Finding a Financial Foundation: The First Bank of the United States and the
Financial Crisis of 1792
Student Who Has Been Moved to the TCU Witness Protection Program
ECON X0XX3
XX XXth, 20XX
Abstract:
As the United States attempted to settle its debts and find stable ground, many political figures
came forward with plans of how to overhaul the present system. Alexander Hamilton, long a fan
of federalism, wanted the United States to emulate England and create a national bank that
would handle the country’s debt. Since the American Revolution destroyed the American
economy and a uniform currency failed to exist, the ability to reap financial benefits was limited.
Thus, Hamilton generated a detailed plan of a national bank that would function as part of the
federal government and would regulate a singular currency, control interest rates, loan money
and extend credit and assess the nation’s debt. Though he was met with much contempt,
especially from Thomas Jefferson and other states’ rights proponents, Hamilton was able to
implement his plan and create the First Bank of the United States, While in its infancy, the First
Bank of the United States was rocked by the financial crisis of1 1792, as speculation had risen
price levels so high leading the bubble to burst. As the markets struggled, Hamilton employed
various tactics, including debt extensions, reduced interest rates and massive lending to dig the
country out of potential financial peril. Hamilton’s diligence in regard to both the First Bank of the
United States and the response to the financial crisis of 1792 created a foundation for the fiscal
infrastructure of the United States that eventually allowed for the Federal Reserve and many of
the policies and practices that still exist today.
Finding a Financial Foundation: The First Bank of the United States and the
Financial Crisis of 1792
Student Who Has Been Moved to the TCU Witness Protection Program
Abstract
As the United States attempted to settle its debts and find stable ground, many political figures
came forward with plans of how to overhaul the present system. Alexander Hamilton, long a fan
of federalism, wanted the United States to emulate England and create a national bank that
would handle the country’s debt. Since the American Revolution destroyed the American
economy and a uniform currency failed to exist, the ability to reap financial benefits was limited.
Thus, Hamilton generated a detailed plan of a national bank that would function as part of the
federal government and would regulate a singular currency, control interest rates, loan money
and extend credit and assess the nation’s debt. Though he was met with much contempt,
especially from Thomas Jefferson and other states’ rights proponents, Hamilton was able to
implement his plan and create the First Bank of the United States, While in its infancy, the First
Bank of the United States was rocked by the financial crisis of1 1792, as speculation had risen
price levels so high leading the bubble to burst. As the markets struggled, Hamilton employed
various tactics, including debt extensions, reduced interest rates and massive lending to dig the
country out of potential financial peril. Hamilton’s diligence in regard to both the First Bank of the
United States and the response to the financial crisis of 1792 created a foundation for the fiscal
infrastructure of the United States that eventually allowed for the Federal Reserve and many of
the policies and practices that still exist today.
Introduction
The current economic decline found in the American economy and our
dependence on financing and banking has roots in far earlier times. Though the
recession that currently befuddles our country is a present-day issue, many of the
banking failures can be linked back to issues that caused failures centuries ago. The
establishment of the modern banking system came only after great struggles with
determining what would work through several attempts. The understanding of why the
banking systems failed and why the federal banks did not initially pan out is a topic that
might explain the current crisis, or at least provide a foundation for why things
happened.
The issue is of interest, because how economies are molded explains much of
what happens in later times, as history often repeats itself despite better knowledge and
more detailed information. The interest of the area to the Field of Economic History is
vast, as the banking systems that were initially implemented in the United States failed.
Though the research and evaluation has much to do with financials, the economics of
the issue cannot be understated. The regulation of the money supply and the control of
interest rates were huge in this time, as it is a wonder how speculative interests did not
dominate the financial landscape. Moreover, as previously stated, history can repeat
itself, so it is important to understand what did and what did not work, as the country
again finds itself in a financial crisis centered largely around banking institutions.
