8. The First Bank of the United States, 1791-1811

0:00The First Bank of the United States, 1791-1811 A lynchpin of the Hamiltonian financial program was a central bank, the first bank of the United States, replacing the abortive Bank of North America experiment. Hamilton's report on a national bank of December 1790 urged such a bank to be owned privately with the government owning one-fifth of the shares. The bank notes were to be legally redeemable in specie on demand and its notes were to be kept at par with specie by the federal government's accepting its notes in taxes, giving it a quasi-legal tender status.

0:51Also, the federal government would confer upon the bank the prestige of being the depository for its public funds. In accordance with Hamilton's wishes, Congress quickly established the first bank of the United States in February 1791. The charter of the bank was for 20 years, and it was assured a monopoly of the privilege of having a national charter during that period. In a significant gesture of continuity with the Bank of North America, the latter's longtime Bank of North America president and former partner of Robert Morris, Thomas Willing of Philadelphia, was made President of the New Bank of the United States. The 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 in specie.

1:37The Bank of the United States invested heavily in loans to the United States government. In addition to $2 million invested in the assumption of pre-existing long-term debt Assumed by the New Federal Government, the Bank of the United States engaged in massive temporary lending to the government, which reached $6.2 million in 1796. The result of the outpouring of credit and paper money by the New Bank of the United States was an inflationary rise in prices. Thus, wholesale prices rose from an index of 85 in 1791 to a peak of 146 in 1796, an increase of 72%. In addition, speculation boomed in government securities and real estate values were driven upward. Pyramiding on top of the Bank of the United States expansion and aggravating the paper money expansion and the inflation was a flood of newly created commercial banks.

2:29Whereas there were only three commercial banks before the founding of the United States and only four by the establishment of the Bank of the United States, eight new banks were were founded shortly thereafter, in 1791 and 1792, and ten more by 1796. Thus, the Bank of the United States and its monetary expansion spurred the creation of eighteen new banks in five years. The establishment of the Bank of the United States precipitated a grave constitutional argument, the Jeffersonians arguing that the Constitution gave the federal government no power to establish a bank. Hamilton, in turn, paved the way for virtually unlimited expansion of federal power by maintaining that the Constitution, quote, implied a grant of power for carrying out vague national goals.

3:15The Hamiltonian interpretation won out officially in the decision of Supreme Court Justice John Marshall in McCullough v. Maryland in 1819. Despite the Jeffersonian hostility to commercial and 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 Bank of the United States before its expiration in 1811 and happily multiplied the number of state banks and bank credit in the next two decades. Thus, in 1800 there were 28 state banks. By 1811 the number had escalated to 117, a four-fold increase. In 1804, there were 64 state banks, of which we have data on 13 or 20% of the banks.

4:01These reported banks had $0.98 million in specie as against notes and demand deposits outstanding of $2.82 million, a reserve ratio of 0.35, or a notes plus deposits pyramiding on top of specie of 2.88 to 1. By 1811, 26% of the 117 banks reported a total of $2.57 million, but the two-and-a-half fold increase in specie was more than matched by an emission of $10.95 million of notes and deposits, a nearly four-fold increase. This constituted a pyramid of 4.26 to 1 on top of specie, or a reserve ratio of these banks of 0.23.

4:48As for the Bank of the United States, which acted in conjunction with the federal government and with the state banks, in January 1811 it had specie assets of $5.01 million and notes and deposits outstanding of $12.87 million, a pyramid ratio of 2.57 to 1 or a reserve ratio of 0.39. Finally, when the time for rechartering the Bank of the United States came in 1811, the Recharter Bill was defeated by one vote each in the House and Senate. Recharter was fought for by the Madison administration, aided by nearly all the Federalists in Congress, but was narrowly defeated by the bulk of the Democratic Republicans, including 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 upon state or private bank inflation, it is instructive to note found that the major forces in favor of re-charter were merchants, chambers of commerce, and most of the state banks.

5:47Merchants found that the bank had expended credit at cheap rates and had eased the external complaint about a quote, scarcity of money. Even more suggestive is the support of the state banks, which hailed the bank as quote advantageous and worried about the contraction of credit if the bank were forced to liquidate. The Bank of New York, which had been founded by Alexander Hamilton, in fact lauded the Bank of the United States, because it had been able, quote, 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.