Finding a Financial Foundation: the First Bank of the United States and the Financial Crisis of 1792

Finding a Financial Foundation: The First Bank of the United States and the Financial Crisis of 1792 Student Who Has Been Moved to the TCU Witness Protection Program ECON X0XX3 XX XXth, 20XX Abstract: As the United States attempted to settle its debts and find stable ground, many political figures came forward with plans of how to overhaul the present system. Alexander Hamilton, long a fan of federalism, wanted the United States to emulate England and create a national bank that would handle the country’s debt. Since the American Revolution destroyed the American economy and a uniform currency failed to exist, the ability to reap financial benefits was limited. Thus, Hamilton generated a detailed plan of a national bank that would function as part of the federal government and would regulate a singular currency, control interest rates, loan money and extend credit and assess the nation’s debt. Though he was met with much contempt, especially from Thomas Jefferson and other states’ rights proponents, Hamilton was able to implement his plan and create the First Bank of the United States, While in its infancy, the First Bank of the United States was rocked by the financial crisis of1 1792, as speculation had risen price levels so high leading the bubble to burst. As the markets struggled, Hamilton employed various tactics, including debt extensions, reduced interest rates and massive lending to dig the country out of potential financial peril. Hamilton’s diligence in regard to both the First Bank of the United States and the response to the financial crisis of 1792 created a foundation for the fiscal infrastructure of the United States that eventually allowed for the Federal Reserve and many of the policies and practices that still exist today. Finding a Financial Foundation: The First Bank of the United States and the Financial Crisis of 1792 Student Who Has Been Moved to the TCU Witness Protection Program Abstract As the United States attempted to settle its debts and find stable ground, many political figures came forward with plans of how to overhaul the present system. Alexander Hamilton, long a fan of federalism, wanted the United States to emulate England and create a national bank that would handle the country’s debt. Since the American Revolution destroyed the American economy and a uniform currency failed to exist, the ability to reap financial benefits was limited. Thus, Hamilton generated a detailed plan of a national bank that would function as part of the federal government and would regulate a singular currency, control interest rates, loan money and extend credit and assess the nation’s debt. Though he was met with much contempt, especially from Thomas Jefferson and other states’ rights proponents, Hamilton was able to implement his plan and create the First Bank of the United States, While in its infancy, the First Bank of the United States was rocked by the financial crisis of1 1792, as speculation had risen price levels so high leading the bubble to burst. As the markets struggled, Hamilton employed various tactics, including debt extensions, reduced interest rates and massive lending to dig the country out of potential financial peril. Hamilton’s diligence in regard to both the First Bank of the United States and the response to the financial crisis of 1792 created a foundation for the fiscal infrastructure of the United States that eventually allowed for the Federal Reserve and many of the policies and practices that still exist today. Introduction The current economic decline found in the American economy and our dependence on financing and banking has roots in far earlier times. Though the recession that currently befuddles our country is a present-day issue, many of the banking failures can be linked back to issues that caused failures centuries ago. The establishment of the modern banking system came only after great struggles with determining what would work through several attempts. The understanding of why the banking systems failed and why the federal banks did not initially pan out is a topic that might explain the current crisis, or at least provide a foundation for why things happened. The issue is of interest, because how economies are molded explains much of what happens in later times, as history often repeats itself despite better knowledge and more detailed information. The interest of the area to the Field of Economic History is vast, as the banking systems that were initially implemented in the United States failed. Though the research and evaluation has much to do with financials, the economics of the issue cannot be understated. The regulation of the money supply and the control of interest rates were huge in this time, as it is a wonder how speculative interests did not dominate the financial landscape. Moreover, as previously stated, history can repeat itself, so it is important to understand what did and what did not work, as the country again finds itself in a financial crisis centered largely around banking institutions. Perhaps the largest question being posed is: How did the First Bank of the United States come to fruition and ultimately play into the financial crisis of 1792? Was the bank’s presence a blessing or an insult to injury during treacherous financial and economic times? These questions lead to an exploration and investigation of Alexander Hamilton, as he became the prominent figure and face of the federal fiscal system, thanks to his belief in controlling the money supply and paying off the country’s debt as a result of the American Revolution. Hamilton’s determination certainly permitted the eventual creation of the First Bank of the United States, but his desire to keep it as a permanent fixture was certainly trumped by feelings of opposition and a fear of federal oversight. In conducting research on the subject, it seems that the banking system of the United States sprouted from a need to maintain wealth and borrow funds simultaneously. The people of the country needed some means (currency) with which they could exchange for goods and services. However, with so many different types of money and so many outstanding loans based on various types of money, the system had failed thus far to permit equitable trading amongst people. Hamilton’s plan required a charter from the federal government, which was controversial in and of itself, as many believed that the United States Constitution did not grant such power to any branch of the federal government. Thus, the ultimate creation of the First Bank of the United States took time, but its introduction to the American infrastructure could not have come at a better time, as the financial crisis of 1792 happened shortly thereafter, and the First Bank of the United States triggered the crisis and solved the crisis in a seeming one-two punch. Literature Theme In H. Wayne Morgan’s “The Origins and Establishment of the First Bank of the United States,” he notes how Alexander Hamilton spent an inordinate amount of time planning for the implementation of a national bank. Hamilton bore witness to the country’s financial failures, as the American Revolution left the country wrought with debt (Morgan 472). Hamilton employed his English heritage, which he shared with most of the members of Congress, to make connections to the Bank of England, which stood as a testament of the need for stability and uniformity within a country’s financial system (Morgan 473). Hamilton noted that after the wars of King William drained the country, “The administration [in England] wisely had recourse to the institution of a bank; and it relieve the national difficulties. We are in the same, and still greater, want of a sufficient medium” (Morgan 473). Despite the bad blood between the United States and England, as a result of the American Revolution, congressional members could understand the historical precedent of the bank on a country in peril. Despite opposition, Hamilton believed that instituting a bank was absolutely vital, as the American situation mirrored that of the English with “weak state finances brought about by war and revolution; opposition from agrarian groups; the pressing need for the government for funds” (Morgan 476). The use of a bank had already happened in the United States as well, as Philadelphia was home to the Bank of North America thanks to charters from several states and the Continental Congress (Morgan 476). The Bank of North America had generated returns for its investors, which Hamilton employed as evidence that a bank would be a positive addition to the financial landscape (Morgan 476). Hamilton believed that “the nation that was supreme in the field of economics was truly a great power”; thus, he insisted that a national bank would put the United States ahead of many others in within the global landscape (Morgan 479). Though Hamilton believed in his plan, he knew it had its faults; these faults were spelled out by opponents who feared a federally- controlled bank. Perhaps the greatest fear came from those who questioned a bank plan were the “money would be open to manipulation by the party in power” (Morgan 480). The Bank of the United States was finally enacted thanks to President George Washington, and Hamilton’s plan, for the most part, remained fully intact as it was originally laid out. In Sylla, Wright and Cowen’s article, “Alexander Hamilton, Central Banker: Crisis Management During the U.S. Financial Panic of 1792,” the authors mention how the panic of 1792 rocked the United States financial system. After the institution of the Bank of the United States, the crisis of the financial markets was wholly new to the infant financial system.

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