Federal Government
First Bank of the United States
1791-1811

As Secretary of the Treasury in President George Washington's first cabinet, Alexander Hamilton negotiated the first loan obtained by the new government in 1789. The amount of $200,000 was issued by the Bank of New York (BNY), against which the treasury drew a series of warrants on the bank. Those warrants constitute a milestone in establishing the credit of the United States government and the economic independence of the young nation. Hamilton's economic vision and firm grasp of banking principles served the BNY well.

The BNY thus became the first Bank of the United States (BUS), but it was not the first bank in America. The Bank of North America (1781-1785) had served the same purpose for the government in the previous century, but had been rejected owing to tight monetary policies and corruption. The BNY (first named the Bank of Manhattan) was created by Hamilton and Aaron Burr. It was the first bank created in New York City, at No. 1 Wall Street.

Working with Hamilton, Burr helped raise subscriptions (shares) for a private company to improve the water supply of pestilence-ridden Manhattan, but Hamilton and Burr also secured a charter (underwriting) from the Bank of England. New Yorkers were shocked to learn that the surplus capital from the venture had been used to establish the Bank of Manhattan, as the BNY was first known.

Twenty-five thousand shares were issued, of which 18,000 were held by investors in England. The Bank of England loaned the United States money in exchange for securities of the United States.

Now the creditors of the United States, which included the Bank of England, wanted to be paid the interest on the loans that were granted to the United States. So Hamilton came up with the bright idea of taxing alcohol. Consumers resisted, so President Washington sent out the militia to collect the tax — which they did. That episode became known as the Whiskey Rebellion.

Right from the start, the BNY began to pay dividends to its investors, which included the bank of England, by whom the BNY was originally chartered. Except for a one-year moratorium mandated by the government, the BNY has continued to pay dividends uninterrupted for more than two 214 years.

Federal rights versus states' rights

At Alexander Hamilton’s urging, Congress granted a charter to a bank to become known as the Bank of the United States (BUS) in 1791 for the purposes of:

The bank proposal was controversial. Some, including Thomas Jefferson, had objected on the basis that there was no authorization in the Constitution for the establishment of a national bank, noting that all powers not enumerated for the federal government were reserved for the states.

Hamilton contended that, owing to the mass of necessary detail, a vast body of powers had to be implied by general clauses, and one of these authorized Congress to "make all laws which shall be necessary and proper" for carrying out other powers specifically granted.

The Constitution authorized the national government to levy and collect taxes, pay debts and borrow money. A national bank would materially help by performing those functions efficiently. Congress, therefore, was entitled, under its implied powers, to create such a bank.

President Washington and the Congress accepted Hamilton's view — and set an important precedent for an expansive interpretation of the federal government's authority versus states' rights. The bank was regarded as a success by some and continued to operate until 1811.

Some critics, especially the emerging Democratic-Republicans, decried the Bank’s conservative policies and the fact that a large portion of its stock was held by foreigners — primarily the Bank of England. State and local bank interests were displeased with the competition and lobbied hard for the demise of the BUS.

In 1811, the congressional charter and government funds were removed from the BUS and redeposited in other banks. The BNY survived. It had been created as a private, profit generating corporation in 1791 and it still is now. It also is at the head of America's central banking scheme, the Federal Reserve System, created in 1913 by passage of the Glass Owens Act.

The American banking saga continued with the creation of the Second Bank of the United States in 1819.

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