Bank of the United States (1791)

Yonatan Eyal

Excerpt from the Acts to Charter the Bank of the United States

The establishment of a Bank for the United States ... will be very conducive to the successful conducting of the national finances; will tend to give facility to the obtaining of loans, for the use of the Government, in sudden emergencies; and will be productive of considerable advantage to trade and industry in general....

Alexander Hamilton, secretary of the treasury during the 1790s, had observed the instability of his fledgling republic during the 1780s, when it still operated under the Articles of Confederation. The new nation's finances and politics then seemed in disarray. Shortly after the government established by the U.S. Constitution began working in 1789, Hamilton devised an economic plan intended to bring stability and prosperity to America's finances.

The Bank of the United States became a central feature of Hamilton's scheme. He expected that a national financial institution such as the Bank would centralize and manage the nation's currency and credit. The Bank would hold government monies and issue notes that could be used to pay debts to the state. It would also extend loans to stimulate manufacturing and economic growth. Additionally, Hamilton hoped that government could forge an alliance with the country's wealthy elite, and indeed the Bank's early subscribers were virtually all speculators and businessmen. The Bank played a vital role in the flourishing, commercialized society that Hamilton and the Federalist Party envisioned, and in 1791 Congress officially chartered it for a period of twenty years (1 Stat. 191).

POLITICAL DISAGREEMENTS

Members of the opposition Republican Party, led by Thomas Jefferson and James Madison, disagreed with Hamilton's philosophy. They thought that chartering a Bank exceeded Congress's constitutional authority and would lead to the unhealthy dominance of a wealthy upper class—exactly what Hamilton desired. The national Bank, they feared, would create a privileged group of nonproducers, people who got rich by handling paper money rather than through hard work. It might encourage corruption, as businessmen cultivated unsavory partnerships with the government. Finally, the Bank flew in the face of the founding republican ideology of the American Revolution, which led Jeffersonians to suspect powerful conspiracies against their liberties.

As president, Jefferson nevertheless allowed the Bank to run its course until Hamilton's charter expired in 1811. Following the War of 1812, a new generation of Jeffersonian Republicans, led by Congressman Henry Clay, rechartered the Bank for another twenty years. As was true in 1791, the Second Bank's charter of 1816 (3 Stat. 266) became part of a grand design for economic growth, now called the "American System." Clay's proposal, like Hamilton's, supplemented the Bank with protective tariffs that raised prices on imported goods in order to benefit native manufacturers. And it authorized federal funding for internal improvement projects such as canals and turnpikes.

In this postwar period the Bank fed an investment boom funded by paper currency, only to see it collapse abruptly in 1819. During that year the Bank called in its loans and contracted the currency, leading to widespread economic depression, joblessness, and bankruptcy. Many victims of these tough economic times—among them future President Andrew Jackson—blamed the Bank for their misfortunes. The resentments nursed by this "Panic of 1819" had much to do with the anti-Bank fervor of succeeding years.

LEGAL AND POLITICAL CHALLENGES

Another challenge to the Second Bank came legally, when the U.S. Supreme Court considered the constitutionality of its existence. Chief Justice John Marshall, in the case of McCulloch v. Maryland (1819), argued that Congress acted legitimately when creating the Bank. He emphasized the "necessary and proper," or elastic, clause of the Constitution, which said that Congress could do whatever it thought essential to fulfill its obligations. In the realm of inter-state commerce, over which Congress exercised control, this included the authority to create a national bank. Marshall's ruling allowed the Bank to continue to function. But the most serious test of its survival came from Andrew Jackson and his new Democratic Party.

Under its director, Nicholas Biddle, the Bank applied for Congressional re-charter in 1832, four years before its current charter was due to expire. President Jackson, already wary of the concentration of power represented by the Bank, revitalized old Jeffersonian arguments against its continuation. The "Monster Bank," as he called it, gave too much influence to a select group of wealthy financiers. Lost in the path of its destruction lay the downtrodden farmers and planters whom the Bank victimized by calling in loans and foreclosing on property. Jackson regarded himself as the spokesman for America's virtuous independent farmers, threatened by an impersonal institution with undue control over their daily lives.

