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The Library Company of Philadelphia A C h a p t e r i n t h e H i s to ry o f C e n t r a l B a n k i n g Acknowledgments The Federal Reserve Bank of Philadelphia thanks John Van Horne, director of The Library Company of Philadelphia, and his staff, particularly Nicole Joniec, for their help in providing most of the images that appear in this publication. Thanks also to Independence National Historical Park and its staff, particularly Karen Stevens, Karie Diethorn, and James Mueller, for their assistance in making this publication possible. A Chapter in the History of Central Banking T he War for Independence was over. The spirited, though work cut out for them: re-establishing commerce and often tattered, militia of industry, repaying war debt, restoring the value of the the American colonies had currency, and lowering inflation. defeated the army of one of the greatest nations in the world. Great leaders had emerged from the conflict: George Washington, John Adams, and Thomas Jefferson, to name just a few. 1 But all was not well. The United States of America, a name the new country had adopted under the Articles of Confederation, was beset with 2 problems. In fact, the 1780s saw widespread economic disruption. The war had disrupted commerce and left the young nation, and many of its citizens, heavily in debt. Furthermore, the paper money issued by the Continental Congress to finance the war was essentially worthless because of the rampant inflation it had caused, and many people were bankrupt, even 3 destitute. Add to this the lack of a strong national government and it’s easy to see how the fragile union forged in the fight for independence could easily disintegrate. Brief biographies of the people mentioned in the text can be found in the Biographical Sketches. 1 2 Explanations of terms in bold italics can be found in the Glossary. Because of this inflation, the expression “not worth a Continental” became a popular way of saying that something was worthless. The Continental dollar was not redeemable on demand for gold or silver. 3 Clearly, the new nation’s leaders had their Proposing a Solution One prominent architect of the fledgling country — Alexander Hamilton, the first Secretary of the Treasury —had ideas about how to solve some of these problems. Unlike other founding fathers, who thought that the United States should remain primarily agricultural, Hamilton researched the history and economic structure of other countries, especially France and Britain, for ideas on how to build a nation. Although Hamilton culled valuable information about public finance from the writings of French Minister of Finance Jacques Necker, it was England — America’s recently defeated colonial overlord — that provided Hamilton with sound foundations for creating a viable economic system. Hamilton consulted the works of philosophers David Hume and Adam Smith. In addition, England’s use of public debt interested Hamilton because this type of funding, which had helped to build England’s military might and pay for its wars, accounted, at least in part, for that country’s prosperity and had enabled the British to build an empire. Hamilton reasoned that an economic structure that incorporated public debt could deliver much-needed capital to The First Bank of the United States 1 that such an institution Most commercial nations have found it necessary to institute banks; and they have proved to be the happiest engines that ever were invented for advancing trade. could issue paper money (also called banknotes or currency), provide a safe place to keep public funds, offer banking facilities for commercial transactions, and act as the government’s fiscal agent, including collecting the government’s tax revenues. Looking across the Atlantic Ocean once again -Alexander Hamilton, 1781 for ideas, Hamilton used the charter of the Bank of England as the basis for his speed the growth of the U.S. financial system. proposed national bank.6 Although similar to the Although estimates vary, at the end of the Bank of England, Hamilton’s proposed bank differed war, the national debt was more than $5 million, and the states collectively owed about $25 million. 4 In one of his many reports to Congress, Hamilton suggested that the federal government assume the states’ war debts. He felt that this consolidation of state and federal debt would give investors who held that debt a reason to support the federal government. Combining the debt would also help to eliminate competition between the new central government and the states for tax revenues. 5 Hamilton’s notions about the importance of public finance to the United States’ ultimate economic success ran parallel to his belief that the country also needed a national bank. Creating a National Bank To further enlist support for a strong central government, in December 1790, Hamilton submitted a report to Congress in which he outlined his proposal for creating a national bank. He argued Although estimates vary, in today’s dollars, $5 million would be over $100 million and $25 million would be over $500 million, according to John McCusker’s composite commodity price index. See his publication, with updated estimates using CPI data between 2000 and 2008. 4 5 2 See Chernow, p. 299. The First Bank of the United States in several ways. For one thing, each shareholder in the Bank of England had one vote. Under Hamilton’s plan, the number of votes would be determined by the size of each shareholder’s investment. Also, the proposed national bank would have a maximum ratio of loans to specie (gold or silver), whereas the Bank of England had no such requirement. Furthermore, the government would own 20 percent of the U.S. bank; the Bank of England was privately owned. However, both institutions were prohibited from trading in commodities, and both were required to obtain legislative approval before making loans to states or local governments.7 Reaction to Hamilton’s Proposal Not everyone agreed with Hamilton’s plan for a national bank. Indeed, it met with violent According to Ron Chernow, Hamilton “kept a copy of the [Bank of England’s] charter on his desk as a handy reference, as he wrote his banking report” (Chernow, p. 347). 