Hamilton Based the Central Banking of the U.S. Bank upon the Notion that there is No Political Independence without Economic Independence

Abstract

The Continental Congress foray into printed money during the American Revolution was so disastrous that the United States printed no more money for nearly a century, the one exception being a brief period during the War of 1812. After that Congress chartered and unchartered its national bank twice.

The American economy henceforth (1816–1836) was often structurally short of coins, and without any national coinage Americans had to find substitute forms of currency to finance the burgeoning economy. The Supreme Court ruled that sovereign States and individuals could authorize both State and private banks to issue their own notes. In consequence, nearly all paper money in circulation was either State or private banknotes based on a limited reserve of gold.

This generally proved insufficient to adequately fund major infrastructure projects. The federal government also had no institution for raising or transferring large amounts of money to fund these national improvements. Nonetheless, Hamilton’s U.S. Bank, without the help of a national currency, was an institutional precursor for what would not take final form until 1913. There would be no Federal Reserve today without the Whig-Republican agenda institutionally incarnated in the First and Second U.S. Bank.

Keywords:

• Alexander Hamilton
• industrialization
• Andrew Jackson
• U.S. Bank
• the American System

JEL Classification Codes:

• O23
• O38
• O43
• N21
• P16

Disclosure Statement

The author confirms that there are no relevant financial or non-financial competing interests to report.

Notes

1 The Whigs would essentially become the Republican Party in 1852.

2 Money in the form of coins rather than notes.

3 Since these paper notes (Continentals) were used to pay off “Continental taxes,” they were in essence nothing but liquid credit accumulated against the Colonies’ most concrete manifestation of societal power: the sovereign, which in this case (assuming the Colonials won the War of Independence) was the Continental Congress. Otherwise, it would be a vengeful Britannica Imperium.

4 The British also flooded the colonies with counterfeit continentals and state currencies.

5 This is the essence of the chartalist theory of money.

6 Also to enhance creditworthiness, the U.S. Congress passed the Coinage Act of 1792, which linked the dollar to gold and silver.

7 While the U.S. Bank made money available for industry, it did not take an equity or management role.

8 Moreover, Justice Marshall found Maryland’s attempt to tax the U.S. Bank unconstitutional since if this were permitted then any State might “tax all the means employed by the government, to an excess which would defeat all the ends of government.”

9 The gold deposits were placed in selected state banks, known derisively as “pet banks” since they were believed to be closely affiliated with the commercial interests of certain esteemed Jacksonian-Democrats. But over the next few years the number of deposit banks was gradually enlarged, and Jackson’s Treasury Department selected many that were controlled by opposition-party Whigs (Scheiber 1963).

10 Biddle wrote, in January 1834: “Nothing but the evidence of suffering abroad will produce any effect in Congress.” And early the following month penned, “all the other Banks and all the merchants may break, but the Bank of the United States shall not break”(McGrane1924).

11 The annual income from sales of public land rose from only $2,300,000 in 1830 to $14,800,000 in 1835, and to the all-time high of nearly $25,000,000 in 1836.

12 The number of banks grew to 506 by 1834 and to 788 by 1837, and bank note circulation soared to $950, 00,000 in 1834 and $149,000,000 in1837 (Gouge and Dorfman1968).

13 Historians typically view Jackson’s pet-banks policy as a crass political move, or at best as a misguided effort to replace the system of controlled banking that the U.S. Bank had assured with a policy of virtual laissez-faire (wildcat banking). But there is an alternative explanation, which interprets the pet-bank policy as a move toward tighter federal regulation of banking and restoration of truly public control, supplanting the irresponsible private-political (nepotistic) control that Biddle had exercised. This latter view is based upon evidence that Jackson’s Treasury Department in 1833–1835 required the new deposit banks to accept guidelines for keeping their specie reserves in a conservative ratio to note issues, to reduce the issue of small-denomination notes, and to provide the government with personal bonds by their directors as security for the deposits they held (Scheiber 1963).

14 The immense adverse Anglo-American trade balance of 1836 might have brought no serious, immediate difficulties had British banks been willing to accept payment in American bills or securities. Admittedly, under a Gold Standard, this scenario is rare to nonexistent.

