The First and Second Banks of the United States

Podcast Transcript

After the American Revolution, the United States economy was in trouble. One soluton proposed to solve the crisis was the establishment of a national bank.

The bank wasn’t just an economic issue; it also sparked one of the first constitutional debates in the nation’s history.

Fast-forward several decades, and the United States found itself debating the exact same issue, with very similar results.

Learn more about the first and second Banks of the United States, why they were created, and how they ended on this episode of Everything Everywhere Daily.

The story of America’s first two national banks represents one of the most fundamental debates in early American history about the role of federal government, economic policy, and the interpretation of the Constitution.

To truly understand these institutions, we need to start with the economic problems that made them necessary and then trace how they became flashpoints for the early nation’s political divisions.

When the United States emerged from the Revolutionary War, the young nation faced a financial crisis that threatened its very survival.

The Continental Congress had accumulated massive debts to fund the war effort, both to foreign creditors and domestic investors who had purchased war bonds. Individual states also carried their own war debts, and the national government under the Articles of Confederation lacked the power to tax effectively or regulate interstate commerce.

The currency was a mess, with various state-issued papers and foreign coins circulating without any unified system. Credit was nearly impossible to obtain, and the new nation’s financial reputation internationally was abysmal.

Alexander Hamilton, appointed the first Secretary of the Treasury under President George Washington, understood that solving these problems required bold action.

Drawing inspiration from the Bank of England, which had successfully managed Britain’s finances for decades, Hamilton conceived of a national bank as the cornerstone of his broader financial program.

His vision was comprehensive: the federal government would assume all state and national war debts, establish reliable revenue streams through tariffs and excise taxes, and create a national bank to serve as the government’s fiscal agent while providing a stable currency and credit system.

Hamilton’s proposal faced fierce opposition from Thomas Jefferson and James Madison, leaders of the Anti-Federalist faction.

Jefferson held a strict constructionist view of the Constitution, asserting that powers not explicitly delegated to the federal government were reserved to the states under the Tenth Amendment. To him, creating a bank was an overreach that threatened the balance of federalism.

Beyond constitutional arguments, critics feared that the bank would centralize economic power in the hands of a wealthy elite, particularly in the commercial centers of the Northeast, at the expense of rural interests in the South and West.

Many were concerned it would favor creditors over debtors, and large speculators over small farmers. These anxieties echoed the colonial experience with the British central bank and the perceived aristocratic nature of European financial systems.

Hamilton countered these criticisms by invoking the Constitution’s “necessary and proper” clause, Article I, Section 8, arguing that the government had the implied powers needed to fulfill its enumerated responsibilities, such as regulating commerce and collecting taxes. A national bank, he claimed, was a practical tool to execute those powers effectively.

President George Washington, caught between the opposing views of his closest advisers, ultimately sided with Hamilton after requesting written opinions from both Jefferson and Hamilton. Convinced by Hamilton’s reasoning, he signed the bill into law in February 1791, chartering the Bank of the United States.

The First Bank of the United States was designed as a hybrid institution that would serve both public and private functions. The federal government would own twenty percent of the bank’s stock and appoint five of its twenty-five directors, while private investors would own the remaining eighty percent and elect the other twenty directors.

This structure was intended to ensure government oversight while maintaining the efficiency and profit motive of private enterprise. The bank received a twenty-year charter, was capitalized at ten million dollars, an enormous sum for that era, and was granted the exclusive privilege of serving as the federal government’s primary banking partner.

The bank’s operations were remarkably sophisticated for its time. It collected federal taxes, disbursed government payments, transferred funds between different regions of the country, and issued banknotes that served as a reliable national currency.

There were restrictions on what the bank could do. It could not own government debt, as it was considered a conflict of interest, nor could it incur debts beyond its collateralization.

Perhaps most importantly, it provided regulatory oversight of the nation’s numerous state-chartered banks by accepting their notes and regularly presenting them for redemption in specie, aka gold or silver coins, which forced these banks to maintain adequate reserves and prevented excessive speculation.

The First Bank proved remarkably successful in achieving Hamilton’s objectives. It stabilized the currency, facilitated government operations, and helped establish the United States’ creditworthiness in international markets.

Government bonds that had traded at steep discounts rose to par value, and foreign investment began flowing into the young nation. The bank’s branches, eventually numbering eight locations from Boston to New Orleans, created the first truly national financial network in American history.

Yet political opposition to the bank only intensified as the Jeffersonian movement gained strength. Critics pointed to the bank’s stockholders, many of whom were foreign investors, particularly British subjects, as evidence that the institution served foreign rather than American interests.

When Jefferson became president in 1801, he chose not to wage an immediate battle against the bank, partly because it was functioning effectively and partly because dismantling it would have caused significant economic disruption.

However, as the bank’s charter approached expiration in 1811, the political landscape had shifted decisively against renewal. The Jeffersonian Republicans now controlled both the presidency and Congress, and they were determined to let the charter expire.

The debate over recharter revealed how thoroughly partisan politics had come to dominate American governance. Supporters of the bank, now primarily Federalists, argued that its abolition would cripple government finances and destabilize the economy.

They pointed to the bank’s exemplary record and the chaos that would likely follow its demise. Opponents countered that the bank represented everything wrong with Federalist policies: favoritism toward the wealthy, constitutional overreach, and subservience to foreign capital.

