First Bank of the United States

The First Bank of the United States was not the first national bank in the U.S. That honor goes to the Bank of North America, authorized by the Continental Congress in 1781.

These two banks, with significantly different charters, have three things in common. First, they were chartered under two governing bodies operating under two different sets of rules, i.e., the Continental Congress was governed by the Articles of Confederation, and the U.S. Congress was created by the U.S. Constitution.

Second, the man who proposed, created, and ushered them through the legislative body was Alexander Hamilton. And three, in both instances, Hamilton managed to do it over the objections of two future presidents, Thomas Jefferson and James Madison.

Establishing the First Bank of the United States was only one of three innovations Hamilton made a reality. The other two were the assumption of all Revolutionary War debt and the establishment of a U.S. mint to print money backed by reserves of gold and silver.

Hamilton was convinced that unless the U.S. got its monetary house in order, it would fail as a country. Goal one was to bring financial order to the U.S. economy. After the War for Independence ended, each state was chartering banks, and there were no standardized rules for their charters, reserves, or how they operated. Hamilton wanted the Federal bank at the top of the financial pyramid with the state banks one level down.

Once the U.S. had a standard currency used in all the states, the U.S. could achieve goal two by establishing credit domestically and internationally. This would allow the Federal government to, when needed, borrow money.

Standardizing the nation’s currency was goal three. Under the Articles of Confederation, each state was allowed to issue its own currency creating what was, to be polite, a financial mess. Hamilton wanted only one currency based on the U.S. dollar.

Hamilton achieved all these goals when the First Bank of the United States was formed in 1791 under the Bank Act of 1791. To get it past the objections of Jefferson and Madison, he acquiesced to a 20-year charter.

Jefferson and Madison felt that the bank was unconstitutional and opposed a national mint. They wanted each state to be allowed to issue its own currency as a “right of the state.” Ultimately, they were overruled, and Washington signed the bill on February 25th, 1791, which gave the First Bank of the United States a 20-year charter. A few weeks later, on March 19th, he appointed its three directors.

The First Bank of the United States did not function as a traditional nation’s central bank because it did not set monetary policy. Instead, it was a separate stock corporation owned by the shareholders, not the U.S. government. It did serve as a lender to the U.S. government as well as to private corporations.

The Bank Act of 1791 forbade the First Bank of the United States to buy U.S. government bonds. The new law ordered the bank to have a separate, independent, rotating board of directors. And last, it was not allowed to issue currency.

The bank’s reserves were provided by selling $10,000,000 in shares. The Federal government bought $2,000,000. Since the Federal government didn’t have the money, Hamilton’s solution was that the Federal government borrow the money from the bank and then pay it back in 10 equal installments plus interest. The remaining $8,000,000 was offered to the public and overseas investors. However, any investor in the bank had to pay 25% of his share price in gold or silver bars or coins while the balance could be in a recognized paper currency.

One of the interesting footnotes is that the bank’s headquarters building in Philadelphia was the first government building authorized to be built by the U.S. Government.

Image, courtesy of the National Museum of American History, is a First Bank of the United States check written by John Jacob Astor in 1792.

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