Bank of the United States

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5 Cranch (9 U.S.) 61 (1809), argued 10–11 Feb. 1809, decided 15 Mar. 1809 by vote of 6 to 0; Marshall for the Court, Livingston not participating. The Constitution gives federal courts jurisdiction over cases between citizens of different states (this is known as diversity jurisdiction). Deveaux involved the issue of whether a corporation can sue or be sued in a federal court under diversity jurisdiction and, if so, how the citizenship of the corporation is to be determined for diversity purposes. The Bank of the United States sued Deveaux, a Georgia tax collector, in federal court to recover property he had seized when the bank refused to pay a Georgia tax. Deveaux argued that the federal court had no jurisdiction because the bank as a corporation was not a citizen for purposes of diversity of citizenship jurisdiction and, in the alternative, that if the bank was a citizen, there was no diversity since some of its shareholders resided in Georgia. The Court held that a corporation was a “citizen” for purposes of diversity jurisdiction but that there was no diversity in this case because the citizenship of the corporation was to be determined by the citizenship of its shareholders, some of whom resided in the same state as the defendant. Later, Marshall and other members of the Court reportedly expressed regret over the decision because it severely limited the right of corporations to sue or be sued in federal court and thereby diminished federal judicial power. But Deveaux remained valid until it was overruled in Louisville Railroad Co. v. Letson (1844), which held that the citizenship of a corporation for diversity purposes was that of the state that chartered it.

See also Judicial Power and Jurisdiction; Lower Federal Courts.

— Robert M. Ireland

Secretary of the Treasury Alexander Hamilton's concept of a central bank grew out of his belief that the government needed a repository for federal funds and an entity to act as its fiscal agent. In 1791, President George Washington signed into law an act creating the Bank of the United States over the objections of Secretary of State Thomas Jefferson. Jefferson and his backers believed this to be an unconstitutional use of federal power and felt it favored commercial and industrial ventures over agrarian interests. They also feared it would promote paper currency over the use of specie, gold and silver coin. However, debt from the Revolutionary War and the differing currencies utilized by each state caused Congress to grant the bank a twenty-year charter.

The bank, based in Philadelphia with branches in eight cities, was empowered to carry on a commercial banking business. It was authorized to issue circulating notes up to $10 million, the amount of its capital. The bank was not permitted to deal in commodities or real estate. It was essentially a private, for-profit institution competing with state banks for deposits and loan customers. At the same time, the Bank of the United States was the Treasury fund depository. Thus, state banks joined the opposition, arguing that the Bank of the United States set the rules and then competed in the marketplace.

During its first eight years of operation, the bank operated conservatively and made few loans. This fiscal conservancy caused state banks and entrepreneurs to complain that economic development was being hampered. By 1811, 70 percent of the bank's stock was held by foreign interests, which would have sent millions in specie overseas had the charter been renewed. That fact, plus opposition from the state banks and agrarians as well as the question of the bank's constitutionality, prevented the charter from being renewed, and the bank ceased operations in 1811.

Debt from the War of 1812 brought about renewed interest in a central bank, particularly as inflation surged from the increasing number of notes issued by private banks, now unrestricted by a federal bank. A twenty-year charter established the Second Bank of the United States in 1816. Congress expected the bank to restore currency soundness through deposits of mass quantities of bank notes by the government. As a large creditor of state banks, the Bank of the United States demanded specie payments for those notes, forcing the state banks to limit the amount of notes and loans they issued. This restriction of credit, which occurred while the population and economy were expanding, led to the same complaints that had plagued the first Bank of the United States.

In 1833, President Andrew Jackson, who had been battling the bank's existence since 1829, removed all federal funds from the bank, placing them in "pet banks." Due to the actions of President Jackson, as well as continuing opposition from state banks and agrarians, the charter was not renewed in 1836. The Second Bank of the United States ceased existing as a national institution.

Bibliography

Hammond, Bray. Banks and Politics in America from the Revolution to the Civil War. Princeton, N.J.: Princeton University Press, 1957.

Knox, John Jay. A History of Banking in the United States. New York: Bradford, Rhodes, 1900.

Remini, Robert V. Andrew Jackson. New York: Twayne, 1966.

—T. L. Livermore

The American Revolutionary War resulted in the emergence of a new country faced with the task of establishing a fundamental basis for government embodying the principles of freedom for which the colonists had fought. The need for a sound financial system was most urgent, and this was remedied by the creation of the First Bank of the United States in 1791.