Jackson vetoed the Bank's re-charter in 1832, and then won a decisive presidential victory over Henry Clay in a campaign largely focused on the Bank. But Jackson thought his veto insufficient, so in mid-1833 he began withdrawing government deposits from the Bank and placing them in various state banks loyal to the Democratic Party. Biddle, in response, called in loans and tightened the currency as a way of demonstrating his power and putting pressure on the chief executive. Despite Biddle's best efforts, the Second Bank went out of existence as its charter expired in 1836.

Anti-Bank Democrats, now led by President Martin Van Buren, did propose an alternative to the "Monster" they killed. Named the "Independent Treasury," or "Sub-Treasury," Van Buren's idea was to create a government depository forbidden from issuing notes and loans and thus lacking the regulatory mechanisms of the First and Second Banks. The Independent Treasury formed part of Van Buren's response to the devastating industrial depression afflicting the nation from 1837 to 1843. During the early 1840s members of the Whig Party in Congress dismantled it, although Democrats under President James K. Polk reinstated it in 1846. Two Whig attempts to revive a national bank failed in the early 1840s, when their renegade president John Tyler vetoed the proposed charters. However, a national monetary system came into existence yet again with the onset of the Civil War. Congress, now under Republican control, established a network of national banks that could issue bonds and thus perform the same managerial functions as the First and Second Banks.

During the first century of the American republic, the Bank of the United States remained the primary means by which statesmen who embraced Hamilton's views (that is, Federalists, National Republicans, Whigs, and then Republicans) sought to administer the nation's economic life. The federal reserve system instituted in 1913 replaced the Bank and its functions and created the modern economic regulatory structure we know today.

See also: BLAND-ALLISON ACT; COINAGE ACT OF 1792; FEDERAL RESERVE ACT.

BIBLIOGRAPHY

Hammond, Bray. Banks and Politics in America, From the Revolution to the Civil War. Princeton, NJ: Princeton University Press, 1957.

McFaul, John M. The Politics of Jacksonian Finance. Ithaca, NY: Cornell University Press, 1972.

Remini, Robert. Andrew Jackson and the Bank War. New York: Norton, 1967.

The Origins of U.S. Political Parties

The first two political parties in the United States were the Federalists and the Democrats. "Federalist" originally described supporters of the Constitution (though the Democrats supported the Constitution as well). The Federalist party emerged during the 1790s as a proponent of close relations with Britain and a strong national government. The Federalists were elitists, and the party's leaders were not in favor of universal suffrage. In 1796 the Federalist John Adams was elected president, but the party was unable to organize effectively after the turn of the century, and during the 1820s the Federalists dissolved.

The Democratic party, originally known as the Democratic-Republican party, also had its roots in the 1790s, when a group of Thomas Jefferson's supporters called themselves "Democratic Republicans" or "Jeffersonian Republicans" to highlight their opposition to monarchy and belief in populist government. The party built its early identity around a popular challenge to ruling elites. It took its present name during the 1830s, when it held prominence under President Andrew Jackson. During the 1860s, the party's Southern Democrats refused to renounce slavery, so antislavery Democrats broke off to form the new Republican party, which dominated U.S. politics for the next seventy years. The Democrats returned to power during the Great Depression in the 1930s, under the presidency of Franklin Delano Roosevelt, who championed the working class. During the twentieth century the Democrats promoted liberal values and the interests of working people. The party was known as a coalition of laborers, farmers, immigrants, urban liberals, and minorities.

The Whig party was named after a British political group that opposed the monarchy. It was formed in 1834 primarily to oppose the policies of President Jackson (who the Whigs referred to as "King Andrew"), and its members were an eclectic group with diverse principles. The Whigs elected two presidents, William H. Harrison in 1840 and Zachary Taylor in 1848. Thereafter the party began to fracture along pro- and anti-slavery lines, and in 1854 the Whig party dissolved when most Northern Whigs joined the new Republican party.

The Republican party was formed during the 1850s to oppose slavery. It soon became the dominant party in the North, and Abraham Lincoln was elected president on the Republican ticket in 1860. After the Civil War the Republican's strongest constituent groups were business interests and farmers in the North and Midwest, creating a lasting divide between the party's "Wall Street" and "Main Street" factions. From 1860 to 1932 the Republicans dominated American politics, winning fourteen out of eighteen presidential elections until the Democrats' support for the working class brought Roosevelt into office during the Great Depression. In the twentieth century the Republicans promoted conservative values and a favorable business climate. Their key issues included opposition to Communism, lower taxes, less government regulation, and a conservative social agenda.