WEBVTT

NOTE 8. The First Bank of the United States, 1791-1811

1
00:00:00.000 --> 00:00:05.000
The First Bank of the United States, 1791-1811

2
00:00:05.000 --> 00:00:15.000
A lynchpin of the Hamiltonian financial program was a central bank, the first bank of the United States, replacing the abortive Bank of North America experiment.

3
00:00:15.000 --> 00:00:24.000
Hamilton's report on a national bank of December 1790 urged such a bank to be owned privately with the government owning one-fifth of the shares.

4
00:00:24.000 --> 00:00:43.000
The bank notes were to be legally redeemable in specie on demand and its notes were to

5
00:00:43.000 --> 00:00:48.440
be kept at par with specie by the federal government's accepting its notes in taxes,

6
00:00:48.440 --> 00:00:51.200
giving it a quasi-legal tender status.

7
00:00:51.200 --> 00:00:57.700
Also, the federal government would confer upon the bank the prestige of being the depository for its public funds.

8
00:00:57.700 --> 00:01:05.000
In accordance with Hamilton's wishes, Congress quickly established the first bank of the United States in February 1791.

9
00:01:05.000 --> 00:01:12.400
The charter of the bank was for 20 years, and it was assured a monopoly of the privilege of having a national charter during that period.

10
00:01:12.400 --> 00:01:18.900
In a significant gesture of continuity with the Bank of North America, the latter's longtime Bank of North America president

11
00:01:18.900 --> 00:01:23.780
and former partner of Robert Morris, Thomas Willing of Philadelphia, was made President

12
00:01:23.780 --> 00:01:26.420
of the New Bank of the United States.

13
00:01:26.420 --> 00:01:30.820
The Bank of the United States promptly fulfilled its inflationary potential by issuing millions

14
00:01:30.820 --> 00:01:37.140
of dollars in paper money and demand deposits, pyramiding on top of $2 million in specie.

15
00:01:37.140 --> 00:01:41.620
The Bank of the United States invested heavily in loans to the United States government.

16
00:01:41.620 --> 00:01:46.140
In addition to $2 million invested in the assumption of pre-existing long-term debt

17
00:01:46.140 --> 00:01:50.420
Assumed by the New Federal Government, the Bank of the United States engaged in massive

18
00:01:50.420 --> 00:01:56.540
temporary lending to the government, which reached $6.2 million in 1796.

19
00:01:56.540 --> 00:02:00.180
The result of the outpouring of credit and paper money by the New Bank of the United

20
00:02:00.180 --> 00:02:03.420
States was an inflationary rise in prices.

21
00:02:03.420 --> 00:02:12.260
Thus, wholesale prices rose from an index of 85 in 1791 to a peak of 146 in 1796, an

22
00:02:12.260 --> 00:02:14.860
increase of 72%.

23
00:02:14.860 --> 00:02:20.380
In addition, speculation boomed in government securities and real estate values were driven upward.

24
00:02:20.380 --> 00:02:24.260
Pyramiding on top of the Bank of the United States expansion and aggravating the paper

25
00:02:24.260 --> 00:02:29.420
money expansion and the inflation was a flood of newly created commercial banks.

26
00:02:29.420 --> 00:02:33.340
Whereas there were only three commercial banks before the founding of the United States and

27
00:02:33.340 --> 00:02:37.440
only four by the establishment of the Bank of the United States, eight new banks were

28
00:02:37.440 --> 00:02:44.560
were founded shortly thereafter, in 1791 and 1792, and ten more by 1796.

29
00:02:44.560 --> 00:02:49.480
Thus, the Bank of the United States and its monetary expansion spurred the creation of

30
00:02:49.480 --> 00:02:52.160
eighteen new banks in five years.

31
00:02:52.160 --> 00:02:56.120
The establishment of the Bank of the United States precipitated a grave constitutional

32
00:02:56.120 --> 00:03:00.580
argument, the Jeffersonians arguing that the Constitution gave the federal government no

33
00:03:00.580 --> 00:03:02.720
power to establish a bank.

34
00:03:02.720 --> 00:03:08.460
Hamilton, in turn, paved the way for virtually unlimited expansion of federal power by maintaining

35
00:03:08.460 --> 00:03:15.020
that the Constitution, quote, implied a grant of power for carrying out vague national goals.

