|First Bank of the United States Note
The most controversial action of Treasury Secretary Alexander Hamilton under President George Washington was the creation of the First Bank of the United States. Assumption of state debts from the Revolutionary War had been acceded to by Secretary of State Thomas Jefferson and his colleague, Virginia Congressman James Madison. But Jefferson and Madison both fought creation of the new national bank. At issue was the power of the federal government to engage in activities not specifically enumerated by the still new U.S. constitution.
The Federal Bank of Minneapolis summarizes the creation of the First Bank of the United States:
The man on the $10 bill, whom biographer Ron Chernow describes as “the clear-eyed apostle of America’s economic future,” believed that the new nation needed a national bank if it was to prosper. After the Revolutionary War, the economy was in tatters: Crushing war debt weighed down the federal government, and a shortage of sound currency and bank credit stifled commercial growth. Hamilton designed the First Bank to help the government get on its financial feet and to galvanize American commerce by providing currency and loans to businesses and individuals. The bank was a vital part of a national financial infrastructure that Hamilton created during his short but prodigious career, the template for today’s monetary economy based on a stable currency and access to credit.
A statesman with a natural genius for economics, Hamilton was far ahead of his contemporaries in perceiving how the country’s fortunes and those of free markets were intertwined, says Thomas M. Humphrey, a former senior economist with the Federal Reserve Bank of Richmond who has written extensively about the history of economic thought. “Hamilton saw a system of sound, secure and resilient financial institutions as being necessary for the real economy to function efficiently,” Humphrey said in a telephone interview. “He also had this vision that America would one day become a huge, thriving economic success around the world, and he thought of these institutions as being necessary to promote that vision.”
The First Bank worked in consort with Hamilton’s other financial reforms—paying off war debt and establishing a stable monetary standard—to put the government’s finances in order and stoke the fires of enterprise at the beginning of the industrial revolution. By aiding in revenue collection, lending to the Treasury and marketing government debt to private investors, the bank served as a financial bulwark for the federal government. And its operations invigorated markets by providing a sizable, trustworthy currency and extending credit to businesses.
The chartering of the Bank was dramatic since involved a clash of strong political personalities and very divergent views about the political model that America would follow. Hamilton, in particular was charged by Jefferson with following too closely what Jefferson viewed as a corrupt British model. Open political warfare broke out within the Washington Administration. One student of the history ably sums it up as suffused with “an astonishing amount of political intrigue and subterfuge.
“It was Hamilton’s proposal for the creation of a Bank of the United States that touched off a firestorm in the House of Representatives, leading to the first major fight of implied versus enumerated powers. The fight came down to this: Could the national government grant a corporate charter? No such power was explicitly mentioned - “enumerated” - in the Constitution. Since it was not, did that not mean that it was therefore a power reserved to the states, as expressed in Article Ten of the Bill of Rights? The leader of the opposition was Secretary of State Thomas Jefferson, who enlisted the aid of James Madison in launching a series of open and covert attacks on Hamilton, and his influence with Washington. Jefferson argued that since the power to create a bank was not expressly and explicitly stated in the Constitution, the proposed charter for a Bank of the United States was unconstitutional. Using an astonishing amount of political intrigue and subterfuge, Jefferson was able to make the Bank a major national issue.
“President Washington therefore requested Attorney General Edmund Randolph, who sided with Jefferson, and Hamilton to write reports explaining and justifying their respective positions regarding the government’s power to create the bank.”
In a memorandum on “Opinion on the Constitutionality of a National Bank,” Jefferson wrote in February 1791, Jefferson denied the “general welfare” clause of the Constitution. Jefferson contended:
“I consider the foundation of the Constitution as laid on this ground: That ‘all powers not delegated to the United States, by the Constitution, nor prohibited by it to the States, are reserved to the States or to the people.’ [XIIth amendment.] To take a single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless field of power, no longer susceptible of any definition. …. It would reduce the whole instrument to a single phrase, that of instituting a Congress with power to do whatever would be for the good of the United States; and, as they would be the sole judges of the good or evil, it would be also a power to do whatever evil they please.
As powerful was the opposition of Jefferson, Madison and Attorney General Randolph --- fellow Virginians – on Washington, Hamilton’s support was more influential. Hamilton’s famous opinion — which promptly and decisively persuaded Washington to sign the legislation, held:
“That every power vested in a government is in its nature sovereign, and includes, by force of the term, a right to employ all the means requisite and fairly applicable to the attainment of the ends of such power, and which are not precluded by restrictions and exceptions specified in the Constitution, or not immoral, or not contrary to the essential ends of political society.”
Economic historian David Cowen describes, in the Economic History Association’s excellent online encyclopedia EH.net, the impact of the Bank, once it became operational:
“The customers were merchants, politicians, manufacturers, landowners, and most importantly, the government of the United States. The Banks notes circulated countrywide and therefore infused a safe medium of paper money into the economy for business transactions. The sheer volume of deposits, loans, transfers and payments conducted by the Bank throughout the country made it far and away the single largest enterprise in the fledgling nation. Profits, however, were moderate during the operation of the Bank because its directors opted for stability over risk taking.
“The Bank had an enormous impact on the economy within two months of opening its doors for business by flooding the market with its discounts (loans) and banknotes and then sharply reversing course and calling in many of the loans. Although the added liquidity initially helped push a rising securities market higher, the subsequent drain caused the very first U.S. securities market crash by forcing speculators to sell their stocks. … This so-called "Panic of 1792" was short lived as again Secretary Hamilton (as in the previous year during the script bubble) injected funds by buying securities directly and on behalf of the sinking fund. …
“The rest of Bank years were never as tumultuous as the events surrounding the Panic of 1792. Rather during its twenty-year lifespan the Bank performed many mundane pecuniary functions for its customers. …
“The Bank performed certain functions that today are associated with central banking. First, the Bank attempted to regulate state banks by curtailing those that had overissued their bank notes. Second, the Bank, in coordination with the Treasury department, discussed economic conditions and attempted to promote the safety of the entire credit system. Third, while the Philadelphia board gave each branch autonomy respecting lending to individuals, the Bank tried to coordinate aggregate policy changes, whether a loosening or tightening of lending credit, across the entire network of branches.”
Although the Bank’s political, philosophical, and mercantile enemies succeeded in preventing its re-chartering, upon expiration in 1811, it would not be long before a Second Bank of the United States was constituted… and with the active support of one of its most ardent opponents, James Madison, when president of the United States and beset by the exigencies of the War of 1812.
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