Routledge Handbook of Major Events in Economic History

Randall Parker, Robert Whaples, Randall E. Parker, Robert M. Whaples

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135080792
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The Handbook of Major Events in Economic History aims to introduce readers to the important macroeconomic events of the past two hundred years. The chapters endeavour to explain what went on and why during the most significant economic epochs of the nineteenth, twentieth and early twenty-first centuries and how where we are today fits in this historical timeline. Its short chapters reflect the most up-to-date research and are written by well-known economists who are authorities on their subjects.

The Handbook of Major Events in Economic History was written with the intent of presenting the professional consensus in explaining the economics driving these historical events.

PART I

World War I and the pre-World War I era

1
SYMMETRY AND REPETITION

Patterns in the history of the Bank of the United States

Eric Lomazoff

Introduction

For those who wish to explore the dense historical forest that is national banking in the early American Republic, past scholarly visitors have cleared and marked multiple trails. One might, for example, pleasantly venture forth using personalities as guideposts. Biographers have chronicled how figures large and small in American history imagined, made, sheltered, managed, and ultimately destroyed the Bank of the United States (Chernow 2004, Govan 1959, Newmyer 2001, Wright 1996, Remini 1984, 1998). Institutional purposes offer a second set of markers for navigating the historical terrain. Economic historians have repeatedly noted that while the “First” Bank was chartered to serve as a fiscal auxiliary to the federal government, the “Second” Bank was created to realize a mixture of fiscal and monetary goals (Redlich 1947, Hammond 1957, Womack 1978).¹ Constitutional principles offer a third way to tour the site and provide the way which is potentially the most straightforward. Scholars of American constitutionalism have portrayed the Bank as the focal point of a recurring two-sided dispute over the meaning of the Necessary and Proper Clause (Brest, Levinson, Balkin, and Amar 2000: 7–70, Gillman, Graber, and Whittington 2013: 123–37 and 201–6, O'Brien 2003: 60–62 and 497–500).

This chapter is not designed to suggest that scholars need to draw yet another trail on the already crowded forest map. In other words, though the Bank's history might also be explored via two additional routes — the parties it helped to shape (Holt 1999, Leonard 2002, Marshall 2000: 353–54) and the places where it operated (Brown 1998, Kilbourne 2006, Wright 2005) — cutting a sixth pathway is not my object. By contrast, this chapter approaches the historical forest altogether differently, eschewing any close-range examination and instead taking a panoramic view from above. When the Bank's history is viewed from afar – with personalities, purposes, principles, parties, and places as mere features of a much larger landscape — two surprising patterns become visible. What is more, the interlocking character of these patterns suggests a broader orderliness about early American banking history that has gone unappreciated for far too long.

Accordingly, the goals of this chapter are to identify and document those patterns. Of course, the successful achievement of these goals necessarily entails a specialized retelling of the Bank's story. That retelling will prioritize patterns of symmetry and repetition in post-ratification American economic history. Symmetry invokes the image of identical shapes on opposite sides of a dividing line. Two gradual changes in the Bank, both of which commenced soon after its chartering in 1791, laid the groundwork for a two-track institutional existence. More importantly, those tracks came to mirror one another in important respects; both changes generated new sources of antagonism toward the institution and (at slightly different junctures) novel claims about its legitimacy. Repetition refers to recurrence over time or space. Both emergent sources of antagonism toward the Bank gained prominence periodically, manifesting themselves at multiple junctures in the institution's history. Repetition along tracks that mirror one another underwrites the claim that these patterns are interlocking.

The First Bank: in search of a fiscal auxiliary

The national bank bill that Alexander Hamilton proposed, the First Congress passed, and President Washington signed — all between December 1790 and February 1791 — created an “auxiliary to the fiscal operations” of the young federal government (Timberlake 1993: 6). This is a simple yet crucial fact that captures much about the institution's origins and its subsequent development. While change during the life of the First Bank (1791–1811) is treated at length below, the circumstances of its birth also warrant some discussion.

