December 12, 1791, was a red-letter day in the financial history of the
young United States. That day a bank unlike any previously seen in
America opened for business in Carpenters’ Hall in Philadelphia, then
the seat of the federal government. The new bank was a national bank,
authorized by Congress to hold $10 million in capital—an astronomical
sum at the time—and operate across state borders. And it was a
quasi-public institution, owned mostly by businessmen and lawyers
motivated by profit, but also intended to serve the public interest by
improving the financial standing of the federal government and fostering
Businessmen and investors across the nation had anticipated the opening
of the Bank of the United States with mounting excitement for almost a
year. In July 1791, a public offering of bank stock sold out in less
than an hour, setting off frenzied speculation in bank shares.
Stockholders had chosen directors hailing from eight states to run the
bank. By December, it was ready to begin accepting deposits, making
loans, selling U.S. Treasury bonds and issuing paper currency backed by
gold and silver coin stored in its vaults. The following year, bank
branches would be established in Boston, New York, Baltimore and
Charleston, S.C., to facilitate the flow of money and credit to various
regions of the country; four more branches would follow by 1805.
The intellectual architect of the bank—known today as the First Bank of
the United States—was Alexander Hamilton, the founding father who most
profoundly influenced the economic development of this country. As the
Republic’s first Treasury secretary, Hamilton championed the idea of a
national bank, proposing its establishment to Congress and convincing
President George Washington—over the strenuous objections of Thomas
Jefferson—that the bank would not violate the Constitution.
The man on the $10 bill, whom biographer Ron Chernow describes as “the
clear-eyed apostle of America’s economic future,”1 believed that the new
nation needed a national bank if it was to prosper. After the
Revolutionary War, the economy was in tatters: Crushing war debt weighed
down the federal government, and a shortage of sound currency and bank
credit stifled commercial growth. Hamilton designed the First Bank to
help the government get on its financial feet and to galvanize American
commerce by providing currency and loans to businesses and individuals.
The bank was a vital part of a national financial infrastructure that
Hamilton created during his short but prodigious career, the template
for today’s monetary economy based on a stable currency and access to
A statesman with a natural genius for economics, Hamilton was far ahead
of his contemporaries in perceiving how the country’s fortunes and those
of free markets were intertwined, says Thomas M. Humphrey, a former
senior economist with the Federal Reserve Bank of Richmond who has
written extensively about the history of economic thought. “Hamilton saw
a system of sound, secure and resilient financial institutions as being
necessary for the real economy to function efficiently,” Humphrey said
in a telephone interview. “He also had this vision that America would
one day become a huge, thriving economic success around the world, and
he thought of these institutions as being necessary to promote that
The First Bank worked in consort with Hamilton’s other financial
reforms—paying off war debt and establishing a stable monetary
standard—to put the government’s finances in order and stoke the fires
of enterprise at the beginning of the industrial revolution. By aiding
in revenue collection, lending to the Treasury and marketing government
debt to private investors, the bank served as a financial bulwark for
the federal government. And its operations invigorated markets by
providing a sizable, trustworthy currency and extending credit to
Hamilton’s bank was destined not to endure; constitutional challenges
and opposition from state banks forced it to close after 20 years of
operation. But the institution he created laid the foundation for a
second national bank and, almost a century later, for the establishment
of the Federal Reserve System. Although the First Bank was not a true
central bank—the concept of centralized monetary control didn’t develop
until the 20th century—its powers and operational scope presage the
Fed’s stabilizing influence on the nation’s money supply.
The economic ideas that sprang from Hamilton’s fertile, industrious mind
have informed financial practice and monetary policy in this country for
more than two centuries. This article examines how those ideas became
manifest in the First Bank of the United States—and transcended the
death of the bank and Hamilton himself.
War and peace
The plan for the First Bank wasn’t cut from whole cloth, the product of
an individual flash of inspiration or a snuff-fueled brainstorming
session in Washington’s cabinet room. Hamilton mulled over the notion of
a national bank for more than a decade before making his formal proposal
During the Revolutionary War, as an aide-de-camp to General Washington,
Hamilton saw firsthand how financial disorder undermined the patriotic
cause. Because the Continental Congress had little power to tax, it was
forced to finance the war by borrowing and issuing paper money, known as
“continentals.” However, without collateral to back them, millions of
dollars in this currency had become nearly worthless. Government debt
was mounting by the day.
