton wrote. Morris may haveincorporated some of Hamilton’s ideas into his plan for the Bank ofNorth America, the first independent bank in the country. (Domesticbanks were banned under Colonial rule.) Incorporated in 1781, thePhiladelphia bank was conceived as a national bank but devolved into aregional bank focused on private lending.
If a national bank was needed to defeat the British, an even strongerargument for establishing such an institution could be made after thewar. The infant nation’s economy was depressed, hobbled by staggeringwar debt and a scarcity of specie (gold and silver coin) with which topay taxes and trade goods and services.
Currency was so scarce in some cities that farmers, unable to sell theirproduce in the market, returned home at the end of the day with fullwagons. Besides the Bank of North America, only a handful ofstate-chartered banks were in operation in the entire country, eachissuing its own notes in a limited geographic area. The Constitutionoutlawed the issue of paper money by state governments.
In 1789, Washington appointed Hamilton his secretary of the Treasury.Finally, Hamilton was in a position to put his long-standing plan for anational bank into action.
A bold proposal
The 34-year-old secretary made his pitch to the first Congress inDecember 1790, in his Report on a National Bank. Like Hamilton’s threeother major reports to Congress, on public credit, the Mint andmanufacturing, it was lengthy, meticulously researched and highlypersuasive. In his seminal 1910 treatise on the First Bank, bankinghistorian John Thom Holdsworth calls the report “undoubtedly the mostinforming and illuminating presentation of banking principles andpractice known to American literature up to that time.”3
Noting that banks had proven their value to government and business inthe world’s leading economies, Hamilton argued in the report that the country needed a national bank to help it shake off its financialmalaise and join the company of modern commercial nations. A Bank of theUnited States would not only enhance the federal government’screditworthiness by issuing a currency suitable for the payment oftaxes, investing in war debt and lending to the Treasury in emergencies,it would also expand the money supply and provide credit to merchantsand other businesses to foster trade, both within the country and acrossthe sea.
Hamilton echoed Smith’s The Wealth of Nations in describing banks as“nurseries of national wealth” that transformed the “dead stock” of goldand silver into active and productive capital that rippled through theeconomy, creating wealth and increasing welfare.4 Deposits and stockinvestments in a national bank would support increased currencycirculation, relieving farmers and merchants of the need to resort tobarter.
To avoid the inflation caused by the wartime continentals, Hamiltonproposed that the bank issue notes redeemable on demand for specie. Thebank and all other banks in the country would operate under amixed-money system, cutting-edge monetary practice in the age of thegold standard. Paper currency issued by the national bank andstate-chartered banks would be a close substitute for gold and silvercoin in financial transactions; thus the nation’s currency would bestable, anchored to a bimetallic monetary standard, and portable,expediting the transport of funds and speeding circulation.
As in his earlier proposals, Hamilton stressed the importance of aquasi-public structure for the bank. It would serve the nationalinterest, but under the control of private individuals, not governmentofficials. In studying other great banks of issue, such as the Bank ofEngland and Bank of Amsterdam, he had concluded that a national bankmust be shielded from political interference: “To attach full confidenceto an institution of this nature, it appears to be an essentialingredient in its structure that it shall be under a private not apublic direction, under the guidance of individual interest, not ofpublic policy.”5
The federal government would be a minority stockholder in the bank,authorized to hold up to one-fifth of its capital and vote fordirectors. But the remaining $8 million in stock would be held byprivate investors—merchants, landowners, speculators or anyone else whocould pony up the required funds.
One of Hamilton’s primary goals in establishing the bank was financingthe country’s war debt, which included the debts of individual statesassumed by Congress. His plan for the bank provided for this byrequiring that 75 percent of its privately held shares be bought with“government stock”—Treasury bonds paying 6 percent interest. (Thebalance was to be paid in specie.) Like the Bank of England, which hadinvested heavily in British government debt, the Bank of the UnitedStates would unite the interests of private enterprise in support ofpublic credit. Bank shareholders would profit as the government paid offits debts over time. Meanwhile, the bank’s government debt—as good asgold in Hamilton’s calculus—would serve as collateral for increasedcurrency circulation, stimulating commercial development.
