Alexander_Hamilton_and_the_First_Bank_of_the_United_States

Alexander Hamilton and the First Bank of the United States Dr. McCormick AMH2010 December 3, 2009 Alexander Hamilton and the First Bank of the United States On December 14, 1790, Secretary of the Treasury Alexander Hamilton conveyed to the House of Representatives one of his most famous public documents, the plan for his national bank. Hamilton’s proposed establishment of a national bank was one of the primary components of his ambitious but controversial fiscal plan to stabilize and stimulate the economy. The plan for a national bank was not Hamilton’s alone, although he was its strongest enthusiast, and he fought the hardest for its implementation. The First Bank of the United States was needed because the government had a substantial amount of debt from the Revolutionary War, and the nation’s finances were in a state of distress. Also, each state had their own form of currency already in circulation (Cowen). Up to the time of the bank’s charter, coins and bills issued by state banks served as the currency of the young country. The leaders of the budding nation were well aware that their troubled finances were not unique, and Hamilton was especially aware of historical precedent concerning his national bank. Because the leaders of the United States were English by heritage, their knowledge of banking and financing were largely English in origin. The one great banking and commercial institution with which they were familiar with was the Bank of England (Morgan 473). Most American leaders of the Confederation period knew something of the history of that bank’s operations. This is the basis for which Alexander Hamilton would start formulating his plan for a national bank, starting ten years before its charter, in 1781. But with Hamilton’s bank proposal came controversy over whether it was a genius financial plan, or just another appalling initiative. It was eyed with great suspicion by representatives of the Southern States, whose chief industry was agriculture, did not require centrally concentrated banks, and whose feelings of states’ rights and Northern motives ran strong (Lane 603). Some, including Thomas Jefferson, had objected on the basis that there was no authorization in the Constitution for the establishment of a national bank. Hamilton contended that the Constitution authorized the national government to levy and collect taxes, pay debts and borrow money. Congress, therefore, was entitled, under its implied powers, to create such a bank (u-s-history). It was unclear whether President George Washington would sign the bill for a national bank into law. Powerful forces led by James Madison, Thomas Jefferson, and the Attorney General, Edmund Randolph, argued to Washington that the Constitution had not granted the government the power to incorporate a Bank, and therefore he should not sign the bill. Also, Hamilton, in his February 1791 speech arguing his side of why the bank will be beneficial, says that Jefferson and Randolph submitted “the reasons which have induced him [Washington] to entertain a different opinion” (EbscoHost). But, President Washington and the Congress accepted Hamilton’s view, and set an important precedent for an expansive interpretation for the federal government’s authority versus states’ rights (Cowen). Therefore, in February 1791, the First Bank of the United States was officially established. The Report on the Bank, one of the papers written by Hamilton, explained that the national bank would be chartered for twenty years, during which time Congress would agree not to establish another national bank. The seed capital would be $10 million: $8 million from private sources and the remaining $2 million would come from the government. The bank would have the right to issue notes or currency up to $10 million. The government would also pledge that the notes of the bank would be unique in that they were valid for payments to the United States. Basically, the notes would be suitable for payments of taxes, a strong feature that would provide the Bank with an enormous advantage over its competitors (Morgan 480). The $8 million of public shares were available in both the United States, and overseas. The chief requirement of these non-government purchases was that one-quarter of the purchase price had to be paid in either gold or silver, and the remaining balance could be paid in bonds (Faragher 70). The national bank would confer many benefits on the government including a ready source of loans, a principle depository for federal monies that were transferable from city to city without charge, and a clearing agent for payments on the national debt (Cowen). The government, as the largest stockholder, would share in the profits, but would have no direct participation in the management of the bank itself. On July 4, 1791 investors displayed confidence in the new funding system by grabbing all of the $8 million of stock in the Bank of the United States with record speed. It was the largest initial stock offering the country had ever witnessed, and many notable members of Congress were purchasers. Scripts, which are prices of receipts for the right to buy stock (not the