Perhaps the largest question being posed is: How did the First Bank of the
United States come to fruition and ultimately play into the financial crisis of 1792? Was
the bank’s presence a blessing or an insult to injury during treacherous financial and
economic times? These questions lead to an exploration and investigation of Alexander
Hamilton, as he became the prominent figure and face of the federal fiscal system,
thanks to his belief in controlling the money supply and paying off the country’s debt as
a result of the American Revolution. Hamilton’s determination certainly permitted the
eventual creation of the First Bank of the United States, but his desire to keep it as a
permanent fixture was certainly trumped by feelings of opposition and a fear of federal
oversight.
In conducting research on the subject, it seems that the banking system of the
United States sprouted from a need to maintain wealth and borrow funds
simultaneously. The people of the country needed some means (currency) with which
they could exchange for goods and services. However, with so many different types of
money and so many outstanding loans based on various types of money, the system
had failed thus far to permit equitable trading amongst people. Hamilton’s plan required
a charter from the federal government, which was controversial in and of itself, as many
believed that the United States Constitution did not grant such power to any branch of
the federal government. Thus, the ultimate creation of the First Bank of the United
States took time, but its introduction to the American infrastructure could not have come
at a better time, as the financial crisis of 1792 happened shortly thereafter, and the First
Bank of the United States triggered the crisis and solved the crisis in a seeming one-two
punch.
Literature Theme
In H. Wayne Morgan’s “The Origins and Establishment of the First Bank of the
United States,” he notes how Alexander Hamilton spent an inordinate amount of time
planning for the implementation of a national bank. Hamilton bore witness to the
country’s financial failures, as the American Revolution left the country wrought with
debt (Morgan 472). Hamilton employed his English heritage, which he shared with most
of the members of Congress, to make connections to the Bank of England, which stood
as a testament of the need for stability and uniformity within a country’s financial system
(Morgan 473). Hamilton noted that after the wars of King William drained the country,
“The administration [in England] wisely had recourse to the institution of a bank; and it
relieve the national difficulties. We are in the same, and still greater, want of a sufficient
medium” (Morgan 473). Despite the bad blood between the United States and England,
as a result of the American Revolution, congressional members could understand the
historical precedent of the bank on a country in peril. Despite opposition, Hamilton
believed that instituting a bank was absolutely vital, as the American situation mirrored
that of the English with “weak state finances brought about by war and revolution;
opposition from agrarian groups; the pressing need for the government for funds”
(Morgan 476). The use of a bank had already happened in the United States as well,
as Philadelphia was home to the Bank of North America thanks to charters from several
states and the Continental Congress (Morgan 476). The Bank of North America had
generated returns for its investors, which Hamilton employed as evidence that a bank
would be a positive addition to the financial landscape (Morgan 476). Hamilton believed
that “the nation that was supreme in the field of economics was truly a great power”;
thus, he insisted that a national bank would put the United States ahead of many others
in within the global landscape (Morgan 479). Though Hamilton believed in his plan, he
knew it had its faults; these faults were spelled out by opponents who feared a federallycontrolled bank. Perhaps the greatest fear came from those who questioned a bank
plan were the “money would be open to manipulation by the party in power” (Morgan
480). The Bank of the United States was finally enacted thanks to President George
Washington, and Hamilton’s plan, for the most part, remained fully intact as it was
originally laid out.
In Sylla, Wright and Cowen’s article, “Alexander Hamilton, Central Banker: Crisis
Management During the U.S. Financial Panic of 1792,” the authors mention how the
panic of 1792 rocked the United States financial system. After the institution of the
Bank of the United States, the crisis of the financial markets was wholly new to the
infant financial system. The financial revolution of the United States “fueled decades of
virtually uninterrupted economic growth that strengthened the nation’s initially weak and
fractured polity” (Sylla, Wright and Cowen 62). The central bank had “just opened when
the 1792 crisis began” (Sylla, Wright and Cowen 64). Hamilton attempted to limit credit
as the bubble grew, which just made the bubble burst that much faster. The changes to
the American financial system were vast, as “all six essential components of a modern
financial system—effective public finances and debt management, a stable monetary
unit, a central bank, a banking system, securities markets, and more accessible
chartering provisions for business corporations---were put in place during the early
1790s” (Sylla, Wright and Cowen 68). Though the steps that the United States took in
the late 1700s helped to establish its financial position, the Bank of the United States
“recklessly overexpanded its credit creation when it first opened” (Sylla, Wright and
Cowen 75). As the financial market began to tumble down, Hamilton instituted several
practices to assist the market including initiating open-market purchases, extending
credit lines and becoming a lender of last resort (Sylla, Wright and Cowen 78).
