First Bank of the United States

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The First Bank of the United States (1791–1811) met the needs of a central bank in the early years of the Republic. It helped regulate the issuance of bank notes by state banks and acted as the bank of the United States government. The First Bank received its charter from the national government in 1791 when President George Washington signed the bill authorizing its incorporation.

The First Bank of the United States was a brainchild of Alexander Hamilton, who saw such a bank as a means of raising short-term capital for the government and handling bills of exchange needed for making payments to foreign holders of the national debt. Hamilton patterned the First Bank after the Bank of England, and got many of his ideas from the role the Bank of England played in the English economy and government finances. He also promoted the bank as a means of increasing the circulation of bank notes, which was needed at that time because of a shortage of specie.

Hamilton’s Report on a National Bank went to Congress in December 1790. The proposal drew fire from critics concerned that the bank was a monopoly sanctioned by Congress. As the debate on this issue waned, constitutional questions arose that were to haunt the bank for the duration of its existence. The Constitutional Convention of 1787 had chosen not to give Congress the power to grant charters of incorporation and the Constitution itself was silent on the subject.

The bill for the bank’s charter passed by a two-to-one vote in the House and by a majority vote in the Senate, but Washington balked at signing it, partly at the urging of such luminaries as Thomas Jefferson. Washington signed the bill chartering the bank after Hamilton wrote a very able paper in its defense. The First Bank made Philadelphia its headquarters and, over Hamilton’s opposition, set up branches, one as far away as New Orleans.

The charter authorized a capital stock of $10 million. The U.S. government purchased one-fifth of the stock, paid for by a loan from the First Bank, and the remaining four-fifths was opened for public subscription. The bank was fully capitalized within an hour after shares became available to the public. Public subscribers could pay one-fourth in specie and four-fifths in government obligations and foreigners eventually held much of the stock. The charter prohibited the bank from trading in anything besides bills of exchange, gold and silver bullion, and goods held as security for defaulted loans. The total debt of the First Bank could not exceed its capital and money held on deposit. The bank needed congressional approval before it could make loans in excess of $100,000 to the U.S. government, any state government, or to purchase any of the public debt.

Commercial loans accounted for most of the bank’s lending, and the bank served some of the functions of a central bank. At that time bank loans were paid out in bank notes, convertible into specie on demand. The bank held other commercial banks accountable by presenting to them their bank notes for redemption in specie. The First Bank’s role in controlling the issuance of bank notes won the support of the large commercial banks. The bank particularly helped control the overissuance of bank notes by country banks, often the source of inflationary pressures.

When the charter for the First Bank came up for renewal in 1811, it failed by one vote in the House. Constitutional issues and foreign ownership cost the First Bank much of its support in Congress. The vote in the Senate was a tie, and the vice president broke it by voting against the First Bank.

Congress soon missed the First Bank and in 1816 Congress chartered the Second Bank of the United States, but that bank lost its charter in 1832. The Federal Reserve System, established in 1913, was the first central bank in the United States to establish itself in the confidence of the voters.