6 7 See Chernow, p. 15. opposition in some quarters. Secretary of State affront to states’ rights and would make the states Thomas Jefferson, for one, was afraid that a national too subservient to the new federal government. bank would create a financial monopoly that would Moreover, agreeing with Jefferson, many of undermine state banks. He also believed that the people who opposed the bank said that the creating such an institution was unconstitutional. Constitution did not grant the government the Also, such an institution clashed with Jefferson’s authority to establish banks. Still others thought vision of the United States as a chiefly agrarian that a national bank would have a monopoly on society, not one based on banking, business, and the government business, to the detriment of the state- pursuit of profit. chartered banks.9 James Madison, who represented Virginia Despite the opposing voices and much in the House of Representatives, opposed the bank debate in Congress, Hamilton’s bill cleared both the for similar reasons. In particular, he objected to the House and the Senate in the winter of 1791. Most bank’s proposed 20-year support for the bank came from the New England 8 and Mid-Atlantic states. Southern states, which feared the federal government’s encroachment on their rights, were less inclined to support the bill. President George Washington, however, was undecided as to whether he should sign the bill or veto it. He sought advice from Attorney General Edmund Randolph and Secretary of State Thomas Jefferson, both of whom told the president to exercise his veto power. But, still on the fence, Washington sent documents containing Randolph’s and Jefferson’s comments to Hamilton on February 16, 1791, giving the Treasury secretary one week to respond. Rising to the occasion, Hamilton went to work on countering the arguments set forth by his colleagues. He spent most of that week gathering his thoughts, outlining his opinions, and consulting with others. Then he stayed up through the night Two checks written by Jonathan Dayton, the youngest man to sign the United States Constitution and the fourth Speaker of the U.S. House of Representatives, in 1796 and 1803. These checks are written on a First Bank check blank. on February 22 — the night before Washington’s The Library Company of Philadelphia. fellow cabinet members’ arguments. Washington deadline — diligently working.10 The next day, right on time, Hamilton delivered to the president a lengthy (almost 15,000 words) refutation of his signed the bill. charter, arguing that two decades was too long a period for an untried entity in a country so young. Other opponents felt that the bank was an 8 Madison’s opposition to a national bank waned over time. In 1816, as president, he signed the bill chartering the second Bank of the United States. See Cowen, p. 138-39. At the time Hamilton proposed his bank, there were only three banks operating in the United States: the Bank of North America, the Bank of New York (of which Hamilton was a founder), and the Bank of Massachusetts. 9 Economic historian David Cowen calls this “arguably the most important ‘all-nighter’ in American banking history.” See Cowen, p. 7. 10 The First Bank of the United States 3 TIMELINE FOR THE FIRST BANK OF THE UNITED STATES 1792 1790 Alexander Hamilton submits a report to Congress outlining his proposal for a national bank. 91 91 1791 In February, President Washington signs the bill establishing the Bank of the United States. 1791 In July, Bank subscriptions of stock go on sale and sell out within hours. 92 Branches open in Boston, New York, Baltimore, and Charleston. Secretary of the Treasury Hamilton quells the panic of 1792. 93 In December, the Bank of the United States opens for business in Philadelphia. 94 96 In July, Bank subscriptions are fully paid for. The Bank of the United States, now commonly referred to as the First Bank, opened for business in Philadelphia on December 12, 1791, with a 20-year charter. The office was initially housed in Carpenters’ Hall and remained there until the bank moved to new quarters on Third Street six years later. Branches opened in Boston, New York, Charleston, and Baltimore in 1792.11 (See The First Bank Building: Still Standing After All These Years, page 11.) The bank started with capitalization of $10 million, $2 million of which was held by the government and the remaining $8 million by private investors.12 By the standards of the day, this was a very large amount of money. The size of its capitalization made the First Bank not only the largest financial institution in the new nation but also the largest corporation of any type by far. The bank’s sale of shares was also the largest initial public Between 1800 and 1805, four more branches were established in Norfolk (1800), Savannah (1802), Washington, D.C. (1802), and New Orleans (1805). 11 Although estimates vary, today $10 million would be more than $220 million according to John McCusker’s composite commodity price index. See his publication. The First Bank of the United States 95 1793 Bank Operations 4 Bank moves into 116 S. Third Street; the building is still there today. 1792 1791 12 1797 97 98 99 1794 Bank acquires property on south Third Street on which it plans to build new headquarters. offering (IPO) in the country to date. Many of the initial investors were foreign, a fact that didn’t sit well with many Americans, even though the foreign shareholders could not vote. Actually, the IPO did not offer shares for immediate delivery, but rather subscriptions, or “scrips,” that essentially acted as a down payment on the purchase of bank stock. When the bank subscriptions went on sale in July 1791, they sold out so quickly that many would-be investors were left out and had to try to bid them away from those fortunate enough to have obtained the scrips. Many borrowed money to do so. Indeed, demand for bank scrips accompanied by frenzied borrowing and buying soon led the country into a financial crisis. (See The Nation Faces Its First Financial Crisis, pages 6-7.) The bank was overseen by a board of 25 directors, the majority of whom came from Philadelphia, New York, and Boston, but Maryland, North Carolina, South Carolina, Virginia, and Connecticut were represented as well. Board 00 1810 1808 1802 Branches open in Washington, D.C., and Savannah. A branch opens in New Orleans. D PH 07 08 In February and March, First Bank shareholders hold a meeting to arrange the liquidation of the bank 09 10 11 IA LA EL 06 HI 1805 05 1809 THE L IB R A A branch opens in Norfolk. 