The Mystery of Banking

Conceived
in Liberty
, Vol. IV, 
The Revolutionary War, 1775–1784 
(New Rochelle, N.Y.:
Arlington House, 1979), p. 392.
Chapter Thirteen.qxp 8/4/2008 11:38 AM Page 193

---

of the United States, a privately owned central bank, with the fed-
eral government owning 1/5 of the shares. Hamilton argued that
an alleged “scarcity” of specie had to be overcome by infusions of
paper money, to be issued by the new Bank and invested in the
public debt and in subsidies of cheap credit to manufacturers. The
Bank notes were to be legally redeemable in specie on demand,
and they were to be kept at par with specie by the federal govern-
ment’s accepting its notes in taxes, thus giving it a quasi-legal ten-
der status. The federal government would also confer upon the
Bank the privileges of being the depository for its funds. Further-
more, for the 20-year period of its charter, the First Bank of the
United States was to be the only bank with the privilege of hav-
ing a national charter. 
The First Bank of the United States was modeled after the old
Bank of North America, and in a significant gesture of continuity
the latter’s longtime president and former partner of Robert Mor-
ris, Thomas Willing of Philadelphia, was made president of the
new Bank. 
The First Bank of the United States promptly fulfilled its infla-
tionary potential by issuing millions of dollars in paper money
and demand deposits, pyramiding on top of $2 million of specie.
The BUS invested heavily in $8.2 million of loans to the U.S. gov-
ernment by 1796. As a result, wholesale prices rose from an index
of 85 in 1791 to a peak of 146 in 1796, an increase of 72 per-
cent. In addition, speculation mounted in government securities
and real estate. Pyramiding on top of BUS expansion, and aggra-
vating the paper money expansion and the inflation, was a flood
of newly created commercial banks. Only three commercial banks
had existed at the inception of the Constitution, and only four by
the time of the establishment of the BUS. But eight new banks
were founded shortly thereafter, in 1791 and 1792, and 10 more
by 1796. Thus, the BUS and its monetary expansion spurred the
creation of 18 new banks in five years, on top of the original four. 
Despite the official hostility of the Jeffersonians to commer-
cial as well as central banks, the Democratic-Republicans, under
the control of quasi-Federalist moderates rather than militant Old
194
The Mystery of Banking
Chapter Thirteen.qxp 8/4/2008 11:38 AM Page 194

---

Republicans, made no move to repeal the charter of the BUS
before its expiration in 1811. Moreover, they happily multiplied
the number of state chartered banks and bank credit during the
two decades of the BUS existence. Thus in 1800, there were 28
state banks; by 1811, the number had grown to 117, a fourfold
increase.
3
When the time came for rechartering the BUS in 1811, the re-
charter bill was defeated by one vote each in the House and Sen-
ate. Recharter was fought for by the quasi-Federalist Madison
administration, aided by nearly all the Federalists in Congress, but
was narrowly defeated by the bulk of the Democratic-Republi-
cans, led by the hard money Old Republican forces. In view of the
widely held misconception among historians that central banks
serve, and are looked upon, as restraints on state bank inflation,
it is instructive to note that the major forces in favor of recharter
Central Banking in the United States I
195
3
On the quasi-Federalists as opposed to the Old Republicans, on bank-
ing and on other issues, see Richard E. Ellis,