The cure for these ills, Hamilton believed, was a national bank. In a
1779 letter to a congressional delegate, Hamilton described a large
banking and trading corporation owned by wealthy individuals, but partly
controlled by the government. The institution would invest in war debt,
converting deflated continentals into new currency and credit that would
promote industry and trade.
Colonel Hamilton was just 24, but versed far beyond his years in matters
of political economy. As a teenager, he had received a crash course in
international commerce as a clerk for a trading firm on the island of
St. Croix in the British West Indies. While studying at King’s College
(now Columbia University) in New York and during the war years, Hamilton
read extensively on economics and finance, absorbing the mercantilist
theories of James Steuart and Malachy Postlethwayt as well as the
classical, free-market teachings of Adam Smith and David Hume. “Hamilton
was just a genius,” Humphrey says, “and he somehow managed to put it all
together, although his style was not completely pro–free market, like
the classical economists.”
In 1781, Hamilton again broached the idea of a national bank, outlining
his vision in a letter to Robert Morris, superintendent of finance for
Congress. The bank would issue pound notes backed in part by real
estate, redeem the government’s outstanding paper money obligations and
lend to both government and private businesses. Such an institution
would furnish the needed capital to win the war and “be a source of
national strength and wealth,”2 Hamilton wrote. Morris may have
incorporated some of Hamilton’s ideas into his plan for the Bank of
North America, the first independent bank in the country. (Domestic
banks were banned under Colonial rule.) Incorporated in 1781, the
Philadelphia bank was conceived as a national bank but devolved into a
regional bank focused on private lending.
If a national bank was needed to defeat the British, an even stronger
argument for establishing such an institution could be made after the
war. The infant nation’s economy was depressed, hobbled by staggering
war debt and a scarcity of specie (gold and silver coin) with which to
pay taxes and trade goods and services.
Currency was so scarce in some cities that farmers, unable to sell their
produce in the market, returned home at the end of the day with full
wagons. Besides the Bank of North America, only a handful of
state-chartered banks were in operation in the entire country, each
issuing its own notes in a limited geographic area. The Constitution
outlawed the issue of paper money by state governments.
In 1789, Washington appointed Hamilton his secretary of the Treasury.
Finally, Hamilton was in a position to put his long-standing plan for a
national bank into action.
A bold proposal
The 34-year-old secretary made his pitch to the first Congress in
December 1790, in his Report on a National Bank. Like Hamilton’s three
other major reports to Congress, on public credit, the Mint and
manufacturing, it was lengthy, meticulously researched and highly
persuasive. In his seminal 1910 treatise on the First Bank, banking
historian John Thom Holdsworth calls the report “undoubtedly the most
informing and illuminating presentation of banking principles and
practice known to American literature up to that time.”3
Noting that banks had proven their value to government and business in
the world’s leading economies, Hamilton argued in the report that the country needed a national bank to help it shake off its financial
malaise and join the company of modern commercial nations. A Bank of the
United States would not only enhance the federal government’s
creditworthiness by issuing a currency suitable for the payment of
taxes, investing in war debt and lending to the Treasury in emergencies,
it would also expand the money supply and provide credit to merchants
and other businesses to foster trade, both within the country and across
Hamilton echoed Smith’s The Wealth of Nations in describing banks as
“nurseries of national wealth” that transformed the “dead stock” of gold
and silver into active and productive capital that rippled through the
economy, creating wealth and increasing welfare.4 Deposits and stock
investments in a national bank would support increased currency
circulation, relieving farmers and merchants of the need to resort to
To avoid the inflation caused by the wartime continentals, Hamilton
proposed that the bank issue notes redeemable on demand for specie. The
bank and all other banks in the country would operate under a
mixed-money system, cutting-edge monetary practice in the age of the
gold standard. Paper currency issued by the national bank and
state-chartered banks would be a close substitute for gold and silver
coin in financial transactions; thus the nation’s currency would be
stable, anchored to a bimetallic monetary standard, and portable,
expediting the transport of funds and speeding circulation.