Alexander Hamilton, first U.S. secretary of the treasury, devised the original plan for the bank. It was argued that the Constitution did not empower Congress to institute such a bank, and that the bank was partial to commercial interests as opposed to those of farmers. Congress, nonetheless, endorsed the passage of the bank's charter.

The bank, located in Philadelphia, began with assets of $10 million, one-fifth of this money furnished by the federal government, the remainder provided by outside investors. Its affairs were administered by twenty-five directors. The bank's powers were limited to commercial enterprises, and loans were processed at six percent interest. The first bank performed well, but renewal of its charter in 1811 was thwarted by the argument against its constitutionality and by the opposition of agricultural workers. The First Bank of the United States closed for business in 1811 with a profit.

The need for a second national bank became apparent in 1816, after the War of 1812 catapulted the country into a financial crisis. However, the constitutionality of such a bank was still in dispute. In the case of McCulloch v. Maryland, the Supreme Court, in an opinion by Chief Justice John Marshall, held that Congress possessed the authority to create a national bank and that the states lacked the power to tax it (17 U.S. [4 Wheat.] 316, 4 L. Ed. 579 [1819]).

The new bank began on a grander scale, with capital amounting to $35 million. For the first three years it tottered on the verge of disaster under the mismanagement of its chief administrator, William Jones. When Jones left the bank in 1819, Langdon Cheeves assumed his duties, and the bank became sound. By the time Nicholas Biddle became president in 1823, the bank was functioning efficiently, and it remained a reliable system of finance for the next ten years.

In 1832, Biddle requested renewal of the charter, which was due to expire in 1836. The bank again met opposition by those who believed it had become too powerful. President Andrew Jackson led the opposition, and the controversy became an issue in his presidential election campaign in 1832 against Henry Clay. Clay, an advocate of the bank, had encouraged Biddle to apply for the charter renewal earlier than necessary.

The reelection of Andrew Jackson sounded the death knell for the Second Bank of the United States. He rejected the renewal of the charter and in 1833 deposited federal monies into selected state banks, termed "pet banks." The loss of federal funds greatly crippled the effectiveness of the bank, and it closed in 1836, the year its charter expired.

See: McCulloch v. Maryland.

Excerpt from the Acts to Charter the Bank of the United States

The establishment of a Bank for the United States ... will be very conducive to the successful conducting of the national finances; will tend to give facility to the obtaining of loans, for the use of the Government, in sudden emergencies; and will be productive of considerable advantage to trade and industry in general....

Alexander Hamilton, secretary of the treasury during the 1790s, had observed the instability of his fledgling republic during the 1780s, when it still operated under the Articles of Confederation. The new nation's finances and politics then seemed in disarray. Shortly after the government established by the U.S. Constitution began working in 1789, Hamilton devised an economic plan intended to bring stability and prosperity to America's finances.

The Bank of the United States became a central feature of Hamilton's scheme. He expected that a national financial institution such as the Bank would centralize and manage the nation's currency and credit. The Bank would hold government monies and issue notes that could be used to pay debts to the state. It would also extend loans to stimulate manufacturing and economic growth. Additionally, Hamilton hoped that government could forge an alliance with the country's wealthy elite, and indeed the Bank's early subscribers were virtually all speculators and businessmen. The Bank played a vital role in the flourishing, commercialized society that Hamilton and the Federalist Party envisioned, and in 1791 Congress officially chartered it for a period of twenty years (1 Stat. 191).

Political Disagreements

Members of the opposition Republican Party, led by Thomas Jefferson and James Madison, disagreed with Hamilton's philosophy. They thought that chartering a Bank exceeded Congress's constitutional authority and would lead to the unhealthy dominance of a wealthy upper class—exactly what Hamilton desired. The national Bank, they feared, would create a privileged group of nonproducers, people who got rich by handling paper money rather than through hard work. It might encourage corruption, as businessmen cultivated unsavory partnerships with the government. Finally, the Bank flew in the face of the founding republican ideology of the American Revolution, which led Jeffersonians to suspect powerful conspiracies against their liberties.