Hamilton's first years as Treasury Secretary were marked by repeated efforts to right the nation's fiscal ship, which had all but capsized following the long and costly Revolutionary War (Ferguson 1961, Bruchey 1990: 118–19). The foundation for Hamilton's efforts was the newly-ratified Constitution, which empowered Congress to both “lay and collect Taxes” and “pay the Debts … of the United States” (Edling 2008). Congress flexed some of these new muscles almost immediately, passing two revenue-raising measures in July 1789 (Cowen 2000: 9). The Treasury Secretary soon argued that these new income streams had utility far beyond “pay[ing] the current expenses of the government”; they could be used to demonstrate the nation's creditworthiness (Beard 1915: 161, Razaghian 2002). His January 1790 Report on the Public Credit proposed both the consolidation of existing debts and the use of federal revenue to pay regular interest on them (Hamilton 2001: 531–74). Both the publication of Hamilton's report and its subsequent adoption by Congress signaled a serious national commitment to debt management, and “public credit” (as revealed through the price of federal bonds) improved accordingly (Sylla, Wright, and Cowen 2009: 70).

The successful push to consolidate and fund existing public debt places Hamilton's next move in its proper context. In December 1790, the Treasury Secretary submitted a second report to Congress, conventionally known as the Report on a National Bank (Hamilton 2001: 575). The institutional design sketched therein became the basis for the first Bank of the United States. The submission, however, was actually called the Second Report on the Further Provision Necessary for Establishing Public Credit (Hamilton 1963: 236). This distinction is important because it calls attention to the myriad ways in which Hamilton's brainchild was designed to support the aforementioned “fiscal operations” of the federal government.

Some of those ways are captured by the Treasury Secretary's suggestion that a national bank “is an Institution of primary importance to the prosperous administration of the Finances” (Hamilton 2001: 575). The proposed bank would provide a number of services to the federal government: it would lend money in times of public need, serve as a depository for revenue, transfer deposited funds elsewhere in the Union upon request and without charge, and make payments from those funds to public creditors (Cowen 2000: 14). These fiscal supports for the government were important, but they fail to explain Hamilton's rationale for naming the report as he did. The answer here lies in the claim that a national bank would also “be of the greatest utility in the operations connected with the support of the Public Credit” (Hamilton 2001: 575). How could the institution offer additional support to the “Public Credit”? In short, by increasing demand for the newly-funded debt. Under Hamilton's plan, shares in the proposed bank would be purchased partially with specie and partially with these government securities. Capitalizing the institution in this manner — in essence, making investors pay for bank stock with interest-bearing federal bonds — would work to support the market for (and price of) these instruments. All told, the bank might render specific fiscal services to the government, but the latter's ability to finance its operations would also be significantly enhanced by the design of the institution.

The bill modeled on Hamilton's bank proposal famously encountered constitutional opposition, first within the House of Representatives and then the executive branch (Clarke and Hall 1832: 37–114, Dellinger and Powell 1994). Some students of the episode, citing Southern anxieties concerning (a) the effect of a Philadelphia-based bank upon a compromise plan to move the nation's capital south of the Potomac River, and/or (b) the power-concentrating effect of banks more generally, have claimed that much of this opposition was insincere (Bowling 1972, Klubes 1990). The veracity of these claims is less important here than the constitutional positions staked out by the opposing sides.

The premise of the constitutional debate was not complicated. No one contended that the Constitution explicitly authorized Congress to charter a national bank. Congress was, however, empowered to make “all Laws which shall be necessary and proper for carrying into Execution [its] foregoing Powers[,]” which included laying and collecting taxes, paying debts, borrowing money, and regulating interstate commerce. Moreover, there was broad agreement that a national bank might prove “incidental, useful, or conducive to” the execution of these powers (Hamilton 2001: 618). The question, simply put, was whether mere utility or conduciveness squared with the constitutional term “Necessary.” Bank advocates urged an affirmative answer here. Their opponents disagreed, fearing the scope of federal power under such a construction and offering a more exacting standard in its place (Lawson, Miller, Natelson, and Seidman 2010: 114–19). In signing the Bank bill (after its passage by Congress), President Washington at least implicitly endorsed the more permissive construction.