As in his earlier proposals, Hamilton stressed the importance of a
quasi-public structure for the bank. It would serve the national
interest, but under the control of private individuals, not government
officials. In studying other great banks of issue, such as the Bank of
England and Bank of Amsterdam, he had concluded that a national bank
must be shielded from political interference: “To attach full confidence
to an institution of this nature, it appears to be an essential
ingredient in its structure that it shall be under a private not a
public direction, under the guidance of individual interest, not of
The federal government would be a minority stockholder in the bank,
authorized to hold up to one-fifth of its capital and vote for
directors. But the remaining $8 million in stock would be held by
private investors—merchants, landowners, speculators or anyone else who
could pony up the required funds.
One of Hamilton’s primary goals in establishing the bank was financing
the country’s war debt, which included the debts of individual states
assumed by Congress. His plan for the bank provided for this by
requiring that 75 percent of its privately held shares be bought with
“government stock”—Treasury bonds paying 6 percent interest. (The
balance was to be paid in specie.) Like the Bank of England, which had
invested heavily in British government debt, the Bank of the United
States would unite the interests of private enterprise in support of
public credit. Bank shareholders would profit as the government paid off
its debts over time. Meanwhile, the bank’s government debt—as good as
gold in Hamilton’s calculus—would serve as collateral for increased
currency circulation, stimulating commercial development.
In hindsight, Hamilton’s bold, financially creative proposal was more
than a plan for a national bank; it was the springboard for a future
U.S. economy based on private capital and the creative use of various
forms of bank credit, including government debt.
This grand plan for economic unity and progress under the aegis of a
national bank was not universally embraced. Hamilton had to summon all
his analytical and rhetorical gifts to overcome the objections of men
who received his proposal coolly, if not with disdain. Congressional
debates in early 1791 over the constitutionality of the bank had
political as well as monetary consequences; Hamilton’s proposal
alienated him from founders Jefferson and James Madison, and helped to
open a permanent schism in the halls of power.
Many politicians of the period, especially those from the agricultural
South, scorned banks as corporate monopolies that profited merchants and
financiers, but defrauded farmers and other ordinary people. Jefferson,
secretary of state in the Washington administration, saw banks, credit
and stock markets subverting his ideal of America as a self-reliant,
agrarian utopia with limited industry. Vice President John Adams abjured
debt and dismissed bankers as “swindlers and thieves.”6 Much of the debate turned on the interpretation of a clause in the
Constitution that allows the federal government to enact “all laws which
shall be necessary and proper” for the carrying out of explicit powers
such as borrowing money and collecting taxes. Jefferson argued in a
written opinion to Washington that a national bank may be convenient,
but not truly necessary or indispensable for the execution of the
government’s enumerated powers. Therefore, Hamilton’s bank was
James Madison of Virginia, co-author with Hamilton of the Federalist
Papers, agreed with Jefferson. He added that a national bank would
conflict with state interests under the Constitution by interfering with
the right of states to charter and oversee their own banks of issue.
Hamilton and allies, such as Congressman Fisher Ames of Massachusetts,
countered that a national bank was indeed necessary for the reasons laid
out in the proposal before Congress. If it was necessary, then it was
proper under the Constitution and did not pose a conflict with states’
rights. Furthermore, the bank would energize state economies in the
agricultural South as well as the mercantile North.
The bitter skirmish between Hamilton’s and Jefferson’s followers over
the First Bank was the first clash in what would become an endless war
of words in America—partisan politics. Quoting Chief Justice John
Marshall, Chernow notes that the dispute led to the emergence of “those
distinct and visible parties which in their long and dubious conflict
for power have … shaken the United States to their center.”7 For the
next 30 years, Hamilton’s Federalists vied with Jeffersonians (or
Democratic-Republicans) for mastery of the government. Although the
parties’ names and constituencies have morphed over the intervening 200
years, the lineage of today’s Republicans and Democrats extends back to
these original foes.
After Congress passed a bill adopting Hamilton’s proposal, its fate lay
on Washington’s desk; the president had been swayed by Jefferson’s
arguments and was considering vetoing the measure. Hamilton defended it
in a 15,000-word manifesto that articulated what would come to be known
as the implied powers doctrine; that is, the government has the right to
employ any means necessary to execute its express powers under the
Constitution. In ringing phrases, Hamilton asserted that “every power
vested in a government is in its nature sovereign and includes, by force
of the term, a right to employ all the means requisite and fairly
applicable to the attainment of the ends of such power.”8 This doctrine
became embedded in constitutional law, giving the federal government
broad scope to exercise its authority.
