Pre-Federal Reserve, The First Bank of the United States kept its cool

The prominent national preoccupation with the Federal Reserve dump has a distinguished pedigree in American history. Maybe once, and once only, we had a reliable national bank. This did not happen 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. President Andrew Jackson, in a fit of enthusiasm, killed this bank in the 1830s, just as Congress paid off the national debt. The destruction of the bank led to political unrest, which resulted in people in power who would do whatever was necessary to bring the bank down. The bank is gone. This was how the system worked.

As for the malignancies that the closing of the second bank caused panics and minor depressions after 1836, not these but the persistence of a long-term boom find support in 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, the Bank of the United States that existed from 1791 to 1811.

When the United States began its new government after the ratification of the Constitution in 1789, the first laws were about establishing skeletal political-economic institutions. The tariff of 1789 set 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 charter of Congress.

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 that the Bank of the United States would have a branch in each state and local residents could negotiate with the government there for tax payments. Now to be sure, the federal government has found that even its modest efforts at domestic taxation have provoked a public backlash. The Whiskey Rebellion of 1794 put federal troops in Western Pennsylvania to quell the tax revolt and encourage people to pay.

The federal government then struggled with domestic taxation, but largely realized that it wasn’t worth the extreme trouble to make Americans themselves pay. Better to rely on the revenue from duties, which foreign agents had to pay after inventory, after a ship arrived at an American port, to Customs. (Work at the Custom House was pure drudgery, as Hawthorne would hilariously depict in his disjointed introduction to The Scarlet Letter.) Accordingly, the powers of the first Bank were largely reduced to two. It was a place for the federal government to hide its cash and could process payments on the national debt. After the Constitution made the federal government assume the national debt, the Dutch actually owned every penny of that debt.

As I noted in a recent columnbanks—private, business enterprises that they were—multiplied in the United States from almost zero in 1790 to 300 over the next thirty years, by 1820. The Bank of the United States was fully conducive to the flourishing of competitors. How did this work? The invaluable monetary historian Richard Timberlake:

“Dividends do [the first Bank pf the United States] The payouts 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 re-charter became an issue. Meanwhile, the market values ​​of its competitors’ shares rose significantly.’

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

The purpose of the Bank, after all, was to enable the payment of taxes on the spot, to make payments and acceptances on the national debt, and to advance the country as a financial and economic entity. It succeeded in all respects. 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 prevent the growth of private competitors (and expected the national debt to expire). Typically, a monopolist would want to do just that, prevent the growth of competitors. But a government-privileged monopolist? Virtue would encourage giving in to better biological alternatives.

Timberlake again:

“[In 1811, the Bank’s gold and silver coin] the reserve… was 37 percent of outstanding demand liabilities and nearly 50 percent of capital and surplus. Therefore, it could have created much higher demand and credit obligations than it actually did.”

These impressive excerpts (when you think about it), plus a treatment of the whole thing, are in ours new book Free Moneyon Bitcoin’s agreement with the essential rhythms of American monetary history.

So the Bank had more final money—gold and silver—than its competitors, and yet it did not issue loans to large customers, leaving the competitors to take over the business? And then an American banking system developed, taking advantage of the Bank’s profitable opportunities — and then the Bank ended, closed in 1811?

Virtue—the big issue, big #1 in the “Machiavellian moment” of the venerable and numerous Pockokian political theorists, and Adam Smith also in Theory of Moral Emotions. Here it is at the First Bank of the United States. This congressionally authorized institution really wanted to help the economy and its handmaidens in finance and then wind up with no credit and little profit, like Cincinnatus, afterwards. The United States became the largest economy in the history of the world, with mass prosperity for billions, over time. The undoubted precedent of selfless efforts at good public service must have had something to do with this epic development, which remains the basis of our prosperity today.