San José State University
Department of Economics
& Tornado Alley
The American Republic had considerable financial problems in its early days. The first American bank was organized by Robert Morris in 1781. This was a private bank but it helped in financing the Revolutionary War, which did not end until 1783. Alexander Hamilton, a major organizational innovator in the Republic, argued for the creation of a central bank, a bankers' bank which would be the lender of last resort. Such a central bank would stabilize the financial system and issue banknotes to supplement the gold and silver in circulation. Hamilton saw lending funds to the Federal Government as a major function of such a central bank.
Shortly after Hamilton proposed the creation of a National Bank for the U.S. a bill was introduced into Congress to accomplish Hamilton's proposal. There was major opposition to the bill on the grounds that creation of such a bank with a monopoly on issuing money was unconstitutional. The bill passed and was signed into law in 1791 but it provided only a twenty year charter for a Bank of the United States. The charter would need to be renewed in 1811.
The Bank of the United States solved many of the monetary problems that troubled the country before 1791. But the Bank of the United States was a private institution and foreign buyers purchased ownership shares of the bank until the 70 percent of the bank was owned by foreigners. This was worrisome to American politicians but this high share of foreign ownership was not unusual in the American financial system. Britain had been supplying capital to the U.S. economy for some time.
But these concerns and politics resulted in a very close vote on the bill for renewing the charter. In the House of Representatives the vote was 65 to 64 for postponing indefinitely the rechartering. In the Senate the vote was a 17-17 tie which allowed the Vice President to cast the deciding vote. The Vice President, George Clinton, voted against the renewal of the bank's charter.
The War of 1812 revealed the weakness of the American financial system so in 1816 the charter of the Bank of the United States was rechartered. Support for the second Bank of the United States came from political figures such as President James Madison and Senator John C. Calhoun who were concerned with the low credit and financial solvency of the Federal government, as revealed by the difficulties financing the costs of the War of 1812. Support also came from business leaders such as John Jacob Astor who were concerned with the financial chaos of the time.
The charter called for capital of $35 million, of which $7 million was to be supplied by the U.S. government. The Bank was controlled by a board of twenty directors, 15 elected by the private stockholders and 5 appointed by the President of the United States. The Bank was to pay the U.S. government $1.5 million per year for its franchise.
Some political figures, e.g. Daniel Webster and John Randolph, opposed this mixing of private and public power but the Act of Congress was passed and President Madison signed it into law on April 10, 1816. But the charter was again limited to twenty years.
The first president of the Second Bank was William Jones. Jones had been Secretary of the Navy and later Acting Secretary of the Treasury during the War of 1812. His tenure as Secretary of the Treasury was marked by mismanagement of finances and there was no reason to believe that he would be any more competent in managing the Bank of the United States.
Under Jones the Bank opened branches in many other cities and expanded operations. It is important to note that while the Bank of the United States functioned as a central bank for the United States it was also a commercial bank involved in making loans. Other banks resented the competition from this Federally supported institution. It was taking business away from them. Two state governments tried to prohibit the establishment of branches of the Bank of the United States in their states and six others tried to levy prohibitive taxes on these branches to discourage their operation. It took a ruling by the U.S. Supreme Court to prevent these restrictions being imposed on the Bank of the United States. Chief Justice John Marshall in 1819 ruled that the Bank of the United States was a proper and necessary instrument of the United States Government for carrying out its fiscal operations. One can clearly see the perplexity of mixing public and private institutions. The Bank of the United States may have been a necessary instrument for fiscal operations of the U.S. government but it was also a private commercial bank.
The branches of the Second Bank were not closely controlled by the main Philadelphia institution and the Baltimore branch came under the control of individuals who looted it of a million dollars before they were caught. The Baltimore branch went into receivership and the whole Bank was close to bankruptcy. William Jones resigned in January of 1819.
The presidency of the Second Bank of the United States went to Langdon Cheves of South Carolina. Cheves cut back operation, reducing the bank loans from $41 million to $31 million and cut the amount of bank notes in circulation from $8 million to $3.5 million. Cheves' policies brought stability to the Second Bank but he was not without critics for these policies. The private stockholders resented the reduction in dividends. The private banks which criticized the expansion of the Second Bank also criticized its contraction because the reduction in credit jeopardized the solvencies of some businesses which were also debtors of those same private banks. In 1923 Cheves resigned and Nicholas Biddle of Philadelphia became president.
For the views of Thomas Jefferson and Alexander Hamilton go to B of US 2.
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