04 FP 1800 03 YO 02 RY CO MP AN 01 1811 Congress debates the charter renewal through the year, but efforts to pass a bill stall. Shareholders resubmit a request for renewal in December. Bank shareholders ask Congress to extend bank’s charter. The Senate forwards the request to Treasury Secretary Albert Gallatin. members included lawyers, merchants, and brokers as well as several senators and 1811 Gallatin submits report to Congress, recommending renewal of the bank’s charter and expansion of its capitalization. The First Bank closes its doors on March 3, 1811, the day before its charter expires, after the bill to renew its charter is defeated by one vote in each chamber of Congress. Thomas Willing, who had been president of the Bank of North America, accepted the job as the national bank’s first president. congressmen.13 The First Bank acted as the federal government’s fiscal agent, collecting tax revenues, securing the government’s funds, making loans to the government, transferring government deposits through the bank’s branch network, and paying the government’s bills.15 The bank also managed the Treasury’s interest payments to European investors in A scrip signed by Robert Morris, a signer of the Declaration of Independence, the Articles of Confederation, and the United States Constitution, transferring 42 shares of Bank of the United States stock to Joseph Ball on October 8, 1792. At the time, Robert Morris was a United States senator from Pennsylvania. U.S. government securities.16 Besides its activities The Library Company of Philadelphia. required it to seek approval from Congress Because of the great distances some board members would have to travel to get to meetings in Philadelphia, the presence of at least seven directors on behalf of the government, the Bank of the United States also accepted deposits from the public and made loans to private citizens and businesses. However, the First Bank’s charter before making loans to any state or to foreigners. Also, the act capped interest rates the First Bank could charge on loans at 6 percent.17 at any given meeting was deemed sufficient for conducting bank business.14 Prominent Philadelphian In other words, as Cowen says, the bank acted as the “guardian of the public money” (Cowen, p. 138). 15 13 See Cowen, p. 44. 16 See Cowen, p. 140. 14 See Cowen, p. 45. 17 See Cowen, pp. 14-15. The First Bank of the United States 5 The Nation Faces ITS FIRST FINANCIAL CRISIS At its initial public offering (IPO), the First as rapidly, and by the end of August 1791, prices for Bank did not directly sell shares for immediate both types of securities had fallen substantially, in delivery, but rather “scrips,” which cost $25 each, some cases by more than $100. payable in specie (gold or silver). This money acted Although reluctant to intercede in financial b as a down payment on buying bank stock, which markets, Hamilton saw the need for intervention sold for $400 a share. Investors would then pay the as the earlier financial bubble kept collapsing, balance due over the course of the next two years credit was becoming less available, and the possible (until July 1793). One-quarter of the amount due complete collapse of prices across the economy would be paid in specie and the remaining three- became increasingly a concern. Consequently, he quarters in U.S. debt securities. met with his fellow members of the Treasury’s Soon, bank scrips were selling at double the sinking fundc commission and asked them to price as many people borrowed money in order to authorize purchases of government securities in the buy the scrips to obtain the bank’s stock. Eventually, marketplace. The commissioners agreed to do so. prices of scrips went even higher. The bank’s IPO Thus, Hamilton managed to dissipate the effects also pushed up the price of U.S. debt securities, since of the collapse of this particular bubble during the investors were required to use these securities to pay late summer and early fall of 1791 and alleviate the three-quarters of the full $400 per share purchase credit crunch before it could do much more harm. price of the bank’s stock. However, after an initial However, as Hamilton biographer Ron surge in the prices of bank scrips and U.S. securities Chernow points out, the relief was only temporary. that appeared to be a financial bubble, they fell just According to Chernow, “The very prosperity that The somewhat simplified discussion here draws heavily on accounts in Ron Chernow’s biography of Alexander Hamilton and the book on the First Bank by David Cowen. See those publications and others in the reference list for more information. Hamilton had set up a federal sinking fund, which was a cash surplus that the Treasury could use to buy government securities in the open market to retire some of its debt earlier than at maturity (Nettels, p. 116). The commission consisted of Hamilton, Thomas Jefferson, Edmund Randolph, John Adams, and John Jay. a b 6 a Terms in bold italics are defined in the Glossary. c [Hamilton’s] ebullient leadership engendered… slowed the number of banknotes it issued,f other generated effervescent optimism that fed yet another banks followed suit, creating another credit crunch. mad scramble for government securities and bank Unfortunately for Duer and other investors scrip, pushing their prices to new highs during the who had bought large amounts of U.S. government winter of 1791-1792.” Among the speculators was William Duer, securities, their prices peaked in January 1792, then d Hamilton’s old friend and former assistant at the Treasury Department. In late 1791, Duer formed a partnership with a wealthy land speculator named Alexander Macomb. Their plan was to corner the market on U.S. government securities. According to economic historian David Cowen, Duer and Macomb then hoped to sell the appreciated assets to other investors at a significant profit.e Another factor contributing to this wild speculation and subsequent crisis was the unforeseen impact that the First Bank had on the economy. The bank’s effect had been substantial, and its subscription sale