Hamilton even went so far as to lend U.S. government bonds at a ‘penalty rate’ of seven
percent as opposed to the normal discount rate of six percent (Sylla, Wright and Cowen
80). The panic of 1792 did little to the U.S. economy, as “industrial production and the
gross domestic product grew every year from 1790 to 1796” (Sylla, Wright and Cowen
84). Hamilton’s willingness to intervene prevented another financial crisis for over a
decade, and created a precedent for how the federal government predicts and reacts to
financial crises.
John Steele Gordon’s “The Founding Father of American Financial Disaster,”
Gordon asserts that Thomas Jefferson is to blame for the instability of the American
banking system, as he did everything he could to sabotage the financial order of the
times. The crisis in 1792 was rather predictable, as a “classic stock bubble had been
growing for months” (Gordon 32). Speculation grew as prices rose, but when the
bubble burst, “securities values plummeted, real estate prices plunged, credit dried up
and unemployment increased” (Gordon 32). As bankruptcy became rampant, Hamilton
“was appalled by the reckless speculation” (Gordon 32). Thus, Hamilton “tried to
confine the damage to speculators and keep it from spreading to the financial system”
(Gordon 32). Hamilton influenced the markets and curbed the effect of the financial
crisis by ordering “the Treasury to buy up hundreds of thousands of dollars in federal
securities, pumping liquidity into the market, and urged banks not to call in loans”
(Gordon 32). Hamilton’s plan worked, as he stopped the downward spiral and allowed
the markets to return to normalcy, as he allowed the speculators to fail, but no one else,
as he believed they deserved the consequences of their actions.
Michael Lind’s “Hamilton’s Legacy” expresses the power of Alexander Hamilton’s
legacy, as he influenced so many facets of the national government. Hamilton, perhaps
most important for this assessment, “established the first fiscal infrastructure of the new
republic, including the Bank of the United States, precursor of the Federal Reserve”
(Lind 41). Though Hamilton’s bank eventually closed, thanks to Thomas Jefferson’s
hatred for Hamilton and federalism, his idea of creating a national bank that stabilized
currency, allowed for regulated borrowing and implemented uniform interest rates (Lind
41). Hamilton’s many policies have instituted change in the fiscal system, as he
charged the populous with creating a system and maintaining said system that would
promote positive benefits for all, not just the federal government.
In Phil Davies’ “The Bank that Hamilton Built,” he delves into how Hamilton
helped create the First Bank of the United States. The implementation of this bank was
huge for the country, as this was the first time that a government-run entity had the
power to influence money and deposits. The bank was in large part due to Hamilton’s
dedication, but Davies notes that Hamilton’s plans were far grander than could ever be
implemented. Hamilton did however create the foundation for the bank that was
eventually overhauled. Moreover, Davies notes that the bank did in fact close, but the
major principles it was founded upon cannot be ignored or understated. Hamilton’s
desire for the Bank of the United States was grand and vast, but the First Bank was
able to achieve much of his desires, as it jump started “the economy and [built] public
confidence in the Treasury and financial markets” (Davies 53). The Bank of the United
States also permitted “a robust currency circulation and lending to other banks and
businesses stimulated the economy, leading to increased domestic and foreign trade
that generated income and job growth” (Davies 53).