Institutional change, 1791–1811

The charter granted to the Bank of the United States in February 1791 ran for just twenty years, ensuring that future federal lawmakers would need to revisit the economic, political, and constitutional dimensions of the institution. This the Eleventh Congress did in late 1810 and early 1811, debating a bill to extend the Bank's charter (Clarke and Hall 1832: 115ff). In doing so, however, they encountered an altogether different institution — one that had been slowly transformed, and twice over at that. While persistent growth in the number of state-chartered banks between 1791 and 1811 slowly altered the national bank's position within the American financial order, an evolving relationship between the former and the latter over the same period rendered the Bank of the United States more than just a financial institution. In addition, these twin changes in the Bank over a two-decade period represent the starting points for the longer-term patterns of symmetry and repetition invoked above.

The legislatures of Pennsylvania and Massachusetts chartered commercial banks in the early 1780s (Gras 1937, Rappaport 1996), and their behavior was imitated in 1790 and 1791 by the governments of Maryland, Rhode Island, and New York.² These five institutions represented the entirety of the nascent American banking “industry” in late 1791, as the newly-organized Bank of the United States was preparing to open its doors. The combined capital of these institutions was approximately $4.6 million (Fenstermaker 1965: 111), meaning that a fully-capitalized national bank ($10 million) would immediately tower over the sparse landscape of competing commercial banks. In other words, the Bank of the United States was effectively born into a position of industry dominance.

The institutional landscape would not remain sparse for long, however. Over the next two decades, the number of state-chartered banks “grew at an exponential rate” (Mihm 2007: 108). The causes of this growth are myriad, including quests for profitable investment vehicles, efforts to solve credit access problems, and reactions to the emergence of the national bank (Bodenhorn 2003: 12, Sylla, Legier, and Wallis 1987, Lamoreaux 1994, Stokes 1902: 2, Crothers 1999: 14). The calendar year 1792 alone saw the number of state banks double to ten, and that number doubled again by the end of 1796. The fortieth state bank in the country was chartered sometime in 1803, and the eightieth at some point in 1807. By the time debate over a bill to extend the charter of the Bank of the United States commenced in early 1811, just over one hundred banks authorized by state governments occupied the nation's terrain (Weber 2006: 449).

Because the authorized capital of the Bank was never enlarged between 1791 and 1811, the steady proliferation of state-chartered institutions also happened to exert a steady downward pull on its industry share. The Bank of the United States represented 68 percent of all authorized banking capital at the close of 1791. From here, the national bank's share declined to 34 percent by December 1801, and then to just over 15 percent as the recharter debate commenced in early 1811 (Fenstermaker 1965: 111). Otherwise put, state bank growth gradually compromised the Bank's initial status as a dominant financial institution.

No contact between the Bank of the United States and its state-chartered peers was required in order for the latter to gradually and collectively erode the former's status within the banking industry. These institutions did interact, however. More importantly, they did so in ways that produced a second change in the national bank between 1791 and 1811: its transformation from a purely fiscal instrument to one that performed both fiscal and monetary functions within the American economy. The multiplication of state banks played a role in this development, but administrative decisions by (a) the national bank's board of directors, and (b) officials at the Treasury Department loomed especially large.

The Bank's development into a m...

Table of contents

• Cover
• Half Title
• Full Title
• Copyright
• Contents
• List of figures
• List of tables
• Notes on contributors
• Preface
• PART I World War I and the pre-World War I era
• PART II The interwar era and World War II
• PART III Post-World War II era
• PART IV The contemporary era
• Index