Washington was convinced. On Feb. 25, 1791, he signed the act
incorporating the Bank of the United States, clearing the way for the
sale of stock (the government borrowed $2 million from money lenders in
Amsterdam to purchase its stake) and the start of operations.
The nation’s bank
Little is known about those operations; virtually all the bank’s records
were destroyed in the early 1800s. But what evidence exists shows that
the bank largely succeeded in accomplishing Hamilton’s
aims—jump-starting the economy and building public confidence in the
Treasury and financial markets. By virtue of the sheer volume of
transactions flowing through its Philadelphia office and regional
branches, the bank was by far the single largest financial entity in the
country. The economic changes it wrought were pervasive and arguably
By converting war debt into bank stock, the bank relieved the government
of that financial burden and sent a message to investors at home and
abroad that the United States would honor its debts. (To this day, the
Treasury has never defaulted on a bill, note or bond.) In an era when
the government could not count on a steady income—there was no income
tax; import duties and public land sales made up the bulk of federal
revenue—the bank sustained daily operations with short-term loans. By
the end of 1795, the Treasury, now led by Hamilton’s successor, Oliver
Wolcott, had borrowed a total of $6.2 million from the bank, more than
60 percent of its capital.9
A robust currency circulation and lending to other banks and businesses
stimulated the economy, leading to increased domestic and foreign trade
that generated income and job growth. Unlike paper issued by state
banks, the First Bank’s widely circulated notes were accepted by the
federal government for the payment of duties. Although the United States
would not have a true uniform currency until after the Civil War, “it is
certain that the notes of no state bank possessed to anything like the
same degree the quality of universality” of the national bank’s notes,
In its organization and many of its functions, the First Bank
foreshadowed the Federal Reserve System. Like the Fed, the First Bank
was quasi-public in nature; as Hamilton intended, it served a public
purpose, but independently from the administration and under the
direction of private interests. (Nominally, each regional Federal
Reserve Bank is owned by its member banks.) Also like the Fed, the First
Bank acted as the government’s fiscal agent and held its bank balances.
And just as the Fed’s 12-bank network does today, the First Bank’s eight
branches extended its influence throughout the country. “I think there
are enough parallels, enough elements there that you could say that
Hamilton’s bank was the progenitor for at least some functions of the
modern Fed,” Humphrey says.
Scholars such as Richard Timberlake Jr., a former economics professor at
the University of Georgia, have pointed out that neither Hamilton nor
Congress intended the First Bank to control the size of the money
stock—a defining function of the Fed and other modern central banks.
Nevertheless, Timberlake contends that over the course of several years
the bank took on that role, leveraging its large transaction volume and
reserve balances to expand or constrain the money supply. To rein in
credit, the bank promptly presented the state banknotes that passed
through its offices for redemption in specie, reducing the lending
capacity of the issuers. To ease credit, the bank lent more to
businesses and banks and treated state banknotes with “forbearance.”11 Timberlake sees this activity as an early form of open market
operations—resented by many state banks—that acted as a check on inflation.
The parallels with the Federal Reserve go only so far, however. The Fed
neither lends to government nor operates as a commercial bank, accepting
deposits from and making loans to businesses and individuals. Also, the
Fed enforces reserve requirements, examines accounts and exercises other
regulatory authority over banks—powers not contemplated by the creators
of the First Bank.
Political defeat, economic victory
For all its successes, Hamilton’s bank could not overcome its political
liabilities. When its charter came up for renewal in 1811, the
Federalists were out of power; the Democratic-Republicans, who had
remained hostile to the bank, now held the majority. Renewing
Jefferson’s attack of 20 years earlier, they charged that the bank was
unconstitutional, a perversion of the necessary-and-proper clause.12 Hamilton’s enemies had allies at many state banks, whose ranks had
swelled to 90 since the First Bank’s founding. Coveting the bank’s
federal government deposits, the directors of these banks—along with the
representatives of state governments that owned bank stock—lobbied
against recharter. The bank’s opponents also accused many of its
directors of being Tories or monarchists, noting darkly that British
investors held a large amount of its capital.
This time there was no Hamilton to mount a passionate and brilliant
defense; Aaron Burr had killed him in a pistol duel seven years earlier.
