East side of the first Treasury Building: the building was occupied in 1800 and burned by the British in 1814.

chase and sale of domestic exchange in much the same way that modern money-market banks specialize in the purchase and sale of foreign exchange. Actually, in 1850 it was probably more difficult for a St. Louis merchant to remit to a New York supplier than it is for a modern Chicago businessman to remit to a manufacturer in Tokyo. Clearly, a growing industrial economy would have to find a better way.

The Start of Bank Regulation

Almost from the beginning of our national history, it was apparent that the money supply would not manage itself in a way satisfactory to the substantial citizens of the country. As the decades went on, a variety of regulatory devices were suggested and put into effect. A glimpse at our pre-Civil War financial history suggests the course that regulation was to take.

Federal Intervention

Throughout the years before 1863, Americans maintained a strange ambivalence toward federal controls over banks and the banking system. From the first it was recognized that only federal regulation could provide a homogeneous, universally accepted currency. Moreover, there was a growing realization that only a bank with special privileges could affect the total money supply, keeping the note issues and deposits of the state banks within certain bounds. Yet there was great reluctance, most pronounced in the newly settled areas of the country, to allow so much authority to the federal government. To this reluctance was added the hostility of a large number of state-chartered banks, whose officers and stockholders were persuaded, rightfully, that banking was more profitable in the absence

of federally chartered institutions. Nevertheless, two experiments with federal regulation left marks on 19th-century banking.

Soon after he became Secretary of the Treasury, Alexander Hamilton proposed the establishment of a Bank of the United States. In his famed Report on a National Bank, he argued that the young country required a major institution to provide a first-rate convertible paper currency, and to serve as lender to the Treasury and fiscal agent for the government. Over

This portrait of financier Alexander Hamilton, less flattering than the Trumbull rendering, hangs in the Treasury. It is this likeness that appears on every $10 bill currently issued.

the opposition of such major figures as Thomas Jefferson and Edmund Randolph, Congress in 1791 created the first Bank of the United States. With a capital of $10 million, one-fifth of it subscribed by the United States as a major stockholder, the Bank of the United States quickly became the most influential financial institution in the country. Following the clear intent of its charter, the Bank earned most of its income by carrying on a regular commercial banking business, though loans to the government were not unusual. As Hamilton had predicted, the Bank provided valuable services to the government, acting in many respects like a modern central bank. The Bank and its branches followed a conservative lending policy and on balance remained the creditor of the state banks, continually receiving a greater dollar volume of state-bank notes than the state banks received of the Bank's obligations.2 Notes of the Bank of the United States and its branches ordinarily circulated throughout the country at par. The Bank gradually came to hold a substantial portion of the monetary gold and silver of the country, its vaults during the last three years of its existence containing about as much specie as the total holdings of the state banks. Moreover, the Bank gradually took on the responsibility of making specie loans to state banks, many of which came to rely on the federal institution for accommodation in times of stress.

By almost any criterion, the first Bank of the United States must be judged a success. In no comparable period of American history was there such a well-ordered expansion of credit, and after 20 years the monetary system had advanced remarkably from its inauspicious start. Yet a combination of fear and cupidity led to congressional opposition to the Bank's recharter in 1811. Ironically, Albert Gallatin's support of the bill to recharter did more harm than good with other members of Jefferson's party, and the bill failed by the narrowest of margins.

Grave problems of financing the War of 1812, and deterioration of the paper currency as state banks filled the void left by the first Bank, led to renewed support for a federal institution. After congressional wrangling over several bills, the second Bank of the United States was chartered in 1816. With a capital of $35 million, one-fifth of it again subscribed by the government, the second Bank was a major force in the economy. Despite a shaky start, the Bank prospered after 1823 under the leadership of Nicholas Biddle. By 1830 it had become a central bank, controlling the quantity of money in the economy and rendering services to the federal government as well as to commercial banks. At times it acted as a lender of last resort to commercial banks, and it undertook countercyclical action to offset swings in economic activity. Its notes and those of its branches

2 Thus, the Bank was on balance in a position to present state-bank notes for redemption in specie, forcing the state banks to limit their circulation. Although not founded for this ostensible reason, the first Bank of the United States soon exercised a regulatory function.