In David Cowen’s “The First Bank of the United States and the Securities Market
Crash of 1792,” he discusses the implications of the First Bank of the United States and
the subsequent market crash. He asserts, rather boldly, “The events of 1792 bring to
mind other occasions in American history when the primary monetary authorities were
accused of first pumping excess liquidity into the economy, and subsequently
withdrawing it, with a resultant market crash” (Cowen 1057). This is perhaps an
implication of things to come, as another market crash occurred in 1812, as a war was
impending, and again when the Second Bank of the United States came to a close.
Cowen believes that the First Bank of the United States had little solidifying its
existence, which explains its failure, along with its second coming. The financial crisis
grew from speculation of large investors like William Duer and Alexander Macomb, who
believed that they could corner the United States debt markets (Cowen 1043). This
speculation of securities created a domino effect that pummeled the markets and
necessitated an intervention by the United States government. Unfortunately, the Bank
of the United States wanted to prevent its own losses, so the bank restricted credit
substantially (Cowen 1044). The withdrawal of these funds made the bubble burst that
much quicker, thus placing some of the blame of the Financial Crisis of 1792 on the
federal government itself. Though Cowen understands and acknowledges that
someone like William Duer speculated maliciously and helped in crashing the market,
he points out that the Bank of the United States “was a major factor in precipitating the
first securities-market crash in our nation’s financial history by sharply contracting credit
and causing speculators and others to sell their securities” (Cowen 1057). Thus, the
blame for the market failure must be shared and not solely placed on the shoulders of
one man.
The First Bank of the United States
Alexander Hamilton had long wanted to create a larger, more powerful federal
government, which he likened to the political powers held in England. Though he
understood that many people valued their independence and the rights of their
respective states, he believed in unifying the forces and permitting a cohesive unit for
establishing an international reputation. Hamilton’s plan was long and considered with
great thought, as he wanted to create something that would last. Though Thomas
Jefferson and many anti-federalists opposed the bank’s creation, on grounds relating to
its charter, its controls and its political implications, the bank was finally chartered once
President George Washington refused to veto the legislation that permitted its final
creation.
Hamilton’s establishment of the first financial infrastructure in American history
was huge, as his ideas set the precedent for what was to come. He had dedicated so
much time writing about the need for a bank and garnering support for its
implementation, that the First Bank of the United States had been a long time coming.
Hamilton penned many important papers about needed a federal fiscal system, as the
lack of a common currency hurt trade both domestically and abroad. Moreover, he
looked to England, which had the Bank of England to handle its debt and loan money to
citizens and businesses alike. Hamilton knew that the war debt from the Americn
Revolution would soon consume the country if it was not addressed, so he attempted to
persuade other political figures of the importance of the a national bank.
Hamilton stated himself, “Most commercial nations have found it necessary to
institute banks; and they have proved to be the happiest engines that ever were
invented for advancing trade” (Morgan 479). He used examples of other countries as a
means of winning favor, as he stood against a group of staunch opponents who wanted
to diminish federal control and feared the possibility of even more national debt.
Though the convincing took some time, and Hamilton had to work diligently as the
Secretary of Treasury to see his plan come to fruition, it did nonetheless. The First
Bank of the United States impacted the American economy almost immediately, as it
“flood[ed] the market with its discounts (loans) and banknotes and then sharply
reversing course and call[ed] in many of the loans” (Cowen). However, the sudden
presence of so much loaned money created a speculative market that soon brought
about financial duress.
The Financial Crisis of 1792
In 1792, after the Bank of the United States had allowed for loaned monies to
flood the market, speculators had drive the price of real estate and goods so high that
the bubble only had one choice: to burst. Speculation was huge within the markets, and
when “the largest speculator caught in the financial crisis was William Duer. When he
went insolvent in March 1792, the markets were temporarily paralyzed” (Cowen). As
the Bank of the United States poured more and more money into the market, the
speculators falsely believed that they had a hold on debt securities. Hamilton was
disgusted by their behavior, as he stated, “Tis time, there should be a line of separation
between honest men & knaves, between respectable stockholders and dealers in tbe
funds and mere unprincipled gamblers" (Gordon 33). Hamilton had little desire to help
these speculators, as the bursting of the bubble was but a formality.