stock itself), jumped from the initial offering price of $25, to the unsustainable height of over $300, and then dropped back down to $150 within just a few days (Cowen). This caused an alarm in the markets, but Secretary of Treasury Hamilton calmed the storm by using public money to directly buy government securities. Also, the script bubble caused many people to blame the bank for such rabid speculations (Lane 610). The new stockholders of the bank met in Philadelphia in the fall of 1791 to decide on rules and regulations. The bank’s headquarters would be in Philadelphia, but they contended for, and received branches, with four new ones opening in Boston, Charleston, Baltimore, and New York, all within the following year (Cowen). By 1805, there were four more fully-functional branches open. The bank branches were of great concern to the already existing state banks because they posed competition. The bank’s first president was Thomas Willing, who “willing”ly accepted his title as the first president of the Bank of the United States, and remained in that position until 1807 (Morgan 481). Willing was the number one candidate for the job, as he possessed strong credentials. He had been the president of the Bank of North America, Mayor of Philadelphia, and a Judge of the Supreme Court of Pennsylvania (UPenn). John Kean was appointed the cashier at the head office in Philadelphia, however, the most noteworthy was George Simpson, who held that title from 1795-1811 (Cowen). The First Bank had a huge impact on the economy within just two months of opening its doors for business. Although the bank helped push a rising securities market higher, the following drop caused the very first crash of U.S. securities markets by forcing speculators to sell their stocks in the bank. This so-called “Panic of 1792” was short lived because once again Hamilton purchases government securities directly. But incidents like the Panic of 1792 would be remembered for many years by opponents of the bank who wanted to see its demise. Later on, they would use these events in their arguments against the bank. Primary customers of the First Bank were merchants, politicians, manufacturers, landowners, and most importantly, the government of the United States (Faragher 70). The banks’ notes were circulated countrywide, and therefore instilled a safe medium of paper money into the economy for business transactions. The sheer volume of business conducted by the bank throughout the country made it the single largest enterprise in the nation. But because the banks directors opted for stability rather than risk-taking, the profits were only marginal. As the time came for the debate of the bank’s renewal in Congress, the Federalists were no longer in control. The Democrats were, and they were ready to act against the renewal of the bank’s charter. The opponents charged that because three-fourths of the ownership of the stock was held by foreigners, that the bank was under their direct influence (Morgan 492). The charge was false, because foreigners were prohibited from electing directors. They also charged that the bank was concealing profits, operating in mysterious fashion, unconstitutional, and simply a tool for loaning money to the government. Although the charter did not expire until March 1811, the renewal process began in the House three years prior, in 1808. After the first bill for renewal was stopped dead in its tracks, the stockbrokers resubmitted the bill, but once again the bill was stopped, with an extremely close vote margin of 65 to 64 (Cowen). Therefore, the Bank of the United States finally closed its doors on March 3, 1811. The reason the bank lost its charter after twenty years had very little to do with banking. Banking was thriving in 1811. The bank was born, lived, and eventually died a victim of politics (Cowen). The government funds were removed from the bank and re-deposited among other banks. It had been created as a private, profit generating corporation in 1791 and it still is now. It is also at the head of America’s central banking scheme, the Federal Reserve System, created in 1913 by passage of the Glass Owens Act. Although the doors were closed on the First Bank of the United States, the American banking saga did not close its doors also, it continued with the establishment of the Second Bank of the United States in 1819. Work Cited Cowen, David. “First Bank of the United States.” EH.net Encyclopedia. 16 Mar. 2008. Web. 10 Oct. 2009. Faragher, John Mack. “Banks of the United States, First and Second.” The American Heritage Encyclopedia of American History. 1st. Ed. 1998. Print. Hamilton, Alexander. “On the Constitutionality of an Act to Establish a Bank.” EbscoHost Database. 3.16 (2009) Web. Lane, Carl. “For a Positive Profit: The Federal Investment in the First Bank of the United States, 1792-1802.” The William And Mary Quarterly. 54.3 (1997): 601-6012. JSTOR. Database. 10 Oct. 2009. Morgan, Wayne H. “The Origins and Establishment of the First Bank of the United States.” The Business History Review. 30.4 (1956): 472-492. JSTOR. Database. 10 Oct. 2009. “Thomas Willing.” UPenn Archives. “The University of Pennsylvania.” 28 Nov. 2003. Web. 16 Oct. 2009.