In hindsight, Hamilton’s bold, financially creative proposal was morethan a plan for a national bank; it was the springboard for a futureU.S. economy based on private capital and the creative use of variousforms of bank credit, including government debt.
Fighting words
This grand plan for economic unity and progress under the aegis of anational bank was not universally embraced. Hamilton had to summon allhis analytical and rhetorical gifts to overcome the objections of menwho received his proposal coolly, if not with disdain. Congressionaldebates in early 1791 over the constitutionality of the bank hadpolitical as well as monetary consequences; Hamilton’s proposalalienated him from founders Jefferson and James Madison, and helped toopen a permanent schism in the halls of power.
Many politicians of the period, especially those from the agriculturalSouth, scorned banks as corporate monopolies that profited merchants andfinanciers, but defrauded farmers and other ordinary people. Jefferson,secretary of state in the Washington administration, saw banks, creditand stock markets subverting his ideal of America as a self-reliant,agrarian utopia with limited industry. Vice President John Adams abjureddebt and dismissed bankers as “swindlers and thieves.”6 Much of the debate turned on the interpretation of a clause in theConstitution that allows the federal government to enact “all laws whichshall be necessary and proper” for the carrying out of explicit powerssuch as borrowing money and collecting taxes. Jefferson argued in awritten opinion to Washington that a national bank may be convenient,but not truly necessary or indispensable for the execution of thegovernment’s enumerated powers. Therefore, Hamilton’s bank wasunconstitutional.
James Madison of Virginia, co-author with Hamilton of the FederalistPapers, agreed with Jefferson. He added that a national bank wouldconflict with state interests under the Constitution by interfering withthe right of states to charter and oversee their own banks of issue.
Hamilton and allies, such as Congressman Fisher Ames of Massachusetts,countered that a national bank was indeed necessary for the reasons laidout in the proposal before Congress. If it was necessary, then it wasproper under the Constitution and did not pose a conflict with states’rights. Furthermore, the bank would energize state economies in theagricultural South as well as the mercantile North.
The bitter skirmish between Hamilton’s and Jefferson’s followers overthe First Bank was the first clash in what would become an endless warof words in America—partisan politics. Quoting Chief Justice JohnMarshall, Chernow notes that the dispute led to the emergence of “thosedistinct and visible parties which in their long and dubious conflictfor power have … shaken the United States to their center.”7 For thenext 30 years, Hamilton’s Federalists vied with Jeffersonians (orDemocratic-Republicans) for mastery of the government. Although theparties’ names and constituencies have morphed over the intervening 200years, the lineage of today’s Republicans and Democrats extends back tothese original foes.
After Congress passed a bill adopting Hamilton’s proposal, its fate layon Washington’s desk; the president had been swayed by Jefferson’sarguments and was considering vetoing the measure. Hamilton defended itin a 15,000-word manifesto that articulated what would come to be knownas the implied powers doctrine; that is, the government has the right toemploy any means necessary to execute its express powers under theConstitution. In ringing phrases, Hamilton asserted that “every powervested in a government is in its nature sovereign and includes, by forceof the term, a right to employ all the means requisite and fairlyapplicable to the attainment of the ends of such power.”8 This doctrinebecame embedded in constitutional law, giving the federal governmentbroad scope to exercise its authority.
Washington was convinced. On Feb. 25, 1791, he signed the actincorporating the Bank of the United States, clearing the way for thesale of stock (the government borrowed $2 million from money lenders inAmsterdam to purchase its stake) and the start of operations.
The nation’s bank
Little is known about those operations; virtually all the bank’s recordswere destroyed in the early 1800s. But what evidence exists shows thatthe bank largely succeeded in accomplishing Hamilton’saims—jump-starting the economy and building public confidence in theTreasury and financial markets. By virtue of the sheer volume oftransactions flowing through its Philadelphia office and regionalbranches, the bank was by far the single largest financial entity in thecountry. The economic changes it wrought were pervasive and arguablylong-lasting.
