Introduction

2. Introduction • The First Bank of the United States was needed because the government had a debt from the Revolutionary War • Alexander Hamilton conceived of the bank to handle the colossal war debt — and to create a standard form of currency. • Up to the time of the bank's charter, coins and bills issued by state banks served as the currency of the country. The First Bank's charter was drafted in 1791 by the Congress and signed by George Washington. • Nowhere in the Constitution is there a reference to a national bank, so Hamilton saying that Congress had the right to use whatever methods necessary to implement its proceedings. Hamilton was in favor of a large federal bureaucracy. • Jefferson was immediately suspicious of a National Banking system and National currency. • One of the most important of Hamilton's contributions to the American economy was his advocacy of a national bank. • The Bank of the United States would generate a great controversy.

3. The Need for Financial Stability • Hamilton believed in the need for banks to provide credit and stimulate the economy. He used the central banks of Europe as an example for the American bank. • On December 15, 1790, Hamilton submitted a report to Congress making the case. He proposed a Bank of the United States with a $10 million capital and the ability to issue paper money. • It would be based in Philadelphia and chartered for 20 years. • The federal government would have a minority stake in the Bank, and its board of directors would be private individuals, ensuring a mix of public oversight and private enterprise. • The Bank would be able to lend the government money and safely hold its deposits, give Americans a uniform currency, and promote business and industry by extending credit. • Together with Hamilton's other financial programs, it would help place the United States on an equal financial footing with the nations of Europe.

4. Division • Hamilton's bank plan had a relative easy time in Congress. • The Senate passed it on January 20, 1791, and the House followed in February. • But support for the Bank fell largely along sectional lines, with Northern endorsement and Southern opposition. • Among those Southern opponents was James Madison, who worried that the Bank's placement in Philadelphia, the nation's temporary capital, might thwart the decision to put the permanent seat of government further south on the banks of the Potomac River. • Madison also noted that the Constitution did not provide power to establish a national bank; and if a power was not in the text, by what authority could it be done? • When the Bank bill reached George Washington, Thomas Jefferson, who termed the banking industry "an infinity of successive felonious larcenies," also weighed in against it on constitutional grounds, urging a veto. • It seemed as if the Bank might yet go down to defeat.

5. The Challenge • Hamilton would not give up without a fight. • Asked by his patron Washington to answer the opinions of Jefferson, Hamilton swiftly penned an opinion of almost 15,000 words presenting his case. • Hamilton's central point was that the Constitution must assume implied powers along with those actually stated; the premise for this was the clause enabling Congress "to make all laws which shall be necessary and proper" to put expressly granted powers into effect. • In Hamilton's view, "necessary" did not mean absolutely essential so much as useful and appropriate, and the Bank certainly met that looser standard -- it would be a great help in enabling the government to carry out a number of powers explicitly granted it by the Constitution, including collecting taxes, regulating trade and creating a military. • Persuaded by Hamilton's arguments, President Washington signed the Bank bill into law

6. The Long Range • When stock in the Bank became available in July 1791, the resulting frenzy and rocketing share price seemed to confirm its value. • But criticism of Hamilton's policies was growing, and the Bank was a key factor in the creation of America's first organized opposition party, the Republicans, that same year. • Republican capture of the White House in 1800 and continued control did not bode well for the Bank, and when its first charter expired in 1811, the Senate rejected a bid to renew it. • President Madison felt the consequences during the War of 1812, when there was no central bank to fund the military effort, and as a result he endorsed renewal in 1816. • But the charter of this Second Bank of the United States expired under President Andrew Jackson, another Bank foe, and Jackson let it lapse. • And this time there would be no quick renewal; although Congress allowed certain nationally charted banks during the Civil War, the modern Federal Reserve system did not come into being until 1914.

7. Other Notes • Virtually all the bank’s records were destroyed in the early 1800s. But what evidence exists shows that the bank largely succeeded in accomplishing Hamilton’s aims—jump-starting the economy and building public confidence in the Treasury and financial markets. • By converting war debt into bank stock, the bank relieved the government of that financial burden and sent a message to investors at home and abroad that the United States would honor its debts • In an era when the government could not count on a steady income—there was no income tax; import duties and public land sales made up the bulk of federal revenue—the bank sustained daily operations with short-term loans. • A robust currency circulation and lending to other banks and businesses stimulated the economy, leading to increased domestic and foreign trade that generated income and job growth. • Nevertheless, over the course of several years the bank took on that role, leveraging its large transaction volume and reserve balances to expand or constrain the money supply.

8. Defeat to Victory • For all its successes, Hamilton’s bank could not overcome its political liabilities. When its charter came up for renewal in 1811, the Federalists were out of power; the Democratic-Republicans, who had remained hostile to the bank, now held the majority. Renewing Jefferson’s attack of 20 years earlier, they charged that the bank was unconstitutional, a perversion of the necessary-and-proper clause. • This time there was no Hamilton to mount a passionate and brilliant defense; Aaron Burr had killed him in a pistol duel seven years earlier. Despite support from President James Madison and Treasury Secretary Albert Gallatin, Congress let the charter expire, and the bank closed its doors on March 3, 1811. • But history has given economic victory to Hamilton. The economy that developed in this country would not realize the Jeffersonian ideal of yeoman farmers and artisans producing goods from their own resources, unassisted by banks and financial markets. Instead, it would embrace Hamilton’s capitalist vision—sophisticated, multifarious commerce thriving on a sound currency and ready access to credit. • Successive generations of Americans have reaped the rewards of the economic revolution that began with the opening of the First Bank of the United States.

9. Divided Philosophies