6. The Bank of North America

0:00The Bank of North America Robert Morris's nationalist vision was not confined to a strong central government, the power of the federal government to tax, and a massive public debt fastened permanently upon the taxpayers. Shortly after he assumed total economic power in Congress in the spring of 1781, Morris introduced a bill to create the first commercial bank, as well as the first central bank in the history of the New Republic. Bank. This bank, headed by Morris himself, the Bank of North America, was not only the first fractional reserve commercial bank in the U.S., it was to be a privately owned central bank, modeled after the Bank of England. The money system was to be grounded upon specie, but with a controlled monetary inflation pyramiding an expansion of money and credit upon a reserve of specie.

0:48The Bank of North America, which quickly received a federal charter and opened its doors at at the beginning of 1782, received the privilege from the government of its notes being receivable in all duties and taxes to all governments, at par with specie. In addition, no other banks would be permitted to operate in the country. In return for its monopoly license to issue paper money, the bank would graciously lend most of its newly created money to the federal government to purchase public debt and be reimbursed by the hapless taxpayer. The Bank of North America was made the depository for all congressional funds. The first central bank in America rapidly loaned $1.2 million to the Congress, headed also by Robert Morris. Despite Robert Morris's power and influence, and the monopoly privileges conferred upon his bank, it was perceived in the market that the bank's notes were being inflated compared with Specie.

1:41Despite the nominal redeemability of the Bank of North America's notes in Specie, the The bank's lack of confidence in the inflated notes led to their depreciation outside its home base in Philadelphia. The bank even tried to shore up the value of the notes by hiring people to urge redeemers of its notes not to ruin everything by insisting upon specie, a move scarcely calculated to improve ultimate confidence in the bank. After a year of operation, however, Morris, his political power slipping after the end of the war, moved quickly to end his bank's role as a central bank and to shift it to to the Status of a Private Commercial Bank Chartered by the State of Pennsylvania By the end of 1783, all of the federal government's stock in the Bank of North America, which had the previous year amounted to five-eighths of its capital, had been sold by Morris into private hands, and all U.S. government debt to the bank had been repaid.

2:37The first experiment with a central bank in the United States had ended. At the end of the Revolutionary War, the contraction of the swollen mass of paper money Combined with the resumption of imports from Great Britain, combined to cut prices by more than half in a few years, vain attempts by seven state governments in the mid-1780s to cure the quote, shortage of money and reinflate prices were a complete failure. Part of the reason for the state paper issues was a frantic attempt to pay the wartime public debt, state and pro-rata federal, without resorting to crippling burdens of taxation. The increased paper issues merely added to the quote, shortage, by stimulating the export of species and the import of commodities from abroad.

3:22Once again, Gresham's law was at work. State paper issues, despite compulsory par laws, merely depreciated rapidly and aggravated the shortage of species. A historian discusses what happened to the paper issues of North Carolina. quote, In 1787 to 1788, the specie value of the paper had shrunk by more than 50 percent. Coin vanished, and since the paper had practically no value outside the state, merchants could not use it to pay debts they owed abroad. Hence, they suffered severe losses when they had to accept it at inflated values in the settlement of local debts. North Carolina's performance warned merchants anew of the menace of depreciating paper money, which they were Neither was the situation helped by the expansion of banking following the launching of the Bank of North America in 1782.

4:19The Bank of New York and the Massachusetts Bank of Boston followed two years later, with each institution enjoying a monopoly of banking in its region. Their expansion of banknotes and deposits helped to drive out specie and in the following Within a year, the expansion was succeeded by a contraction of credit, which aggravated the problems of recession.