The Bank of the United States

1. The Bank of the United States

2. Four Pillars of Hamiltonian Finance • Coinage Systema monetary regime with long-term price stability • Taxes and Tax Collectionrevenue for the federal government • Management of the National Debtrecovery from bankruptcy permits long-term borrowing by federal government • A National Bank (proto-Central Bank)foundation for financial system and short-term borrowing for federal government

3. IV. The Fourth Pillar:The First Bank of the United States • Alexander Hamilton, Report on a National Bank argued for a Bank of the United States • Notes would replace some gold and silver in circulation and thus augment “the active or productive capital” of the country • Bank would serve as the fiscal agent of the government—accepting tax funds and transferring them---it would be the federal government’s banker • Bank would provide short-term lending to the government • Based on his favorable appraisal of the Bank of England.

4. First Bank of the United States • Established by Act of Congress 1791. • Twenty Year Charter (1791-1811). • Capital Stock of $10 million (huge---total of five other banks at the time have combined capital of $3 million) Government owns 20 percent • Bank prohibited from buying long-term government debt, most of assets are short term loans. • Home Office Philadelphia: • Branches in New York, Boston, Baltimore, Charleston by 1800 and Washington and Savannah in 1802 and New Orleans 1805.

5. Go visit the Bank in Philadelphia.

6. The Battle over the Bank • Madison: “Reviewing the Constitution….it is not possible to discover in it the power to incorporate a bank.” NOT among power specifically enumerated to federal government. • Hamilton argued that had the right to pass any legislation that was “necessary and proper” to exercise of its listed powers. • Madison accuses Hamilton of “leveling all the barriers which limit the powers of the general government and protect those of the state governments.” A “strict constructionist” • Jefferson blasts Bank of the United States as unconstitutional---it must be more than convenient to executing its power, it must be indispensable.

7. The Battle over the Bank • Hamilton gets bill passed in House of Representatives 39-20, but all Congressmen North of Potomac in favor, most in South against. • Southerners and some others regard bank as of value only to commercial North not agricultural South. A source of corruption.

8. Relation to Federal Government • Unlike Bank of England—wholly privately owned---Bank of the United States was mixed government/private, 20%/80. [Ownership of the FRS? Government control?] • Mixed ownership to forestall criticism that only serves interests of wealthy urban investors. • Fiscal agent of U.S. Government • Receives deposits---customs in ports • Pays interest on public debt • Manages foreign exchange operations of U.S. Treasury • Supplies bullion and coin to mint. • Prohibition on owning U.S. government bonds to avoid financing budget deficitsinflation.

9. But it is a key source of Government Finance • Key to government finance in 1790s before confidence is restored. • Tariff revenues not enough---first loan in 1792. • By 1796, short-term loans of the Bank of United States to federal government are $6.2 million. Key to avoiding a second default while establishing tax revenues (Whiskey Rebellion) • Finally in 1798 and 1799, Treasury issues new securities at 8% and reduces loans to $3 million.

11. Transition to Commercial Bank • Budget surpluses after 1800 allow repayment of debt entirely. • BUS becomes primarily a commercial bank. • Bank follows very conservative lending---consequently it becomes net creditor of state banks in transactions. • Presents notes to them regularly, limiting extent of their note issue. • Made short-term loans to other banks---beginnings of lender of last resort. Thus a proto-central bank.

13. First Crisis: Stock Market Boom of 1792 • General Speculation------Hamilton’s stabilization creates a boom. IPO of BUS July 1791. Script for shares $25 rises to $300 in August • Scandal: William Duer (former Treasury deputy) and his “company” of fellow speculators. Propose new bank to rival Bank of New York. Want to drive down its price and take it over, the corner market for U.S. 6s which are needed to make future BUS payments (paid in cash or bonds for BUS stock). • BUS opens for business December 1791—-- • BUS Monetary expansion: speculators borrow heavily by Dec 1791-Jan 1792, total “bills discounted 30-60 day loans: $964,260$2.6 million. • Speculators borrow to buy US bonds to pay for installments in BUS stock (payable in bonds)

15. BUS IPO July 4, 1791

16. Crash of 1792 • BUS Monetary Contraction • Potential run. Cut discounts by March 1792, $2.6  $2.0 million---renewals refused, borrowers sell bonds to repay loans. Jan-March 1792 US 6% bonds fall from $121 to $103. • Hamilton fears that crashloss of faith in bonds and BUS. • Hamilton uses Sinking Fund to buy bonds. • But on board of Sinking Fund sits Thomas Jefferson blocks who later intervention of the Sinking Fund. • Hamilton turns to Bank of New York to act as lender of last resort provide loans to high quality borrowers.---Bagehot’s rule “lend freely on good collateral.”