36
00:03:15.020 --> 00:03:19.920
The Hamiltonian interpretation won out officially in the decision of Supreme Court Justice John

37
00:03:19.920 --> 00:03:24.360
Marshall in McCullough v. Maryland in 1819.

38
00:03:24.360 --> 00:03:29.400
Despite the Jeffersonian hostility to commercial and central banks, the democratic Republicans

39
00:03:29.400 --> 00:03:34.700
under the control of quasi-Federalist moderates rather than militant old Republicans made

40
00:03:34.700 --> 00:03:38.920
no move to repeal the Charter of the Bank of the United States before its expiration

41
00:03:38.920 --> 00:03:44.280
in 1811 and happily multiplied the number of state banks and bank credit in the next

42
00:03:44.280 --> 00:03:45.280
two decades.

43
00:03:45.280 --> 00:03:49.100
Thus, in 1800 there were 28 state banks.

44
00:03:49.100 --> 00:03:54.440
By 1811 the number had escalated to 117, a four-fold increase.

45
00:03:54.440 --> 00:04:01.760
In 1804, there were 64 state banks, of which we have data on 13 or 20% of the banks.

46
00:04:01.760 --> 00:04:07.320
These reported banks had $0.98 million in specie as against notes and demand deposits

47
00:04:07.320 --> 00:04:16.020
outstanding of $2.82 million, a reserve ratio of 0.35, or a notes plus deposits pyramiding

48
00:04:16.020 --> 00:04:20.620
on top of specie of 2.88 to 1.

49
00:04:20.620 --> 00:04:28.940
By 1811, 26% of the 117 banks reported a total of $2.57 million, but the two-and-a-half fold

50
00:04:28.940 --> 00:04:35.180
increase in specie was more than matched by an emission of $10.95 million of notes and

51
00:04:35.180 --> 00:04:38.740
deposits, a nearly four-fold increase.

52
00:04:38.740 --> 00:04:44.960
This constituted a pyramid of 4.26 to 1 on top of specie, or a reserve ratio of these

53
00:04:44.960 --> 00:04:48.200
banks of 0.23.

54
00:04:48.200 --> 00:04:52.140
As for the Bank of the United States, which acted in conjunction with the federal government

55
00:04:52.140 --> 00:04:59.080
and with the state banks, in January 1811 it had specie assets of $5.01 million and

56
00:04:59.080 --> 00:05:07.000
notes and deposits outstanding of $12.87 million, a pyramid ratio of 2.57 to 1 or a reserve

57
00:05:07.000 --> 00:05:09.000
ratio of 0.39.

58
00:05:09.000 --> 00:05:14.480
Finally, when the time for rechartering the Bank of the United States came in 1811, the

59
00:05:14.480 --> 00:05:18.880
Recharter Bill was defeated by one vote each in the House and Senate.

60
00:05:18.880 --> 00:05:24.380
Recharter was fought for by the Madison administration, aided by nearly all the Federalists in Congress,

61
00:05:24.380 --> 00:05:28.780
but was narrowly defeated by the bulk of the Democratic Republicans, including the hard-money

62
00:05:28.780 --> 00:05:31.160
old Republican forces.

63
00:05:31.160 --> 00:05:35.360
In view of the widely held misconception among historians that central banks serve and are

64
00:05:35.360 --> 00:05:40.700
looked upon as restraints upon state or private bank inflation, it is instructive to note

65
00:05:40.700 --> 00:05:45.400
found that the major forces in favor of re-charter were merchants, chambers of commerce, and

66
00:05:45.400 --> 00:05:47.900
most of the state banks.

67
00:05:47.900 --> 00:05:51.940
Merchants found that the bank had expended credit at cheap rates and had eased the external

68
00:05:51.940 --> 00:05:55.480
complaint about a quote, scarcity of money.

69
00:05:55.480 --> 00:05:59.380
Even more suggestive is the support of the state banks, which hailed the bank as quote

70
00:05:59.380 --> 00:06:04.620
advantageous and worried about the contraction of credit if the bank were forced to liquidate.

71
00:06:04.620 --> 00:06:09.220
The Bank of New York, which had been founded by Alexander Hamilton, in fact lauded the

72
00:06:09.220 --> 00:06:14.060
Bank of the United States, because it had been able, quote, in case of any sudden pressure

73
00:06:14.060 --> 00:06:19.060
upon the merchants to step forward to their aid in a degree which the state institutions

74
00:06:19.060 --> 00:06:20.020
were unable to do.