15 The technical term for this is “maturity transformation,” which is a euphemism since no transformation takes place. Alas, alchemy is as impossible in banking as in the natural sciences. Thus, banks are susceptible, particularly when on a specie standard (gold and/or silver).

16 Bank credit/money creation does not funnel existing money to novel employ, but instead creates new credit/money that did not exist beforehand and then funnels it to some use. Furthermore, money is not neutral and impacts the economy (Phillips 2017; Werner2014). Post-Keynesians’ avouching this position for years amounted to being a veritable “voice crying out in the wilderness,” until 2014(McLeay, Radia, and Thomas 2014). The models within Orthodoxy’s equilibrium analysis would conclude with an unpredictable indeterminacy if money were not neutral. Hence, mainstream economics’ academic adamancy in the neutrality of money.

17 To avoid the appearance of impropriety, the Bank was precluded from buying government bonds or issuing notes or incurring debts beyond its actual capitalization.

18 If the U.S. Bank wanted to restrict the volume of a particular bank’s loans and notes, it would accumulate a large quantity of those notes and then present them for redemption. This drained the issuing bank’s specie reserves, forcing the latter to reduce its notes or face bankruptcy. The central bank rewarded satisfactory operating policies by holding on to the notes or paying them out into circulation rather than redeeming them, thus allowing that state bank to retain its reserves(Kidwell, Blackwell, and Peterson1997).

19 The Nation was thus left without a central bank from 1836 until the Federal Reserve Act of 1913 (Calomiris 2012).

20 “Barter, in the strict sense of moneyless market exchange, has never been a quantitatively important or dominant mode of transaction in any past or present economic system about which we have hard information.” (Dalton 1982; Humphrey1985)

21 Charles Kindleberger had indicated that the expiration of the Second U.S. Bank was due not least to its greedy and corrupt directors. These bankers enriched themselves through an assortment of unscrupulous practices, which often compounded any rampant credit-financed speculation. (Kindleberger and Aliber 2005).

22 Since Babylonian times, Sovereigns had their mints underhandedly diminish the amount of precious metal in the coin when the people came to have their worn out coins re-minted (of course, for a fee). This ultimately was inflationary, but in the interim, poured “free money” into the royal coffers usually for the purpose of war.

23 The other important innovation was that a board of three commissioners was established, and charged with the responsibility of making quarterly inspections of the operations of each bank. Even the Second Bank of the United States, though of course permitting examination by an agent of the United States Secretary of the Treasury, made no provision for periodic examination by experts. This requirement of the New York Act was very soon copied by other states and came to be regarded as an essential feature of a sound banking system(Helderman 1980).

24 In 1845 the legislature provided for a state loan to make up current deficits in the fund. The chief weakness lay in assessing contributions to the fund on the basis of bank capital instead of on note circulation. The effect was to penalize the New York City banks, whose capitals were large but whose note issues were seldom excessive. On the other hand, the country banks, whose capitals were small and who were most likely to overextend their note issue and get into trouble, made relatively small contributions to the fund and so felt little pressure to contract their note issue.

25 Hereafter called Report on the Public Credit. The two reports that followed are both dated Dec. 13, I790: First Report on the Further Provision Necessary for Establishing Public Credit, which concerned taxes; and Second Report on the Further Provision Necessary for Establishing Public Credit, also known as Report on a National Bank.

26 Although the principal business of the Bank of England was to serve as fiscal agent for the British government, it also engaged in private banking, specializing in dealings with large companies such as the East India Company. Very early it began to accept deposits from other bankers, including the goldsmith-bankers, and gradually in the course of the eighteenth century it became a true central bank, that is, a bankers’ bank. Officials of the Bank of England contended into the nineteenth century that it was just like any other bank, all the while being quite unique in the British fiscal system, and only after 1873 did it take clear responsibility for acting as a lender of last resort. The Bank of England remained privately owned (until 1945) but always remained under government control.

Additional information

Notes on contributors

Emir Phillips

Emir Phillips is an Associate Professor of Finance at Lincoln University (Jefferson City, MO) as well as a Lecturer of Economics at the University of Arkansas (Fayetteville, AR). The author would like to thank Alexander Hamilton for institutionalizing the insight that there is no political independence without economic independence.