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Posts Tagged ‘Bank of the United States’

Well, it’s been quite a while since I last put fingers to keyboard, but I’ve got a good excuse.  We took a vacation to Clearwater Beach, Florida.  I actually took the laptop with me, figuring I’d have time for a bit of work and maybe bit of typing.  Such was not the case.  The weather was absolutely perfect (bright sunshine, blue skies, beautiful beaches, and temperatures in the 70s), the condo was fabulous, and there were plenty of things to do.

I love to eat fish, and being on the Gulf meant there was plenty to be had…all of it was great.  But then we found The Gondolier, an East Coast chain that specializes in pizza.  Their food was outstanding…so good in fact that on our last evening, we simply went back there a second time.  Had we tried that place first, we may have eaten every meal there.  If we go back to Clearwater (and that’s a pretty serious possibility), we may do just that.

The long and short of it is that the laptop stayed mostly parked on the dresser.  But now we’re back to reality (and single-digit temperatures), so I’m hoping to get going this year.  Last year averaged fewer than eight pieces per month, so I’d like to improve on that.

“On January 20, 1791, a bill to charter the Bank of the United States for twenty years virtually breezed through the Senate.”

It’s a pretty simple statement taken from Chernow’s biography of Alexander Hamilton, and one that’s easy to just gloss over because we’re so used to banks in the 21st century.  We have banks of every shape and size on nearly every corner.  We can bank online, at the teller window, in the lobby, at an ATM machine, or on a smartphone.  Banks are as common as grocery stores.

In the 18th century, that was not the case.  And while there are people today that don’t trust banks and bankers, 18th-century opinions against the banking system was almost violent.  For Founders like James Madison and John Adams, their political differences found common ground in their opposition to banks.  Jefferson wrote, “I think our governments will remain virtuous for many centuries as long as they are chiefly agricultural…”  He would describe banks as “an infinity of successive felonious larcenies.”

For those against, banks were seedbeds of corruption and vice, turning honest men into money-hungry, money-grabbing monsters.  I think of a bank as a place to store our money safely and earn a bit of interest.  Men like our third President, through the lens of the 1780s, saw it as an oppressor of the poor and a creator of a class-based society…somewhat ironic considering Jefferson’s adherence to slavery despite his vocal abhorrence of the practice.

Some would say that Jefferson and Madison and Adams and those on their side were somewhat backwards in their stance.  Sure, America was largely agrarian now.  But was agriculture the only industry with a future in brand-new America?  Manufacturing and heavy industry, while not a major force at the time, would certainly increase in importance.  They required large amounts of capital to get started…the kind of capital only a bank could hold.  Furthermore, a national bank would help establish credit with other countries as well as manage and reduce the nation’s outstanding debt.

But for James Madison, it went beyond class and oppression and ended at the Constitution.  Alexander Hamilton had authored the idea of the bank using that most famous little piece of our founding charter…Article 1, Section 8.  We know it best as the “necessary and proper” clause.  It gave (and still gives) Congress the power to pass legislation “necessary and proper” to exercise its delegated duties.  Madison didn’t see a bank as “necessary”.  Nice?…maybe.  Convenient?…maybe.  Necessary?…absolutely not.

Madison had argued for the Constitution’s elasticity when writing pieces for The Federalist, but he believed a national bank pushed that elasticity beyond the breaking point.  Many agreed with him.  Hamilton had also argued for flexibility in the Constitution and believed the bank fit nicely under that clause.  And more Senators agreed with him than with Madison, so the bill passed the Senate.

Curious about the bank’s ultimate claim to fame?  How about the party system we enjoy (or loathe, depending on your bent) today?  Yep, it was along the banks of the “banking river” that political parties were born.

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Today, banks are a part of everyday life.  Our money is deposited there (usually via electronic transfer), we draw on it to buy stuff (usually via electronic transfer), and if there’s enough in our accounts, we might even draw a bit of income in the form of interest paid.  But unless there’s a discrepancy or our identity is stolen or we lose our cash card, we really don’t give banks a second thought.

Back in 1790, however, banks were not a part of everyday life.  Many people in the infantile United States looked on banks with intense suspicion.  And when Alexander Hamilton, the 30-something Treasury Secretary, proposed a government-run “central bank”, one didn’t have to go to the woods to see the fur fly.  As a leading Federalist, the bank was one of many ideas that Hamilton proposed to strengthen the central government, establish good credit with trading partners, pay down debts, and create a uniform U.S. currency.

Others, however, saw it as Hamilton grasping for greater and greater power and, ultimately, the return of a monarchy.  When the Bank was proposed, Secretary of State Thomas Jefferson and James Madison spoke for this group in a strongly-worded letter to President Washington, castigating the “bank” concept and warning of Hamilton’s ambitions.  Hamilton, as usual, wrote a massive response that swept opposition away.  As the primary defender of the U.S. Constitution when writing The Federalist Papers, he fully understood the importance of the existing government and had no desire to revert to a monarchy.

In February of 1791, the Bank of the United States was created with a 20-year charter.  Carpenter Hall (shown above), located in Philadelphia and meeting place for the First Continental Congress, was selected as the Bank’s location.  On July 4th of the same year, the country’s first official “IPO” (Initial Public Offering) took place, when stock in the Bank was sold to the public.  And for all their fears and concerns, the stock sale created a frenzy.  All the stock sold in an hour, and the rumor of double-digit returns in interest sparked a frenzied speculation that simply overran people’s sensibilities.

People began trading their shares, called scrip, driving the price through the roof.  They stopped working, they stopped running their businesses, and newspapers came out less frequently.  An angry Jefferson wrote, “Stock and scrip are the sole domestic subjects of conversation. . . . Ships are lying idle at the wharfs, buildings are stopped, capital withdrawn from commerce, manufacturers, arts and agriculture to be employed in gambling.”  People gave themselves over to the “baser angels of their nature” and simply went nuts.  It was “Scrippomania”.

Much of the speculation was led by Hamilton’s former Assistant Treasury Secretary, William Duer.  He conjured up all kinds of speculation schemes to drive prices up.  Many people, including Duer, completed their purchases with the help of loans from the smaller national banks, which horrified Hamilton.  On several occasions, he warned the public on the dangers of using credit to make such volatile purchases.  He warned Duer specifically about this, adding that his former position in the Treasury Department made him susceptible to charges of “insider trading”.  On almost all counts, Hamilton was ignored.

Within weeks, stock prices had climbed from $25 to more than $300 per share.  It was not sustainable, and the Treasury Secretary knew it.  On August 11, 1791, the runup ended in dramatic fashion.  Smaller banks refused to extend any more credit to people wanting to trade the scrip.  This frightened investors, who now realized that the stock they held was valued at far more than it was worth.  A frantic sell-off ensued, the price plummeted, and people lost their fortunes.  A good number of people were poorer now than they were when the Bank of the United States stock was first issued back in July.

The United States, just a few years old, had experienced its first Stock Market crash.

Recommended Reading:  The American Heritage Website – Alternatively, subscribe to the magazine.

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