By converting war debt into bank stock, the bank relieved the governmentof that financial burden and sent a message to investors at home andabroad that the United States would honor its debts. (To this day, theTreasury has never defaulted on a bill, note or bond.) In an era whenthe government could not count on a steady income—there was no incometax; import duties and public land sales made up the bulk of federalrevenue—the bank sustained daily operations with short-term loans. Bythe end of 1795, the Treasury, now led by Hamilton’s successor, OliverWolcott, had borrowed a total of $6.2 million from the bank, more than60 percent of its capital.9
A robust currency circulation and lending to other banks and businessesstimulated the economy, leading to increased domestic and foreign tradethat generated income and job growth. Unlike paper issued by statebanks, the First Bank’s widely circulated notes were accepted by thefederal government for the payment of duties. Although the United Stateswould not have a true uniform currency until after the Civil War, “it iscertain that the notes of no state bank possessed to anything like thesame degree the quality of universality” of the national bank’s notes,Holdsworth writes.10
In its organization and many of its functions, the First Bankforeshadowed the Federal Reserve System. Like the Fed, the First Bankwas quasi-public in nature; as Hamilton intended, it served a publicpurpose, but independently from the administration and under thedirection of private interests. (Nominally, each regional FederalReserve Bank is owned by its member banks.) Also like the Fed, the FirstBank acted as the government’s fiscal agent and held its bank balances.And just as the Fed’s 12-bank network does today, the First Bank’s eightbranches extended its influence throughout the country. “I think thereare enough parallels, enough elements there that you could say thatHamilton’s bank was the progenitor for at least some functions of themodern Fed,” Humphrey says.
Scholars such as Richard Timberlake Jr., a former economics professor atthe University of Georgia, have pointed out that neither Hamilton norCongress intended the First Bank to control the size of the moneystock—a defining function of the Fed and other modern central banks.Nevertheless, Timberlake contends that over the course of several yearsthe bank took on that role, leveraging its large transaction volume andreserve balances to expand or constrain the money supply. To rein incredit, the bank promptly presented the state banknotes that passedthrough its offices for redemption in specie, reducing the lendingcapacity of the issuers. To ease credit, the bank lent more tobusinesses and banks and treated state banknotes with “forbearance.”11 Timberlake sees this activity as an early form of open marketoperations—resented by many state banks—that acted as a check on inflation.
The parallels with the Federal Reserve go only so far, however. The Fedneither lends to government nor operates as a commercial bank, acceptingdeposits from and making loans to businesses and individuals. Also, theFed enforces reserve requirements, examines accounts and exercises otherregulatory authority over banks—powers not contemplated by the creatorsof the First Bank.
Political defeat, economic victory
For all its successes, Hamilton’s bank could not overcome its politicalliabilities. When its charter came up for renewal in 1811, theFederalists were out of power; the Democratic-Republicans, who hadremained hostile to the bank, now held the majority. RenewingJefferson’s attack of 20 years earlier, they charged that the bank wasunconstitutional, a perversion of the necessary-and-proper clause.12 Hamilton’s enemies had allies at many state banks, whose ranks hadswelled to 90 since the First Bank’s founding. Coveting the bank’sfederal government deposits, the directors of these banks—along with therepresentatives of state governments that owned bank stock—lobbiedagainst recharter. The bank’s opponents also accused many of itsdirectors of being Tories or monarchists, noting darkly that Britishinvestors held a large amount of its capital.
This time there was no Hamilton to mount a passionate and brilliantdefense; Aaron Burr had killed him in a pistol duel seven years earlier.Despite support from President James Madison and Treasury SecretaryAlbert Gallatin, Congress let the charter expire, and the bank closedits doors on March 3, 1811.
