The First Bank of the United States: Formation, Role, Impact

The First Bank of the United States was a project spearheaded by Alexander Hamilton that existed from 1791 until 1811. Its first and main branch was in Philadelphia with branches eventually opening in Boston, Mass., New York, N.Y., Charleston, S.C., Baltimore, Md., Norfolk, Va., Savannah, Ga., New Orleans, La., and Washington, D.C. A distant precursor to the Federal Reserve, the First Bank of the United States was the nation’s first central bank and played an important role in shaping and supporting the fledgling economy of the United States in the early years post-Revolution.

Formation of the First Bank

The First Bank of the United States was originally proposed by Alexander Hamilton, the first U.S. treasury secretary. Hamilton modeled the bank after the Bank of England and proposed that with the First Bank of the United States, the federal government would be the major stockholder and the federal treasury would deposit its surplus revenues there. His original intention was for the bank to print paper money and provide a stable national currency that could supplant the Continental dollar.

Hamilton’s original proposal was staunchly opposed by Thomas Jefferson and his anti-federalist compatriots. They were concerned that the First Bank of the United States was unconstitutional and would favor commercial interests over the interests of the agrarian economy they wanted to foster.

Hamilton eventually won the disagreement, and the bank was formed in 1791 with a 20-year charter, $10 million in capital, 20% of its stock held by the federal government, and 20% of its board members appointed by the federal government. When the bank sold its remaining shares in its initial public offering (IPO), it was the largest in the country to date. The majority of initial investors were foreigners, which made several congressmen wary, but foreign shareholders were banned from voting on bank business as part of the original bank charter. Also as part of the charter, the treasury secretary was given authority to remove government money and freely inspect the bank’s books.

Role of the First Bank

The First Bank served as a fiscal agent of the government but was not actually a government entity itself, as 80% of its stock and board of directors positions were held by private investors. At the time, the bank was both the largest bank and the largest corporation of any type in the United States due to the size of its capitalization.

The bank served many of the same functions as the Federal Reserve does today. It paid the government’s bills, collected and held tax revenues, made loans to the government, and paid off the government’s foreign creditors. Unlike the Federal Reserve, the First Bank of the United States also served as a commercial bank, taking deposits and issuing loans to individuals and corporations. 

While the First Bank didn’t issue paper money, as that was done by the United States Mint starting with the passage of the coinage act in 1792, it did issue banknotes, which were used as a form of currency. These notes were usually issued after private borrowers took out loans from the bank, but they ended up in general circulation throughout the country. 

The First Bank of the United States didn’t directly set economic policies but it did impact interest rates and the availability of credit by virtue of its size as the largest lender in the country.

Impact of the First Bank

After the bank’s charter was up in 1811, it had strong opposition with no real supporters since Alexander Hamilton had died in his duel with Aaron Burr. The bank’s charter was not renewed, but after the federal government was in need of financing as a result of the War of 1812, the Second Bank of the United States was chartered in 1816.

Detractors believed that the bank had too much control over the nation’s economy and wanted that control to be decentralized from a federal bank to state banks. After his re-election, Andrew Jackson withdrew all federal funds from the bank and its charter was not renewed in 1836.

It wasn’t until 1913, when the Federal Reserve Act was signed by President Woodrow Wilson, that a centralized banking system would return to the United States after a series of worsening financial crises culminated in the financial panic of 1907.

The Bottom Line

The First Bank of the United States was the first centralized banking system and helped stabilize the economy during the volatile years after the Revolutionary War. It helped shape fiscal policy that continues to this day through the Federal Reserve.