The First Bank of the United States (1791-1811)

The First Bank of the United States is considered a success by economic historians. Treasury Secretary Albert Gallatian commented that the Bank was "wisely and skillfully managed" (Hixson, 114). The Bank carried a remarkable amount of liquidity. In 1809, for example, its specie/banknote ratio was about 40 percent (compared to a modern average reserve/deposit ratio of about 12 percent) making it probably the most liquid bank in the U.S. at the time. Despite the liquidity, the Bank was also profitable, earning most of its income through substantial loans to both government and private business. It helped to end several bank runs by transferring funds to banks in need of temporary liquidity.

The chief argument in favor of the Bank's renewal in 1811 was that its circulation of about $5 million in paper currency accounted for about 20 percent of the nation's money supply (Symons, 12). It was the closest thing to a national currency that the U.S. had. Ironically, this may have contributed to its downfall because the Bank's issuance of notes came at the expense of state banks. In addition, the currency issued by the Bank was not discounted, whereas the currency issued by the 712 state banks were discounted anywhere from 0 to 100 percent. However, the arguments against the Bank were too strong. Foreign ownership, constitutional questions (the Supreme Court had yet to address the issue), and a general suspicion of banking led the failure of the Bank's charter to be renewed by Congress. The Bank, along with its charter, died in 1811.

Following the Bank's disappearance, state banks, unhindered by either state regulations or the discipline imposed by the Bank of the U.S., greatly increased the number of bank notes in circulation. John K. Galbraith writes of the period, "State banks, relieved of the burden of forced redemption [imposed by the First Bank], were now chartered with abandon; every location large enough to have 'a church, a tavern, or a blacksmith shop was deemed a suitable place for setting up a bank.' These banks issued notes, and other, more surprising enterprises, imitating the banks, did likewise. 'Even barbers and bartenders competed with banks in this respect'" (Galbraith, 58). Coupled with the disruptions associated with the war with England, this caused considerable inflation from 1812-1815. During that period, prices rose an average of 13.3 percent per year. An 1815 attempt to establish a new central bank failed, but by 1816 a consensus emerged for a return to central banking (Ibid, 13).