Bank of the United States: History & Explanation

Instructor: Adam Richards

Adam has a master's degree in history.

The Bank of the United States has an extensive legacy in American financial history. Learn more about the rise and fall of the First and Second Banks of the United States.

Introduction

The basis of this lesson is the history of the Bank of the United States. Now, it is important to note that the word 'Bank' is somewhat of an ambiguous term in relating to early American financial history. In other words, you must understand that there were two federally appropriated Banks between the 18th and 19th centuries: the First Bank of the United States and the Second Bank of the United States. For a complete understanding, I will cover the history of both of these financial institutions.

First Bank of the United States

Following the Anglo-American Revolution, the U.S. faced serious war debt as well as an unsteady financial system. Alexander Hamilton, First U.S. Secretary of the Treasury and financial savant, indicated in a report to Congress that it was vital that the U.S. develop a form of centralized banking to address its mounting debt. Hamilton encouraged Congress to charter what would become known as the First Bank of the United States. This centralized institution was expected to store federal funds and oversee the financial operations of the nation. The Bank was also responsible for printing paper currency, establishing credit (domestic and international), regulating additional federal banks and overseeing the national excise tax on consumable liquids (liquor, wine, tea).

Opposition immediately arose to the First Bank of the United States from prominent individuals including Thomas Jefferson and James Madison. Both men viewed the Bank as unconstitutional, arguing that Congress did not have the implicit right to charter a national bank. Moreover, both men were concerned by the fact that the Bank was operated by civilian directors who looked out for the best financial interests of its stockholders rather than the general population.

Regardless of the opposition from Jefferson and Madison, in 1790, the First Congress of the United States approved a 20-year charter for the First Bank of the United States. President George Washington signed the charter into law on February 25, 1791. The Bank was located in Philadelphia, Pennsylvania, where it operated until the expiration of its charter in 1811.

Second Bank of the United States

When the charter of the First Bank of the United States expired in 1811, Congress was slow to renew the financial institution. Eventually, in 1816, Henry Clay campaigned for the American System to be established in the U.S. One aspect of his new economic system was to recharter the Bank.

Congress obliged. In 1816, the Second Bank of the United States received a 20-year charter. The Second Bank of the United States had a number of similarities to its earlier counterpart. Most importantly, the 'new' Bank maintained federal funds, oversaw transactions for land sales and centralized the monetary and credit system. The Bank now had the authority to regulate state banks. In order for a state bank to use its own form of currency to make payments to the government, it had to be backed by an appropriate amount of gold. The Bank was once again situated in Philadelphia, Pennsylvania.

Opposition to the Second Bank of the United States differed greatly the second time. President Andrew Jackson loathed the financial institution, so much so that he did everything in his power to kill the Bank. The year 1836 was when the charter for the Second Bank of the United States expired, so Henry Clay began a campaign in 1832 to petition Congress to recharter the institution.

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