First and Second Banks of the United States

In 1791 Alexander Hamilton Started Bank of United States which was bankrupt in 1811.
In 1791 Alexander Hamilton Started Bank of United States which was bankrupt in 1811.

Between 1791 and 1836, two federally chartered banks, both headquartered in Philadelphia, helped the United States manage its national wealth and regulate economic activity.

Always controversial, each bank in turn faced major political and managerial obstacles. When Andrew Jackson denied the Second Bank a new charter, America’s experiment with central banking ended, not to be restored until the 20th century.

In 1790 Treasury Secretary Alexander Hamilton submitted to Congress what he believed would be a permanent solution to the young nation’s shaky finances. His proposed national bank unleashed deeprooted anxieties about the use and abuse of money and newer concerns for legitimacy.

The recently ratified Constitution gave little guidance on monetary issues. Thomas Jefferson, then secretary of state, was one of many Americans who believed that only specie—gold and silver coins—was honest.

Paper notes and financial instruments could be (and were) used to cheat honest people while enriching corrupt businessmen and speculators. Creation of a powerful national bank raised tensions between North and South, farmers and merchants, debtors and creditors. Some feared that European investors would use the bank to undermine national independence.

After a secret meeting at which Hamilton agreed to a plan creating a capital district near Virginia, the First Bank of the United States won a 20-year charter from a regionally split Congress. Opening in 1791, it was both a private, profit-making corporation and a government agency.

Five of the bank’s 25 directors were presidential nominees requiring Senate confirmation. The bank’s public duties included issuing paper money, collecting federal taxes, and paying federal debts, all on behalf of the Treasury.

Although President Jefferson never welcomed this powerful institution, he generally worked with it harmoniously. Meanwhile, privately held and state-chartered banks proliferated.

Under pressure from local interests, especially after Jefferson’s 1803 Louisiana Purchase, the bank authorized eight regional branches. In this era of slow travel and communications, this posed a problem of central oversight and led to a scandal for the Second Bank.

As the largest U.S. corporation, the bank was a lightning rod for political attacks. When the bank’s charter expired in 1811, it failed by one vote in each house to win renewal. President James Madison’s distrust of banking, added to denunciations by competing state banks and the enmity of important businessmen, helped kill the First Bank as the War of 1812 loomed.

While British troops attacked Washington and other important sites, the Treasury struggled to finance the war and protect the economy. Many of the nation’s 200 state and regional banks issued paper currency of dubious value; some banks failed.

At war’s end, Madison called for a new bank, as did House Speaker Henry Clay, who had helped kill the first one. In 1816 the Second Bank of the United States won a 20-year charter and soon opened in a new Philadelphia location.

Organized on the same public-private lines as the previous bank, the Second Bank had a rocky start. During the panic of 1819, it abruptly curtailed lending, harming its reputation. In the Baltimore branch, a group of officials, including cashier James McCulloch, embezzled more than 1 million dollars.

Ironically, McCulloch also figured in a major 1819 victory for the bank. Maryland, at the behest of its state banks, had imposed a tax on the federal bank’s local operations. In its unanimous McCulloch v. Maryland decision, the Supreme Court declared the bank to be a “necessary and proper” use of federal power and forbade state taxation.

In 1823 Philadelphian Nicholas Biddle was promoted to the bank’s presidency and began reshaping its oversight mission and role in the economy. Generally considered a banking success, although he lacked business training, Biddle would fail politically, as his arrogance and restrictive policies collided with the fiscal exuberance of an era of explosive growth.

Andrew Jackson was steeped in Jeffersonian ideals of agrarian republicanism. He opposed public debt, paper money, and federally financed improvements. The president’s intentions toward the bank vacillated.

He reappointed Biddle yet called the bank a “hydra of corruption” in his first message to Congress. Jackson’s inner circle, including New York political mastermind Martin Van Buren, had additional reasons for undercutting Biddle’s bank.

A rivalry for banking predominance pitted New York City and Philadelphia. Elsewhere, Jacksonian entrepreneurs and speculators seethed over Biddle’s efforts to curb credit and restrain inflation.

Treasury Secretary Roger B. Taney (later Supreme Court Chief Justice)
Treasury Secretary Roger B. Taney (later Supreme Court Chief Justice)

In 1832, a presidential election year, Biddle made a serious political error. He allowed anti-Jackson political leaders, including Henry Clay, to persuade him to force Jackson’s hand by pressing for charter renewal four years early.

Congress passed the extension but could not override the president’s July veto, the first significant veto in U.S. history. In his fiery message, Jackson called the bank an enemy of “the humble members of society—the farmers, mechanics, and laborers.”

Easily beating Clay to win a second term, Jackson was not content to allow the bank to complete its remaining years. By the fall of 1833 Treasury Secretary Roger B. Taney (later Supreme Court Chief Justice) had found ways to transfer government deposits from the bank to so-called “pet” banks that supported Jacksonian initiatives. By 1836, when the bank ceased to exist, deposits had been moved to 91 of the nation’s 600 banks.

The death of the Second Bank of the United States was not the only cause of the orgy of lending, speculation, and bank failure that fed the panic of 1837, but it was an important factor.

Financial and political battles over gold or silver, greenbacks or hard currency, roiled the 19th century, fueling populism after the Civil War. Centralized banking did not reemerge until a Federal Reserve banking system was established in 1913 under President Woodrow Wilson.