The Mystery of Banking

The Jeffersonian Crisis: Courts
and Politics in the Young Republic
(New York: Oxford University Press,
1971) p. 277 and passim. Ellis perceptively writes: 
For all their hostility to banks during the 1790’s, the Jeffer-
sonians, once in power, established more state banks than the
Federalists had ever thought of creating. Much of this was
deliberate on the part of the moderates and bitterly opposed
by the radicals. . . . The real meaning of Jeffersonian Democ-
racy, it would seem, is to be found in the political triumph of
the moderate Republicans and their eventual amalgamation
with the moderate wing of the Federalist party. This repre-
sented a victory of moderation over the extremism of the
ultra-nationalist, neo-mercantile wing of the Federalist party
on the one hand, and the particularistic, Anti-Federalist-Old
Republican wing of the Democratic party on the other.
Very true, although the use of the term “moderate” by Ellis, of course, loads
the semantic dice. Ellis notes that one quasi-Federalist hailed the triumph of
the center over “Federalism, artfully employed to disguise monarchy” on
the one hand, and Democracy, “unworthily employed as a cover for anar-
chy” on the other. Ibid., pp. 277–78.
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The Mystery of Banking
were merchants, Chambers of Commerce, and most of the state
banks. Merchants found that the BUS had expanded credit at
cheap interest rates, and eased the eternal complaints about a
“scarcity of money.” Even more suggestive is the support of the
state banks, which hailed the BUS as “advantageous” and worried
about a contraction of credit should the Bank be forced to liqui-
date. The Bank of New York, which had been founded by Alexan-
der Hamilton, even lauded the BUS because it had been able “in
case of any sudden pressure upon the merchants to step forward
to their aid in a degree which the state institutions were unable to
do.”
4
But free banking was not to have much of a chance. The very
next year, the United States launched an unsuccessful war against
Great Britain. Most of the industry and most of the capital was in
New England, a pro-British region highly unsympathetic to the
War of 1812. New England capital and the conservative New
England banks were not about to invest heavily in debt to finance
the war. Therefore, the U.S. government encouraged an enor-
mous expansion in the number of banks and in bank notes and
deposits to purchase the growing war debt. These new and reck-
lessly inflationary banks in the Middle Atlantic, Southern, and
Western states, printed enormous quantities of new notes to pur-
chase government bonds. The federal government then used these
notes to purchase arms and manufactured goods in New England. 
Thus, from 1811 to 1815, the number of banks in the coun-
try increased from 117 to 246. The estimated total of specie in all
banks fell from $14.9 million in 1811 to $13.5 million in 1815,
4
John Thom Holdsworth, 
The First Bank of the United States 
(Washing-
ton, D.C.: National Monetary Commission, 1910), p. 83. Holdsworth, the
premier historian of the First BUS, saw this overwhelmingly supported by
the state banks, but still inconsistently clung to the myth that the BUS func-
tioned as a restraint on their expansion: “The state banks, though their note
issues and discounts had been kept in check by the superior resources and
power of the Bank of the United States, favored the extension of the char-
ter, and memorialized Congress to that effect.” Ibid., p. 90. Odd that they
would be acting so contrary to their self-interest!
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