As president, Jefferson nevertheless allowed the Bank to run its course until Hamilton's charter expired in 1811. Following the War of 1812, a new generation of Jeffersonian Republicans, led by Congressman Henry Clay, rechartered the Bank for another twenty years. As was true in 1791, the Second Bank's charter of 1816 (3 Stat. 266) became part of a grand design for economic growth, now called the "American System." Clay's proposal, like Hamilton's, supplemented the Bank with protective tariffs that raised prices on imported goods in order to benefit native manufacturers. And it authorized federal funding for internal improvement projects such as canals and turnpikes.

In this postwar period the Bank fed an investment boom funded by paper currency, only to see it collapse abruptly in 1819. During that year the Bank called in its loans and contracted the currency, leading to widespread economic depression, joblessness, and bankruptcy. Many victims of these tough economic times—among them future President Andrew Jackson—blamed the Bank for their misfortunes. The resentments nursed by this "Panic of 1819" had much to do with the anti-Bank fervor of succeeding years.

Legal and Political Challenges

Another challenge to the Second Bank came legally, when the U.S. Supreme Court considered the constitutionality of its existence. Chief Justice John Marshall, in the case of McCulloch v. Maryland (1819), argued that Congress acted legitimately when creating the Bank. He emphasized the "necessary and proper," or elastic, clause of the Constitution, which said that Congress could do whatever it thought essential to fulfill its obligations. In the realm of inter-state commerce, over which Congress exercised control, this included the authority to create a national bank. Marshall's ruling allowed the Bank to continue to function. But the most serious test of its survival came from Andrew Jackson and his new Democratic Party.

Under its director, Nicholas Biddle, the Bank applied for Congressional re-charter in 1832, four years before its current charter was due to expire. President Jackson, already wary of the concentration of power represented by the Bank, revitalized old Jeffersonian arguments against its continuation. The "Monster Bank," as he called it, gave too much influence to a select group of wealthy financiers. Lost in the path of its destruction lay the downtrodden farmers and planters whom the Bank victimized by calling in loans and foreclosing on property. Jackson regarded himself as the spokesman for America's virtuous independent farmers, threatened by an impersonal institution with undue control over their daily lives.

Jackson vetoed the Bank's re-charter in 1832, and then won a decisive presidential victory over Henry Clay in a campaign largely focused on the Bank. But Jackson thought his veto insufficient, so in mid-1833 he began withdrawing government deposits from the Bank and placing them in various state banks loyal to the Democratic Party. Biddle, in response, called in loans and tightened the currency as a way of demonstrating his power and putting pressure on the chief executive. Despite Biddle's best efforts, the Second Bank went out of existence as its charter expired in 1836.

Anti-Bank Democrats, now led by President Martin Van Buren, did propose an alternative to the "Monster" they killed. Named the "Independent Treasury," or "Sub-Treasury," Van Buren's idea was to create a government depository forbidden from issuing notes and loans and thus lacking the regulatory mechanisms of the First and Second Banks. The Independent Treasury formed part of Van Buren's response to the devastating industrial depression afflicting the nation from 1837 to 1843. During the early 1840s members of the Whig Party in Congress dismantled it, although Democrats under President James K. Polk reinstated it in 1846. Two Whig attempts to revive a national bank failed in the early 1840s, when their renegade president John Tyler vetoed the proposed charters. However, a national monetary system came into existence yet again with the onset of the Civil War. Congress, now under Republican control, established a network of national banks that could issue bonds and thus perform the same managerial functions as the First and Second Banks.

During the first century of the American republic, the Bank of the United States remained the primary means by which statesmen who embraced Hamilton's views (that is, Federalists, National Republicans, Whigs, and then Republicans) sought to administer the nation's economic life. The federal reserve system instituted in 1913 replaced the Bank and its functions and created the modern economic regulatory structure we know today.

Bibliography

Hammond, Bray. Banks and Politics in America, From the Revolution to the Civil War. Princeton, NJ: Princeton University Press, 1957.

McFaul, John M. The Politics of Jacksonian Finance. Ithaca, NY: Cornell University Press, 1972.

Remini, Robert. Andrew Jackson and the Bank War. New York: Norton, 1967.

Bank of the United States may refer to:

• First Bank of the United States (1791–1811)
• Second Bank of the United States (1816–1836)
• Bank of United States (1913–1930), a commercial bank not affiliated with the government

See also

• Independent Treasury (1846–1921), a system for the retaining of government funds in the United States Treasury and its subtreasuries
• Federal Reserve (1913–present), a system of banks controlling access to currency

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