The Birth of the Bank of the United States


By Allen Guelzo, Ph.D.Gettysburg College

On December 13, 1790, Alexander Hamilton, the Secretary of the Treasury, submitted a report to implement his proposal for creating the Bank of the United States. Robert Morris had attempted to create a Bank of North America under the Confederation, only to be stymied by the Confederation’s inability to provide a stream of funding and the denunciations of the Pennsylvania Assembly.

American coins and banknotes on the flag of the U.S.
Alexander Hamilton faced great pushback when he proposed the notion of a national bank. (Image: Sergey Fedoskin/Shutterstock)

Advantages of a National Bank

Hamilton might have been tempted, with Morris’s example in mind, to handle the funding of the United States debt and the assumption of the state debts purely through the Treasury on a cash-in, cash-out basis. But Hamilton had a bigger object in mind. 

The report on a national bank would be one step further toward the creation of an active economy. Banks, after all, are more than just storage places for spare cash. Banks are the legal means whereby groups of individuals pool their private wealth and make it available for large-scale entrepreneurs to borrow and create large-scale enterprises. And in the end, they receive large-scale profits in the form of interest or dividends. Banks are, so to speak, the pumping stations of capitalism. 

Without the kind of large-scale pooling of capital, which banking made possible, no kind of major economic growth could happen in America. “Trade and industry, wherever they have been tried, have been indebted to banks for important aid,” Hamilton announced. And he reminded Congress that the United States had relied on foreign banks for survival “in dangerous and distressing circumstances.”

This is a transcript from the video series America’s Founding FathersWatch it now, on Wondrium.

Hamilton’s Proposition

What Hamilton now proposed to Congress was the creation of a joint public-sector/private-sector venture, a Bank of the United States, managed by 25 directors, in which both the federal government and private investors would pool funds up to $10 million. 

The federal government would provide one-fifth of the capitalization from its own revenues, and in return, would use the bank as its instrument for receipt and disbursement of funds and use the bank’s paper notes as a national paper currency. “Thus,” Hamilton added, “large sums are lent and paid without the intervention of a single piece of coin.”

The federal government’s involvement in the bank would guarantee its soundness for private investors. And the remaining four-fifths of the bank’s capitalization, which they contributed, would be available for lending out to entrepreneurs and businesses to fuel economic development. The profits, which the Bank would then earn, would not only enrich the private depositors but would then also help pay off the remaining federal debt.

Learn more about Alexander Hamilton’s fiscal policies.

A portrait of Thomas Jefferson.
Thomas Jefferson firmly opposed Alexander Hamilton’s proposal for creating the Bank of the United States. (Image: Independence National Historical Park/Public domain)

Reactions to Hamilton’s Suggestion

The proposal for a Bank of the United States was greeted with a new round of derision and hostility. Jackson of Georgia attacked the Bank as a plan for “an endless labyrinth of perplexities calculated to benefit a small part of the United States, the mercantile interest only; the farmers, the yeomanry, will derive no advantage from it.” Worse than that—and here Jackson raised the old bugaboo from the ratification process about the meaning of what necessary and proper authorized the national government to do.

Thomas Jefferson, the king of agrarian loyalists, believed that banks existed only “to enrich swindlers at the expense of the honest and industrious.” Jefferson argued, like Madison, that the Constitution had given Congress no authority to create a national bank. And under the provisions of the Bill of Rights, the entire proposal was unconstitutional from the start.

Jefferson’s Plea against the Bank

But Jefferson was the Secretary of State, and the person whose ear he was filling with these warnings of woe was no one less than George Washington. The bill to incorporate a national bank squeezed through the House of Representatives 39–20. And that was after approval by the Senate. But Jefferson intervened with a lengthy letter, at Washington’s request, claiming that since:

All powers not delegated to the United States by the Constitution are reserved to the States or to the people to take a single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless field of power, no longer susceptible of any definition.

And “the incorporation of a bank, and the powers assumed by this bill” are perfect examples of such constitutional overreach. Therefore, Jefferson concluded, “in my opinion, those powers have not been delegated to the United States by the Constitution.”

Learn more about Thomas Jefferson’s frustration.

Writing an Important Letter

But if the Secretary of State had one ear, the Secretary of the Treasury had Washington’s other ear. And Hamilton plied Washington with an equal amount of argument to support his position that a national bank was a necessary and proper function of a national government. 

“Every power vested in a Government,” Hamilton wrote in reply to Jefferson’s note, “includes by force of the term, a right to employ all the means requisite, and fairly applicable to the attainment of the ends of such power,” provided they are not expressly precluded “by restrictions and exceptions specified in the constitution, or not immoral, or not contrary to the essential ends of political society.”

Hamilton’s Detailed Response to Jefferson

Hamilton understood Jefferson’s larger point, that “no government has a right to do merely what it pleases.” But in this case, there is a “natural and obvious relation between the institution of a bank and the objects of several of the enumerated powers of the government.” 

The bank will expedite processing of receipts, collection of taxes, regulation of commerce “to deny the power of the government to add these ingredients to the plan,” Hamilton concluded with a flourish, “would be to refine away all government,” which is just what had prevailed under the Confederation.

Hamilton sent his note to Washington on February 23, after staying up all night to compose it. Washington studied it for a day, then signed the bill on February 25.

Common Questions about the Birth of the Bank of the United States

Q: What would have been the advantages of having a national bank in the U.S.?

The Bank of the United States would have had advantages to it just like other banks, such as being able to pool money together to be used to propel the economy forward with large-scale operations.

Q: What were Jefferson’s concerns in regard to establishing a national bank?

He believed that establishing the Bank of the United States would require power that the Constitution had not granted to the government. He also believed that banks existed only “to enrich swindlers at the expense of the honest and industrious.”

Q: How did Hamilton respond to Jefferson’s criticism?

Hamilton acknowledged that the birth of the Bank of the United States might imply that governments can do what they please, and this is a risk. But he also suggested that without a national bank, a government could not function properly.

Keep Reading
The Political Propaganda of Alexander Hamilton and Thomas Jefferson
Alexander Hamilton’s Reports: Creating a Bank of the United States
Jefferson and the Agriculturist Opposition to Hamilton’s Bank Bill