The Hamiltonian model of banking and monetary policy did not die withthe First Bank, however. Out of the financial chaos that followed theWar of 1812 rose a Second Bank of the United States. This federallychartered, well-capitalized institution was not as well managed as itspredecessor, but in time it too exerted central-bank-like influence overthe economy. During the war the number of state banks exploded, and theystopped redeeming their notes for specie, contributing to highinflation. Leveraging its large currency reserves, the Second Bankencouraged the redemption of those bank-notes for gold and silver,helping to shrink the money supply and stabilize prices.
The Second Bank’s life was also cut short; irked by its burgeoningmonetary and political power, President Andrew Jackson refused to renewits charter, and the bank ceased operations in 1836. But even in theabsence of a central bank, the ideas that Hamilton expounded and putinto practice endured. In the 19th century, bank lending supported inpart by state and federal credit spurred business growth, planting theseeds for the nation’s flowering into an economic power after the Civil War.
After a financial panic in the early 1900s, Congress revived Hamilton’snotion of a centralized, quasi-governmental bank exerting a positiveinfluence on the monetary system and the overall economy. The FederalReserve Act of 1913 created the system of Reserve Banks that hasprovided a backstop for commercial banks and shaped monetary conditionsever since.
In ensuring the demise of the First Bank, the Democratic-Republicans mayhave won their political battle with Hamilton, impugned by Jefferson as“the servile copyist”13 of British Prime Minister William Pitt. Buthistory has given economic victory to Hamilton. The economy thatdeveloped in this country would not realize the Jeffersonian ideal ofyeoman farmers and artisans producing goods from their own resources,unassisted by banks and financial markets. Instead, it would embraceHamilton’s capitalist vision—sophisticated, multifarious commercethriving on a sound currency and ready access to credit.
Successive generations of Americans have reaped the rewards of theeconomic revolution that began with the opening of the First Bank of theUnited States.
Hamilton Lives!
On television, on the Web and in the classroom
Alexander Hamilton is the subject of an excellent Twin Cities Public Television program, originally aired in May 2007.
The Minneapolis Fed helped develop the two-hour TV program, generating educational content for the teachers and producing a supplemental Web site on the history of central banking.
Hamilton is also part of the debate in the 2007-2008 Minneapolis Fed student essay contest: “Hamilton vs. Jefferson: Whose economic vision was better?” for which high school students will discuss the founding fathers’ competing concepts for the new nation’s economic future.
Endnotes
1 Ron Chernow, Alexander Hamilton. New York: Penguin Books, 2004, p. 344/p>
2 Bray Hammond, Banks and Politics in America: From the Revolution tothe Civil War. Princeton: Princeton University Press, 1957, p. 47.
3 John Thom Holdsworth and Davis R. Dewey, The First and Second Banks ofthe United States. Washington, D.C.: Government Printing Office, 1910,p. 13.
4 Alexander Hamilton, The Papers of Alexander Hamilton, ed. Harold C.Syrett and Jacob E. Cooke. New York: Columbia University Press,1961–1987, vol. 7, p. 308. “Report on the Bank,” Dec. 13, 1790.
6 Joseph J. Ellis, Passionate Sage: The Character and Legacy of JohnAdams. New York: W.W. Norton, 1994, p. 161.
8 The Papers of Alexander Hamilton, vol. 8, p. 98. “Final Version of anOpinion on the Constitutionality of an Act to Establish a Bank,” Feb.23, 1791.
11 Richard H. Timberlake Jr., Monetary Policy in the United States.Chicago: University of Chicago Press, 1993, p. 10.
12 The constitutionality of a national bank with broad monetary powerswould not be affirmed until 1819, in the landmark U.S. Supreme Courtcase McCulloch v. Maryland. Echoing Hamilton’s assertion of impliedpowers in 1791, the Court ruled that Congress indeed had the power toincorporate such a bank under the necessary-and-proper clause.
13 Letter from Jefferson to James Monroe, May 26, 1795, in PaulLeicester Ford, ed., The Writings of Thomas Jefferson. New York: 1896,VII, 16.