had led to a flood of loans and banknotes in the market as investors borrowed money from other banks to obtain shares in the First Bank and as the First Bank itself opened and began making loans and issuing its own banknotes. In addition, Duer was borrowing heavily to pay for his investments. When in early 1792 the First Bank somewhat suddenly slowed the expansion of its loan pool and in turn started to go rapidly downhill, leading to a selloff of these assets in March 1792.g Duer, who had borrowed from anyone who was willing to lend, lost money on his security holdings and faced financial ruin, eventually landing in prison.h However, the amount of Duer’s debt was so overwhelming and the number of people and companies he had borrowed from so large that his undoing, in turn, led to widespread financial contagion. Other investors also started to sell off securities and default on their loans. This crisis has become known as the Panic of 1792. Once again, Hamilton and the other commissioners authorized the use of monies from the Treasury’s sinking fund to buy government securities in the open market. And, again, this activity calmed the markets and allowed the fledgling U.S. financial system to return to more normal operations. In the end, the First Bank scrip bubble of 1791 and the Panic of 1792 did not stop the rapid development of the new nation’s economy over the next several years, although it did temporarily interrupt the economy’s growth. From today’s central banking perspective, however, these episodes offer the first example of the use of rudimentary open market purchases of government securities to quell panic and provide liquidity to the financial system. And even though the panic was short-lived and the economy quickly recovered, these financial crises further tainted the First Bank’s reputation in the eyes of some and added to the level of opposition Check written by Alexander Hamilton to a Mr. Becknel on February 18, 1796, a little over a year after Hamilton left office as Secretary of the Treasury. The Library Company of Philadelphia. to both the First Bank and Hamilton. f See the book by Cowen, especially pp. 89-91. Interest rates, which move in the opposite direction to the prices of securities, rose rapidly. g d Chernow, p. 379 e See Cowen, pp. 89-90. h His friend Alexander Macomb soon joined him (Cowen, p. 90). 7 MAP OF FIRST BANK AND ITS BRANCHES companies, its banknotes (paper currency) most 1 commonly entered circulation as part of the loan process rather than through the purchase of U.S. 2 government securities. Economic historian David 7 Cowen says that, when making a loan, the bank 4 gave the borrower “banknotes, redeemable in specie,” or credited the “borrower’s account on 5 the bank’s books.”20 Cowen also points out that the prevailing philosophy of the time was that loans and deposits were related: more deposits meant more loans (and more paper currency in circulation). That’s why many state banks 3 6 envied the Bank of the United States: It received all of the government’s deposits21 and therefore could make more loans. Although state banks 8 issued their own banknotes when making loans, these banks did not have the size or geographic scope of the First Bank. Philadelphia (1791) 3 Charleston, SC (1792) 6 Savannah (1802) 1 Boston (1792) 4 Baltimore (1792) 7 Washington, D.C. (1802) 2 New York (1792) 5 Norfolk, VA (1800) 8 New Orleans (1805) Unlike modern central banks, the Bank of the United States did not officially set monetary policy. Nor did it regulate other banks. Nonetheless, its prominence as one of the largest corporations in America and its branches’ broad geographic position in the emerging American Although the U.S. government, the largest economy allowed it to conduct a rudimentary shareholder, did not directly manage the bank, it did monetary policy. The bank’s notes, backed by garner a portion of the bank’s profits. The Treasury substantial gold reserves, gave the country what secretary also had the authority to inspect the bank’s passed for a more stable national currency.22 By condition but was allowed to do so no more than managing its lending policies and the flow of funds once a week. through its accounts, the bank could — and did — 18 Indeed, the bank and the Treasury had alter the supply of money and credit in the economy a close relationship. It was Hamilton, acting as and hence the level of interest rates charged to Treasury secretary, who calmed the markets during borrowers. the country’s first financial crisis. And many economic historians believe that the Treasury today’s monetary policy actions, can be seen most secretaries who served during the 1791-1811 period 20 of the First Bank’s 20-year charter were in effect acting See Cowen, p. 59. 21 in some ways as central bankers would act today.19 See Cowen, p. 139. 22 Because the First Bank also functioned as a commercial bank and made loans to individuals and 8 These actions, which had effects similar to 18 See Cowen, p. 14. 19 See especially Cowen, pp.161-163. The First Bank of the United States Even in its earliest years, the First Bank, like its modern counterparts, had to worry about the counterfeiting of banknotes and check forgeries. Cowen notes that after the bank had been in operation for about six months, the bank’s chief cashier, John Kean, warned tellers at the bank’s branches to watch out for forgeries, since one criminal had recently tried to pass off a forged check in Philadelphia (see Cowen, p. 114). clearly in the First Bank’s interactions with state new banknotes. To speed up the growth of money banks. In the course of business, the First Bank and credit, the First Bank would hold on to the state would accumulate the notes of the state banks and banks’ notes, thereby increasing state banks’ reserves hold them in its vault. When it wanted to slow and allowing those banks to issue more banknotes the growth of money and credit, it would present through their loan-making process. the notes for collection in gold or silver, thereby reducing state banks’ reserves and putting the brakes on state banks’ ability to circulate In addition, banknotes issued by the First Bank were widely accepted throughout the country. And unlike notes issued by state banks, First Bank notes were the only ones accepted for payment of federal