Finding a Financial Foundation: The First of the United States and the 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. , 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, money

and extend and assess the nation’s debt. Though he was met with much contempt,

especially from 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 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 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 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 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 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 , 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. The financial revolution of the United States “fueled decades of virtually uninterrupted economic growth that strengthened the nation’s initially weak and fractured polity” (Sylla, Wright and Cowen 62). The central bank had “just opened when the 1792 crisis began” (Sylla, Wright and Cowen 64). Hamilton attempted to limit credit as the bubble grew, which just made the bubble burst that much faster. The changes to the American financial system were vast, as “all six essential components of a modern financial system—effective public finances and debt management, a stable monetary unit, a central bank, a banking system, securities markets, and more accessible chartering provisions for business corporations---were put in place during the early

1790s” (Sylla, Wright and Cowen 68). Though the steps that the United States took in the late 1700s helped to establish its financial position, the Bank of the United States

“recklessly overexpanded its credit creation when it first opened” (Sylla, Wright and

Cowen 75). As the financial market began to tumble down, Hamilton instituted several practices to assist the market including initiating open-market purchases, extending credit lines and becoming a (Sylla, Wright and Cowen 78).

Hamilton even went so far as to lend U.S. government bonds at a ‘penalty rate’ of seven percent as opposed to the normal discount rate of six percent (Sylla, Wright and Cowen 80). The panic of 1792 did little to the U.S. economy, as “industrial production and the gross domestic product grew every year from 1790 to 1796” (Sylla, Wright and Cowen

84). Hamilton’s willingness to intervene prevented another financial crisis for over a decade, and created a precedent for how the federal government predicts and reacts to financial crises.

John Steele Gordon’s “The Founding Father of American Financial Disaster,”

Gordon asserts that Thomas Jefferson is to blame for the instability of the American banking system, as he did everything he could to sabotage the financial order of the times. The crisis in 1792 was rather predictable, as a “classic bubble had been growing for months” (Gordon 32). Speculation grew as prices rose, but when the bubble burst, “securities values plummeted, real estate prices plunged, credit dried up and unemployment increased” (Gordon 32). As bankruptcy became rampant, Hamilton

“was appalled by the reckless speculation” (Gordon 32). Thus, Hamilton “tried to confine the damage to speculators and keep it from spreading to the financial system”

(Gordon 32). Hamilton influenced the markets and curbed the effect of the financial crisis by ordering “the Treasury to buy up hundreds of thousands of dollars in federal securities, pumping liquidity into the market, and urged banks not to call in loans”

(Gordon 32). Hamilton’s plan worked, as he stopped the downward spiral and allowed the markets to return to normalcy, as he allowed the speculators to fail, but no one else, as he believed they deserved the consequences of their actions.

Michael Lind’s “Hamilton’s Legacy” expresses the power of Alexander Hamilton’s legacy, as he influenced so many facets of the national government. Hamilton, perhaps most important for this assessment, “established the first fiscal infrastructure of the new republic, including the Bank of the United States, precursor of the Federal Reserve”

(Lind 41). Though Hamilton’s bank eventually closed, thanks to Thomas Jefferson’s

hatred for Hamilton and federalism, his idea of creating a national bank that stabilized

currency, allowed for regulated borrowing and implemented uniform interest rates (Lind

41). Hamilton’s many policies have instituted change in the fiscal system, as he

charged the populous with creating a system and maintaining said system that would

promote positive benefits for all, not just the federal government.

In Phil Davies’ “The Bank that Hamilton Built,” he delves into how Hamilton

helped create the First Bank of the United States. The implementation of this bank was

huge for the country, as this was the first time that a government-run entity had the

power to influence money and deposits. The bank was in large part due to Hamilton’s dedication, but Davies notes that Hamilton’s plans were far grander than could ever be

implemented. Hamilton did however create the foundation for the bank that was

eventually overhauled. Moreover, Davies notes that the bank did in fact close, but the major principles it was founded upon cannot be ignored or understated. Hamilton’s desire for the Bank of the United States was grand and vast, but the First Bank was able to achieve much of his desires, as it jump started “the economy and [built] public confidence in the Treasury and financial markets” (Davies 53). The Bank of the United

States also permitted “a robust currency circulation and lending to other banks and businesses stimulated the economy, leading to increased domestic and foreign trade that generated income and job growth” (Davies 53).

In David Cowen’s “The First Bank of the United States and the Securities Market

Crash of 1792,” he discusses the implications of the First Bank of the United States and the subsequent market crash. He asserts, rather boldly, “The events of 1792 bring to mind other occasions in American history when the primary monetary authorities were accused of first pumping excess liquidity into the economy, and subsequently withdrawing it, with a resultant market crash” (Cowen 1057). This is perhaps an implication of things to come, as another market crash occurred in 1812, as a war was impending, and again when the Second Bank of the United States came to a close.

Cowen believes that the First Bank of the United States had little solidifying its existence, which explains its failure, along with its second coming. The financial crisis grew from speculation of large investors like William Duer and Alexander Macomb, who believed that they could corner the United States debt markets (Cowen 1043). This speculation of securities created a domino effect that pummeled the markets and necessitated an intervention by the United States government. Unfortunately, the Bank of the United States wanted to prevent its own losses, so the bank restricted credit substantially (Cowen 1044). The withdrawal of these funds made the bubble burst that much quicker, thus placing some of the blame of the Financial Crisis of 1792 on the federal government itself. Though Cowen understands and acknowledges that someone like William Duer speculated maliciously and helped in crashing the market, he points out that the Bank of the United States “was a major factor in precipitating the first securities-market crash in our nation’s financial history by sharply contracting credit and causing speculators and others to sell their securities” (Cowen 1057). Thus, the blame for the market failure must be shared and not solely placed on the shoulders of one man.

