The First Bank of the United States influenced much more than mere economics. Many scholars indeed believe that divisions caused by the Bank led to the creation of the first real political divisions in the country.
By the standards set by the Second Bank of the United States, the First Bank was tame. The precious and precocious offspring of Alexander Hamilton’s mind and soul, the First Bank had hoped to use debt as a means of stimulating economic growth, especially in the manufacturing sector. “A national debt if not excessive, will be to us a national blessing; it will be a powerful cement of our union,” Hamilton has argued, famously or infamously, depending upon one’s point of view. “It will also create a necessity for keeping up taxation to a degree which without being oppressive, will be a spur to industry,” he continued.
When President Washington approved the chartering of the Bank for twenty years, it immediately (again, for better or worse) created debt on which private banks could borrow and it also put the United States—at least on paper—on par with other great powers in the world who also relied upon debt and financial manipulation. Of the twenty-five governors, only five would come from the U.S. government, with the rest coming from private industry. The United States enjoyed immense prosperity during the years of the First Bank, but its prosperity—fueled by trade with warring Britain and France—might very well have been in spite of the Bank rather than because of the Bank.
The First Bank, however, influenced much more than mere economics, and many scholars believe that divisions caused by the Bank—whether the constitution should be interpreted broadly or strictly—led to the creation of the first real political divisions in the country.
When the First Bank expired in 1811, interestingly enough, no one seriously considered re-chartering it.
In the overwhelming rush of post-war nationalism, however, President Madison in 1816 wanted a Second Bank of the United States. From its opening moments, the Second Bank of the United States (SUSB) was a disaster for the country, economically and politically. Even Madison’s appointment of William Jones as the first president of the SUSB was pathetic, as Jones had been Madison’s Secretary of the Navy and a failed businessman. The appointment had been a mere political favor, and Jones had absolutely no clue how to run a bank. Worse, Jones was corrupt, and he used his position as president of the Bank to increase the wealth and prestige of his friends. The Bank quickly became an efficient means to shift wealth from the political nobodies to the politically-endowed. Hoping to avoid too much criticism—especially for the obvious political corruption—the Bank offered easy loans on easy credit, and, as a consequence, initiated one of the greatest eras of debt (proportionately) in the U.S. In 1815, for example, a year prior to the Bank’s creation, there was only $3 million in debt on the purchase of public lands. Two years after the creation of the SUSB, public debt on public lands stood at $17 million, and it reached $22 million a year later, in 1819. The number of banks—fueled by easy credit—expanded rapidly as well. In 1816, the year the SUSB came into existence, there were 246 banks in the U.S. Three years later, in 1819, there were 400. A committee of the Pennsylvania legislature reported: “The plenty of money, as it was called, was so profuse, that the managers of banks were fearful that they could not find a demand for all they could fabricate, and it was no infrequent occurrence to hear solicitations urged to individuals to become borrowers, under promises of indulgences the most tempting.”
The rapid growth in debt, in banks, and in cheap credit began to inflate prices, and the British, especially, pulled back from investing in late 1818. Land prices plummeted as the bubble burst. Finally (over) reacting, Jones recalled loans to the branch banks. President Monroe replaced Jones with a much more sound (and far less corrupt) Bank president, Langdon Cheaves, but the damage had already been done.
The bubble had burst, and the United States began an economic freefall. Property values dropped precipitously in New York and in Baltimore, and Pittsburgh lost nearly 1/3 of its population, as Americans fled depressed cities. Not one for hyperbole, John Quincy Adams lamented: “There has been within these two years an immense revolution of fortunes in every part of the Union; enormous numbers of persons utterly ruined; multitudes in deep distress; and a general mass of disaffection to the government, not concentrated in any particular direction, but ready to seize upon any event and looking out anywhere for a leader.” American economist Matthew Carey predicted that nearly 30% of the American population had been affected by the 1819 depression. The president of a New York agricultural society stated: “Last year we talked of the difficulties in paying for our lands; this year the question is, how to exist. The struggle is not now for property; from this time onwards we shall have to contend for clothing, and a few other necessaries, without which we must become a miserable, and, I fear, a barbarous people. . . . There can be no industry without a motive: and it appears to me there is great danger that our people will soon limit their exertions to the raising of food for their families. . . there cannot be much ambition or hope; education will decay, and the decencies of social life neglected.”
Crazily, given all of the defaults and failures, the SUSB became one of the single largest landowners in the early Republic. By some estimates, the SUSB owned a huge chunk of Baltimore, and it owned at least half of Virginia’s banks. An opposition to the Bank formed, labeling it the “monster,” and creating immense distrust regarding all joint government-business ventures. To be certain, the unrelenting nationalism of the immediate post-War of 1812 period had collapsed, with conspiracy theories, poverty, and bitterness taking its place. Such anger would propel a charismatic and forceful frontier militia leader, Andrew Jackson, to the White House, in 1829, and lead to the creation of first real and tangible political parties in American history.
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The featured image is a photo of the First U.S. National Bank (1975) taken by Jack Boucher (1931-2012) and is in the public domain, courtesy of Wikimedia Commons.