First Bank of the United States

The First Bank of the United States was the financial brainchild of Alexander Hamilton and the first de facto central bank in the nation’s history. Chartered by Congress in 1791 for a twenty-year period, it was created to put the new country's chaotic finances in order. Imagine a startup nation fresh from a revolution, drowning in debt, with thirteen different currencies floating around—a complete mess. The Bank was designed to be the solution. Its primary missions were to manage the government's massive public debt from the Revolutionary War, create a stable and uniform national currency, act as the federal government's fiscal agent (its main bank), and regulate the often-wild lending practices of state-chartered banks. Though headquartered in Philadelphia, its influence was felt across the young economy. It was a private corporation operating in the public interest, with the government owning 20% of its shares and private investors holding the rest.

The Bank's creation ignited a political firestorm that pitted two of America's Founding Fathers against each other, setting the stage for a debate that echoes to this day: what is the proper role of government in the economy?

• Hamilton's Vision: As Treasury Secretary, Hamilton argued for the Bank in his famous “Report on a National Bank.” He saw it as “necessary and proper” for a modern, commercial economy. He believed a strong central financial institution was essential to provide credit, foster industrial growth, and give the federal government the power it needed to be effective. For Hamilton, the bank was a tool for building a prosperous and powerful nation, an idea rooted in his arguments in the Federalist Papers.
• Jefferson's Opposition: Secretary of State Thomas Jefferson, along with James Madison, was horrified. They argued the Bank was unconstitutional, as the Constitution didn't explicitly grant Congress the power to create a corporation. More deeply, they feared it would concentrate financial power in the hands of a wealthy, urban elite, creating a “moneyed aristocracy” that would corrupt the new republic. They envisioned an agrarian America of yeoman farmers, and saw the Bank as a threat to that ideal.

For investors, the Bank of the United States wasn't just a political football; it was America's first hot stock. Its Initial Public Offering (IPO) in July 1791 was a blockbuster event that offers timeless lessons. The IPO was for $10 million, a staggering sum at the time. The public could buy shares, or “scrip,” with a down payment of just $25. Demand was so intense that the offering was oversubscribed within an hour. This triggered a speculative frenzy, arguably America's first stock market bubble. Scrip that cost $25 was soon trading for over $300 as speculation ran rampant. This excitement, and the subsequent crash in prices a month later, perfectly illustrates the power and danger of market sentiment. However, for long-term investors who looked past the initial mania, the Bank was a solid investment.

• Profitability: The Bank was consistently profitable, paying an average annual dividend of over 8%, a very handsome return for the era.
• Stability: Its notes were widely accepted and trusted, providing a stable currency that greased the wheels of commerce.
• Government Gains: The U.S. government itself made out well. It sold its shares over the years for a significant profit, proving the venture's financial success.

Despite its success, the Bank's fate was sealed by politics. When its 20-year charter came up for renewal in 1811, its old enemies resurfaced. They were joined by state banks that resented the Bank's regulatory oversight (which limited their ability to print money recklessly) and by politicians wary of the significant foreign ownership—by 1811, over 70% of the Bank's shares were held by Europeans, primarily the British. The renewal bill failed in Congress by a single vote. The timing couldn't have been worse. Without a central bank, financing the War of 1812 became a chaotic, inflationary nightmare. The government struggled to raise money, and the financial system nearly collapsed. The experience was so painful that in 1816, Congress, including many of the Bank's former opponents, chartered the Second Bank of the United States. For today's investor, the story of the First Bank offers several key insights:

• Political Risk is Real: A fundamentally sound and profitable enterprise can be destroyed by political opposition. Government charters and regulations can be a double-edged sword. This is a classic lesson in political risk.
• Distinguish Value from Hype: The 1791 IPO mania shows how markets can get caught up in irrational exuberance. Wise investors focus on the underlying business's long-term value, not short-term speculative fever.
• The Bedrock of Modern Finance: The Bank's turbulent life demonstrated the critical need for a central banking institution to ensure financial stability, control inflation, and manage government finances—a legacy that lives on today in institutions like the Federal Reserve System.