Pre-Federal Reserve, The First Bank Of The United States Kept Its Cool

The eminent national pastime of trashing the Federal Reserve has a distinguished pedigree in American history. Maybe one time, and one time only, we had a creditable national bank. This was not in the 1820s and 1830s, when Congress chartered a second Bank of the United States, and popular outrage against it rose to the level of mass public entertainment. The President, Andrew Jackson, riding the excitement, killed this bank off in the 1830s, just as he with Congress repaid the national debt. Trashing the bank resulted in political agitation, which resulted in people in office who would do everything necessary to end the bank. The bank ended. This was the system working.

As for cavils that the closing of the second bank caused panics and mini-depressions after 1836, not these but the persistence of a long-term boom find support in the macroeconomic statistics. But we come today not to bury the second Bank of the United States (the one that Jackson ended), but more or less to praise the first one, the Bank of the United States that existed from 1791 to 1811.

When the United States started its new government after the ratification of the Constitution in 1789, the first laws of note concerned the establishment of skeletal political-economic institutions. The tariff of 1789 set up the revenue system, the Coinage Act of 1792 the definition of the dollar and the Mint, and in 1791 came the Bank of the United States with a twenty-year Congressional charter.

Why a Bank of the United States? It was a place to pay taxes. Domestic taxation at the federal level had to be paid somewhere. Congress provided for the Bank of the United States to have a branch in each state, and locals could settle with the government there for tax payments. Now to be sure, the federal government found that even its modest efforts at domestic taxation incurred riotous responses from the public. The Whiskey Rebellion of 1794 got federal troops placed in Western Pennsylvania to put down the tax revolt and encourage people to pay up.

Afterwards, the federal government dallied with domestic taxation but largely realized it was not worth the extreme bother of getting Americans themselves to pay. Better to rely on tariff revenue, which foreign agents had to pay after the inventory, after a ship’s arrival at an American port, at the Custom House. (Custom House work was sheer drudgery, as Hawthorne would hilariously depict in his non-sequitur introduction to The Scarlet Letter.) The first Bank’s responsibilities therefore dwindled, largely to two. It was a place for the federal government to stash its cash, and it could process the payments on the national debt. After the Constitution had the federal government assume state debt, the Dutch actually owned every penny of this debt.

As I noted in a recent column, banks—private, entrepreneurial businesses that they were—multiplied in the United States from nearly nil in 1790 to fully 300 over the next thirty years, by 1820. The Bank of the United States was fully conducive to the thriving of competitors. How did that work? Inestimable monetary historian Richard Timberlake:

“The dividends it [the first Bank pf the United States] paid were somewhat more modest than those of competing commercial banks, and the market value of its stock showed at best no appreciation even before its recharter became an issue. Meanwhile, the market values of its competitors’ stocks increased considerably.”

Check this out—the bank refrained from distributing profits. Its stock did not appreciate on the basis of the retained cash (as Apple did legendarily in the 2010s) because, surely, the message was clear that the bank was not using the retained profits as a pretext for further growth. Otherwise the stock price would have had a chance to appreciate. This is most interesting. The First Bank of the United States conducted its operations as if it would expire on schedule.

The Bank’s purpose, after all, was to enable tax payments on site, make payments and acceptances on the national debt, and to get the country going as a financial and economic entity. It succeeded on all counts. Almost all counts—tax payments after the Whiskey affair became largely a matter of customs. The important point is that the bank did not seek to impede the development of private competitors (and it expected the national debt to expire). Ordinarily, a monopolist would want to do just this, impede the development of competitors. But a governmentally privileged monopolist? Virtue would encourage ceding to the best organic alternatives.

Timberlake again:

“[In 1811, the Bank’s gold and silver coin] reserve…was 37 percent of its outstanding demand obligations and almost 50 percent of its capital and surplus. It might therefore have generated considerably more demand and credit obligations than it actually did.”

These eye-popping quotations (when you think about it), plus a treatment of the whole subject, are in our new book Free Money, on the consonance of Bitcoin with the essential rhythms of American monetary history.

So the Bank had more final money—gold and silver—than its competitors, and yet did not issue loans to great customers, letting competitors take the business? And then an American banking system grew up, taking the Bank’s profitable opportunities—and then the Bank ended, closed in 1811?

Virtue—the big issue, the big #1 in the “Machiavellian moment” of the venerable and all-t00-numerous Pockockian political theorists, and Adam Smith as well in the Theory of Moral Sentiments. Here it is in the First Bank of the United States. This Congressionally mandated institution actually wanted to help the economy and its handmaids in finance along, and then expire with no credit and minimal profit, Cincinnatus-like, after. The United States became the greatest economy in the history of the world, with mass prosperity for zillions, in time. The precedent, unmistakable, of selfless attempts at good public service must have had something to do with that epic development, which remains the basis of our prosperity today.