Bank of the United States

A banking corporation chartered by the federal government to serve as a central bank. The bank existed in two stages, known as the First Bank (1791 — 1811) and the Second Bank (1816 — 1836). Although the bank rendered important services to the economy, it became in its later years the focal point of a bitter political struggle that resulted in its eventual overthrow by President Andrew Jackson.

Hamilton's Proposal

The Constitution made no provision for the chartering of federal corporations but this is what Alexander Hamilton proposed to Congress in his Report on a National Bank, Dec. 14, 1790. His plan involved the creation of a national bank that, while largely privately owned, would perform important public functions. Such a bank would act as the fiscal agency of the government and the principal depository of the Treasury, and would help to provide for the government's monetary requirements. It would lend to government. It would deal in foreign exchange. It would serve as a regulator of the country's money supply. At the same time, while directly aiding commerce and industry by its own loans, it would be a banker's bank — so that private state-chartered commercial banks could borrow from it.

Hamilton's bank was to be set up as follows. It would be chartered for 20 years and would have branches. It should not lend on land mortgages but on 60-day notes to the federal government, the states, and private individuals. It should be capitalized at $10 million, with the government subscribing to one fifth of the stock. Stock subscriptions were to be one fourth in specie (thus setting up the principle of a fractional reserve) and the rest in the government's new funded debt. Its board of directors was to be chosen by the stockholders, but no foreigners could serve on the board.

The bank was to deal only in bills of exchange, specie, and goods pledged for its loans, with 6% the maximum interest rate. It was to receive deposits and to issue bank notes, and these, on demand, were to be payable in specie. The notes were to be legal tender in all payments to the government. All debts of the bank, including notes but not deposits, could not exceed its capitalization.

USA First Bank

A bill along the lines indicated was passed in the Senate on Dec. 23, 1790, and in the House — after much debate on its constitutionality — on Feb. 8, 1791. President Washington signed the bill on Feb. 25, 1791.

The stock of the Bank of the United States was quickly subscribed and the bank began operations on Dec. 12, 1791. Its main office was set up in Philadelphia, and in time eight branches were created. This so-called First Bank was conservatively run, and it fulfilled brilliantly all of Hamilton's expectations. It handled the government's foreign-exchange operations; it was its depository, transferring public moneys from place to place; it helped importers pay their customs dities; and it assured the successful establishment of the United States Mint, toward this end furnishing the bullion for the country's own coinage. It lent to the state banks and placed checks on their note circulation. As a private bank, it exercised restraint. It always paid handsome dividends.

When the charter expired in 1811, Madison was president. Like Jefferson's, his hostility to the bank had never ceased. Southern agrarians were of the same mind, and the bank's request for charter renewal was denied by Congress. The country had no controls over its monetary affairs from 1811 to 1816.

USA Second Bank

The turmoil in the country's finances as a result of the War of 1812 — specie payments had been suspended and state banks were exnding their circulations recklessly — forced Congress' hand. The so-called Second Bank was set up by law on April 10, 1816. The provisions of its charter were similar to those of the First Bank with certain exceptions. The capitalization was to be $35 million, the government again furnishing one fifth. Five of the bank's 25 directors were to be appointed by the government. The immediate consequence of the bank's establishment was the resumption of specie payments on Feb, 20, 1817.

In its fist seven years the Second Bank floundered and created hostility. In 1823, Nicholas Biddle, a wealthy Philadelphian and one of the government's five directors, became its president. Under Biddle, the Second Bank roceeded to deport itself like the central bank Hamilton had envisaged. He increased the number of branches to 29, and in several ways was able to regulate the country's money — and the ups and downs of its business. He was not averse, however, to using the bank for political purposes, and to Philadelphia's advantage, by imposing restraint on the government's own activities and by checking overexpansion in banking in the Southwest and in New York State.

Biddle was a great banker, but his arrogance created too many enemies. Chief among these were President Jackson, the powerful Democratic party of New York State (controlled by Martin Van Buren), and the New York State bankers. Jackson, elected in 1828, was a hard — money man who was suspicious of all banks and paper money. To Jackson and the organized workingmen's parties, the bank was a monopoly, controlled by foreigners, and representing wealth.

Biddle's Whig friends in Congress introduced a bill on Jan. 9, 1832, for the bank's recharter. The existing charter was due to expire in 1836. Somewhat earlier, the Whigs had nominated Henry Clay for the presidency and voted to make the bank the issue of the campaign. The bill was passed on July 3. Jackson's quick temper was aroused. He vetoed the bill on July 10 in a message that denounced the bank as an agency of "the rich and the powerful" that was oppressing the poor. Congress did not override the veto, and the stage was set for the presidential contest. With the bank the primary issue, Clay was badly defeated in the 1832 election.

The bank might have been rechartered had it not been for Biddle's conduct. He antagonized the Treasury in his handling of foreign loans and in August 1833, to bring pressure to bear on the administration, he began to contract credit. Discounts and exchange handled by the bank fell by 20%, and state bank balances were sharply reduced. The country's economy — which Biddle had been insisting was his particular concern — began to suffer from a financial deflation. Jackson's answer was to change his secretary of the treasury to one unfriendly to the bank (Roger B. Taney) and to order the withdrawal of the government deposits from the bank's branches. Biddle saw that he had lost, and he began to wind up the bank's affairs. The demise of the Second Bank in 1836 was borth unfortunate and ironical. The expansion of state banking and note issue ledthe sharp depression of 1837. Biddle converted the bank into a state institution with a Pennsylvania charter. It went bankrupt in 1841 as a result of his speculation in cotton.

The country was left without any regulator of its money supply and a period of "wildcat banking" ensued in the late 1840's and the 1850's. From 1837 to 1863, state banking alone remained in the field. In the latter year national banks were chartered. After the Civil War, the Treasury itself was forced to take on some of the functions of a central bank. It was not until 1914, with the establishment of the Federal Reserve System, that real central banking was finally achieved in the United States.

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