The vote in Congress was extraordinarily close. The recharter bill failed by a single vote in both the House and Senate. Vice President George Clinton cast the tie-breaking vote in the Senate against renewal, sealing the bank’s fate.

When the charter expired in March 1811, the First Bank of the United States ceased operations, liquidating its assets and returning capital to shareholders.

The timing of the expiration of the bank’s charter couldn’t have been more ironic. The next year, in 1812, the United States found itself at war with Great Britain.

Whenever a country goes to war, it needs one thing more than arms and men: money.

When the War of 1812 began, the Treasury was unable to finance military operations effectively. This forced the government to issue short-term notes at disadvantageous terms and struggle with the logistical challenges of moving funds around the country.

The war’s financial difficulties powerfully demonstrated the First Bank’s value. Government credit deteriorated so severely that Treasury notes traded at substantial discounts, and the federal government came extremely close to bankruptcy. Meanwhile, the proliferation of state bank currencies created such confusion that merchants often had to consult published lists to determine which notes to accept and at what discount rates.

These problems convinced many former opponents of the national bank that some form of federal financial institution was necessary. Even President Madison, who had opposed the First Bank as a congressman, acknowledged that practical experience had demonstrated the need for such an institution.

The economic nationalism that emerged from the War of 1812 created political space for reconsidering federal involvement in banking and finance.

The Second Bank of the United States, chartered in 1816, was designed to address the lessons learned from both the First Bank’s operations and the chaos that followed its demise.

The new institution was substantially larger, with a capitalization of thirty-five million dollars compared to the First Bank’s ten million, reflecting the nation’s growth and the increased scale of its financial needs.

Like its predecessor, the federal government owned twenty percent of the stock and appointed five of the twenty-five directors, but the bank’s headquarters were moved from Philadelphia to Washington, symbolically emphasizing its public rather than private character.

The Second Bank of the United States did not go as well as the first. It was marked by poor management and speculative excess that contributed to the Panic of 1819. The bank’s initial president, William Jones, pursued reckless lending policies that fueled a speculative bubble in land and commodities.

When the bubble burst, the resulting economic depression was blamed partly on the bank’s mismanagement, providing ammunition for its critics and nearly destroying the institution’s credibility before it had established itself.

The appointment of Nicholas Biddle as president in 1823 marked a turning point in the Second Bank’s history. Biddle was an aristocratic Philadelphia intellectual who brought financial expertise and political sophistication to the role.

Under his leadership, the bank developed into arguably the most effective central banking institution in the world at that time. Biddle understood that the bank’s power came from its ability to regulate the currency supply by controlling the flow of specie and banknotes throughout the economy.

The Second Bank under Biddle operated what was essentially a central banking system decades before such institutions became common elsewhere. The bank used its network of branches, eventually numbering twenty-nine locations, to monitor and influence credit conditions across the country.

By expanding or contracting its lending and by more or less aggressively presenting state bank notes for redemption, Biddle could effectively control the nation’s money supply and influence economic conditions.

This power made the Second Bank enormously influential but also deeply controversial. Biddle’s policies generally promoted economic stability and growth, but they also meant that a single institution, controlled largely by private interests, could determine credit conditions for the entire nation.

Critics argued that this gave the bank dangerous power over the economic welfare of ordinary Americans, particularly farmers and small business owners who depended on credit for their operations.

These tensions came to a head with Andrew Jackson’s election as president in 1828. Jackson brought to the presidency a deep suspicion of banks in general and the national bank in particular. His opposition was both philosophical and personal: He believed that banks allowed the wealthy to manipulate the economy, and he had personal experience with bank failures.

The conflict between Jackson and Biddle escalated throughout Jackson’s first term. Biddle decided to force the issue by applying for recharter in 1832, four years before the existing charter would expire. This timing was intended to make the bank a central issue in the 1832 presidential election, with Biddle believing that Jackson would not dare oppose renewal during a campaign.

Biddle’s calculation proved to be a catastrophic misjudgment. Jackson welcomed the opportunity to make the bank the central issue of his re-election campaign, framing the contest as a battle between ordinary Americans and privileged elites. His veto message, when Congress passed the recharter bill, was one of the most famous political documents in American history.

The 1832 election became a referendum on the bank, and Jackson’s overwhelming victory demonstrated the political power of his anti-bank message. Jackson interpreted his re-election as a mandate to destroy the Second Bank even before its charter expired in 1836.

In 1833, Jackson began withdrawing federal deposits from the bank and placing them in selected state banks, which opponents dubbed “pet banks.”

This action precipitated what became known as the Bank War, one of the most intense political battles in American history. Biddle responded to the withdrawal of federal deposits by contracting credit sharply, hoping to create economic pressure that would force Jackson to reverse course.

This policy caused significant economic distress, with businesses failing and unemployment rising, but it also backfired politically by appearing to confirm Jackson’s charges that the bank wielded dangerous power over the economy.

When the Second Bank’s charter expired in 1836, Biddle obtained a state charter from Pennsylvania and continued operating as a state institution. However, without its federal privileges and facing continued political hostility, the bank struggled financially and finally failed completely in 1841.

The demise of the Second Bank left the United States without a central banking institution until the establishment of the Federal Reserve in 1913.

The establishment of the Federal Reserve will be the subject of its own future episode.

The debates surrounding the First and Second Banks set important precedents in American history, highlighting the tensions between federal authority and states’ rights, between elite control and popular democracy, and between financial innovation and fears of centralization.

The same issues would appear time and time again throughout American history.