Following the colonial period of financial dependence on Great Britain, American banks began operations in the 1780s and steadily became an important, ubiquitous, and sometimes controversial component of the early U.S. economy. Previously, banks in colonial North America had existed mainly in the form of merchants' associations, or colonial land offices that issued paper currency or bills of credit to farmers and others in selected colonies such as Pennsylvania, Massachusetts, and Rhode Island. Also, many private individual lenders operated in the absence of real institutionalized banking. Between 1741 and 1773, Parliament passed a series of laws that first restricted and then secured the rights of the colonies to issue paper notes and therefore provide banking facilities for their growing numbers of entrepreneurial farmers, artisans, and merchants. Fear of problems resulting from inordinate land speculation based on the use of paper money issued by colonial governments resulted in two restrictive parliamentary acts in 1741 and 1751. These measures officially banned the issuance of paper money or bills of credit by colonial authorities in New England. In 1764 the Currency Act banned the use of paper bills of credit as legal tender throughout the colonies, although it allowed for the issuance of paper money that was not used as legal tender. Finally, a 1773 act gave broad clearance to the colonies for the issuance of paper money in the absence of enough gold and silver currency (specie). However, the 1773 act probably came too late to ease the growing revolutionary viewpoint that banking restrictions were similar to other parliamentary actions in that they illegitimately suppressed independent colonial economic pursuits.

The first true bank in the United States began in Philadelphia in 1780 when the financier Robert Morris and other wealthy Philadelphians organized the Bank of Pennsylvania with private investment to raise revenue to support the Continental army. Through their collective efforts, the merchants managed to build credit and supply the army until the end of the war. Between 1780 and 1790, a few commercial banks started operations in Philadelphia, New York, Boston, and Baltimore. The first of these institutions was Morris's Bank of North America in Philadelphia, which opened in 1782. Likewise, Alexander Hamilton organized the Bank of New York in 1784. These early banks existed largely to support the merchant communities of the port cities in which they operated. They lent money, provided other means of credit, sold stock, and issued paper banknotes for use mainly by merchants and others in the urban mercantile communities. At times the banks had greater financial stability than the new state governments since they often had more specie in reserve and held less debt than many of the states. As a result, people relied on bank paper notes more than those issued by the states. In Pennsylvania the new bank aroused the suspicion of rural citizens who viewed it as a scheme by elite Philadelphians to monopolize the state's finances and control the state's political arena via politicians who were also involved in the bank. Significantly, the U.S. Constitution explicitly banned state governments from issuing paper money but was silent on the subject of banks doing so.

In 1791 Congress chartered the Bank of the United States to provide revenue, a repository for federal funds, credit, and financial stability to the new nation. President George Washington signed the measure into law creating the bank, and it went into operation despite substantial objections. The Bank of the United States provided a regulatory anchor for the growing number of state banks chartered in the same period. From 1791 to 1811, the number of banks in the United States increased from 5 to 117, and their overall capital stock grew from $4,600,000 to $66,290,000. The increase in the number of state banks mirrored the growing national economy, which grew in every respect in those years. Popular demand for capital increased as manufacturing and commerce expanded throughout the nation.

New banks were often designed to support artisans, farmers, and mechanics through loan guarantees or longterm loans. Sometimes the new banks became political entities, designated as either connected to the Jeffersonian Democratic-Republican Party or the Federalist Party. Regions such as the Ohio River Valley, central Pennsylvania, and rural New England experienced tremendous growth in the financial sector in these years. Typically, the new banks of this period had a substantial popular appeal. Laborers, women, African Americans, and Native Americans all became stockholders and customers in the new institutions. In some areas, such as New England, banks developed as money clubs administered by a select few, for their own benefit, or for the benefit of their colleagues and families. The new banks issued millions of dollars in the form of banknotes, which became the standard form of currency used in local marketplaces. State legislatures utilized the new banks in the development of transportation networks by mandating that banks invest in turnpike, bridge, and canal companies in exchange for charters. Political opponents of the Bank of the United States viewed the expanding state banking system as generally favorable because it gave many people more financial opportunities while decreasing the power of the national bank to create and regulate lending policies.

The timing of the demise of the Bank of the United States in 1811 could not have been worse since the War of 1812 (1812-15) put tremendous strain on the national banking system. The failure to recharter the Bank of the United States meant that there was no national banking institution to offer loans to the U.S. government. Moreover, without the Bank of the United States, many of the new banks created after 1811 went unchecked, printing much more money than the specie held in their vaults. This facilitated the purchase of war bonds, which helped the federal government to pay for the war but also created something of a financial balloon. When there was a run on the banks in Baltimore and Washington, D.C., during the British invasion of the Chesapeake in 1814, vaults quickly emptied and the banks had to suspend payment. This action had a ripple effect, and most banks across the nation had to refuse to redeem notes in specie. Bank notes were therefore discounted at anywhere from 15 to 30 percent. As the war ended, the nation stood at the brink of financial collapse.

President James Madison and Secretary of the Treasury Alexander J. Dallas pushed for legislation to establish a new national bank in 1814, but Madison had to veto the charter in January 1815 because the final bill reflected more the needs of bankers than the national government. Only in 1816 was a new national bank--the Second Bank of the United States--chartered by the federal government.

Bibliography:

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

2) Naomi Lamoreaux, Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England (New York: Cambridge University Press, 1994)

3) Edwin J. Perkins, American Public Finance and Financial Services, 1700-1815 (Columbus: Ohio State University Press, 1994)

4) Fritz Redlich, The Molding of American Banking, Part I: Men and Ideas, 1781-1840 (New York: Johnson Reprint Corp., 1968)

5) Gordon S. Wood, The Radicalism of the American Revolution (New York: Knopf, 1992)

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