A steel engraving of the second Bank of the United States: the Bank was created by Congress in 1816 and located in Philadelphia.

were literally as good as gold, circulating without discount throughout the United States. Branches of the Bank provided banking facilities in backwoods areas, and greatly reduced the cost to the business community of transferring funds from one part of the country to another.

Once again, agrarian conviction that the Bank unduly restricted the money supply plus the jealousy of state bankers, especially in New York and Boston, furnished the basis of opposition to the Bank's recharter. Even so, the Bank might have survived if Biddle had not allowed Henry Clay, Presidential candidate of the Whigs, to make the question of recharter a campaign issue in the election of 1832. In the summer preceding the campaign, pro-Bank forces in Congress had passed a bill to recharter, which Jackson vehemently and swiftly vetoed. Jackson considered his victory in the autumn a confirmation of his action by the electorate; a year later, the government discontinued making deposits in the Bank, and for all practical purposes the United States again relinquished its central bank.3 During the second Jackson administration and the Van Buren administration that followed, continuing efforts were made to put the government on a hard-money basis. Toward the end of Van Buren's term, Western

3 For two somewhat conflicting views of the forces at work to abolish an American central bank, see Bray Hammond, Banks and Politics in America from the Revolution to the Civil War, Princeton: Princeton University Press, 1957, and Jean Alexander Wilburn, Biddle's Bank-The Crucial Years, New York: Columbia University Press, 1967. In this, as in so many public issues, the decision turned ultimately on the demands, not of the majority of the electorate, but of political and business figures who wielded great power.

and Southern Democrats in Congress at last overpowered their Eastern colleagues and the Whigs, passing an Independent Treasury bill requiring the government to receive only gold and silver in payment of its obligations. But the Whigs repealed this legislation a year after winning the election of 1840. Twice Congress passed bills, drafted by Secretary of the Treasury Thomas Ewing, to charter a third Bank of the United States, only to have them vetoed by unyielding President Tyler. With the return of the Democrats to power in 1844, the battle was renewed to put the Treasury on a specie basis. In 1846, the Independent Treasury was reestablished; from that time on, government officials were "to keep safely, without loaning, using, depositing in banks, or exchanging for other funds than as allowed by this act, all the public money collected by them, or otherwise at any time placed in their possession and custody, till the same is ordered . . . to be transferred or paid out." The federal government was literally on a hard-cash basis. If the letter of the law were observed, the United States could have nothing to do with the money supply except to provide the coinage. Congress had not only killed the central bank but had insisted that the government have no dealings with state banks. Henceforth, all funds were to be kept in the vaults of the Treasury at Washington or in the subtreasuries in various cities, and neither notes of state banks nor checks drawn on state banks would be accepted in payment of obligations due the government.

Almost from the first, Treasury secretaries found themselves unable to adhere strictly to the Independent Treasury law. Even in the 1850s it would be necessary for the Secretary of the Treasury, by means that bordered on illegality, to get coin back into a banking system stripped of coin by tax payments. Nevertheless, the people had spoken. If there was to be regulation of banks and the banking system, it would have to be done by the states. Not until the 1830s, however, had anything like a modern regulatory pattern begun to form. By 1850 state laws adumbrated the complex of rules and regulations that would develop after the Civil War.

Charter and Entry

For the first half-century of our national history, banks were chartered by special act of a legislature, a common procedure for granting all corporate charters. By 1810 the corporate form was usual for banks, insurance companies, and turnpike companies, as it would one day be for railroads and large manufacturing companies. Banks, then, were not singled out for special treatment.

The requirement that charters be granted by a specific legislative act presumably had the advantage of insuring more than routine scrutiny of the incorporators. But there was an objection, loudly raised as the years passed, that the scrutiny was more often than not to see if the