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Banking and Finance

Banking and Finance


Debt. As the American Revolution ended, financial problems were among the most pressing issues facing the new nation. Although the war had disrupted the economy, particularly those parts of it engaged in overseas trade, people still farmed and made a living, and in many respects life for many after the Treaty of Paris simply continued as it always had. The war had cost money, however, and the financial system of the new nation needed to be completely reconstructed to pay for it and to take account of independence. The Continental Congress and the states had issued bills of credit during the war to pay for expenses. These bills were like paper money and represented the governments obligations to redeem them at some future time, for specie (gold and silver coin). They circulated among the public as dollar bills today do, although they were often not honored. In the case of Congress, the problem was that nothing backed the value of these bills, or continentals. During the course of the war they depreciated rapidly, making it necessary to issue more and more of them to keep the nation afloat. An inflationary spiral ensued, bringing hardship to many and undermining the economy as a whole. Congresss superintendent of finance, Robert Morris, estimated the debt of the United States in 1783 at $30 million, but this was really just a portion of the vast amounts of loans, depreciated bills of credit, and unpaid obligations the nation faced.

Taxes. The inability of the Congress to tax under the Articles of Confederation made the financial problems worse. The Articles allowed Congress to raise money only by requisitioning the states, which were not always ready or willing to impose taxes to fulfill their obligations. Some states such as Virginia did attempt to redeem their share of the national obligations, as well as their own, making themselves seem stronger than the Union. Efforts to tax imports at the federal level failed repeatedly during the 1780s to gain the unanimous consent required by the Articles. A shortage of specie also compounded the problem. The main source of gold and silver was foreign trade, which revived after the war but not quickly enough to solve the financial crisis of the 1780s. At first, imports dominated trade as Americans consumed goods denied them during the war, which meant that specie was leaving the country, not coming in. The principal wealth of the new nation was in land, something not readily converted to cash. Congress and the states, however, did try to meet some of their obligations with land. Some Continental Army veterans received western land grants for their service.

Reform. Robert Morris made the most serious efforts to reform the countrys finances while he was superintendent of finance from 1781 to 1784. Morris tried to stabilize the paper currency by making it redeemable in specie and to provide for the steady payment of interest on the national debt. He hoped these measures would inspire confidence in the new government and lay the basis for

economic growth. The failure of the import duty ruined his plan, however, since it depended on the government having a steady source of income with which to redeem bills and pay interest. States instead imposed their own import taxes and rivaled each other in efforts to lure and control trade. Within the states there was unrest over economic matters as well, exhibited by Shayss Rebellion in Massachusetts in September 1786, as a group of debtor farmers, unhappy over the states taxing policies which seemed to favor eastern merchants, attacked courthouses and the state militia. This chaotic situation and growing dissatisfaction with the weak commercial powers of Congress led to a convention of several states in Annapolis, Maryland, in 1786, which in turn called for broader constitutional reform. The Constitution that emerged in 1787 gave Congress the ability to tax and far greater direct control over the economy, powers skillfully exploited by the first secretary of the treasury, Alexander Hamilton, in the 1790s as he struggled to place the United States on firmer economic ground.

Banks. A key element in shoring up the American economy was developing a sound banking system to facilitate the circulation of money and credit. Morris took the first steps in 1781 with the chartering of the Bank of North America in Philadelphia, the first national commercial bank. The government was the principal stockholder in this enterprise, which loaned money back to the nation. It was followed by the Massachusetts Bank of Boston and the Bank of New York in 1784, all three succeeding in providing a stable currency and in making short-term loans, mainly to merchants in their respective locations. One of the centerpieces of Hamiltons economic program was a true national bank that would be sponsored by the government and could back its money with government deposits. He proposed such an institution in his January 1791 Report on a National Bank, and Congress responded by chartering the Bank of the United States one month later.


Alexander Hamilton prepared this report on public credit, estimating the debts of the United States and of the states and the amount of the debt owed to Americans (domestic debt) and to foreigners (foreign debt).

Total Public Debt: $77, 124, 464

Foreign Debt: $11, 710, 307

Principal: $10, 070, 307

Arrears of Interest: $1, 640, 072

Domestic Debt: $40, 414, 085

Principal: $27, 383, 917

Arrears of Interest: $13, 030, 168

State Debt: $25, 000, 000

Ascertained: $18, 201, 206

Estimated Balance: $6, 798, 794

Source: Alexander Hamilton, Report of the Secretary of the Treasury on the Public Credit of the United States (New York, 1790).

Bank of the United States. The Bank was controversial. Jeffersonians opposed it, saying the Constitution did not grant Congress the power to charter banks, and behind this argument was a fear that the Bank would serve the interests of Federalist merchants over those of Jeffersonian farmers. The Bank was supported by many others, however, and its stock quickly sold out. It opened in Philadelphia in December 1791 with Thomas Willing as president and soon opened branches in other cities, beginning a twenty-year career supporting American business and government. It issued paper currency that held its value in specie, thus ending the inflation of the 1780s. The success of the Bank assisted Hamilton in the other major piece of his economic policy, funding the public debt. The Funding Act of 4 August 1790 provided for a final settlement of debts still owed from the Revolution. The national government consolidated the remaining debts, assumed the remaining state debts, and issued new securities to replace them both. Backed by new taxes and the emerging stable banking system, the United States was able to make regular interest payments, earning the confidence of financiers and merchants for the first time. While retiring the debt was popular, the new taxes supporting it were not. In 1794 farmers in western Pennsylvania participated in an armed uprising objecting to the federal tax on liquor. This Whiskey Rebellion was quickly suppressed but indicated the depth of feeling on economic matters and the fragility of the new nations finances.

State Banks. Events such as the Whiskey Rebellion showed that many Americans felt the merchants in the East unfairly dominated the nations economy and used the Bank to their own advantage. One response to this feeling as well as to the success of the Bank was the formation of state-chartered banks across the country. There were twenty-nine banks in 1800 and eighty-nine by 1811. Many of these banks were located in interior regions, owned by businessmen with Jeffersonian sympathies. Many were more sensitive to the needs of farmers on the frontier hungry for long-term credit which conservative Federalist state banks in eastern cities and the Bank of the United States would not extend. Although they took greater risks, in general all these banks were secure before 1812; this was in part because of the influence of the Bank of the United States. As the only bank the federal government dealt with, it functioned informally as a central bank at the heart of a network of state banks and was able to assert some control over lending policies. Resentment of this central control over the economy grew during the Jeffersonian era, however, and state banks and their customers demanded more freedom to extend more credit. In 1811 Congress refused to re-charter the Bank of the United States, despite the support of Albert Gallatin, the Jeffersonian secretary of the treasury. The Bank succumbed to its economic rivals and to the constitutional issues raised at its founding, losing by one vote in the House of Representatives and losing a tie in the Senate when Vice President George Clinton voted against it. Most of the branch offices were purchased by state banks, and shipping magnate Stephen Girard bought the Banks main Philadelphia office and set up his own private bank. There was no longer any one bank to meet the federal governments financial needs in a unified way, however, and this combined with the disruptions of the War of 1812 to destabilize the American economy. Confusion continued until Congress chartered the Second Bank of the United States in 1816.


Donald R. Adams Jr., Finance and Enterprise in Early America (Philadelphia: University of Pennsylvania Press, 1978);

Bray Hammond, Banks and Politics in America (Princeton, N.J.: Princeton University Press, 1957).

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