Did Bernanke Study The First Bank of the United States?

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Dr Bryan Taylor, Chief Economist Global Financial Data

The President, Directors and Company, of the Bank of the United States, or the First Bank of the United States, as it is more commonly known, was chartered for a term of twenty years, by the United States Congress on February 25, 1791. The bank was part of Alexander Hamilton’s plan for stabilizing and improving the nation’s credit by establishing a central bank, a mint, and introducing excise taxes.

The Bank of the United States was to have $10 million in capital, of which $2 million would be subscribed by the government. The $8 million in shares sold to the public (20,000 shares at $400) were quickly purchased and the price of the stock initially rose to $600. Of the first $8 million in shares that were sold, one quarter had to be paid in gold or silver. The rest could be paid in bonds, scrip, etc. Shares sold for $400, and to understand how much money this was by today’s standard, the per capita income in the United States in 1791 was only $50 (vs. over $50,000 today), so one share of stock cost the equivalent of $400,000 in today’s dollars, making Berkshire Hathaway Class A stock cheap by comparison.

Hamilton modeled the Bank of the United States on the Bank of England. The bank could be a depository for collected taxes, make short-term loans to the government, and could serve as a holding site for incoming and outgoing money. Nevertheless, Hamilton saw the main goal of the bank as a way of promoting commercial and private interests by making sound loans to the private sector, and most of its activities were commercial, not public.

The Bank of the United States was a privately-owned bank and was the only Federal Bank, though states could also charter banks. The bank had a 20-year charter; foreigners could be stockholders (and owned about three-fourths of the stock), but could not vote; and the Secretary of the Treasury had the right to inspect the bank’s books as often as once a week.

There were a couple ways, however, in which the First Bank of the United States differed significantly from the Federal Reserve Bank. The Bank of the United States could not buy government bonds, and the bank could neither issue notes nor incur debts beyond its actual capitalization. Alexander Hamilton would have been a strong opponent of Bernanke’s quantitative easing, and if Bernanke had studied the First Bank of the United States rather than the Great Depression, he might not be Fed Chairman today.

The same battles that exist today between tight-money and easy-money factions existed when the Bank of the United States was established and will always exist. The “moneyed interests” of the northern, commercial businesses generally favored the bank while the southern, agricultural groups opposed it. The reason for this is quite clear. Since farmers had to borrow money to fund their crops and people in the southern and western United States needed capital to buy land and establish new communities, they wanted interest rates as low as possible. Lenders of money wanted to keep interest rates higher and provide sound money. Since the wealthy had suffered from the depreciation of the Continental Dollar, which lost 99.9% of its value during the Revolutionary War, lenders wanted to avoid another debasing of the currency. Moreover, the Bank of the United States was the largest bank in the country, so state banks were naturally opposed to this competition.

When the Bank’s charter came up for renewal in 1811, the Democrats, who opposed the bank, were in control of Congress, while the Federalists, who had set up the bank, were not. The vote to renew the charter failed by one vote in both the House (65-64) and in the Senate where the vote was deadlocked at 17 and Vice-President Clinton cast the deciding vote against the renewal of the charter. The Bank of the United States was born of politics and died of politics. Votes along party lines are nothing new in Congress.

This battle between lenders and borrowers continued for the rest of the century. It occurred again when the Second Bank of the United States was established in 1817, and when William Jennings Bryan ran for President three times at the end of the nineteenth century and made his “Cross of Gold” speech. Today, in the twenty-first century, the same battle lines are drawn between easy-money advocates in favor of quantitative easing, and tight-money opponents who believe these policies will lead to another bubble and financial crash. No doubt, two hundred years from now, the same battle lines will be drawn.

For shareholders, the Bank of the United States was a good investment. While U.S. Government bonds paid 6% interest, Bank of the United States stock paid an 8% dividend. When the Bank’s charter was not renewed, the bank liquidated and paid off investors in full. Stephen Girard purchased most of the bank’s stock as well as the building in Philadelphia where the Bank had its headquarters. Philadelphia and not New York was the financial capital of the United States at that time, and Philadelphia was also the capital of the United States from 1790 to 1800 before the capital was moved to Washington, D.C.

Global Financial Data not only has price data for the First Bank of the United States, but a complete record of dividend payments for the bank as well. The price of the stock fluctuated between $400 and $600, and the bank paid $634 in dividends on the original $400 investment.

The Bank of the United States was succeeded by Girard’s Bank in 1811. Girard’s Bank was chartered by Pennsylvania on September 1, 1832, was chartered under the National Bank Act on November 30, 1864 as the Girard National Bank, and was closed on March 31, 1926. Girard’s Bank spun off the Girard Life Insurance Annuity and Trust Co. which incorporated on March 17, 1836 and merged into Mellon National Corp. on April 6, 1983.

Although Ben Bernanke wouldn’t admit it, Alexander Hamilton probably would have voted against Bernanke’s quantitative easing, but since the easy-money interests were able to prevent the charters of both Banks of the United States from being renewed, that should come as no surprise.

Ralph Dillon

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