The causes of the bubble bursting extended beyond just speculation, as the
Bank of the United States and its branches offered too much credit too soon. The
financial statements from these branches were mostly destroyed in the early 1800s, but
new information has arisen revealing the vast amount of money being loaned in the
markets. The balance sheet from the Philadelphia branch of the Bank of the United
States reveals the increased in loaned monies over time, as shown below (Cowen).
PH
I
In response to the speculation and the sharp price changes, the Bank of the United
States suddenly started pinching its credit. The causes of this credit tightening more
many, but they included “a deteriorating cash position, a recognition that the BUS had
added too much of its own paper to the market, a concern that new branches in April
would be undercapitalized, and a discount-to-capital ratio higher than the board’s
prescribed limits (Cowen 1058). With so much happening at once, the bubble finally
burst and the financial crisis of 1792 ensued.
Hamilton was prepared for such a crisis, as he knew that this was an opportunity
to show that his national bank could respond and regulate the markets. Thus, “this socalled "Panic of 1792" was short lived as again Secretary Hamilton (as in the previous
year during the script bubble) injected funds by buying securities directly and on behalf
of the sinking fund” (Cowen). Hamilton extended credit payments by forty-five days,
lowered interest rates and issues treasury bonds at a loss to control the money supply
and restore the market. His handling of the financial crisis was remarkable, as “the
financial system remained remarkably stable after April 1792. The United States did not
suffer a bank failure until 1809, nor did it undergo another systemic peacetime financial
crisis until 1819” (Sylla, Wright and Cowen 84). Even Hamilton’s successors
understood the power of his swift actions, as his joint efforts with the Bank of the United
States saved the economy (Sylla, Wright and Cowen 84).
Conclusion
Alexander Hamilton forever changed fiscal policies and standards in the United
States with the institution of the national bank. His ideas were profound, and “the
economic changes it wrought were pervasive and arguably long-lasting” (Davies 53).
Moreover, “by converting war debt into bank stock, the bank relieved the government of
that financial burden and sent a message to investors at home and abroad that the
United States would honor its debts” (Davies 53). Though his efforts were thwarted
when the bank’s charter was not renewed, his ideas perpetuated a system that remains
in place today. Unfortunately, for the economically and financially minded, Hamilton
“never wrote down for the benefit of posterity a definitive account—based on his
thinking, actions, and results of those actions—of how a responsible authority ought to
act in a financial crisis” (Sylla, Wright and Cowen 85). There is much to be learned from
how Hamilton acted in the crisis, both in terms of public relations and in terms of fiscal
policy. The First Bank of the United States certainly helped the financial crisis of 1792
to occur, as the bank flooded the market with loaned funds, but the response by
Hamilton solidified him as a financial mastermind and restored the economy before
major consequences could occur.
Bibliography
Cowen, David. “The First Bank of the United States and the Securities Market Crash of
1792.” Journal of Economic History 60.4 (2000): 1041-1055. Print.
Cowen, David. “The First Bank of the Untied States.” Economic History Service. 1 Feb.
2010. Web. 10. Dec. 2012.
Davies, Phil. “The Bank that Hamilton Built.” Region 21.3 (2007): 10-55. Print.
Gordon, John Steele. “The Founding Father of American Financial Disaster.” American
History 44.1 (2009): 30-37. Print.
Lind, Michael. “Hamilton’s Legacy.” The Wilson Quarterly 18.3 (1994): 40-52. Print.
Morgan, H. Wayne. “The Origins and Establishment of the First Bank of the United
States.” The Business History Review 30.4 (1956): 472-492. Print.
Sylla, Richard, Wright, Robert E., and Cowen, David J. “Alexander Hamilton, Central
Banker: Crisis Management During the U.S. Financial Panic of 1792.” Business
History Review 83.1 (2009): 61-86. Print.