The First Bank of the United States

Background

From 1783 to 1789, the United States experienced moderate economic expansion. Then, the U.S. economy went into a stage of contraction and depression. A combination of factors contributed to this economic crisis, including The U.S. government, which was almost exclusively funded by tariffs and import duties, could not fund the Revolutionary War debt. This led to the implementation of a taxation system. However, the American people did not want to pay taxes, and the government did not have enough funds to pay off its massive debt. The huge debt made the American government very weak and dependent on others. To maintain the country’s minimal standard of living, the American government was forced to borrow money from other countries. The country borrowed money from France and the Netherlands, but it was not able to repay them. The government faced an economic depression that led to a decrease in imports and exports.

Founding of the First Bank

To improve the economic and political situation in the United States, Congress established a national bank. The First Bank of the United States (BUS) was created on February 25, 1791. The bank was chartered for 20 years and was given the authority to hold public funds, issue notes, and regulate the amount of money in circulation. It was the first government institution authorized to issue paper money. The Founding Fathers, such as Thomas Jefferson and James Madison, were skeptical of a national bank because they believed that it would concentrate too much power in a few hands. Congress tried to address these concerns by appointing people from a variety of social and economic backgrounds to the Board of the Bank of the United States. However, Congress did not give the bank a public source of funds. This meant that the bank was less powerful than those who controlled it. The BUS was first located in Philadelphia, but it relocated to Washington, DC, after its charter expired in 1811.

Structure and Functioning of the Bank of the United States

The bank was governed by a board of 25 directors. The bank had two types of accounts: government accounts, which were used to hold funds collected by the government; and private accounts, which were used to hold funds owned by private individuals and businesses. The bank compared the interest rates of the accounts to calculate the amount of money to distribute to each account. Then, it created and issued notes based on the total funds in each account. The government was required to deposit all funds collected through customs and excise taxes into a government account at the bank. The board of directors decided on how much of the funds deposited in the government account should be released and transferred to the other accounts. The remaining funds in the government account were retained by the bank as security against unexpected fluctuations in the value of the deposited money.

The Debate Over Renewing the Charter

The bank’s charter expired in 1811. Although many people wanted to renew the charter, others, such as Congressman James Madison (the future president), wanted to create a new and more powerful institution. Madison argued that the bank had become a tool for large corporations and government officers. The renewal of the charter was hotly debated in Congress during the early years of the 19th century. Eventually, Congress passed the Funding Act of 1816, which created the Second Bank of the United States (SBUS). The SBUS differed from the BUS in that it was privately owned, had higher capital reserves, and had more far-reaching powers. For example, the SBUS was authorized to issue more and higher-value notes. Unfortunately, the SBUS became as controversial as the BUS. Out of the same debate emerged a new political party: the Democratic Party. The new party was formed from the same group of people that opposed the BUS.

Final Words: Lessons from the First Bank of the United States

There have been many efforts to establish a centralized banking system in the United States since the first attempt in 1816. These attempts have generally been rejected by the public and have thus failed. Why has the United States been so resistant to the establishment of a central bank? One reason is that the United States is a large and diverse country with different economic and political interests. The population and economy of New York are different from those of California and Texas. Thus, a centralized banking system that serves the interests of New York City may not be suitable for other parts of the country. The United States is also a country built on the rule of law, which means that laws must be obeyed by all. A centralized banking system that is not approved by the majority of citizens does not respect the rule of law. This can be seen in the creation of the Federal Reserve System, which was approved by Congress and signed into law by the President in 1913.