How America's First Central Bank Was Killed

This year is the 200th anniversary of a political fight that terminated the Bank of the United States, the nation’s long-ago central bank. Amid current political pressures to audit and abolish the Fed, this Independence Day weekend is a good time to look back at the now largely forgotten episode that put an end to the Fed’s early precursor.

The key figure in this episode is now also largely forgotten. He was George Clinton (1739-1812), fourth U.S. vice president and, before that, first governor of New York state. Clinton was uncle and political mentor to the later governor DeWitt Clinton (about whom I wrote for FrumForum a year ago) but is not related to either Bill Clinton or the George Clinton of Funkadelic music fame.

In early 1811, Congress was considering whether to renew the soon-to-expire 20-year charter of the Bank of the United States. The House of Representatives had defeated a bill authorizing renewal, by a razor-thin 65-64 vote. The matter would be taken up again in the House if the Senate voted for renewal, but that body deadlocked 17 to 17.

Clinton, presiding over the Senate, cast the tie-breaking vote, against the central bank — and also against the policy of President James Madison, who supported the renewal. The vice president was “going rogue,” making a particularly strong show of independence even for an era marked by chilly relations between presidents and VPs.

Central banking had been a contentious issue in American politics for two decades. The Bank of the United States was chartered by Congress in 1791 at the behest of Alexander Hamilton, then treasury secretary, over the objections of Thomas Jefferson, then secretary of state. This rift fed into the nascent two-party system of Hamilton’s Federalists and Jefferson’s Democratic-Republicans (later known just as Democrats).

To the Jeffersonians, a central bank was a dangerous concentration of federal power, and something not authorized by the Constitution. To the Hamiltonians, a central bank was needed to modernize government finances and the money supply, and was justified by implication of the Constitution’s wording about government financial duties.

Clinton, by squashing the Bank of the United States’ renewal in 1811, was holding to the old-line Democratic-Republican hostility to central banking. It was a position that Madison, persuaded by Treasury Secretary Albert Gallatin, no long held. The central bank had proven useful for government borrowing and transferring of funds. And contrary to fears of a monopoly, banks and financial markets were proliferating.

Clinton long had an independent streak. As governor, he had been a staunch defender of New York’s prerogatives against encroachments by the federal government. As vice president, he was an outsider in the administrations of Jefferson and Madison. At age 71 and in declining health, he saw fit to vote his antipathy to central banking.

That decision, though, had terrible consequences (which Clinton, dying in office the next spring, did not live to see). When the U.S. went to war with Great Britain over a range of issues in June of 1812, it lacked a central bank to help fund the war effort. This placed the U.S. in financial straits that not only almost caused it to lose the war but also prolonged the fighting, as the British, aware of America’s financial condition, stalled on peace negotiations. (Consider that when you hear Ron Paul say that abolishing the Fed will keep the U.S. out of “unnecessary wars.”)

The federal government’s desperation for funds was such that it even pulled troops away from the strategic St. Lawrence Valley in upstate New York — and into disadvantageous positions further west — to secure a loan from a financier named David Parish, who wanted to protect the area’s cross-border trade with the British, an episode recounted in historian Alan Taylor’s recent book The Civil War of 1812.

The war ended in 1815 after the U.S. had scrapped together enough money to achieve a military stalemate (while Britain was preoccupied with the Napoleonic Wars). The following year, Madison signed a bill granting a 20-year charter to the Second Bank of the United States. The new central bank had legislative supporters including Henry Clay and John Calhoun, prominent opponents of the first one.

In the early 1830s, President Andrew Jackson launched a campaign against the Second Bank, ushering in further calamity. But that’s a story for another day.