taxes. The First Bank’s branches were all located in the fledgling nation’s port cities. This made it easier for the federal government to collect tax revenues, most of which came from customs duties. Locating the branches in ports also made it easier for the First Bank to finance international trade and help the Treasury finance the government’s operations through sales of U.S. government securities to foreigners. Furthermore, the bank’s branch system gave it another advantage: It could move its notes around the country more readily than could a state bank. In fact, the bank’s branches also helped to fund and encourage the country’s westward expansion. David Cowen tells us that “this transportation service did not stop at the coast: it extended far into the interior and back country.”23 Closing of the Bank of the United States Although the bank’s charter did not expire until 1811, discussions about renewing it began much earlier. In 1808, the bank’s shareholders These 50 counterfeit $100 First Bank banknotes were certified as counterfeit by George Simpson, the cashier of the first Bank of the United States, after their surrender to William C.C. Claiborne, the governor of the Territory of Orleans (1804-1812) and subsequently governor of Louisiana from 1812 to 1816. The wrapper reads: “Five thousand dollars in Contourfeit [sic] notes delivered to Mr. Saul by Governour [sic] Claiborne, examined & cancelled by me Geo Simpson Jr. Cashr.” asked Congress to extend the charter. The Senate The Library Company of Philadelphia. 23 forwarded the request to Secretary of the Treasury Albert Gallatin, asking him for comment. Gallatin, who favored renewing the charter and expanding the bank’s capitalization to $30 million (from its initial capitalization of $10 million), did not respond to Congress until March 1809 —almost a full year See Cowen, p. 139. The First Bank of the United States 9 later.24 Gallatin wanted to wait until Jefferson’s After the First Bank closed, the country soon term was at an end because of the third president’s found itself engulfed in economic woes once more. generally low opinion of the bank. The War of 1812 had dampened trade to the point After receiving Gallatin’s report, Congress let the matter of charter renewal languish until where prices on imported goods went up and even some domestic goods carried heavier price tags. January 1810. At that time, the House gave the request for renewal a quick reading but took no action. Finally, in January 1811, both chambers of Congress engaged in a debate on whether to renew. Later that month, the House voted against renewal, the bill going down to defeat by one vote. In February, the Senate asked Gallatin A Bank of the United States check written by Pierre Charles L’Enfant, designer of the layout of Washington, D.C., on July 22, 1792. for another report, and he complied, again recommending renewal. The Senate vote, however, The Library Company of Philadelphia. resulted in a tie. The vice president, George Clinton of New York, cast the tie-breaking vote, and the Moreover, restrained trade meant that custom duties charter renewal was again defeated by one vote. on imported goods — the main source of revenue By 1811, many of those who had opposed the bank in 1790-91 still opposed it for the same for the federal government — also took a sharp drop. reasons — for example, concerns that it was The war had also led the federal unconstitutional — and said that the bank’s charter government to rack up significant debt. Without should be allowed to expire. By this point, the First Bank, the government had to rely more Alexander Hamilton was dead — killed in a duel heavily on state banks to help finance the war. with Aaron Burr — and the Federalists, his party, The influx of federal government deposits to these who were generally staunch supporters of the bank, institutions led them to issue greater quantities of were out of power, and the Republican Party was in banknotes and loans. The proliferation of banknotes control. Furthermore, by 1811, the number of state increased money in circulation and resulted in banks had increased greatly, and those financial inflation, because too much money was chasing institutions feared both competition from a national too few goods. Without the First Bank’s ability to bank and its power. limit the state banks’ issuance of paper currency, 25 26 there was no longer an entity that could control Although estimates vary, today $30 million would be about $510 million, according to John McCusker’s commodity price index. See his publication. the amount of money created. In addition, strong Congress did not even give the bank an extension that would allow it to end its business affairs in an orderly manner. Consequently, the bank created a trust to help with the dissolution of its assets and to protect shareholders’ investment in the bank. 26 24 25 10 The First Bank of the United States demand for loans during the war increased interest When the First Bank opened, the country had only three other banks. In contrast, there were 101 state banks in the country when the First Bank’s charter expired in 1811. By 1816, that number had grown to 205. The First Bank Building STILL STANDING AFTER ALL THESE YEARS When the Bank of the United States opened * an exterior of brick and Pennsylvania blue marble. for business in 1791, its offices were in Carpenters’ Inside, a double staircase leads to the second floor. Hall at 320 Chestnut Street in Philadelphia. In At the time the First Bank occupied the site, an east- 1793, a fire that destroyed many buildings on west corridor on the first floor connected the front Third Street near Chestnut threatened Carpenters’ and back doors. The main banking room consisted Hall. Consequently, the bank’s directors, who had of a large barrel vault supported by eight columns. considered moving its headquarters, realized that In addition, vaults in the cellar supplied not only perhaps now was the time to act. structural support but a secure storage area. The fire had created several vacant lots When the First Bank’s charter expired where buildings once stood. So property on Third in 1811, Philadelphia merchant Stephen Girard Street was readily available and at fairly cheap bought the building and opened his own bank prices. In 1794, the