19. Hamilton’s Triumph • By 1796---federal government runs a surplus • In 1798 and 1799 Treasury issues new securities at 8% and reduces loans from BUS to $3 million. • National Debt Reduced and Interest Rate Premium is reduced.

20. Hamilton’s Triumph

21. Before Hamilton’s Debt Plan? Hamilton’s Achievement Are you a Jeffersonian or a Hamiltonian?

22. Jefferson (1801-1809) & Madison (1809-1817) • Hostile to Hamiltonian Finance • Dangerous to republican government, opportunities for political corruption, too “British” • Louisiana Purchase 1803: $15 million, but….. • No “perpetual debt” begin to retire debt. • Eliminate excise taxes—1805 • Refuse to re-charter First Bank of the United States

23. Bank is not renewed in 1811 • Thomas Jefferson and many of his followers hate BUS, although his Secretary of the Treasury Albert Gallatin was pro-bank. • They claim it was unconstitutional, a money power, did not help agriculture and 70% of stock was owned by foreigners. • 1811. President Madison tells representatives to vote their conscience (he privately supports bank now) • House postpones indefinitely vote on renewal 65-64. • Senate tie 17-17 broken by Vice President George Clinton (New York).

24. Bank eliminated 1811, the War of 1812 (1812-1814/1815)

25. Economic Characteristics of the War of 1812 • June 1812-February 1815 • Total military personnel 286,000 • Population est. 8,179,000, percent mobilized—3.5% • Battle Deaths 1,950 • Direct cost $87 million. • Nominal GNP: $880 million. • Direct Cost/One years GDP=9.9% • Financing by taxes—21% and by debt and money 79% • Inflation returns!

28. What’s this?

29. How to finance the new war? • Previous bond issues, successful—1803 Gallatin offers $11.3 million at 6% to finance Louisiana purchase. Quickly taken, mostly by foreigners. Sum for acquisition of new territory. War is different. • Secretary of the Treasury, Albert Gallatin gets Congress to authorize issuance of $11 million in bonds at 6%, 3 months before war declared in March 1812. • How to sell? • Jeffersonians opposed to middlemen security dealers and bankers. Just announce sale and wait for investors. Difficulty in selling them directly to bankers and rich investors.

30. How to finance the new war? • Result? • By May 1812 only $6.2 million is sold. President Madison refuses to allow Gallatin to raise interest rate. • Instead Congress authorizes the issue of short term 1 year Treasury bills that are legal tender for public not private transactions---used to pay expenses. Small denominations $20 to $100, and circulate as money---inflation.

31. Financing the War of 1812 • 1813 Gallatin tries another $16 million debt issue---$10.1 million unsold. • Gallatin then turns to a syndicate of private underwriters • Stephen Girard in Philadelphia • John Jacob Aster of New York • David Parish agent of European banking houses (remember the importance Hamilton placed on paying the foreign debt in full!)

32. Financing the War of 1812 • The syndicate agrees to assume $10.1 million of 6% bonds, paying a price of $88 per $100 (with an implicit yield of 6.8%) and getting fee of $17,600. • The syndicate recruits 12 junior partners to syndicate. • Bonds are sold within a month---cash for U.S. government! • But government reverts to trying to sell directly afterwardsincreased difficulty in sales. Slow subscriptions. Why? • Market interest rate rise towards 8%

33. Return to Hamiltonian Finance • Military setbacks in summer of 1814 • Banking panics begin---Why? • General banking suspension in 1814 when British seize and burn Washington, D.C. Banks hold on to their reserves. • Financial system halted until suspension eases in 1816. • Hamiltonian virtues triumph. Second Bank of the United States is chartered in 1816.