In , Congress passed a bill creating a national bank for a term of 20 years, leaving the question of the bank's constitutionality up to President Washington. The president reluctantly decided to sign the measure out of a conviction that a bank was necessary for the nation's financial well-being. Finally, Hamilton proposed to aid the nation's infant industries. Through high tariffs designed to protect American industry from foreign competition, government subsidies, and government-financed transportation improvements, he hoped to break Britain's manufacturing hold on America.
The most eloquent opposition to Hamilton's proposals came from Thomas Jefferson, who believed that manufacturing threatened the values of an agrarian way of life. Hamilton's vision of America's future challenged Jefferson's ideal of a nation of farmers, tilling the fields, communing with nature, and maintaining personal freedom by virtue of land ownership. Alexander Hamilton offered a remarkably modern economic vision based on investment, industry, and expanded commerce.
Most strikingly, it was an economic vision that had no place for slavery. Before the s, the American economy--North and South--was intimately tied to a trans-Atlantic system of slavery. States south of Pennsylvania depended on slave labor to produce tobacco, rice, indigo, and cotton.
The northern states conducted their most profitable trade with the slave colonies of the West Indies. A member of New York's first antislavery society, Hamilton wanted to reorient the American economy away from slavery and colonial trade. Although Hamilton's economic vision more closely anticipated America's future, by Jefferson and his vision had triumphed.
Incorporated in , the Philadelphia bank was conceived as a national bank but devolved into a regional bank focused on private lending. If a national bank was needed to defeat the British, an even stronger argument for establishing such an institution could be made after the war. Currency was so scarce in some cities that farmers, unable to sell their produce in the market, returned home at the end of the day with full wagons. Besides the Bank of North America, only a handful of state-chartered banks were in operation in the entire country, each issuing its own notes in a limited geographic area.
The Constitution outlawed the issue of paper money by state governments. In , Washington appointed Hamilton his secretary of the Treasury. Finally, Hamilton was in a position to put his long-standing plan for a national bank into action. The year-old secretary made his pitch to the first Congress in December , in his Report on a National Bank. To avoid the inflation caused by the wartime continentals, Hamilton proposed that the bank issue notes redeemable on demand for specie.
The bank and all other banks in the country would operate under a mixed-money system, cutting-edge monetary practice in the age of the gold standard. As in his earlier proposals, Hamilton stressed the importance of a quasi-public structure for the bank. It would serve the national interest, but under the control of private individuals, not government officials. The federal government would be a minority stockholder in the bank, authorized to hold up to one-fifth of its capital and vote for directors.
The balance was to be paid in specie. Like the Bank of England, which had invested heavily in British government debt, the Bank of the United States would unite the interests of private enterprise in support of public credit. Bank shareholders would profit as the government paid off its debts over time. This grand plan for economic unity and progress under the aegis of a national bank was not universally embraced.
Hamilton had to summon all his analytical and rhetorical gifts to overcome the objections of men who received his proposal coolly, if not with disdain. Many politicians of the period, especially those from the agricultural South, scorned banks as corporate monopolies that profited merchants and financiers, but defrauded farmers and other ordinary people.
Jefferson, secretary of state in the Washington administration, saw banks, credit and stock markets subverting his ideal of America as a self-reliant, agrarian utopia with limited industry. He added that a national bank would conflict with state interests under the Constitution by interfering with the right of states to charter and oversee their own banks of issue. Hamilton and allies, such as Congressman Fisher Ames of Massachusetts, countered that a national bank was indeed necessary for the reasons laid out in the proposal before Congress.
Furthermore, the bank would energize state economies in the agricultural South as well as the mercantile North. Hamilton defended it in a 15,word manifesto that articulated what would come to be known as the implied powers doctrine; that is, the government has the right to employ any means necessary to execute its express powers under the Constitution.
Washington was convinced. On Feb. By virtue of the sheer volume of transactions flowing through its Philadelphia office and regional branches, the bank was by far the single largest financial entity in the country. The economic changes it wrought were pervasive and arguably long-lasting. By converting war debt into bank stock, the bank relieved the government of that financial burden and sent a message to investors at home and abroad that the United States would honor its debts.
To this day, the Treasury has never defaulted on a bill, note or bond. In an era when the government could not count on a steady income—there was no income tax; import duties and public land sales made up the bulk of federal revenue—the bank sustained daily operations with short-term loans.
A robust currency circulation and lending to other banks and businesses stimulated the economy, leading to increased domestic and foreign trade that generated income and job growth. In its organization and many of its functions, the First Bank foreshadowed the Federal Reserve System.
Like the Fed, the First Bank was quasi-public in nature; as Hamilton intended, it served a public purpose, but independently from the administration and under the direction of private interests.
Nominally, each regional Federal Reserve Bank is owned by its member banks. By , many of those who had opposed the bank in still opposed it for the same reasons and said the charter should be allowed to expire. By this point, Alexander Hamilton was dead — killed in a duel with Aaron Burr — and his pro-Bank Federalist Party was out of power, while the Democratic-Republican Party was in control. Furthermore, by , the number of state banks had increased greatly, and those financial institutions feared both competition from a national bank and its power.
Cowen, David J. New York: Garland Publishing, Hammond, Bray. Princeton: Princeton University Press, Wright, Robert E. Chicago: University of Chicago Press, Current Fed leaders. Classroom resources About this site Our authors Related resources. The First Bank of the United States — Alexander Hamilton's grand experiment in central banking began in to assist a post-Revolutionary War economy and ended 20 years later.
Image via Library Company of Philadelphia. Hill, Federal Reserve Bank of Philadelphia. Bibliography Cowen, David J. Written as of December 4, See disclaimer.
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