there, called Girard Bank. In 1902, bank officials directors acquired had the interior completely remodeled. The a piece of property financial institution vacated the building in 1926, at 116 South Third after which it remained unoccupied until 1930, Street and hired when the City Board of Trusts leased it to the architect Samuel American Legion. The National Park Service Blodget, Jr., to acquired the building in 1955. In 1967, the first floor design the new bank temporarily became a visitors’ center. The building building. The bank is part of Independence National Historical Park, moved into its new which is overseen by the National Park Service. home in 1797, and the building still Carpenters’ Hall at 320 Chestnut Street in Philadelphia stands there today. The structure has * This discussion draws heavily on information in John D.R. Platt, Penelope H. Batcheler, and Sarah M. Sweetser, “Historic Structure Report: Historical and Architectural Data,” Philadelphia: Independence National Historical Park, April 1981. The First Bank of the United States 11 rates and thus bank profits. Without the restraining hand of the Bank of the United States, state banks became less cautious in their lending habits and credit expanded rapidly. In effect, the country found itself in circumstances similar to those after the Revolutionary War: mounting debt from a war with England, soaring prices, and devalued money from rising inflation. A Bank of the United States check for $20 written by Raphaelle Peale to his father Charles Willson Peale on June 16, 1798. Charles Willson Peale is known for the large number of portraits he painted of important Americans, such as Thomas Jefferson, Alexander Hamilton, and George Washington. His son Raphaelle is considered the founder of the American school of still-life painters. The Library Company of Philadelphia. These problems and the resulting economic consequences would soon lead the United States to make another attempt at creating a national bank.27 In 1816, President James Madison signed the bill that would create the second Bank of the United States. 27 See the book by Chester Wright, pp. 228-29. REF ERENC E S Chernow, Ron. Alexander Hamilton. New York: The Penguin Press, 2004. Cowen, David Jack. The Origins and Economic Impact of the First Bank of the United States, 1791-1797. New York: Garland Publishing, 2000. Cowen, David J., Richard Sylla, and Robert E. Wright, “The U.S. Panic of 1792: Financial Crisis Management and the Lender of Last Resort,” mimeo (July 2006). Daniels, Belden L. Pennsylvania: Birthplace of Banking in America. Harrisburg, PA: Pennsylvania Bankers Association, 1976. Faulkner, Harold Underwood. American Economic History. New York: Harper & Row, 1960. Gordon, John Steele. Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt. New York: Walker and Company, 1997. Nettels, Curtis P. The Emergence of a National Economy, 17751815. New York: Holt, Rinehart, and Winston, 1962. Schocket, Andrew M. Founding Corporate Power in Early National Philadelphia. De Kalb, IL: Northern Illinois University Press, 2007. Stockholders of the Bank of the United States. “Proceedings of the Stockholders of the Bank of the United States Preparatory to the Creation of a Trust for Closing the Concerns of That Institution,” Philadelphia, 1811, printed by order of the stockholders. Wright, Chester Whitney. Economic History of the United States. New York: McGraw-Hill Book Company, 1949. Hammond, Bray. Banks and Politics in America from the Revolution to the Civil War. Princeton, NJ: Princeton University Press, 1957. Wright, Robert E. The First Wall Street: Chestnut Street, Philadelphia, and the Birth of American Finance. Chicago: University of Chicago Press, 2005. Hendrickson, Robert. Hamilton II: 1789-1804. New York: Mason/Charter, 1976. Wright, Robert E. Hamilton Unbound: Finance and the Creation of the American Republic. Westport, CT: Greenwood Press, 2002. Hepburn, A. Barton. A History of Currency in the United States. New York: Macmillan, 1924. Matson, Cathy, ed. The Economy of Early America: Historical Perspectives and New Directions. University Park, PA: Pennsylvania State University Press, 2006. 12 McCusker, John J. How Much Is That in Real Money? A Historical Commodity Price Index for Use as a Deflator of Money Values in the Economy of the United States, second edition, revised and enlarged. American Antiquarian Society (2001). The First Bank of the United States Wright, Robert E., and David J. Cowen. Financial Founding Fathers: The Men Who Made America Rich. Chicago: University of Chicago Press, 2006. GL O S SARY ARTICLES OF CONFEDERATION Provided the 13 colonies with a system of government from 1777 until replaced by the U.S. Constitution in 1789. Among other things, the articles gave Congress the authority to make war and conduct foreign affairs. However, under the articles, Congress could not impose taxes or enforce laws. INFLATION A rise in the general level of prices over a sustained period of time. BANKNOTE A negotiable instrument; a promissory note (promise to pay) that is used as money. MONETARY POLICY A central bank’s actions to influence the availability and cost of money and credit in the economy, as a means to promote national economic goals. CENTRAL BANK A governmental institution responsible for issuing currency and monetary policy, which involves the overall growth of money and credit and the level of short-term interest rates. The Federal Reserve is now the central bank of the United States. CONTINENTAL CURRENCY The currency authorized by the Continental Congress to help finance the Revolutionary War. Continental currency was not redeemable for gold or silver. CREDIT CRUNCH A situation in which banks become unwilling or unable to supply additional credit. CUSTOMS DUTIES A form of tax levied on goods traded internationally. FEDERALIST PARTY Generally advocated a strong central government. Federalists were often accused of being elitist or acting in favor of the wealthy. FINANCIAL BUBBLE A market condition created by excessive buying of assets and a resulting run-up in prices. FINANCIAL CONTAGION When problems at one financial institution spill over to others and cause problems at other financial institutions or businesses. FISCAL AGENT An organization that handles finances for another