The First Bank of the United States

Alexander Hamilton had long wanted to create a larger, more powerful federal government, which he likened to the political powers held in England. Though he understood that many people valued their independence and the rights of their respective states, he believed in unifying the forces and permitting a cohesive unit for establishing an international reputation. Hamilton’s plan was long and considered with great thought, as he wanted to create something that would last. Though Thomas

Jefferson and many anti-federalists opposed the bank’s creation, on grounds relating to its charter, its controls and its political implications, the bank was finally chartered once

President George Washington refused to veto the legislation that permitted its final creation.

Hamilton’s establishment of the first financial infrastructure in American history was huge, as his ideas set the precedent for what was to come. He had dedicated so much time writing about the need for a bank and garnering support for its implementation, that the First Bank of the United States had been a long time coming.

Hamilton penned many important papers about needed a federal fiscal system, as the lack of a common currency hurt trade both domestically and abroad. Moreover, he looked to England, which had the Bank of England to handle its debt and loan money to citizens and businesses alike. Hamilton knew that the war debt from the Americn

Revolution would soon consume the country if it was not addressed, so he attempted to persuade other political figures of the importance of the a national bank.

Hamilton stated himself, “Most commercial nations have found it necessary to institute banks; and they have proved to be the happiest engines that ever were invented for advancing trade” (Morgan 479). He used examples of other countries as a means of winning favor, as he stood against a group of staunch opponents who wanted to diminish federal control and feared the possibility of even more national debt.

Though the convincing took some time, and Hamilton had to work diligently as the

Secretary of Treasury to see his plan come to fruition, it did nonetheless. The First

Bank of the United States impacted the American economy almost immediately, as it

“flood[ed] the market with its discounts (loans) and banknotes and then sharply reversing course and call[ed] in many of the loans” (Cowen). However, the sudden presence of so much loaned money created a speculative market that soon brought about financial duress.

The Financial Crisis of 1792

In 1792, after the Bank of the United States had allowed for loaned monies to flood the market, speculators had drive the price of real estate and goods so high that the bubble only had one choice: to burst. Speculation was huge within the markets, and when “the largest speculator caught in the financial crisis was William Duer. When he went insolvent in March 1792, the markets were temporarily paralyzed” (Cowen). As the Bank of the United States poured more and more money into the market, the speculators falsely believed that they had a hold on debt securities. Hamilton was disgusted by their behavior, as he stated, “Tis time, there should be a line of separation between honest men & knaves, between respectable stockholders and dealers in tbe funds and mere unprincipled gamblers" (Gordon 33). Hamilton had little desire to help these speculators, as the bursting of the bubble was but a formality. The causes of the bubble bursting extended beyond just speculation, as the

Bank of the United States and its branches offered too much credit too soon. The financial statements from these branches were mostly destroyed in the early 1800s, but new information has arisen revealing the vast amount of money being loaned in the markets. The balance sheet from the Philadelphia branch of the Bank of the United

States reveals the increased in loaned monies over time, as shown below (Cowen).

PH

I

In response to the speculation and the sharp price changes, the Bank of the United

States suddenly started pinching its credit. The causes of this credit tightening more many, but they included “a deteriorating cash position, a recognition that the BUS had added too much of its own paper to the market, a concern that new branches in April would be undercapitalized, and a discount-to-capital ratio higher than the board’s prescribed limits (Cowen 1058). With so much happening at once, the bubble finally burst and the financial crisis of 1792 ensued. Hamilton was prepared for such a crisis, as he knew that this was an opportunity to show that his national bank could respond and regulate the markets. Thus, “this so- called "Panic of 1792" was short lived as again Secretary Hamilton (as in the previous year during the script bubble) injected funds by buying securities directly and on behalf of the sinking fund” (Cowen). Hamilton extended credit payments by forty-five days, lowered interest rates and issues treasury bonds at a loss to control the money supply and restore the market. His handling of the financial crisis was remarkable, as “the financial system remained remarkably stable after April 1792. The United States did not suffer a bank failure until 1809, nor did it undergo another systemic peacetime financial crisis until 1819” (Sylla, Wright and Cowen 84). Even Hamilton’s successors understood the power of his swift actions, as his joint efforts with the Bank of the United

States saved the economy (Sylla, Wright and Cowen 84).

Conclusion

Alexander Hamilton forever changed fiscal policies and standards in the United

States with the institution of the national bank. His ideas were profound, and “the economic changes it wrought were pervasive and arguably long-lasting” (Davies 53).

Moreover, “by converting war debt into bank stock, the bank relieved the government of that financial burden and sent a message to investors at home and abroad that the

United States would honor its debts” (Davies 53). Though his efforts were thwarted when the bank’s charter was not renewed, his ideas perpetuated a system that remains in place today. Unfortunately, for the economically and financially minded, Hamilton

“never wrote down for the benefit of posterity a definitive account—based on his thinking, actions, and results of those actions—of how a responsible authority ought to act in a financial crisis” (Sylla, Wright and Cowen 85). There is much to be learned from

how Hamilton acted in the crisis, both in terms of public relations and in terms of fiscal policy. The First Bank of the United States certainly helped the financial crisis of 1792 to occur, as the bank flooded the market with loaned funds, but the response by

Hamilton solidified him as a financial mastermind and restored the economy before major consequences could occur.

Bibliography

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Gordon, John Steele. “The Founding Father of American Financial Disaster.” American

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