Despite support from President James Madison and Treasury Secretary
Albert Gallatin, Congress let the charter expire, and the bank closed
its doors on March 3, 1811.
The Hamiltonian model of banking and monetary policy did not die with
the First Bank, however. Out of the financial chaos that followed the
War of 1812 rose a Second Bank of the United States. This federally
chartered, well-capitalized institution was not as well managed as its
predecessor, but in time it too exerted central-bank-like influence over
the economy. During the war the number of state banks exploded, and they
stopped redeeming their notes for specie, contributing to high
inflation. Leveraging its large currency reserves, the Second Bank
encouraged the redemption of those bank-notes for gold and silver,
helping to shrink the money supply and stabilize prices.
The Second Bank’s life was also cut short; irked by its burgeoning
monetary and political power, President Andrew Jackson refused to renew
its charter, and the bank ceased operations in 1836. But even in the
absence of a central bank, the ideas that Hamilton expounded and put
into practice endured. In the 19th century, bank lending supported in
part by state and federal credit spurred business growth, planting the
seeds for the nation’s flowering into an economic power after the Civil War.
After a financial panic in the early 1900s, Congress revived Hamilton’s
notion of a centralized, quasi-governmental bank exerting a positive
influence on the monetary system and the overall economy. The Federal
Reserve Act of 1913 created the system of Reserve Banks that has
provided a backstop for commercial banks and shaped monetary conditions
In ensuring the demise of the First Bank, the Democratic-Republicans may
have won their political battle with Hamilton, impugned by Jefferson as
“the servile copyist”13 of British Prime Minister William Pitt. But
history has given economic victory to Hamilton. The economy that
developed in this country would not realize the Jeffersonian ideal of
yeoman farmers and artisans producing goods from their own resources,
unassisted by banks and financial markets. Instead, it would embrace
Hamilton’s capitalist vision—sophisticated, multifarious commerce
thriving on a sound currency and ready access to credit.
Successive generations of Americans have reaped the rewards of the
economic revolution that began with the opening of the First Bank of the
On television, on the Web and in the classroom
Alexander Hamilton is the subject of an excellent Twin Cities Public Television program, originally aired in May 2007.
The Minneapolis Fed helped develop the two-hour TV program, generating educational content for the teachers and producing a supplemental Web site on the history of central banking.
Hamilton is also part of the debate in the 2007-2008 Minneapolis Fed student essay contest: “Hamilton vs. Jefferson: Whose economic vision was better?” for which high school students will discuss the founding fathers’ competing concepts for the new nation’s economic future.
1 Ron Chernow, Alexander Hamilton. New York: Penguin Books, 2004, p. 344/p>
2 Bray Hammond, Banks and Politics in America: From the Revolution to
the Civil War. Princeton: Princeton University Press, 1957, p. 47.
3 John Thom Holdsworth and Davis R. Dewey, The First and Second Banks of
the United States. Washington, D.C.: Government Printing Office, 1910,
4 Alexander Hamilton, The Papers of Alexander Hamilton, ed. Harold C.
Syrett and Jacob E. Cooke. New York: Columbia University Press,
1961–1987, vol. 7, p. 308. “Report on the Bank,” Dec. 13, 1790.
5 Ibid., p. 331.
6 Joseph J. Ellis, Passionate Sage: The Character and Legacy of John
Adams. New York: W.W. Norton, 1994, p. 161.
7 Chernow, p. 351.
8 The Papers of Alexander Hamilton, vol. 8, p. 98. “Final Version of an
Opinion on the Constitutionality of an Act to Establish a Bank,” Feb.
9 Holdsworth, p. 45.
10 Ibid., p. 94.
11 Richard H. Timberlake Jr., Monetary Policy in the United States.
Chicago: University of Chicago Press, 1993, p. 10.
12 The constitutionality of a national bank with broad monetary powers
would not be affirmed until 1819, in the landmark U.S. Supreme Court
case McCulloch v. Maryland. Echoing Hamilton’s assertion of implied
powers in 1791, the Court ruled that Congress indeed had the power to
incorporate such a bank under the necessary-and-proper clause.
13 Letter from Jefferson to James Monroe, May 26, 1795, in Paul
Leicester Ford, ed., The Writings of Thomas Jefferson. New York: 1896,