organization. The First Bank acted as the government’s fiscal agent. Today the Federal Reserve fills the role of fiscal agent for the U.S. government. INITIAL PUBLIC OFFERING (IPO) A company issues common stock or shares to the public for the first time. PUBLIC DEBT Money (or credit) owed by the government — federal, state, or local. The government accumulates debt over time by running a deficit; it spends more than it receives in tax revenue. Governments borrow by issuing securities such as government bonds. REPUBLICAN PARTY In early U.S. history, opposed strong central government; generally wanted to keep the U.S. a nation of farmers. Originally called the Anti-Federalist Party and led by Jefferson. The party later became known as the Democratic-Republican Party, the predecessor of today’s Democratic Party. SUBSCRIPTIONS (OR SCRIPS) Down payments on the purchase of new shares of stock in a company or bank; an initial partial payment of the full amount required to purchase a share of stock, with the remainder paid in installments over a period of time. Scrips were tradable and could be purchased after their initial issuance by others seeking to acquire the company’s or bank’s stock. SINKING FUND A cash fund established by a corporation or government to purchase debt it has issued in order to retire the outstanding debt more quickly. SPECIE Money in the form of gold or silver. In the colonial period and in the early years of the United States, specie often referred to gold or silver coins. The First Bank of the United States 13 THE LIBRARY COMPANY OF PHILADELPHIA Biographical Sketches both Jefferson (1805-09) and James Madison (1809-12). As John Adams vice president, he cast the tie-breaking vote that defeated (1735-1826) the First Bank’s charter renewal. He died of a heart attack Born in Massachusetts, John Adams in 1812, the first vice president to die in office. Congress and as George Washington’s vice president. Although not a major player in the debate over the national bank, Adams was a Federalist who often NEW YORK PUBLIC LIBRARY served as a delegate to the Continental (1747-1799) supported Hamilton’s policies, even though the two men Born in England, William Duer came sometimes clashed personally. In 1796, Adams was elected to the United States in 1773 and was a president of the United States. Just before the election of signer of the Articles of Confederation. Washington, D.C. There, he became the first occupant of under Alexander Hamilton, a post Hamilton created for the new Executive Mansion, later known as the White him. Duer had success as a speculator, but his talent for House. Losing to Thomas Jefferson in the election of 1800, speculation proved to be his undoing. He went bankrupt he did not serve a second term. He died on July 4, 1826, during the Panic of 1792 and was thrown into debtor’s just a few hours after Jefferson died at Monticello. prison, where he died in 1799. Aaron Burr (1756-1836) Aaron Burr was born in New Jersey, the son of the second president of THE LIBRARY COMPANY OF PHILADELPHIA In 1789, he became assistant secretary of the Treasury THE LIBRARY COMPANY OF PHILADELPHIA 1800, Adams left Philadelphia for the new capital city, the College of New Jersey (later Albert Gallatin (1761-1849) Born in Switzerland, Albert Gallatin came to the United States in 1780, landing in Boston. He served in Congress from 1795 until 1801 and often found himself with the Continental army during its winter encampment at odds with Treasury secretary Alexander Hamilton, at Valley Forge in 1777-78. He moved to New York in although he ultimately supported Hamilton’s plan for 1783 and shared a law practice with Alexander Hamilton. a national bank. In fact, when the Senate asked him to In 1800, Burr ran as vice president on the ticket with render an opinion on whether to let the First Bank’s Thomas Jefferson. When both men received the same charter expire, Gallatin sent a report favoring renewal of number of votes (at that time, people voted separately for the charter and expansion of the bank’s capitalization to president and vice president), Hamilton threw his support $30 million from $10 million. Hamilton fought a duel in Weehawkin, New Jersey, in THE LIBRARY COMPANY OF PHILADELPHIA which Burr mortally wounded his former law partner. George Clinton (1739-1812) THE LIBRARY COMPANY OF PHILADELPHIA Princeton). He fought in the Revolutionary War and was to Jefferson, who won the presidency. In 1804, Burr and 14 William Duer Alexander Hamilton (1757-1804) Alexander Hamilton was born on the island of Nevis in the British West Indies, the illegitimate son of Rachel Born in Little Britain, New York, Faucette Lavien and James Hamilton. After working as a George Clinton was elected the first clerk for a New York-based import-export firm, Hamilton governor of his home state in 1777. In made his way to the United States in 1772, landing in 1804, he replaced Aaron Burr as Thomas Jefferson’s pick to Boston. Eventually making his way to New York, he run for vice president. He served as vice president under enrolled in King’s College (now Columbia University). The First Bank of the United States he joined a militia company in 1775, and two years later, General George Washington appointed him to his staff. When Washington was elected the nation’s first president COLLECTION OF THE NEW-YORK HISTORICAL SOCIETY Sympathetic to the American cause for independence, Alexander Macomb (1748-1831) Born in Ireland, Alexander Macomb in 1789, he appointed Hamilton the first Secretary of the moved to the United States with Treasury. The following year, Hamilton wrote “Report on a his parents in 1755. While still in National Bank,” in which he laid out his plans to establish his twenties, he started a successful trading firm with a single national bank. One year later, Hamilton’s proposed his brother, William, in Detroit, then an outpost on the financial institution materialized in the form of the Bank western frontier. The Macomb brothers prospered further of the United States. Hamilton died in 1804, one day after during the Revolutionary War as suppliers of various being mortally wounded in a duel with Aaron Burr. scarce consumer goods and military materials. Eventually, THE LIBRARY COMPANY OF PHILADELPHIA Alexander made his way to New York City, where he had