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First Bank of the United States (aka B.U.S.)

The First Bank of the United States [B.U.S.] was the nation's central bank, but the Secretary of the Treasury, not the president of the B.U.S., was the nation's central banker. The Treasury Department, in other words, set policies that the national banks implemented. The Treasury Department, through the B.U.S., aided several distressed banks and frequently added liquidity to the credit system when securities prices flagged. In other words, because the Secretary of the Treasury was essentially running the show when circwnstances warranted his intervention, the stockholders had little say over the Bank's actions during crises.

The creation of the original Bank of the United States in 1791 sparked the first major division within President George Washington's administration, which later ripened into the Federalist and Democratic-Republican parties. Congress chartered the first Bank of the United States in 1791 as a privileged commercial bank possessing many of the powers and functions of a central bank. Domestic discontent with the bank’s position in the affairs of the republic influenced Congress to decline to renew the bank’s charter when it expired in 1811.

After the Revolutionary War, the United States faced overwhelming debt and an uncertain commercial future. As a response, Secretary of the Treasury Alexander Hamilton stepped forward with a plan to establish a national bank, which would give the federal government more authority to handle the fiscal situation. His proposal incited a heated debate that tested the U.S. Constitution’s boundaries and laid the foundation for the country’s financial system.

Hamilton's proposal to charter a national bank was severely attacked in Congress on constitutional grounds. The opposition was led by James Madison, who was becoming increasingly hostile to Hamilton's program. Although the two men had supported strong national government in the convention and had worked together to secure ratification of the Constitution, neither their constitutional philosophies nor their economic interests were harmonious. Hamilton wished to push still further in the direction of a powerful central government, while Madison, now conscious of the economic implications of Hamilton's program and aware of the hostility which the drift toward nationalism had aroused in his own section of the country, favored a middle course between centralization and states' rights.

In the Constitutional Convention Madison had proposed that Congress be empowered to "grant charters of incorporation," but the delegates had rejected his suggestion. In view of this action, he now believed that to assume that the power to incorporate could rightfully be implied either from the power to borrow money or from the "necessary and proper" clause in Article I, Section 8, would be an unwarranted and dangerous precedent.

In February 1791, the bank bill was passed by Congress, but President George Washington, who still considered himself a sort of mediator between conflicting factions, wished to be certain of its constitutionality before signing it. Among others, Thomas Jefferson was asked for his view, which in turn was submitted to Hamilton for rebuttal.

In a strong argument Jefferson advocated the doctrine of strict construction and maintained that the bank bill was unconstitutional. Taking as his premise the Tenth Amendment (which had not yet become a part of the Constitution), he contended that the incorporation of a bank was neither an enumerated power of Congress nor a part of any granted power, and that implied powers were inadmissible.

He further denied that authority to establish a bank could be derived either from the "general welfare" or the "necessary and proper" clause. The constitutional clause granting Congress power to impose taxes for the "general welfare" was not of all-inclusive scope, he said, but was merely a general statement to indicate the sum of the enumerated powers of Congress. In short, the "general welfare" clause did not convey the power to appropriate for the general welfare but merely the right to appropriate pursuant to the enumerated powers of Congress.

With reference to the clause empowering Congress to make all laws necessary and proper for carrying into execution the enumerated powers, Jefferson emphasized the word "necessary," and argued that the means employed to carry out the delegated powers must be indispensable and not merely "convenient." Consequently, the Constitution, he said, restrained Congress "to those means without which the grant of power would be nugatory."

In rebuttal, Hamilton presented what was to become the classic exposition of the doctrine of the broad construction of federal powers under the Constitution. He claimed for Congress, in addition to expressly enumerated powers, resultant and implied powers. Resultant powers were those resulting from the powers that had been granted to the government, such as the right of the United States to possess sovereign jurisdiction over conquered territory. Implied powers, upon which Hamilton placed his chief reliance, were those derived from the "necessary and proper" clause.

He rejected the doctrine that the Constitution restricted Congress to those means that are absolutely indispensable. According to his interpretation, "necessary often means no more than needful, requisite, incidental, useful, or conducive to.... The degree in which a measure is necessary, can never be a test of the legal right to adopt; that must be a matter of opinion, and can only be a test of expediency." Then followed Hamilton's famous test for determining the constitutionality of a proposed act of Congress: "This criterion is the end, to which the measure relates as a mean. If the end be clearly comprehended within any of the specified powers, and if the measure have an obvious relation to that end, and is not forbidden by any particular provision of the Constitution, it may safely be deemed to come within the compass of the national authority." This conception of implied powers was later to be adopted by John Marshall and incorporated in the Supreme Court's opinion in McCulloch v. Maryland (1819) on the constitutionality of the second national bank.

Congress gave the Bank of the United States, now commonly known as the First Bank, a 20-year charter that started in December 1791. The bank did not dictate fiscal policy, but it still wielded great influence over the country’s finances. The banknotes issued by the First Bank gave the U.S. the closest thing to a national currency at a time when each state could print its own banknotes. First Bank notes were also the only ones accepted when paying federal taxes, which the First Bank was in charge of collecting. It also worked to pay the government’s bills, including much of the debt left over from the Revolutionary War.

Agrarian interests were opposed to the Bank on the grounds that they feared it would favor commercial and industrial interests over their own, and that it would promote the use of paper currency at the expense of gold and silver specie. Ownership of the Bank was also an issue. By the time the Bank's charter was up for renewal in 1811, about 70 percent of its stock was owned by foreigners. Although foreign stock had no voting power to influence the Bank's operations, outstanding shares carried an 8.4 percent dividend.

The First Bank of the United States is significant because the institution provoked the first great debate over strict, as opposed to an expansive interpretation of the Constitution. In adopting Hamilton's proposal and chartering the bank both the Congress and the President took the necessary first steps toward implementing a sound fiscal policy that would eventually ensure the survival of the new federal government and the continued growth and prosperity of the United States.

The House opted not to renew the bank's charter when it expired in 1811. Five years later, President James Madison signed a bill establishing the Second Bank of the United States.