WEBVTT NOTE 6. The Bank of North America 1 00:00:00.000 --> 00:00:02.000 The Bank of North America 2 00:00:02.000 --> 00:00:13.000 Robert Morris's nationalist vision was not confined to a strong central government, the power of the federal government to tax, and a massive public debt fastened permanently upon the taxpayers. 3 00:00:13.000 --> 00:00:26.000 Shortly after he assumed total economic power in Congress in the spring of 1781, Morris introduced a bill to create the first commercial bank, as well as the first central bank in the history of the New Republic. 4 00:00:26.000 --> 00:00:27.000 Bank. 5 00:00:27.000 --> 00:00:32.400 This bank, headed by Morris himself, the Bank of North America, was not only the first fractional 6 00:00:32.400 --> 00:00:37.300 reserve commercial bank in the U.S., it was to be a privately owned central bank, modeled 7 00:00:37.300 --> 00:00:39.280 after the Bank of England. 8 00:00:39.280 --> 00:00:44.900 The money system was to be grounded upon specie, but with a controlled monetary inflation pyramiding 9 00:00:44.900 --> 00:00:48.880 an expansion of money and credit upon a reserve of specie. 10 00:00:48.880 --> 00:00:52.880 The Bank of North America, which quickly received a federal charter and opened its doors at 11 00:00:52.880 --> 00:00:57.840 at the beginning of 1782, received the privilege from the government of its notes being receivable 12 00:00:57.840 --> 00:01:02.860 in all duties and taxes to all governments, at par with specie. 13 00:01:02.860 --> 00:01:07.360 In addition, no other banks would be permitted to operate in the country. 14 00:01:07.360 --> 00:01:11.920 In return for its monopoly license to issue paper money, the bank would graciously lend 15 00:01:11.920 --> 00:01:16.260 most of its newly created money to the federal government to purchase public debt and be 16 00:01:16.260 --> 00:01:19.140 reimbursed by the hapless taxpayer. 17 00:01:19.140 --> 00:01:23.700 The Bank of North America was made the depository for all congressional funds. 18 00:01:23.700 --> 00:01:28.740 The first central bank in America rapidly loaned $1.2 million to the Congress, headed 19 00:01:28.740 --> 00:01:31.320 also by Robert Morris. 20 00:01:31.320 --> 00:01:35.100 Despite Robert Morris's power and influence, and the monopoly privileges conferred upon 21 00:01:35.100 --> 00:01:39.800 his bank, it was perceived in the market that the bank's notes were being inflated compared 22 00:01:39.800 --> 00:01:41.780 with Specie. 23 00:01:41.780 --> 00:01:46.500 Despite the nominal redeemability of the Bank of North America's notes in Specie, the 24 00:01:46.500 --> 00:01:50.960 The bank's lack of confidence in the inflated notes led to their depreciation outside its 25 00:01:50.960 --> 00:01:53.300 home base in Philadelphia. 26 00:01:53.300 --> 00:01:57.540 The bank even tried to shore up the value of the notes by hiring people to urge redeemers 27 00:01:57.540 --> 00:02:03.340 of its notes not to ruin everything by insisting upon specie, a move scarcely calculated to 28 00:02:03.340 --> 00:02:06.740 improve ultimate confidence in the bank. 29 00:02:06.740 --> 00:02:11.540 After a year of operation, however, Morris, his political power slipping after the end 30 00:02:11.540 --> 00:02:16.340 of the war, moved quickly to end his bank's role as a central bank and to shift it to 31 00:02:16.340 --> 00:02:21.740 to the Status of a Private Commercial Bank Chartered by the State of Pennsylvania 32 00:02:21.740 --> 00:02:27.080 By the end of 1783, all of the federal government's stock in the Bank of North America, which 33 00:02:27.080 --> 00:02:31.760 had the previous year amounted to five-eighths of its capital, had been sold by Morris into 34 00:02:31.760 --> 00:02:37.120 private hands, and all U.S. government debt to the bank had been repaid. 35 00:02:37.120 --> 00:02:41.640 The first experiment with a central bank in the United States had ended. 36 00:02:41.640 --> 00:02:46.200 At the end of the Revolutionary War, the contraction of the swollen mass of paper money 37 00:02:46.200 --> 00:02:50.900 Combined with the resumption of imports from Great Britain, combined to cut prices by more 38 00:02:50.900 --> 00:02:57.060 than half in a few years, vain attempts by seven state governments in the mid-1780s to 39 00:02:57.060 --> 00:03:02.940 cure the quote, shortage of money and reinflate prices were a complete failure. 40 00:03:02.940 --> 00:03:07.340 Part of the reason for the state paper issues was a frantic attempt to pay the wartime public 41 00:03:07.340 --> 00:03:13.760 debt, state and pro-rata federal, without resorting to crippling burdens of taxation. 42 00:03:13.760 --> 00:03:18.680 The increased paper issues merely added to the quote, shortage, by stimulating the export 43 00:03:18.680 --> 00:03:22.400 of species and the import of commodities from abroad. 44 00:03:22.400 --> 00:03:25.320 Once again, Gresham's law was at work. 45 00:03:25.320 --> 00:03:31.340 State paper issues, despite compulsory par laws, merely depreciated rapidly and aggravated 46 00:03:31.340 --> 00:03:32.800 the shortage of species. 47 00:03:32.800 --> 00:03:37.520 A historian discusses what happened to the paper issues of North Carolina. 48 00:03:37.520 --> 00:03:45.720 quote, In 1787 to 1788, the specie value of the paper had shrunk by more than 50 percent. 49 00:03:45.720 --> 00:03:50.400 Coin vanished, and since the paper had practically no value outside the state, merchants could 50 00:03:50.400 --> 00:03:55.000 not use it to pay debts they owed abroad. Hence, they suffered severe losses when they 51 00:03:55.000 --> 00:04:00.320 had to accept it at inflated values in the settlement of local debts. North Carolina's 52 00:04:00.320 --> 00:04:05.100 performance warned merchants anew of the menace of depreciating paper money, which they were 53 00:04:05.100 --> 00:04:16.880 Neither was the situation helped by the expansion of banking following the launching of the Bank 54 00:04:16.880 --> 00:04:19.940 of North America in 1782. 55 00:04:19.940 --> 00:04:24.820 The Bank of New York and the Massachusetts Bank of Boston followed two years later, with 56 00:04:24.820 --> 00:04:29.620 each institution enjoying a monopoly of banking in its region. 57 00:04:29.620 --> 00:04:34.380 Their expansion of banknotes and deposits helped to drive out specie and in the following 58 00:04:34.380 --> 00:04:38.540 Within a year, the expansion was succeeded by a contraction of credit, which aggravated 59 00:04:38.540 --> 00:04:39.980 the problems of recession.