considerable success as a land speculator. Incurring David Hume increasing debt to maintain a life of luxury and to support (1711-1776) a household of 17 children, Macomb formed a partnership A Scottish philosopher and economist, with William Duer in 1792. They planned to corner the David Hume was an early proponent market in U.S. government securities. He joined Duer in of empiricism, a theory that asserts debtor’s prison, but unlike Duer, Macomb did not die in prison. works are A Treatise of Human Nature and Philosophical Essays Concerning Human Understanding. Alexander Hamilton consulted Hume’s writings when outlining his THE LIBRARY COMPANY OF PHILADELPHIA plans for a viable economic system for the United States. Thomas Jefferson THE LIBRARY COMPANY OF PHILADELPHIA that knowledge arises from experience. Among his major James Madison (1751-1836) Often called the Father of the Constitution, James Madison became the fourth president of the United (1743-1826) States in 1808. Before that, he served in the Virginia Born in Virginia, Thomas Jefferson had Assembly and was a delegate to the Continental Congress. a distinguished career as a member He was one of the authors of the “Federalist Papers,” of the Continental Congress, drafter essays often credited with contributing to the ratification of the Declaration of Independence, minister to France, of the Constitution. He is also credited with helping to secretary of state under George Washington, and vice frame the Bill of Rights. Like his fellow Virginian Thomas president under John Adams. Jefferson, who believed Jefferson, Madison opposed the idea of a national bank, that the U.S. should remain primarily a nation of farmers, and in 1811, during his administration, the bank’s charter argued that Alexander Hamilton’s proposed national bank expired. However, after the War of 1812, the government was unconstitutional. In 1800, Jefferson was elected the once again found itself with mounting debt and the country’s third president. As president, he secured the country in increasing economic distress. But there was purchase of the Louisiana Territory from France and sent no central bank to help ease these conditions. In 1816, Meriwether Lewis and William Clark on their famous Madison signed the bill chartering the second Bank of the expedition to the Pacific coast. He died at his home, United States. Monticello, on July 4, 1826, just a few hours before John Adams died in Massachusetts. The First Bank of the United States 15 THE LIBRARY COMPANY OF PHILADELPHIA Biographical Sketches what would become his masterwork, The Wealth of Nations, Jacques Necker which was published in 1776. This volume is considered (1732-1804) to be the first modern work on economics. When outlining Born in Switzerland, Jacques Necker his plans for the U.S. economic system, Alexander was sent to Paris by his father to Hamilton consulted Smith’s writings. was a wealthy man. From 1777 to 1781, he served as director general of finances in the government of Louis XVI. In 1788, the king re-appointed Necker as a director of finances, a term that lasted until the outbreak of the THE LIBRARY COMPANY OF PHILADELPHIA become a bank clerk. Eventually becoming a partner in the bank, by the mid-1760s, Necker French Revolution in 1789. He wrote several books (1732-1799) George Washington, in his early career, was a surveyor and gentleman farmer. He served as a lieutenant colonel of the Virginia militia in the French and Indian War influenced Alexander Hamilton as he searched for ways to (1754-63). In 1775, he went to Philadelphia as a delegate promote the economic development of the United States. to the second Continental Congress, which named him He died at his Swiss estate in 1804. commander-in-chief of the Continental Army. After six years of war with England, Washington accepted the surrender of the British general Lord Cornwallis in 1781 Edmund Randolph at Yorktown, Virginia. He took the oath of office as first (1753-1813) President of the United States in 1789 in New York City. In 1791, he signed the bill chartering the first Bank of the name in both Virginia and national United States. He died at Mt. Vernon in December 1799. supported the British cause, Edmund embraced the fight for independence, serving as an aide-de-camp to George Washington during the Revolutionary War. Although he tried to remain neutral in the debate over the national bank, he nonetheless advised President Washington to veto Alexander Hamilton’s bill to create that institution. COLLECTIONS OF Edmund Randolph was a prominent THE UNIVERSITY OF PENNSYLVANIA ARCHIVES THE LIBRARY COMPANY OF PHILADELPHIA about public finances, and some of his writings probably politics. Unlike his father, John, who Thomas Willing (1731-1821) A native of Philadelphia, Thomas Willing was educated in England. Although Willing was sympathetic to the colonists’ cause, he stopped short of supporting assumed the post of secretary of state after Jefferson separation from England. However, he did not leave the resigned from that position. He retired from public office city when the British arrived, and he refused to take the in 1795. oath of allegiance to the British monarch George III. In THE LIBRARY COMPANY OF PHILADELPHIA Appointed attorney general by Washington, Randolph 1782, Willing was elected president of the Bank of North Adam Smith (1723-1790) Born in a village in Scotland, Adam America, the first bank chartered in the United States. A staunch supporter of Alexander Hamilton, Willing resigned his position with the bank to accept the post of president of the first Bank of the United States. Smith first pursued an academic career at the University of Glasgow. He left that post to take a job as private tutor to the stepson of a duke. In 1766, with that position at an end, Smith returned to his birthplace, where he spent the next 10 years writing 16 George Washington The First Bank of the United States Image of William Duer from the New York Public Library. Image of Thomas Willing from the Collections of the University of Pennsylvania Archives. Image of Alexander Macomb from the Collection of the New-York Historical Society. All other images courtesy of The Library Company of Philadelphia. www.philadelphiafed.org JUNE 2009
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