The controversial Bank of the United States, a commercial institution, provided financial support to the federal government, lent resources for business interests, and helped stabilize the national economy from 1791 to 1811. The Bank of the United States began operations in 1791 after Congress approved a charter for it to operate for 20 years. The bank--based in Philadelphia with branches in eight major cities around the United States--was one component of the financial plan submitted by Secretary of the Treasury Alexander Hamilton during President George Washington's first term in office. Hamilton modeled his plan on the Bank of England, which had proved to be a stabilizing force for the British economy since the mid-17th century. Hamilton wanted an institution similar to Robert Morris's Bank of North America--only stronger. The bank issued currency, made payments on the national debt abroad, served as a depository for government funds, and lent money to merchants. It also provided a mechanism to raise money for the federal government by selling government bonds. Holders of continental certificates could use these notes to buy shares in the new institution, and new bank stock was offered for sale to private investors. Three-fifths of the bank's capital stock was in the form of government securities, while the government itself owned one-fifth of the original stock.

The bank became a divisive political issue in 1790 as the first two-party system emerged in national politics, pitting the Federalist Party against the Democratic-Republican Party (Jeffersonians). The Federalist Party supported the bank by accepting Hamilton's plans and theory that the bank could stabilize and support the national economy. The members of the Federalist Party also argued that it was constitutional, based on the power of Congress to manage national finances, raise government revenue, and create national institutions such as the military. Led by Secretary of the State Thomas Jefferson and Speaker of the House of Representatives James Madison, the Democratic-Republican Party unsuccessfully opposed the bank's chartering on the basis that the bank was unconstitutional because Congress did not have the explicit power to charter corporations. To Jeffersonians, the Bank of the United States represented an abuse of federal power by overriding state legislative authority to charter a bank. Jeffersonians also believed that the bank would give financial speculators and merchants too much influence in the national government, to the detriment of farmers and other producers. The debate over the bank also reflected sectional divisions in Congress, with most of its support coming from New England and mid-Atlantic states, while southerners opposed it.

The bank quickly established itself as an important component of the expanding economy in the early American republic. The bank followed a conservative lending policy to merchants while also lending steadily increasing amounts of money to the federal government. In time, its operations became integrated with government administration. In addition, the branch banks served as regulators of the local economies in which they operated, providing credit and exchange facilities for the state-chartered banks that started business in the period from 1791 to 1811. Throughout the bank's 20 years of operation, its managers strictly observed policies that preserved specie, or hard-money reserves, in the bank's vaults rather than extensively lent these resources out to other banks and individuals. An important feature of this policy was the curtailment of banknotes, or paper notes, used by the bank as currency. For example, in 1792 the bank had $976,910 in specie reserves and $1,689,486 in banknotes in circulation. In 1800 the bank had $5,671,949 in specie reserves and $5,469,063 in banknotes in circulation.

Political controversy and an evolving economy affected the bank after the election of 1800. Although the Democratic-Republican Party had begun in part to oppose the bank, once Thomas Jefferson became president he followed the advice of Secretary of the Treasury Albert Gallatin and did not move to revoke the bank's charter. The bank kept its special relationship with the national government, even though the government sold its shares in the institution to help pay the national debt. On the local level, growing numbers of state banks intensified pressure on the Bank of the United States to ease its lending policies, and many small farmers and producers around the nation--the core of the Jeffersonian support--never reconciled themselves to the bank's constitutionality or financial necessity. Gallatin--who remained in the treasury after Jefferson stepped down from the presidency--and President Madison supported rechartering the bank in 1810-11. Local bankers and merchants in cities where the bank operated were among its strongest supporters. Their arguments now included the point that the national bank was necessary to regulate the expanding network of state banks around the nation. Opponents of rechartering again tended to be farmers and producers, now acting with considerable strength through state assemblies and congressional delegations. They emphasized states' rights, constitutional issues, and an objection to foreign ownership of the bank's stock (many investors in Great Britain and elsewhere in Europe had been purchasing bank shares for over a decade).

The bank lost its charter in early 1811 due to a split Congressional decision to postpone renewal. In the Senate, Vice President George Clinton broke a tie by voting against the bank in opposition to President Madison and Secretary Gallatin. Clinton, an old Anti-Federalist from New York, was characteristic of Jeffersonians who never did accept the bank. After unsuccessfully attempting to secure a charter from the state of Pennsylvania, the bank's trustees liquidated the bank's assets, and it ceased to function by the end of 1811. In 1812 wealthy merchant Stephen Girard purchased the bank's building in Philadelphia and established his own private bank.

Bibliography:

1) Stuart Bruchey, The Dynamic Economy of a Free People (Cambridge, Mass.: Harvard University Press, 1990)

2) Bray Hammond, Banks and Politics in America: From the Revolution to the Civil War (Princeton, N.J.: Princeton University Press, 1957)

3) John Thom Holdsworth and Davis Dewey, Jr., The First and Second Banks of the United States (Washington D.C.: Government Printing Office, 1910)

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